Big bank accounts apparently held by kleptocratic penguins
In last week’s newsletter I talked about the surprisingly large investments in U.K. property by people apparently resident in Antarctica, and suggested it was probably a statistical anomaly: perhaps people had clicked on the wrong line of a drop-down menu? But as often seems to happen when these rocks get turned over, the creepy-crawlies are more interesting than anticipated.
Thanks to Andres Knobel, lead researcher on beneficial ownership at the Tax Justice Network, for pointing out that this has happened before. To misquote Oscar Wilde: to assign improbable quantities of wealth to icy wastelands inhabited primarily by penguins once may be regarded as a misfortune; to do it twice looks like carelessness.
After the Global Financial Crisis of 2007-8, most of the world’s richest countries adopted the Common Reporting Standard and agreed to share information about money held in each others’ bank accounts to prevent tax dodging (America is an exception. It just demands information from other countries, without sharing it back, which helps explain South Dakota’s booming trust industry). Australia takes transparency that bit further and does not only receive information about how much wealth foreign residents hold in its banks, it also publishes it. And that brings us back to penguins.
In the 2019 data, some 2.5 million Australian dollars were apparently held in 12 accounts owned by tax residents of Bouvet, a storm-lashed uninhabited sub-Antarctic volcano, which belongs to Norway (Britain once also had a rival claim to it, though why anyone would want it is something of a mystery) and holds the rare distinction of being the most remote island in the world.
- “Bouvet’s only vertebrate residents are thousands of seals, seabirds and penguins,” notes a report from ABC.
- “The island measures only 49 square kilometers, and is almost entirely covered by ice. Steep cliffs on all sides of the island make it extremely difficult to go ashore there,” notes the polar institute in Norway, where the island is called Bouvetøya.
And that’s not all the financial wealth in the Southern Ocean. Non-existent tax residents of Heard Island and the McDonald islands, a group of rocks that belong to Australia despite being as far from Perth as London is from the North Pole, owned a surprising 967,497 Aussie dollars of their own. It is easier to visit these islands than it is to visit Bouvet, but not by much. No one lives there, unless you count penguins, of which there are four species, breeding in vast numbers. The data also reveal another 348,759 dollars belonging to people resident in Antarctica.
- “An account reported as belonging to Antarctica means the account is held by a financial institution in Australia, but the account holder has indicated they are a tax resident in Antarctica,” a spokesperson for the Australian Tax Office helpfully explained.
Other slightly anomalous data include 336 accounts belonging to residents of Pitcairn, a Pacific island group with a population of “around fifty” (and the Henderson Crake, a flightless bird of its own, which is “bold and curious”). All of this does rather suggest the Common Reporting Standard may not be as robust a tool as we had hoped for when it comes to cracking down on tax dodging.
- “If these mistakes are present in a country transparent enough to publish statistics, it’s troubling to think what worse mistakes may be present in much more secretive countries,” noted Knobel.
Almost all of these anomalies had vanished by the time 2020’s data was reported — though Pitcairn was still there, with AU$183,306 in a reduced 39 accounts — which gives us space to look at the really striking insights (and they’re not flightless birds). It’s not surprising that the largest totals in Australian banks belonged to residents of the largest economies: the United States, China, the United Kingdom, Germany, etc. But this reform was designed to expose and defang tax havens, which it clearly has not done. There was AU$1.798 billion belonging to people resident in Bermuda; AU$2.59 billion from the Cayman Islands; and AU$1.1 billion from Jersey, which all looks slightly improbable. If anyone knows of other countries that publish equivalent data, please send it over.
LIMITED LIABILITY PARTNERSHIPS
Back in the 1990s, British accountants were getting nervous. There had been a series of scandals — not least, the collapse of the Bank of Credit and Commerce International — and auditors worried they might be held liable if more malfeasance was uncovered, and if they’d failed to spot it. Back then, British accountants’ firms were structured as general partnerships, which had great advantages (the members didn’t have to publish their accounts) but also exposed them to unlimited liability if they were sued. The partners could lose everything. So, what were they to do?
They could have formed limited companies to protect themselves from being sued like an ordinary person would, but that would have involved them publishing accounts and revealing their profits, so instead they lobbied for the flexibility of the “limited liability partnerships” such as already existed in the United States, where they’re called “limited liability companies”, or LLCs (thanks, Wyoming).
In an improbable and rarely-repeated display of resolve in the face of financial sector lobbying, the British government stood firm, so the accountants went to Jersey, which was happy to oblige (for the full story, read Nick Shaxon’s Treasure Islands) and pass all the legislation the accountants wanted. Faced with the prospect of all its accountancy companies relocating to Jersey, the U.K. backed down, which is why — in 2000 — it passed a law creating the limited liability partnership.
There has been a lot of attention on the misuse of Scottish Limited Partnerships, but not much on their close cousins. So how have the LLPs been doing? Sadly, it is the usual sordid tale of disastrous mismanagement, untold damage to the world, and British authorities doing nothing about it.
- “More than one in ten Limited Liability Partnerships (LLPs) (21,000+) that have ever been incorporated have characteristics identical to those used in serious financial crimes, such as bribery, embezzlement of public funds and sanctions evasion,” concludes a brand-new and landmark report from Transparency International.
