Crack Down On Tax Avoidance, Don’t Fix Spending Problems

The OECD is releasing an “Action Plan” to “crack down on international tax avoidance, particularly by multi-national companies”.

The head of the OECD thinks that the rise of online commerce and the fact it is harder for global tax authorities to compete against firms who might employ dozens of tax lawyers let alone accountants is a bad thing.

He is borderline insane. The Financial Action Task Force (FATF) has morphed from a pipe dream of anti money laundering conference attendees into changing how literally every participant in the global financial markets must conduct business.

New Zealand recently “updated” its anti money laundering and compliance rules. It will be interesting to see how that plays out over the past few years. A lot of firms -particularly SMEs – have literally no idea how they are now breaking the law by not performing sufficient customer due diligence.

But let’s go back to the OECD and its plan to make information sharing easier for global tax authorities. How on earth can that be a good thing? Here in New Zealand we already have a situation where the law as it exists on paper isn’t the same as how Inland Revenue will actually apply it.

This is not a good thing – tax issues alone are becoming a deterrent to overseas investment in New Zealand. The bleating about big corporates cutting their tax bills forgets that the complainants have not stopped purchasing Apple products or searching the internet with Google.

Focusing on making it easier to extract tax revenue ignores the fact the governments around the world have proven pretty poor managers of the taxes they do raise.

Does it surprise you that so many Greeks don’t pay their taxes? Why would they throw good money after bad when Greek public servants and politicians have basically done nothing except sell out their fellow countrymen?

But if there is one thing that makes me laugh out loud it is this – how many of the people absolutely furious about PRISM and NSA surveillance are cool with tax authorities sharing information to raise more revenue?

What is the difference between “we need surveillance to get the terrorists” and “we need more information-sharing to get tax avoiders”?

Please share your thoughts below. I suppose it’s one of those things where people demonstrate how their thought processes are more to do with what “their team” thinks than consistently applying principles to different policy situations.


Ross Asset Management Cash Flow 2000 to 2012

“It was not the financial elite, [it] was ordinary New Zealanders who are working hard and have saved money,” he said.

I am pleased to read that there are rumblings of net winners having money clawed back from the Ross Asset Management scheme.

In the recovery of assets in the Madoff scheme, Irving Picard has pursued “net winners” who received more from the scheme than they put in. He has achieved several substantial settlements, notably the estate of Jeffry Picower and the NY Met owners who used Madoff like a checking account.

The comment by investor Bruce Tichbon that his group of investors want to limit the fees charged by receivers and liquidators is entertaining.

The cost of recovering funds from fraud is high due to the need for forensic accounting experts and civil suits against “net winners”. Many of the transactions over the past few years could qualify as voidable preference, meaning the liquidator can claw them back.

The process will also take years to wind down. There are no quick resolutions to situations like this. You can’t just get a court order one month and have the “net losers” bank cheques the next.

We are yet to hear back from the Serious Fraud Office on whether charges will be laid against David Ross.

But by representing the cash flows identified by PWC in its report to the High Court graphically, we can see how these schemes work:

The net difference over the 12 year period, which excludes activity before 2000, is -$15,774,673.59. But over $303 million was contributed to the scheme and almost $290 million withdrawn. Management fees accounted for almost $30 million dollars.

The onset of the global financial crisis seems to have set the unwinding of David Ross into motion. A substantial increase in withdrawals along with a major reduction in contributions rapidly altered the mathematics here.

It’s clear that although management fees of $30 million were a factor in the collapse of the scheme, they are dwarfed by the mathematics. It’s simply not possible to keep adding substantial investors to finance the withdrawals of other investors in a global financial crisis where people are cautious about investing outside of lower risk assets.

I am extremely concerned that anti-money laundering rules didn’t pick up on really odd cash flow patterns like this. I hope the FMA will use this occasion to instruct the commercial banks to identify high cash cash flow patterns like we saw above.

The “unusually large” number of brokerage accounts held by RAM and its associated entities are also major red flags. If you have hundreds of millions of dollars under management, maintaining accurate performing reporting over a handful of accounts is difficult enough – dozens of accounts would require a substantial back office operation.

With respect to overseas asset recovery, if a substantial portion of the management fees has been transferred offshore best of luck to PWC in getting any of that back.

This is going to be one of the most interesting cases to come out of the global financial crisis in New Zealand. The fact that nobody has done serious due diligence does not bode well for any notion that investors are capable of managing their own money without enormous investment in education and financial literacy.

Anti Money Laundering And Barriers To Trade

Over at Offsetting Behaviour, Eric Crampton despairs over the difficulty of executing arbitrage trades with respect to the US election.

For just $8.88 he could make a guaranteed return of ~10% by purchasing an InTrade Romney contract and a BetFair Obama contract.

He quotes the terms & conditions at Intrade which make it hard to deposit money in order to comply with anti-money laundering rules.

But anti-money laundering requirements are not just barriers to performing arbitrage on electoral events.

They function as barriers to actual country-to-country trade. Just think about how hard it would be for a developing country exporter to have all the correct documentation and paperwork to open a US bank account and receive payment for commodities on account. Essentially, incumbent commodities firms have an edge because they will be able to put deals together faster than an ostensibly cheaper developing country supplier.

Imposing greater “know your client” rules functions as a barrier to entry. If you can’t get an account set up in the first place because you’re starting up a business in the developing world, you’ll have to rely on more expensive banking services.

You might even skip the mainstream banking system altogether, relying on immigrant cash transfer networks.

There are so many second-order effects of anti-money laundering legislation. Making it harder to take advantage of goods arbitrage opportunities is just one I can think of.