The recession and tax havens: the banks must come clean

29 Jan 2009, by Adam Lent Guest in Economics

It used to be the case that those who engaged in debate about tax havens fell into three categories: those who thought they were morally indefensible and should be closed down, those who thought they were morally indefensible but didn’t think anything could be done about it, and those who thought tax havens provided a useful service to the wealthy and to the global economy.

It is a measure of how much has changed since the financial crisis in September that this debate has been transformed. Tax havens are recognised now not just as a moral outrage but also as a key cause of the crisis itself. The vast bubble in debt trading that has been central to the crisis was fundamentally linked to tax havens with the ‘special purpose vehicles’ which were set up to hold the proceeds of securitisation initiatives being based as a matter of course in locations such as the Cayman Islands. The important point being that this not only took such trading out of tax liabilities but also removed it from regulatory oversight due to the secrecy that deliberately shrouds financial activity in havens.

So the TUC report today which reveals that four of the five big banks have 1,207 subsidiaries incorporated in tax havens will ring alarm bells across the world. The report could not analyse HBOS because the bank failed to list its subsidiaries or their location in either its annual return or company accounts. This may be a breach of company law.

The Chief Executive of the British Bankers Association, Dame Angela Knight, has been doing the rounds of the studios today claiming that the TUC has failed to understand the global nature of banking and it is inevitable that banks will have subsidiaries all over the place. As proof of this she quotes the fact that the Spanish bank Santander has companies incorporated in the UK. This is ineffably lame.

Of course, many of those 1,207 subsidiaries will be genuine companies providing normal banking services to the population of a particular territory. But why exactly should the Cayman Islands, with a population of around 50,000, need 262 banking subsidiaries to service their population? I’ve been to the Cayman Islands, I can’t remember seeing a branch of Barclays on every single street corner despite the fact it has 143 subsidiaries there. Why, for example, are over a quarter of all HSBC’s subsidiary companies incorporated in tax havens – all of which have small populations and small real economies?

Sadly for Dame Angela this issue is not about to go away for three simple reasons. Firstly, it makes no sense for the taxpayer to be bailing out organisations which may at the same time be avoiding contributing to public funds. Secondly, there is now enormous global political momentum behind much tighter regulation of banking and financial services – this can’t be done effectively while that sector makes such wide use of tax havens. Thirdly, taxpayers need to know their level of exposure to banks’ liabilities and this can’t be known if banks are holding a fair proportion of their assets in secret accounts. These arguments have an irresistible force and logic which could not have existed before the globe was plunged into this economic crisis. In the end the banks (and the havens themselves) will have to co-operate.