The scandal of the tax havens

Offshore financial centres, such as Jersey and the Bahamas, now play host to a third of the world's

Where did all the money go? Not so much those billions that disappeared from computer screens when the stock market began its downward slide in the summer. Rather, I am thinking of those missing chunks of the last $4.8 billion International Monetary Fund loan to Russia, now being sought by Russian interior ministry officials.

According to those who know about these things, a large proportion of the missing IMF money left the Russian economy via the secretive and anonymous circuits of offshore finance centres. It re-entered the capital markets in private hands. For all we know, it is probably here - invested from there in the City of London.

"It's not fanciful," says Adam Courtenay, the editor of Money Laundering Bulletin. "It could have gone to Cyprus or another offshore centre, then sent to another trust somewhere like Jersey, set up by lawyers in the City of London, and then reinvested by them. The trail gets lost - that's what money laundering is all about."

Most of these offshore centres are tiny pin-pricks in an atlas, like Jersey or the Bahamas, the British Virgin Islands or Labuan in Malaysia - though Luxembourg, Switzerland and even offshore aspects of London, New York and Dublin ought to be included as well. But these tiny places now host a staggering amount of the world's wealth.

Because of the secrecy that surrounds them we can't know how much. The most recent estimate is around $6 trillion, approximately the annual world trade in goods and services, or about one-third of all global wealth.

Take the Cayman Islands. By 1994 they were playing host to as many as 546 banks, though there were actually only six in the George Town capital of the kind that actually cash cheques. Only 69 had a physical presence: the rest were just nameplates and legal entities. It's the same in the offshore financial centres nearer home. Deposits in the Channel Isles and the Isle of Man probably amount to £400 billion.

Then there is the money that simply passes through the offshore centres on its way somewhere else. One American study believes that up to half of all global transactions are conducted electronically via the offshore financial centres.

Why so much? That depends on who you talk to, but there is no doubt that offshore anonymity encourages big companies and rich people to use these tiny islands as a means of avoiding or evading tax. And secrecy is important if the money happens to be a missing IMF loan.

A Home Office report on the Channel Islands and Isle of Man, commissioned from a retired Treasury official, Andrew Edwards, is expected next week. Edwards lists a series of abuses, including Jersey's failure to help foreign authorities investigate tax evasion and other frauds, and the "Sark Lark", whereby islanders are paid to be bogus directors of foreign companies.

One inhabitant of Sark was found to be on the board of as many as 2,400 companies, most of which he knew almost nothing about. Another was a nominee director of the Mil-Tec Corporation, registered in the Isle of Man, which was involved in supplying arms to the Rwandan Hutu militias at the time of the 1994 genocide.

Among Edwards' recommendations are that the 100,000 offshore companies registered on the Channel Isles should be forced to file proper accounts and tell island regulators who owns them. But he stops short of requiring that they reveal the identity of directors publicly, fearing that this would turn business away to other jurisdictions.

But even in the Channel Islands not everybody is happy with the present system. Jersey's economic adviser, John Christensen, resigned from his post four months ago, having spent 11 years telling Jersey politicians that their growing offshore finance industry would inevitably lead to a vulnerable single-sector economy.

Christensen says: "I think it imprudent to base an entire economy on a sector that would not only crowd out the island's other industries - tourism, agriculture and light manufacturing - but would inevitably attract criticism about fiscal free-riding."

Now he believes it is probably too late. Demand from financial services has made it impossible to diversify - homes for first-time buyers cost £170,000. "There is simply no available skilled labour, and the cost structures are prohibitive for most other industries. The banking cuckoo has taken over the nest."

He argues: "Inward investment into the UK or any EU member state has no need to route itself via tax havens, other than where it is trying to obtain an unfair tax or regulatory advantage, or where it wants to avoid disclosure of its provenance. Too much of the capital flowing through the offshore circuits is engaged in speculative activity rather than being committed to long-term investment. The impact of such vast sums moving in and out of equity markets and currencies without effective regulation has created a global economy that is probably beyond the control of nation states."

Multinational companies increasingly route their deals through tax havens - the goods may be made onshore but the invoices are issued offshore. Using tax havens for transfer pricing allows companies to disguise their onshore profits. Brazil's petrol giant Petrobras, for example, is battling with local tax authorities at the moment, because it routes 75 per cent of its fuel and lubricant via the Caymans: "intelligent strategy to reduce the financial costs of its transactions," it says.

Over half of Australia's top 200 companies are thought to use the offshore centres of Vanuatu and the Cook Islands as part of their tax-minimisation strategies. In Jersey and Guernsey, non-resident companies have been able to adopt new types of tax status, which means they can negotiate tax rates of less than 2 per cent. Some companies use offshore invoicing to avoid the sanctions on, for example, Bosnia.

