Moody’s pays $864 million to U.S., states over pre-crisis ratings

Moody’s Corp has agreed to pay nearly $864 million to settle with U.S. federal and state authorities over its ratings of risky mortgage securities in the run-up to the 2008 financial crisis, the U.S. Department of Justice said on Friday. The credit rating agency reached the deal with the Justice Department, 21 states and the District of Columbia, resolving allegations that the firm contributed to the worst financial crisis since the Great Depression, the department said in a statement.

S&P Global’s Standard & Poor’s entered into a similar accord in 2015 paying out $1.375 billion. Standard and Poor’s is the world’s largest ratings firm, followed by Moody’s. Moody’s said it would pay a $437.5 million penalty to the Justice Department, and the remaining $426.3 million would be split among the states and Washington, D.C.

Moody’s settlement on Friday resolved the Justice Department probe without a federal lawsuit. In the Standard & Poor’s case, resolution was reached after the U.S. filed a $5 billion fraud suit.

Connecticut’s lawsuit claimed that Moody’s ratings were influenced by its desire for fees, despite claims of independence and objectivity. It also accused Moody’s of knowingly inflating ratings on toxic mortgage securities.

— source

Is the British State Complicit in World’s Largest Systemic Fraud?

Five years ago it emerged that the LIBOR interest rates, the world’s most influential and important financial benchmark, were rigged. New revelations suggest that not only was this fraud a systemic practice by big banks, but Bank of England and the government in Westminster were also in on the big fix.

What is LIBOR?

The London Interbank Offering Rate is an interest rate based supposedly on the rates banks will lend money to each other, set on a daily basis. LIBOR directly impacts over $350 trillion in worldwide financial products. If you have a mortgage, student loan or other financial tie, these products are likely tied to the rate. Local councils’ and public organisations’ financial investments are determined by LIBOR. It affects everything.

To manipulate the rate, banks gave false rates, higher or lower than they would actually lend money for. Rate-setters were influenced by traders who had bets on the rate going a certain way; these traders made fortunes for themselves and the banks, returning the favor in extravagant holidays and other gifts. On the other side of the equation, unsuspecting customers, institutions and the public lost out.

The bankers even rigged LIBOR to cash in even more from the bank bailout. In 2012, Timothy Geithner the U.S. Treasury Secretary, admitted that banks rigged the U.S. bank bailout. Lloyds of London was fined for rigging the rate connected to its U.K. state assistance. The LIBOR rigging alone could be grounds to declare the bank bailouts illegal.
Not Just “a Few Bad Apples”

One of the over-arching myths surrounding the LIBOR rigging was that it was caused by a few bad apples. This narrative was the same one pushed when the whole financial world crashed a few years previously. But the more we understand about both LIBOR and the financial crash, the more blatant is the evidence of systemic, wholesale corruption throughout the financial industry.

Since the LIBOR scandal broke, only a few low-ranking traders from UBS, Citigroup and Barclays have found themselves in jail, among them Tom Hayes, who was sentenced to 14 years. Yet to this day, none the top bankers have joined them. Equally disturbing, the banks fined for rigging the rate have only been forced to pay out in the hundreds of millions. This amounts to loose change for the LIBOR fraud and profiteering that they successfully undertook.
Fraud From on High

Earlier this month, a BBC Panorama documentary further lifted the lid on the scandal by releasing a telephone recording made between Mark Dearlove and Peter Johnson. Dearlove headed Barclays Japan, and Johnson was a LIBOR submitter responsible for giving an interbank offering figure for the bank.

In the recording, which took place Oct. 29, 2008, Dearlove said: “The bottom line is you’re going to absolutely hate this… but we’ve had some very serious pressure from the U.K. government and the Bank of England about pushing our Libors lower.”

Johnson, who is now serving four years for LIBOR fixing, objected to the request for legal reasons. To this, Dearlove replied, “The fact of the matter is we’ve got the Bank of England, all sorts of people involved in the whole thing… I am as reluctant as you are… these guys have just turned around and said just do it.”

Dearlove is currently under investigation by the U.K. Serious Fraud Office.

The same day as that phone call was made, Paul Tucker, Executive Director at the Bank of England, called Bob Diamond, chief of Barclays. The BBC reported that LIBOR was also discussed on this call.

These allegations contradict claims made by both Diamond and Tucker to Parliament that they were unaware of lowballing, that is, setting LIBOR interest rates lower to give the impression that the bank was healthier during the financial crash. Lowballing, just like inflating LIBOR rates, gave traders the chance to cash in.

In response, the Bank of England said that LIBOR and other global benchmarks “were not regulated in the U.K. or elsewhere during the period in question” and that they would help the Serious Fraud Office with their enquires.

By not denying the allegations, the Bank of England effectively admitted it was complicit in fixing LIBOR. Presumably the bank’s motivation was to give a false impression that might steady the collapsing economic system. It’s actions also enabled and condoned further systemic profiteering.

