Tuesday, March 24, 2009

Trillions down the drain: tax havens and shadow banks

This is the title of a first-rate article published by a German political magazine looking at tax havens and the economic crisis. It is written by Nicola Liebert, an active member of TJN-Germany, and Axel Troost, a member of the German Bundestag (parliament) who is also a TJN member. The article can be downloaded in German here, but we now have an English translation, which we provide here.

An early paragraph gives a flavour, quoting the Deputy Managing Director of the Bank for International Settlements as saying that the emergence of a "shadow banking system" had simply not been noticed, then adding:

"This paper argues that one key reason why the development of a shadow banking system had not been registered by even the most senior supervisors, let alone regulated, is that this system is almost exclusively based in tax havens."

It then goes on to outline why this has been so. It focuses especially, but not exclusively, on German financial institutions, looking, for example, at how German banks such as IKB, Sachsen LB, Hypo Real Estate (HRE), HSH Nordbank and Bayern LB shifted assets abroad, offshore, and off their balance sheets, often to jurisdictions like Dublin or Delaware that most people don't realise are tax havens, but also to the more "classic" tax havens like Cayman or Jersey. This complements and expands on research for TJN by Jim Stewart, Senior Lecturer in Finance at Trinity College, Dublin, who described problems with Dublin's International Financial Services Centre (IFSC) in a recent edition of our newsletter, Tax Justice Focus.

Liebert and Troost note, for example, about an HRE subsidiary called Depfa:

"in a letter to the Finance Committee of the German Bundestag written on 16 October 2008, Jochen Sanio, the President of the German Federal Financial Supervisory Authority (BaFin), emphasised that it was exclusively incumbent upon the Irish supervisory authority to monitor Depfa’s liquidity and solvency, which was why the German auditors had definitely not been required to examine the liquidity position of HRE’s Irish subsidiary."

And then compare this to what Jim Stewart wrote:

"Yet despite the location of managed funds and substantial operations in Ireland, the Irish regulator does not feature in any media analysis or discussions relating to the insolvency and subsequent take-over of Bear Stearns. In an interview, the Irish regulator considers his remit is to ‘Irish banks’ – that is, banks that have their headquarters located in Ireland."


The long article continues; it looks at hedge funds, at the off balance sheet activities of Fortis bank and its hundreds of offshore subsidiaries; at the Icelandic bank Kaupthing and its activities in Bermuda, and it briefly examines Dublin, Jersey and Delaware to illustrate typical features of "regulatory havens." It also provides fascinating snippets, such as this comment from the Managing Director of the Cayman Islands Monetary Authority, Cindy Scotland, which illustrates not only attitudes in tax havens, but also the high legal hurdles that must be overcome to enact exchange of information under OECD guidelines:

"In the last few years, exactly two inquiries have come from Germany. So there does not appear to be any great need for transparency."

The article contains many more points and looks at approaches to tackling the problems; it is fitting to end this blog on this quote:

"The strategy currently being pursued by the world’s governments resembles that of health authorities that react to the outbreak of a pandemic solely by treating the people who are carrying the infectious disease – the banks – with expensive medicines without asking where they picked up the infection. No one is stopping their patients from setting off straight away for the same destination again, and no one is bothering with action to fight the sickness at its epicentre."

If you haven't already read the article, click here (English; Deutsch)

(Separately, Liebert has prepared a comment for the Finance Committee of the German parliament on tax havens and explaining why OECD standards are not enough. Click here - unfortunately it is only in German; no English translation is available.)

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