The Offshore Wrapper is written by George Turner, c/o Wrapper Towers

Dial C for Corruption?

Authoritarian countries and mobile phone companies present a great opportunity for money laundering and corruption. In developing countries most mobile phone services are bought though pre-paid cards which means companies handle large amounts of cash payments.

As we have covered in previous editions of the Wrapper (OW:41), the large amounts of cash flowing though mobile phone companies can make them a target for money launderers.

Another great feature of the mobile phone industry is that its fortunes are founded on government-issued licences.

If you can control or influence who gets the licences, you are made. 

You can extract money from the telecoms companies – and also from end consumers, who in a tightly controlled market can be squeezed with higher prices and shoddy services. What’s not to like?

This week the indefatigable Organised Crime and Corruption Reporting Project (OCCRP) uncovered a sizzling example of these kinds of practices in Uzbekistan, courtesy of old Wrapper favourites Gibraltar, Luxembourg and the British Virgin Islands (BVI).

At the beginning of the century Uzbekistan had only 128,000 mobile phone subscribers out of a population of 24 million. It had huge growth potential and Gulnara Karimova, the daughter of Uzbekistan’s president, saw an opportunity.

She allegedly put forward a simple proposition to the US owners of the local mobile phone network Uzdunrobita: give her 20% of the company – or exit the market.

Now investigators in Sweden, the US and Netherlands are probing how Karimova managed to extract up to $1bn from successive mobile phone companies working in the country.

This is alleged to have been facilitated by a range of offshore companies. At the same time Uzbeks were paying some of the highest mobile phone charges in the world.

It may not be a great surprise that a US diplomat referred to her as “the single most hated person in the country.”

The answer is $100bn – now what’s the question

The United Nations Conference on Trade and Development (Unctad) has released a new report with a characteristically glamorous title: “The fiscal role of multinational enterprises: towards guidelines for Coherent International Tax and Investment Policies”.

It is available here.

The report has some interesting stats about tax avoidance in developing countries. It states that multinationals contribute around $220bn though corporate income taxes to developing countries. But around $100bn in tax revenues are lost to offshore tax avoidance, on the “inward investment” portion of their activities. (Let’s call this tax cheating instead: after all, not all of what gets called ‘avoidance’ is necessarily legal. ) That figure is not far off the total $130-odd billion in development assistance from the rich world.

And of course that is just one dimension of offshore tax-dodging.

UNCTAD also found that an increasing amount of new investment into developing countries is routed though offshore hubs — even as international efforts to crack down on corporate tax cheating have reduced the usage of offshore hubs in richer countries.

The trend is particularly worrying, as developing countries rely more heavily on corporation tax receipts than countries in the developed world. And, as we’ve noted, the corporate income tax is one of the most precious of all taxes.

For a more detailed analysis of the report see the TJN’s blog post here. Or our very own Alex Cobham’s longer look at the numbers, here.

Polluting the ocean is tax deductible

If you were to cause a catastrophic environmental disaster though gross negligence, would you expect your fine to be tax deductible?

Well, it could happen.

If the Justice Department in the US settles with a company out of court, the costs of any fine imposed are considered a normal tax deductible cost of business unless the agreement specifically excludes this.

The US Public Interest Research Group (PIRG) estimates that for these reasons BP has already reaped $10 billion in tax windfalls related to its $40 billion clean-up and compensation bill for the ecological disaster it provoked when its offshore Marshall Islands-registered rig Deepwater Horizon started spewing oil in 2010. BP stands to reap a further $4.9 billion tax windfall on the remaining costs, the fruit of ongoing negotiations with the US government under the Clean Water Act.

This week PIRG delivered a petition with more than 30,000 signatures to the Justice Department asking them to make sure any fines against BP are not tax deductible.

Pigs prepare for take off?

The last week was a big week for corporate transparency. The United Kingdom adopted a law to set up a public register of beneficial ownership. This makes Britain the first really major economy to take action on anonymous companies.

Surprise, surprise, though: it is only a job half done. Not nearly good enough.

Still, it is a step forwards. And campaign groups hope this will pile pressure on other countries like the US to follow suit. The U.S. is a real hotbed of financial secrecy, as we have noted before.

Another crucial question to ask is this: will it put pressure on the UK’s own network of tax havens and secrecy jurisdictions?

When the plans for a UK register of beneficial ownership were first announced the UK prime minister wrote to all British overseas territories (Cayman, Bermuda, British Virgin Islands/BVI, and a few others) and crown dependencies (Jersey, Guernsey, and the Isle of Man) asking them to consider similar moves.

He got, at best, a lukewarm reply. After all, countries like the British Virgin Islands don’t make money from transparency. Britain can force their hand, if it really wants to. But on secrecy, it never seems to want to. Why could that be?

But now it seems that some countries may be seeing the writing on the wall. Gibraltar, we’ve gleaned, looks keen to be seen to be clean, it seems. Let’s see where that one goes.

The Cayman Islands may be another case in point. Its premier was recently at an event in the UK House of Lords to promote “investment” in the country (if one can use that word to describe paper reincorporation, shell company business or profit-shifting and its facilitatation.) After stressing how the Caymans are a fantastically well regulated financial centre, as tax havens always do, he told the audience that the Caymans would look into implementing a register of beneficial ownership.

No public register, however: this “would be detrimental to our economy,” Cayman Premier Alden McLaughlin said. So that’s all right then. The interests of sixty thousand people, versus the world’s.

But still, a non-public register available to public authorities, elsewhere, is better than no register.

Will Cayman take a step forwards on this?  The Wrapper will be watching this one….

Heard the one about the Swiss and Lebanese bankers?

Lebanon has an old reputation as the Switzerland of the Middle East. It is one of relatively few countries left with banking secrecy laws and it is a popular destination for all sorts of illicit funds. It’s not for nothing that it made seventh place on our Financial Secrecy Index. Swiss bankers have played an important role in the construction of offshore Lebanon, it seems.

According to the Lebanese newspaper the Daily Star, Swiss banker Jacque de Saussure, chairman of Banque Pictet & Cie, told a conference that the game was up: Lebanese banks need to prepare for the end of banking secrecy.

Pressure from the United States and Europe, he said, would compel countries like Lebanon and Switzerland to disclose if EU citizens hold bank accounts in their countries. He went onto say that clients of banks should start the process of transitioning to more transparency though training and advising their clients.

Whether any of this happens remains to be seen. Lebanon has hardly been falling over itself to clean up its financial system: the article also revealed that anti-money laundering rules approved by the government three years ago are still waiting to be ratified by Parliament.

Order your tickets for the revolution

Russell Brand is now, reportedly, the world’s fourth most influential thinker. The man with nine million twitter followers is only bettered in the influential Prospect Magazine ranking by French economist Thomas Piketty, Greek finance minister Yanis Varoufakis and environmental activist Naomi Klein. Brand just beat U.S. economist Paul Krugman, who weighed in at number five. (Krugman, it seems, was not particularly amused by the comedian.)

Now the controversial UK comedian is about to release a new film covering tax avoidance and the global financial crisis. It’s going to be big.

Here is the trailer for “The Emperor’s New Clothes.” Enjoy.