Whatever route the government chooses for Brexit it will need to cooperate with other countries, especially our EU neighbours, to combat tax avoidance, tax evasion and money laundering. Yet the signs are not very good as the government seems to have chosen non-cooperation. It has snubbed the EU inquiry into the Panama Papers.
Last year, a leak of 11.5m documents and 2.6 terabytes of information from the office of Mossack Fonseca, a Panamanian law firm, drew attention to the possible involvement of UK-based companies, accountants, lawyers, bankers and others in alleged organised tax avoidance and money laundering. The leaked documents, known as the Panama Papers, showed that some 1,924 UK-based banks, accountants, lawyers and other intermediaries helped to set up opaque corporate structures that processed illicit financial flows.
Secretive British crown dependencies and overseas territories act as an outpost of the City of London and facilitate the flow of money. More than 113,000 of the suspect companies were incorporated in the British Virgin Islands, 15,000 in the Bahamas and a number were also registered in Jersey, Guernsey and the Isle of Man. Suspicious cash is thought to have flooded into the London property market. In April 2016, the UK government claimed that a special task force was investigating the leak.
Following the leak, the EU parliament formed a committee of inquiry into money laundering, tax avoidance and tax evasion, known as the PANA committee, to investigate the issues and develop reforms. After months of discussions, it visited London on 9-10 February to take evidence from academics, researchers, accountants, lawyers, banks, HSBC, parliamentary committees, regulators and ministers. I was one of the individuals who gave evidence on 9 February. On 10 February, the committee was due to meet officials from HM Treasury and Her Majesty’s Revenue & Customs (HMRC) to learn about the state of its investigations. At the last minute, HM Treasury sent a short email and pulled out of the meeting. Despite prior discussions, it failed to send any minister or senior civil servant to discuss anything with the PANA committee. The HMRC representative was unable to engage fully with the committee.
Perhaps the Treasury’s snub sends a signal about how the UK will cooperate, or otherwise, with the EU after Brexit. It is quite likely that treasury ministers Jane Ellison and/or David Gauke did not show up because they would have been unable to defend the UK’s ineffective regulatory response.
The UK has a poor record. Previously, inside information provided by HSBC whistleblower Hervé Daniel Marcel Falciani to HMRC showed that the bank’s Swiss branch may have helped wealthy people to evade taxes. Only one individual from the Falciani list of some 3,600 potential UK tax evaders has been prosecuted. In January 2016, HMRC told the Public Accounts Committee that it had abandoned its criminal investigation. By HMRC’s own admission, there have been only 13 offshore-specific prosecutions since 2009 as it puts more emphasis on making secretive deals than sending a message of zero tolerance. Matters are not helped by the fact that the government has systematically hollowed out HMRC.
Deal making and private manipulations are deeply ingrained in the British system. In the US, HSBC was fined $1.9bn. The charge sheet issued by the US Department of Justice said that the bank’s failures permitted “narcotics traffickers and others to launder hundreds of millions of dollars through HSBC subsidiaries, and to facilitate hundreds of millions more in transactions with sanctioned countries”. Later on, it emerged that then UK chancellor George Osborne and banking regulators were urging the US regulators to go easy and not to prosecute HSBC.
The UK cannot succeed in combating illicit financial flows because it has poor regulatory structures. There are more than 20 regulators dealing with tax avoidance and money laundering and no one adequately coordinates them, scrutinises them or calls them to account for their silence. The regulatory patchwork includes HM Treasury, HMRC, the Financial Conduct Authority, National Crime Agency, Serious Fraud Office, Ministry of Justice, Department for Business, Energy & Industrial Strategy, the Insolvency Service, various professional bodies representing accountants, lawyers, insolvency practitioners and estate agents, to mention just a few.
The Panama Papers, HSBC and other episodes draw attention to the role of accountants, lawyers and other enablers in facilitating tax evasion and money laundering, but the professional bodies representing them routinely lobby to water down laws and enforcement. The same bodies are then expected to investigate and prosecute their own members. None owes a duty of care to the public, nor is obliged to reveal the evidence examined by them. The result is all too predictable. On many occasions, judges have declared avoidance schemes developed by accountants to be unlawful but, to this day, not even one accountancy firm has been investigated, prosecuted or fined.
The UK government’s snub of the EU parliamentary committee is foolish and short-sighted. It is hardly a way of making friends for the tough post-Brexit journey ahead. In a globalised economy, no country on its own can combat illicit financial flows, and the UK stands to lose more than most because London’s reputation for dirty business will deter honest businesses. It will erode the country’s tax base and anger people who pay their taxes only to discover that the government is not living up to its promise of tackling organised tax avoidance/evasion and money laundering.