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Thursday, March 19, 2009

A depressing pyrrhic victory.

The only possible way you can describe Barclays' depressing legal victory over the Guardian, Mr Justice Blake ruling that the paper cannot republish the memos detailing the workings of Barclays' Structured Capital Markets team is as a pyrrhic one. The Guardian, in its own editorial, more than sums it up when it states that all that Barclays has achieved is to shut the stable door after the horse has not just bolted, but completely disappeared from view. This is thanks to the documents being immediately mirrored by Wikileaks, where they still reside and where they can be downloaded from a server in this country, in defiance of the injunction. The terms of the injunction mean that the Guardian cannot even point people in the direction of where they can find them or "incite" others to publish; all they will have to do instead is Google for them, where they'll quickly find them.

Part of Justice Blake's justification for ruling against the Guardian was that he didn't believe that the documents had spread far enough for their confidentiality to have completely broken down. This is clearly nonsense: all those that Barclays wanted to hide these documents from have not only got them, they've been poring over them now since Tuesday, whether they be HMRC, Barclays' rivals, or anyone else with the slightest grudge against the bank. The Grauniad refers to the House of Lords ruling on Spycatcher, that you cannot put the melting ice cube back into the freezer. That is more than apt: through the ban the only people who are being denied from being allowed to see what everyone else has is those who are either without the internet or those that have never heard of Wikileaks and can't properly use a search engine.

Equally weak was Blake's second argument. He agreed that the Guardian can report on the contents of the documents, as that is in the public interest; not in the public interest is the unexpurgated publication of the documents in full, containing legally sensitive matters and other confidential information. There are some obvious flaws in this: how is the paper meant to know firstly what is considered legally sensitive and confidential and what isn't? Their lawyers' might come to predictability different conclusions from those of Barclays'. This appears to have the potential to be a slippery slope; how else can a paper know what is sensitive unless they first consult the people they are preparing to expose and give them the opportunity to halt publication in its entirety? Ideally, journalists should do this anyway, but there are certain situations where if they did on an incredibly important story, undoubtedly in the public interest, they could end up not being able to publish anyway. In cases such of that as Max Mosley, there ought to be no question of the person being informed beforehand; when it involves politicians being accused of corruption or corporations being accused of blatant and artifical tax avoidance, there is a good argument for not doing so. Furthermore, why shouldn't the general public be able to view the source material for such exposes and be able to make their own minds up where it is possible for the hacks to provide such a service? Journalists cannot always be relied upon to report accurately what is in things which they either come across, investigate or are handed to them, especially when it comes to such incredibly complex and difficult to understand matters as tax avoidance. The Guardian itself is has an example of this, having misinterpreted how Tesco was operating a tax avoidance scheme and wrongly claiming that they were avoiding corporation tax to the tune of £1bn when they were in fact avoiding stamp duty land tax on a much lesser scale.

Blake also suggested that "if the debate can flourish without the publication of the full documents, that is a highly material factor". But none of the articles in either the Graun or the Sunday Times begins to cover in anything approaching forensic detail just what is discussed and proposed in these documents; they just give a broad summary. Debate can flourish without them being freely available, but that is not truly informed debate. The best summation of what they contain was made by Alan Rusbridger in his statement to the court:

"I considered these documents to be of the highest significance in the debate about tax avoidance.
"They revealed at first hand the processes involved in structuring extremely complex and artificial tax avoidance vehicles; how lawyers and accountants worked together to exploit loopholes in government legislation; and the degree to which they are sanctioned at the highest levels within Barclays."

Only by examining the documents first hand do you fully understand just how Barclays' SCM team operated and operates. Blake's decision has slammed the door on one source of light, but the others remain wide open.

Labels: banks bailout, Barclays, economics, Grauniad, legal threats, Richard Murphy, tax, tax avoidance, Wikileaks

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3/19/2009 11:18:00 PM | Permalink | | links to this post

Tuesday, March 17, 2009

The smartest guys in the room get hot under the collar.

It would be nice to think that with various tax havens having to promise to be rather more transparent in their operations than they have been previously, threatened with being "named and shamed" by the OECD, that the actual businesses which exploit such havens would be following a similar trajectory. The sad reality is that both will continue to get away with it just as they have in the past: they'll wait for the current mood to slowly wither away, as it will when the economy eventually recovers, and then the same old lawyers and same bean-counters will be back to doing what they do best, letting the rich and powerful get away it while castigating the scum at the bottom who dare to fiddle their benefits.

Barclays however hasn't even bothered with letting it all blow other. Despite being in negotiations with the Treasury, threatened by its toxic assets, which it wants the government to insure, it still succeeded in gaining an injunction against the Guardian, stopping it from hosting documents detailing "Project Knight", a tax avoidance scheme devised in Feburary 2007 which could have seen the bank save between £40m to £60m in a single year. This is despite the fact the scheme is not illegal, and that Barclays even says that it fully informed Her Majesty's Revenue and Customs of what it was doing. Why then is it so desperate for the documents not to enter the public domain? Is it ashamed of what it was doing, legal though it was? Barclays' lawyers Freshfields argued that the documents were property of the bank, and that could only have been acquired by someone who had breached confidentiality agreements.

