Omar Marques/SOPA Images/LightRocket via Getty Images

These tax havens strangle the EU

Oligarchy is a weekly newsletter tracking how the super rich are changing the world for the rest of us. In this edition: These tax havens strangle the EU; Peak corruption in Mozambique

To get Oliver Bullough’s weekly Oligarchy delivered straight into your inbox sign up here

SURPRISE EU HYPOCRISY ON TAX HAVENS

The European Union doesn’t like tax havens, which is why – twice a year – it publishes a list of “non-cooperative jurisdictions,” so as to highlight places that are undermining its efforts to tackle not just illegal tax evasion and money laundering, but also tax avoidance – “the use of legal means to minimize tax liability”. This is apparently a principled stance, about defending the spirit of the law, as well as its letter.

Of course, the EU’s approach to tax havens is not without its criticshere’s what I had to say about it in October– and some of those critics are from within European institutions. 

  • “While the list can be a good tool, member states forgot something when composing it: actual tax havens. The truth is, the list is not getting better, it’s getting worse. Guernsey, the Bahamas and now the Cayman Islands are only some of the well-known tax havens that member states have taken off the list,” said Members of the European Parliament in a motion adopted earlier this year.

Still though, that’s just a technicality. In general, the European Union must be fully onboard with the effort to impose a global minimum tax rate to force multinational companies to pay taxes to the countries from which they extract profits, right? Well, no, actually. This is where things get, as my kids might say, totally awkward.

Some 130 jurisdictions last week agreed to support the deal agreed at the G7 meeting in June, including notorious tax havens like Bermuda, the British Virgin Islands and the Caymans, even though its minimum tax rate of 15% threatens the appeal of their no-tax business model. Obviously, it remains unclear whether Congress can be persuaded to back the deal, so U.S. participation is not completely guaranteed. More worrying, however, is that EU participation isn’t guaranteed either, thanks to three member states refusing to sign up.

  • “I consider it absurd that any world organization should assert the right to say what taxes Hungary can levy and what taxes it cannot,” said Hungarian Prime Minister Victor Orban. “Especially as we are not a tax haven.” (Hungary’s corporate tax rate is nine percent.)
  • “To put it bluntly – the aim of the proposal is to limit tax competition and tax policy choices between different countries. When has restricting competition ever amounted to anything good?” said Estonian Finance Minister Keit Pentus-Rosimannus.
  • “I was not in a position to join the consensus on the agreement and specifically a global minimum effective tax rate of ‘at least 15%’ today,” said Irish Finance Minister Paschal Donohoe.

Estonia and Hungary have both threatened to take the European Commission to court if it tries to impose the agreement on them, which is alarming, since – thanks to the EU’s unanimous decision-making process — without the countries’ agreement, the EU cannot sign up. 

The thing about tax havens is that they invariably emerge anywhere that money can move freely, but regulations and laws cannot. In the United States, many states have specialized in trying to swipe money from their neighbors by undercutting their rules: South Dakota, Nevada, Florida, Delaware, etc. Almost all of the fragments of the rump British empire – Jersey, Gibraltar, Anguilla, etc. – have undercut the tax base and legal system of the “mother country” at one time or another. Inevitably, the same has happened within the European Union, with smaller countries like Estonia or Ireland deliberately passing laws to attract companies which are keen to trade in Germany or France, but which are un-keen to pay their taxes. Because of the UN’s consensus decision-making process, this means tax havens now have a veto over the bloc’s tax policy, which is sub-optimal.

Hopefully, this latest plot twist in the effort to reform global taxation rules will encourage European policy makers to pay a bit more attention to themselves, before further bullying places like Dominica, Vanuatu or Samoa by putting them on their blacklist. Sadly, however, I suspect that – come October, when the next update to the list is due – we’ll see the EU once more naming and shaming diplomatic minnows for policies that are commonplace in many of its members.

Of course, all of the above pre-supposes that the terms of the minimum tax deal agreed at the meeting of the Organization for Economic Cooperation and Development (OECD) last week are actually good. I’m not going to pretend I understand them all, but I am troubled by some of the analysis I have read, including the suggestion that it would actually deepen inequalities around taxation between rich and poor countries.

  • “The OECD increasingly looks unable, or unwilling to deliver a fair and effective reform. Countries should take the opportunity to push ahead with their own reforms, and consider the possibility of future negotiations being held under UN auspices instead,” said the Tax Justice Network’s Alex Cobham.

WHO AUDITS THE ACCOUNTANTS?

I have a confession to make: I have never really engaged with Mozambique, and have thus up to now overlooked the astonishing scandal of the tuna bonds – “surely the most egregious corruption offense of the decade”.

It is a huge sprawling disaster, of the kind we thought had ended decades ago, with Credit Suisse and VTB lending money to state-owned companies, all audited by EY, before it was stolen by kleptocrats, leaving ordinary Mozambicans liable to pay it back. If like me, you haven’t read much about it before, I highly recommend checking out this series from Open Secrets, which covers it in depth.