- “Using available evidence from known cases, a reasonable and conservative estimate puts the economic damage caused by this network in the tens of billions, potentially hundreds of billions, of pounds.”
- “While there are criminal cases in Denmark and Latvia against some of those involved, there are currently no known cases before the U.K. courts and almost no civil enforcement action by U.K. anti-money laundering supervisory bodies.”
There is a bill currently before parliament which would finally give the U.K.’s corporate registry the powers it needs to check the information provided when companies are created, but this report demonstrates — as if it were needed — the incredible damage already done by the British government’s failure to act on problems that have been clear for years.
- “The Bill includes significant and overdue reforms to Companies House. It has long been acknowledged that it was far too easy to register a company in the UK without any checks being performed on the individuals involved or the information provided. This lax environment has been exploited by criminals and kleptocrats to move illicit funds,” said Sarah Wrigley, a director at Forensic Risk Alliance.
One of the many good policy suggestions in the Transparency International report is that it should simply be more expensive to create a company (the report suggests 50 pounds, up from the current cost of 12 pounds), which would raise funds for Companies House, giving it the resources to hire the people it needs to check the information it needs to do its job.
Much of the money laundered through LLPs has belonged to Russian kleptocrats, which means that — thanks to those 1990s accountants who didn’t want to be accountable — these British corporate structures have helped hide cash for the war criminals currently launching missiles at playgrounds in Kyiv. If anyone involved in making British government policy felt like taking a step back at any point, I hope they would conclude that this kind of senseless deregulation is a mistake everyone should actively seek to avoid in future. Sadly, I would estimate that the chance of the current British government doing anything so sensible is approximately zero.
In fact, Prime Minister Liz Truss appears to be planning a series of mini-tax havens within Britain, in the apparent belief that the rest of the country is over-regulated, god help us all.
It’s sometimes possible to forget that kleptocracy isn’t all about Putin and other gilded thugs strutting around on the world stage, but about the hundreds of millions of ordinary people whose lives those thugs have ruined. This report from The Sentry helps to remind us of the true cost of our disastrously run financial system, and of what happens when crooked politicians are given everything they want by enablers. In this case, a lack of medicine, power, food and security resulted from the misuse of letters of credit (LCs) provided by two foreign banks supposedly to allow the South Sudanese government to import necessities.
- “Documents reviewed by The Sentry, which include hundreds of corporate records and government documents, as well as dozens of interviews with former officials and banking experts with first-hand knowledge of the program, show that South Sudanese government officials and regional networks of traders gained access to the majority of the LC-backed contracts, obtaining more than $500 million of the $922 million allocated LCs without showing any proof of delivering the essential goods these millions were meant to buy,” the report states.
One of the things that is so valuable about the Sentry — founded in 2016 by actor George Clooney and author John Prendergast — is that its focus on Central Africa exposes many of the lower-level kleptocratic networks often missed by those of us who are based in Western Europe or the United States. South Sudanese politicians have used corporate structures in Uganda and Kenya to steal the wealth that should have been being used to rebuild their country, but the damage they have done is every bit as harmful as that done by kleptocrats elsewhere who routed their wealth via the British Virgin Islands, Miami or Scotland.
WHAT’S WRONG WITH VLADIVOSTOK ANYWAY?
Back in April, the good folks at Whale Hunting published an article laying out all the delights of Vladivostok for a sanctioned oligarch looking for a new home for his yacht. That was a response to news that steel tycoon Alexei Mordashov’s 142-meter Nord — the eight-largest penis substitute in the world — had turned up in Russia’s Far East. Six months on, its owner (who has been sanctioned by the U.S., EU and U.K.) appears to have tired of the pearl of the Russian Pacific since his yacht has arrived in Hong Kong, much to the displeasure of the U.S. government.
- “The possible use of Hong Kong as a safe haven by individuals evading sanctions from multiple jurisdictions further calls into question the transparency of the business environment. Hong Kong’s reputation as a financial center depends on adherence to international laws and standards,” said a State Department spokesperson.
Hong Kong’s administration has insisted that this is none of its business, and that it cannot cooperate with unilateral sanctions imposed by other countries, but it seems unlikely that Washington will consider that to be the end of the matter. Since Putin began his renewed assault on Ukraine in February, China has trodden a careful path, simultaneously friendly with Russia, while also trying to avoid secondary sanctions that could deprive its companies of access to dollars or Western markets. Mordashov may be about to test that, and it could be fascinating.
WHAT I’VE BEEN READING
Last week I devoured Chip War, the fight for the World’s Most Critical Technology, by Chris Miller, which was absolutely fascinating. I knew nothing about semiconductors, so just learning how they worked was great, but then I got to delve into the many-sided struggle to control their production, with the roles of the United States, Japan, Taiwan, South Korea and China all ebbing and flowing over the decades. From the perspective of someone sitting in Europe, it was notable how much of a sideshow the Old World is when it comes to this new technology. With the exception of ARM Holdings in the U.K. and the Netherlands’ ASML, there seem to be no significant European companies in this space at all, which is a pretty remarkable continent-wide strategic failure.