The Frontline Debate

Last week, I was invited by a friend to listen to a debate at the Frontline Club in Paddington of which he is a member on Kleptocracy. The debate was to centre on the role of the UK as an ‘enabler’.

Hosting the evening was award winning investigative journalist and author of two books on Russian history and politics, Oliver Bullough. He was joined on the platform by Professor Ronan Palan one of the world’s ‘leading academic experts on tax havens’, Professor Anastasia Nesvetailova who specialises in the way the finance industry uses offshore jurisdictions and John Christensen founder of Tax Justice Network, leading campaigner against tax havens and fierce advocate of a public register of the beneficial ownership companies.

Kleptocracy, for those scratching their heads, means a government with corrupt rulers, that use their powers to exploit the people and natural resources of their own territory in order to extend their own personal wealth and political power.

When first invited, I expected the debate to focus on case studies of how ‘politically exposed persons’ steal from their country and spend it in the UK – but no, the focus was on how ‘big corporations hide their profits from tax’.

Why the shift from crooks to companies? The truth is that the OECD initiatives are working. Financial institutions worldwide, have a high duty of due diligence towards any ‘politically exposed person’ and if any transaction is thought to be suspicious it has to be reported and if not the financial institution would face fierce fines and penalties.

Criminals, in which I include evaders of tax, are now rightly concerned that they can run – but they can no longer hide – the worlds finance industry has ganged up on them. What is their way out? My fear is that these criminals will find ways to avoid this worldwide watchdog by going underground and what better place to start than through the use of a virtual currency created from a computer code – Bitcoin. Somewhat riskier, but outside of the obligations of the financial industry - but that is a topic for future discussion.

London is without doubt the centre for global corporate settlements stage because of its expertise and knowledge of derivatives. Anastasia gave an example taken from an article on fixed/variable interest rate swaps. This could possibly have taken more of the audience with her had she accompanied it by an example; such as the following.

A cash rich company, ABC Limited negotiates a low fixed rate interest loan, because there is little risk of the company defaulting. Another company XYZ Limited is a municipal bus company which makes no profit, and can therefore only borrow on a high variable interest rate. The companies through their bankers agree to swap their interest rate obligations. ABC Limited can then deduct the high interest rates of XYZ against its profits and XYZ gets a lower rate of interest which is fixed. Both companies win, the only loser is HMRC.

But derivative transactions are not limited to interest rate swaps. As my host my friend, a former ship finance specialist explained; XYZ limited a municipal bus company, it needs to buy buses to replace its ageing fleet, but it is not a profitable business, so can never set off its tax breaks for investing in plant and machinery against profits. It therefore onward sells its contracts for the acquisition of buses to ABC Limited which can use the tax breaks on the investment in buses for a fee. Both companies benefit, the only loser is HMRC.

As Anastasia admitted, although academics may have only in the past ten yearswoken up to the role played by derivatives, derivative transactions have been around for decades. My first task as a junior lawyer in the 80’s in the commercial department of Allen & Overy was to analyze the VAT consequences of an interest rate swap.

These derivative transactions do not however thrive on kleptocracy or even a thriving offshore industry, but capitalism, where big profits can be made by eager bankers keen to match a need with a demand and make money. London has been the world leader in this form of capitalism, but derivative trading does not explain why the former colonies and satellite territories of London play such a key role in the world’s financial settlements.

The secret as John Christenson pointed out lies in the invention of the trust by the UK, in the times of Richard the Lionheart, and the role this legal concept plays in big corporate transactions. I will highlight next week together with my views on why I do not think this country needs a public register of the beneficial ownership of companies.

If you have any comments or would like to meet Caroline or any one of her team to discuss one or more concerns of the UHNW community, please contact Svetlana on or call her on 020 3740 7423.

Please also contact us if you would like to buy a copy of Caroline’s book ‘Who can you trust when you are Super Rich?