Sadly for Barclays, either the documents were up long enough for someone to mirror them, or they were also distributed to Wikileaks, increasingly becoming vital against legal threats of all varieties, where they are still fully available. Not just is the proposal for Project Knight included, but also documents detailing the setting up of a "Brazilian Investment Strategy", "Project Brontos", "Project Berry II - Investment in Index Linked Gilts", "Project Faber", "Project Valiha" and a memo detailing the minutes of a meeting of Barclays' Structured Capital Markets team concerning the setting up of an office for SCM in Luxembourg. Most interesting to do with the injunction issued against the Guardian is the involvement of Freshfields with Project Faber. Normally you would imagine that Barclays would have employed a separate legal firm to deal with the media, as Freshfields is ostensibly only involved with business law advice, but in this instance they seem to have decided not to do so. This raises a potential conflict of interest because the document on Project Faber details Freshfields' legal advice on the tax risk which the project would incur, and unlike the other documents where the risks are summarised fairly succinctly, Freshfields goes into quite some detail on five specific UK risks which Faber raises. Again, there's no suggestion here that either Barclays or Freshfields has done anything specifically illegal, but it also certainly seems to be in Freshfields' interest, as well as Barclays', to stop the documents from entering the public domain.

I won't pretend that I understand much of these documents, nor probably would 99% of the other people in the country, unless we had the likes of "Slicker" from Private Eye personally explaining them to us, but Richard Murphy is another man who does and who was asked by the Sunday Times to look at them after they were first passed them but didn't publish them in full. He described Project Valiha thusly:

It is designed so the money goes round in a big circle and comes back to Barclays so that they make £99m in tax savings without taking any risk at all. The whole thing takes three days.

As for the others:

“They work on the basis of exploiting tax regulations and the laws of different countries. They don’t generate any real profit for anyone, but they do save vast amounts of tax that they would otherwise pay.”

The Sunday Times claimed that Barclays might have been saving up to £1bn in tax through the various schemes, something the bank has vigorously denied. Murphy has though commented rather further on the schemes, of which it seems there might be even more which haven't turned up on Wikileaks:

I’ll tell you what I think is going on with Barclays. In my opinion it has constructed a series of wholly almost entirely artificial transactions undertaken through a significant number of separate legal entities, most under the control of Barclays itself, but some, inevitably, owned, or controlled (and in these deals it is always difficult to define what that might mean, deliberately) by the counterparty to the transaction - in most cases banks such as Goldman Sachs, Deutsche Bank, Credit Suisse, Fortis and so on.

Those entities have been in a number of jurisdictions, the UK and the Cayman Islands being the most common, but Luxembourg also being a participant. Some have been limited companies, some limited liability partnerships.

Some of those entities, even when incorporated elsewhere are tax resident in the UK, and some are not.

Some account under International Financial Reporting Standards. Some account under UK accounting standards.

It would seem that Barclays are trying to realise profits that they have ‘manufactured’ in most cases through these immensely complex structures by arbitraging (trading off) international taxation law, company law in various jurisdictions and even accounting standards, to achieve taxation results that mean that profits are realised or sold without taxation liabilities arising for Barclays.

The result has been a deliberate attempt to defraud – by which term I mean seeking to secure a financial advantage by deception, although not (I stress) illegally.

The deception has been on three parties. The first has been tax authorities who despite their brave statements to the contrary did not, I suspect, know the full details of some of these arrangements. It would seem that some may not have been disclosed to them.

Secondly, Barclays have sought to defraud (using the above definition) the taxpayers of the UK and maybe elsewhere who have not received the funds rightfully due to them on profits declared.

Thirdly, I think they have defrauded (using the above definition) their shareholders by declaring profits which were not, in my opinion, sustainable and which were manufactured through preconceived and structured financing deals in which the counterparties played a remarkably small part in exchange for what was, in effect, a fee to allow Barclays to record realised profits by turning the manufactured profits into third-party transactions.

This seems to be the real reason why Barclays is so desperate to keep the documents out of ordinary people's hands. They realise that they are some of the first real hard evidence to emerge of just how specialist teams within the banks sought to avoid tax, and who were subsequently incredibly richly rewarded for their work, with Murphy claiming that the head of Barclays' SCM division may well have been earning an astonishing £40m a year (other sources claim it could be £75m, for which see this revoltingly sycophantic article), about the same amount as that which one of the schemes would have saved the bank. In order to offset such huge remuneration, the profits from the avoidance would have had to have been far higher, and the £1bn a year figure no longer looks as nonsensical as Barclays claim. It somewhat puts Fred Goodwin's pension, even the £3 million lump-sum we now know he received into perspective, hence why Murphy has put up a further four posts on what should be done. At the very least we need to stop apologising for and excusing tax avoidance and demand that companies, in the words of Alistair Darling, don't just adhere to the letter of the law but also the spirit of it. Great public anger over the bailing out of the banks has not yet reached boiling point, but the Barclays revelations may just push the mercury further towards the top.

Labels: banks bailout, Barclays, economics, legal threats, Richard Murphy, tax, tax avoidance