A Foreign Office report about the offshore centres of the Caribbean is due soon, and in May the G8 backed a plan by the Organisation for Economic Co-operation and Dev-elopment to clamp down on what it calls "fiscal poaching". Add to that German concerns about $20 billion in lost tax revenues to "offshore centres" in Luxembourg, and US fears about drug money laundered through the Caribbean, and it looks as if the political will may exist to make a change. Tony Blair himself has spoken about "secretive and highly leveraged funds" operating on "an unprecedented scale".

But can he do anything? This is one of the rare occasions when Britain could act alone effectively. Most of the world's most prominent tax havens - from the Isle of Man to Gibraltar, the Caymans and Bermuda - are under British control or influence. "Britain is extremely well placed to lead international action against the tax havens," says Mark Hampton, another Jerseyman and senior lecturer in economics at Portsmouth University. "Given the key role that these havens have played in the current global economic crisis and the worsening poverty of millions, British government action at this stage would be in the spirit of developing an ethical foreign policy."

The capture of Jersey by the awesome power of world capital is reminiscent of Britain - where economic policy is tailored to suit the financial services industry, while manufacturing struggles away unsupported. In the end, it would be better for everybody if these escape routes for international capital were closed now.

The writer's "Funny Money: in search of alternative cash" will be published by HarperCollins in January

This article first appeared in the 13 November 1998 issue of the New Statesman, Why gays become politicians

Charities go corporate

Marketing campaigns, mergers, high salaries for the bosses, image rebranding: these days, even those

My first Christmas card came extra early this year, dropping through the letter box sometime in the first week of November. Like any card from a close friend, it came in a personally addressed envelope, accompanied by an intimate handwritten letter carrying news of what someone would be up to during the festive season.

Only this card wasn't from a personal friend. It was a fundraising appeal from Help the Aged. The news was not about someone I knew personally, but of Maud Wilson, a 78-year-old woman who will be completely alone this Christmas - again.

"For me, Christmas is the loneliest time of the year," writes Maud. "I try to keep my spirits up by singing along to the carols on the television and putting up some holly and tinsel, but it's really hard when there's no one to share it with."

Saddening, isn't it? Help the Aged's unsolicited appeal stirred my emotions and had me reaching for my chequebook - "your £14 could help stop this tragedy" - as well as a stamp, which was "not required but using one saves our funds".

Anyone familiar with the pile of leaflets that tumbles out of any worthy magazine at this time of year will know Maud isn't the only one appealing for us to dig deep this Christmas. This is the giving season and the spending season. Hundreds of large charities spend thousands to persuade us to give.

The weekly magazine Third Sector - "working for a better world" - has for months carried news of Christmas campaigns launched by the biggest charities. The Salvation Army has "invested" £2.5m this year, hoping to bring in 240,000 new supporters and up to £12m in Christmas funds. Other charities have launched integrated TV, magazine and mail-shot campaigns with marketing firms such as WWAV Rapp Collins, which also helps Toyota to flog cars and Pfizer to market drugs. A new TV advert promoting membership of the Royal Society for the Protection of Birds sets out to "emotionally involve the viewer in the theme of loss", to show what the world would be like without birds.

Third Sector also carries the latest news about the world of charity branding. Did you know the Samaritans have just relaunched their image? "A phone line is never going to change society," says David Richards, director of marketing. Through a series of new posters and press adverts, none of which display the helpline number or the traditional orange logo, the charity wants to show that it is an organisation which provides support for all aspects of emotional distress, not just the suicidal.

The International Spinal Research Trust has spent weeks in focus groups this year, emerging to rebrand itself as Spinal Research, complete with a modern logo. "Spinal Research has a striking new look. It marks the dawn of a new era as medical science develops ways to repair spinal cords to reverse paralysis," the revamped website says.

"Every aspect of what an organisation does must communicate the right image to those audiences that matter," says a new report on charity branding, Polishing the Diamond, by the think-tank NFP Synergy. "It is no longer enough to do good work."

Image matters. Research for the report revealed nearly two out of three people can't name a charity that works in overseas development, while even more can't name a disability charity. Marketing tricks to promote charity brands are common practice now.

Few charities would want consciously to associate their brand with smelly, grotty pub toilets, but that's exactly what the Prostate Cancer Charity has just done. Instead of chasing around that rogue cigarette butt in the pub urinal, men are being urged to buy a gobstopper-sized powder "pee ball" from the bar, and chase that around instead. A yukky subject? Perhaps. But the charity reckons it could make £1m out of this smart marketing trick, while raising awareness about the UK's fastest-growing cancer.

