The worldwide thievery of big business

FEW THINGS better display the underlying morality of capitalism than the scale and scope of 'offshore banking', 'off-balance-sheet' accounting and parasitical speculation - thievery by most people's definition.

Steve Appleton

The World Bank estimates that the total of 'illicit money' hidden from tax authorities, governments and accountants, amounts to between $1 trillion and $1.6 trillion a year.

Only one-third of it is accounted for by organised crime, and only a tiny proportion (about 3%) is taken by corrupt government officials. Most of the money, around 65%, finds its way into secret bank accounts via 'ordinary' international trade!

The 'greatest' single event of mass swindling took place following the collapse of Stalinism in Russia. Between $200 billion and $500 billion has been siphoned-off since 1990. In the main this was achieved by deliberately underpricing assets that were sold abroad - assets such as oil, gas, minerals, timber, etc.

According to an article in the New York Review of Books (3 Dec 2009): "Oil was ostensibly sold abroad for as little as $10 a metric ton, with the balance of the real (market) value paid into the European and American bank accounts of Russian Oligarchs".

Roman Abramovich, the well known football supporting Russian oligarch, 'earned' some of his money by using Western-supplied loans to buy half the shareholding of the Sibneft oil company, for $100 million. He sold these shares ten years later for upward of $9,000 million.

Although official corruption is not the main component, Nigeria is singled out due to its renowned level of government venality. Around 100 million of Nigeria's 150 million citizens subsist on less than $2 a day. However, since the 1960s around $400 billion has been stolen by corrupt government officials and ministers.

Accounting tricks

Simple accounting tricks can help corrupt managers and executives divert cash into private accounts and evade tax authorities. Consider this simplified example of how it's done. International Klepto Corporation (IKC), in country A, makes machines at a cost to them of $1,000 each. A dummy corporation, owned by IKC, in a tax haven, then buys the machines at cost (ie for $1,000 each). Since IKC has not made any profit on this transaction, no tax is due in country A.

The dummy corporation in the tax haven then sells the machines to another IKC subsidiary in country C, for $2,000 each. Klepto Corp thereby makes $1,000 profit per machine. However, the tax paid is minimal - because that is what tax havens for.

The IKC subsidiary in country C now sells the machines on the open market for $1,500 each. This allows Klepto to claim a $500 loss for tax avoidance on each machine - which it had bought for $2,000. However, since Klepto Corporation owns each of the firms involved in these operations, IKC is actually making $500 profit on each machine!

Needless to say, most of this 'black money' tends to flow from poorer countries into richer ones. Since the 1990s, foreign aid to developing countries has been around $50 billion to $80 billion a year. Compare this, however, with the money stolen from these countries. This is estimated by the World Bank to be around $500 billion to $800 billion dollars. In other words, for every dollar paid in aid, $10 is stolen!

Tax havens

Tax havens now control around $6 trillion of assets. The Cayman Islands alone hold around $2 trillion in liquid assets - mainly cash and gold. (One trillion, is a thousand billion, ie 1,000,000,000,000).

Last month it was reported that Robert Gaines-Cooper may have to pay a £30 million tax bill he allegedly has been seeking to avoid.

Despite having 'moved' to the Seychelles, he nonetheless "owns an estate in Oxfordshire where he keeps his collection of paintings, classic cars and guns" (Financial Times - 19/2/10). The tax authorities, perhaps not unreasonably, believe that the Seychelles move may in fact have been a bit of a wheeze!

Some other unlucky businessmen may indeed get caught too as the government seeks to "get tough" on tax evasion.

But these will be the exceptions that prove the rule. It will be a cold day in hell when capitalist governments put the same effort into cracking down on tax fraud as they do into chasing the pennies of supposed benefit fraud.

An often overlooked aspect of tax thievery is that the consequential multi-billion dollar tax-gap has to be made up somehow, by someone.

Those organisations best able to evade and avoid paying taxes are most likely to be large international corporations - who can afford the tax lawyers, and who can most easily set up subsidiaries in tax havens. This means that the tab for the missing billions has to be picked up mostly by everyone else - including small and medium-sized businesses.

Under political pressure as a result of the economic crisis, politicians and academics are searching around for ways to look as though they are doing something. However, their proposals fall wildly short of what is required.

The so-called "Tobin Tax" (on international financial transfer payments - at a proposed rate of well under 0.5%) has been touted - but it is barely a fig-leaf!

It is named after James Tobin, a Nobel Prize-winning American economist who suggested it in 1972. The BBC website (7/11/09) said: "The idea has been gaining some currency in the last few months as world financial leaders look for ways of ensuring that taxpayers do not have to bear the cost of future bank bailouts. But there was no sign until today of any great sympathy for it from the British government."

Paul Mason (economics editor on BBC TV's Newsnight) said on his blog recently that the tax, however, "would be hard to do, and require international co-operation..."

Little will happen beyond stopping some of the worst excesses. Governments are fundamentally at the beck and call of the capitalist classes and so will only tinker with their money making scams.

A democratic socialist government, though, would make a good start by opening the books of the main culprits to see where the billions have gone. It would nationalise the main levers of the economy, under democratic and transparent control.

This would kick-off the process of bringing to justice some of these economic freebooters - and set the basis for, amongst many other things, a truly fair taxation system - and an honest, transparent morality in government!

The corporate avoidance scam

WHEREAS TAX evasion is illegal, tax avoidance by large corporations - who, for example, relocate their head offices from a higher tax country to a lower tax country - is perfectly legal.

So even though a company may conduct most of its business in for example the UK, where corporation tax is around 28%, its main office may be relocated to say Dublin, Ireland, or Geneva, Switzerland, where corporation tax rates and income tax rates are significantly lower, eg a 12.5% corporation tax rate in Ireland. (In parts of Switzerland personal income tax is only 10% compared to a new upper rate of 50% in the UK).

Companies that have recently moved from Britain to lower tax countries include advertising giant WPP, drugs group Shire, publishing company United Business Media, rented office group Regus, financial groups Henderson, Brit Insurance and Hiscox, and engineering firm Charter. Henderson for example is estimated to have saved £8.5 million a year by this move (Times online 31/08/08).

US companies who have moved their European headquarters to Switzerland include Kraft, Procter & Gamble, Colgate-Palmolive, Yahoo! and Google (The Guardian, 13/7/09).