Tax havens: Time to act by Richard Murphy

Richard Murphy, featured on Radio 4's "Face the Facts" last week, speaking to the BBC about the issue of UK banks with subsidiaries in offshore tax havens. Richard expressed the view that these structures, set up for tax reasons, would make it more difficult to realise potentially "toxic" assets due to the complex nature of the transactions and the artificial locations of assets. Richard, director of Tax Research LLP, here discusses the issue of tax havens and how banks are using offshore investments to the detriment of the UK economy.

I recently undertook some research for the TUC on where major British banks located their operations. As a result we were able to publish a list of the tax havens which each of these banks uses, HBOS excepted because they failed to comply with the law that requires a company to either disclose details of its subsidiaries in its published accounts or as an annex to its annual return. The resulting data can be found

What surprised me, even as a seasoned tax haven campaigner, was the sheer number of subsidiaries that our banks have in recognised tax havens. We found 1,207 in all. That was 22% of all the banks’ subsidiaries. In the case of Barclays almost 30% of its subsidiaries were in tax havens. An equivalent survey in the USA found that no bank had more than 10% of its subsidiaries in tax havens, and their overall exposure to this market was very much lower than that of the UK banks overall.

Cayman was the most popular haven location: 262 of the subsidiaries were based there. Jersey came next with 170, partly due to the considerable enthusiasm of Lloyds TSB for creating subsidiaries in that island.

Knowing this does not by itself represent a major breakthrough in understanding. Contextualising this does, however, give rise to considerable concern.

We all know that the current financial recession started when the banks began to refuse to lend to each other. They did that for good reason. They did not know the scale of risks that were to be found on each other's balance sheets, but quite reasonably presumed that they were at least as big as those that they were themselves hiding on and off their own balance sheets.

Tax haven special purpose vehicles were a major feature of off-balance sheet financing by banks. I know from my own research on behalf of a number of major newspapers that many of these subsidiaries will be special purpose vehicles associated with structured finance, often with billions of pounds apparently flowing through them, and yet in most cases we will have no way of appraising the risk because the data on these subsidiaries will not be available on public record. In the circumstances is it surprising that the banks have refused to lend to each other?

And then there is a second risk: this is that the money flowing through these offshore subsidiaries has been used in turn to finance some of the strangest investments that our banks have made. We know, for example that oligarchs have a liking for tax havens and the secrecy that surrounds them. We know that many of our banks have been happy to lend such people considerable sums of money. I now have a simple concern which is that the complexity of the structures that have been created to make these loans now increases the risk of a bad debt arising. This is because the borrower will also be using complex offshore structures, which will be far removed from the location of the assets on which the borrowing is secured. As a result, pursuit of a debt will in that circumstance be so tortuous that the secured assets in question will be long gone by the time our bankers arrive to claim their security. In many cases the resulting cost will fall on us, the ordinary taxpayer.

For many years people questioned why I, and some others, have campaigned so vigorously against tax havens. The failure of the banking system provides part of the answer. Without the opacity that the enormous tax haven structures of our banks has created the severity of our economic downturn would have been considerably reduced because banks could have carried on lending to each other knowing with much greater confidence the risk that they faced. Instead, they reasonably refused to trade. We have picked up the bill. Indirectly we have done so precisely because of the activities of tax havens.

And I very much doubt that we've seen the end of this is yet: the bad debt could keep on rolling for some time to come.

When it is that personal isn't it time that everyone demanded an end to this abuse? After all, it's your money that is disappearing into these black holes. Is that what you want? Or is it time for the accounting profession to join the call for reform that puts an end to this abuse for good?