Yet there's something not quite right with this picture. Haven't we seen these clever tactics, this emotional manipulation, somewhere before? Indeed, we have. We are bombarded with this stuff daily from companies trying to flog us everything from holidays to health insurance. Firms undergo huge corporate rebranding - like BP's multimillion-pound, environment-friendly new flower/sun logo - to get us to buy their products or change our opinion about what they do. Marketing firms invent silly games, competitions and puzzles to push the brand into our brains and the cash out of our pockets.

Charities have inherited, customised and reissued all the marketing ploys everyone loves to hate from big business.

"The world is getting more and more competitive for charities," says the NFP Synergy report. "Competition is intense for fundraising, for media coverage, for local authority contracts, for government grants and volunteers."

Competition? Yes. Charity is big business. It employs more than half a million people - more than 2 per cent of the total workforce - and contributes £5.4bn to the economy. The whole voluntary sector earns £15.6bn in funds every year.

As I wrote in these pages a few weeks ago, the voluntary sector is Tony Blair's "fourth way". Next to big business, charities are the Labour government's best friend for the delivery of public services. The sector earns £4.5bn a year from government contracts, has enjoyed its own cross-cutting Treasury report and was reviewed by Blair's Performance and Innovation Unit (PIU).

In our competitive economy, the biggest charities have had to adopt the expensive marketing ruses of big business in order to contend with them for every pound in our pockets. Smaller charities have had to mimic their big sisters just to keep up. This year has even seen million-pound mergers between cancer charities, as well as between those working on HIV issues.

These days, charity fundraisers are invited to conferences such as "the changing world of kids", where they hear that "the kids' marketplace is an ever-changing landscape creating numerous commercial challenges". Charity fundraising executives are able to command salaries akin to the private sector. RNID, the Red Cross and Guy's Hospital are all recruiting for £60,000-plus marketing staff.

Is this corporatisation of the charity sector a bad thing? It is a question many will ask themselves as they cross the road to avoid clipboard-wielding teenagers trying to sign up new members on street corners. There's something a little distasteful about this, like religious preachers or car breakdown insurance salesmen.

Distasteful, maybe. But effective. "Face-to-face fundraising" brought in an extra £2m for Save the Children last year, as well as thousands of younger supporters (with a long giving-life ahead of them); supporters whom the charity could not otherwise reach. Greenpeace, which brought the technique to the UK in 1997, still swears by it. More than half a million new members are recruited by charities annually using these methods.

The government and charity sector alike have acknowledged that, with its hugely increased power and growing income, the charity sector will not only take on the marketing techniques of big business, but must also be subject to the same public accountability checks and legal obligations endured by the private sector.

That was one of the main conclusions of both the Treasury's cross-cutting review into the voluntary sector and the PIU review. Charities were urged to publish better annual reports, be more honest about how and why income is spent, and to provide better conditions for staff. Charities and voluntary groups that receive taxpayers' money by providing public services were particularly urged to clean up their act.

In business, where the bottom line is the balance sheet, companies factor in social responsibility, good governance and ethical behaviour because not to do so could hurt their profits. In charities, where the bottom line already is the good work, does good governance, transparency and ethical behaviour matter as much, as long as the good work continues?

It does - just as in the commercial sector, public support, and therefore spending, can be fickle and short-lived. Where once newspapers would run cuddly puppy-dog stories of charities doing good work against the odds, the emphasis has now shifted in the opposite direction. Tabloids look out for scandal: Cancer Research UK and the Leukaemia Research Fund both came under fire in March, when it was revealed they had shareholdings in BAE Systems, the world's second-largest arms manufacturer.

A charity's ability to do good can be threatened by a poor image. Better regulation and more transparency will strengthen public trust in giving. That translates into more donations, more good works being done and more people (plants and animals) helped.

Before we all hand over the readies, though, a simple note of caution. Just as happens in the corporate world, the free marketisation of the charitable sector has a worrying potential to put the squeeze on the little guy. While big-branded, million-pound-budget charities rake in your cash through TV campaigns, face-to-face fundraising and mail-shots, smaller local causes, those trying to build that new hospice wing or plant a butterfly garden at the local old folks' home, just can't measure up. These charities are not run by teams of highly paid professionals with a management or marketing degree, but by committed individuals desperate to make some kind of difference.

So Maud Wilson will get my £14 this year, even though I know how much it cost Help the Aged to ask for it. But this Christmas, I'll also make an extra effort to find the small change that makes a real difference to those tin rattlers and carol singers appealing for funds without the slick tricks and gimmicks attached.

This article first appeared in the 13 November 1998 issue of the New Statesman, Why gays become politicians