Really importantly, thanks to Spotlight on Corruption (full disclosure: I was a founding trustee), we also have documents for all the UK court cases that this scandal has spawned. London regularly hosts legal proceedings addressing the effects of kleptocracy worldwide, but it is very hard to obtain court documents thanks to Britain’s antiquated transparency mechanisms. It is fantastic that Spotlight has decided to build a database of relevant legal documents, so we can keep an eye on the proceedings as they grind onwards. Spotlight plans to expand the database to cover all cases that come to court in the UK, and I recommend you keep an eye on it.

PLAY THAT FUNKY MUSIC, DJ

I was a little alarmed by the response to my letting slip last week that I used to go out dancing to electronic music every weekend. One reader told me she’d always thought I was more the kind of guy who’d sit at home listening to Nick Drake. For the record: I was not.

The reason I mentioned music at all was because of a London court ordering the disclosure of the identities of two people under investigation for money laundering: self-styled DJ Izzat Jamadova and her husband Suleyman Javadov, both of whom have close ties to the ruling elite in Azerbaijan. Now they’re back in the news, having agreed to forfeit more than four million pounds to settle an investigation brought by Britain’s National Crime Agency.

  • “This case is a significant moment in the UK’s fight against illicit finance. What we’ve shown here is that the method you use to transfer money matters,” said Matthew Long, Director of the National Economic Crime Centre at the NCA. “International elites should pay close attention and make sure any method used to transfer their assets is legitimate from end-to-end.”

According to the NCA, the couple’s assets were moved via the so-called Azerbaijan laundromat scheme exposed by journalists from all across Europe, including from the Organized Crime and Corruption Reporting Project, although – under the terms of the settlement — they admitted no wrong-doing. The sum recovered is just a fraction of the estimated $2.9 billion that moved through the laundromat over two years, but money laundering expert Graham Barrow hoped it showed a new resolve by British law enforcement, after years of passivity and inaction.

  • “It puts a stake in the ground. It represents a start. We are beginning to fight back. And, I hope, gives us the courage to fight future cases even harder,” he tweeted.

But many others saw the glass as being half-empty.

  • “Fines do not deter kleptocrats, but rather embolden them. This is a drop in the bucket; no admission of wrongdoing, no loss of property, no jail, no nothing. Might as well be endorsing grand corruption,” tweeted Paul Massaro, who advises the US Helsinki Commission.

And Sue Hawley, who runs Spotlight on Corruption, was almost equally downbeat in her assessment

  • “Settlements are deeply unpopular with those from countries where corruption occurs because they let suspects off the hook and provide impunity for kleptocracy,” she wrote.

British investigative agencies appear to be increasingly reliant on non-conviction-based asset forfeiture when tackling kleptocrats, as they try to navigate between the high expectations of activists; the counter-attacks of potent and highly-paid defense lawyers; and the constraints imposed upon them by being chronically starved of resources. Settlements such as this latest one are better than nothing, because the National Crime Agency can walk away secure in the knowledge it hasn’t seen a case collapse in a disastrous and expensive manner. However, suspects get to walk away claiming innocence, keeping some of the funds that were frozen, and assured there will be no further investigation. 

Both sides are probably happy with this outcome, which means we are likely to see many more settlements of this nature. Essentially, therefore, a whole slew of supposedly illegal activities have now been legalized for rich people, and I can’t say I’m very happy about that.

WHAT I’M READING

I sat down happily to peruse the World Wealth Report, to learn a bit more about how oligarchs are doing. It was as you’d expect, pretty interesting, particularly when read in conjunction with last month’s Ultra Wealth Report from Wealth-X. In the natural world, when you get a proliferation of groups studying something – pandas, say, or flightless birds on remote islands – that is a bad sign, since it suggests those creatures are endangered and we need to learn how to conserve them. You don’t get global coalitions of activists dedicated to understanding mice, for example, because they’re so plentiful they don’t need examination.

Wealthy people are not like that, however: the more of them there are, the more specialized organizations pop into existence to help us study them. Prediction: it won’t be long before scientists start trying to attach radar collars to oligarchs, so they can better understand how to sell them stuff.

Anyway, if you’re interested in the very wealthy, take a look. Here’s a highlight: if you rank cities by how many people worth more than $30 million they are home to, London has dropped out of the top ten ranking for the first time since records began. How’s that for a Brexit dividend?

The story you just read is a small piece of a complex and an ever-changing storyline that Coda covers relentlessly and with singular focus. But we can’t do it without your help. Show your support for journalism that stays on the story by becoming a member today. Coda Story is a 501(c)3 U.S. non-profit. Your contribution to Coda Story is tax deductible.

Support Coda

Oliver Bullough

Oliver Bullough is an author and journalist from Wales, who specializes in writing about financial crime, often when it has links to the former Soviet Union. His most recent book is Moneyland, why thieves and crooks now rule the world and how to take it back, and he is currently trying to write another one despite lockdown.

@OliverBullough