Conservative Party Complicity

The new revelations serve only to further tarnish the argument that this was all the work of some rogue traders. As reported in 2013, LIBOR rigging charges have also been levied against members at the top of the U.K. Conservative Party.

ICAP, the FTSE 250 trading and bank brokerage firm, was described in late 2013 as a “lynchpin” in the LIBOR scam, where low level employees have been found guilty of rate rigging. ICAP is run by the Conservative Party’s former top treasurer and donor, Michael Spencer. Spencer, who was not charged for a role in LIBOR, nonetheless adamantly pushed the “rotten apples” narrative.

Another strong connection between LIBOR and the Conservatives is Angela Knight, a former MP (1992-97) and prominent figure in the London. She was Chief Executive of the British Banker’s Association, a lobby group for banks, and kept her knowledge about LIBOR rigging secret since 2005. The truth spilled out once she spun back through the revolving door and became the government’s tax advisor in 2016.

As Knight’s experience showed, the way that bankers move from being politicians to regulators and back again speaks volumes about why LIBOR and other systemic fraud often remain unresolved. Where there is no political will, there is no way. The City of London and the Conservative Party are not only connected via the revolving door: the city in fact bankrolls the party and has become its main donor in the years since the financial crash.

In opposition, the Labour Party has called for an open public enquiry into LIBOR rigging – demands that have become all the more urgent with a forthcoming snap election called by Theresa May last week. Shadow Chancellor of the Exchequer John McDonnel said of the enquiry: “It is essential that we clarify who took the decisions to rig the Libor index, and when, so that the schools, NHS hospitals and local councils that lost out can be paid the compensation that is rightfully due and public confidence in our banking system and official institutions can be restored.”

— source by Steve Rushton

Why are Tax Haven Users Getting Govt Contracts?

The federal government is giving lucrative contracts to suppliers who avoid paying their share of taxes by using tax havens. This includes individuals and organizations named in the Panama Papers. Those findings, and recommended changes to the current rules, are contained in a report by Canadians for Tax Fairness and the labour organization Unite Here.

The organizations have sent that report to the Minister of Public Works and Government Services (PWGS) urging changes in the procurement rules. Currently, those rules do not penalize businesses that avoid taxes by moving money to offshore tax havens.

— source

15,080 Profitable Indian Companies Paid No Tax in 2015-16

Tax incentives allowed 15,080 profit-making Indian companies to have effective tax rates of zero, and in some cases less than zero, in 2015-16, according to an IndiaSpend analysis of the latest available national tax data or more specifically a government analysis called the Revenue Impact of Tax Incentives under the Central Tax System.

The central government introduced minimum alternate tax (MAT) in the late 1980s to tackle this anomaly, but even MAT has exemptions that appear to have negated its original intent partially: 52,911 companies made profits in 2014-15 and paid no tax, IndiaSpend reported in March 2016.

— source by Rohit Parakh

US Military Waste Game Suddenly Seems Prophetic

The most jaw-dropping element of President Donald Trump’s proposed budget for 2018 is still shaking the foundations of Washington. The Pentagon, the most profligate agency in all the land, would get another $52 billion to play with — and it is already one of the top spenders of taxpayer money. To fatten up the military coffers, pretty much everything else would take a drastic pay cut. Here’s the brutal visual by Quartz:

You can see pretty clearly what Americans would give up to finance Trump’s military spending, which includes another $2 billion for other non-Pentagon defense programs. Everyone from students to diplomats would take a hit. (Congress ultimately decides the budget, and Trump’s plan would require lawmakers to repeal the current spending caps — a contentious issue with opponents in even Trump’s own Republican party.) Although Trump wants the military to shrink its footprint abroad — essentially to do less — he nevertheless wants to give the Pentagon the extra cash to build up the number of, well, everything from troops to fighter jets.

No one questions the importance of the Pentagon’s mission, and there are many experts and lawmakers who not only agree with Trump’s idea to increase military spending but believe the Pentagon needs even more money. Almost 16 years of war has left the military with many recovery needs. Sen. John McCain argues that the military is “underfunded, undersized, and unready to confront threats to our national security.”

History shows, however, that there’s reason to be skeptical about what the Pentagon will do with the proposed largesse. The massive military industrial complex, with ample assistance, if not insistence, from Congress (which likes to buy unneeded toys), isn’t known for its efficiency with a dollar. More than one watchdog has noted that the Pentagon’s daily routine includes overpaying for parts — for instance, spending $264 for a helicopter part worth $8 — even when it already has a surplus of the supplies in military warehouses. The financial head smacking just gets worse the bigger the purchase. The F-35, anybody? That stealth fighter jet has gone over budget by $200 billion.

Waste like that could fully fund some of the programs on the chopping block for years. The roughly $148 million spent each year on the National Endowment for the Arts is but a rounding error for the Pentagon. So just how much of that $52 billion can we expect the Pentagon to fritter away, while other agencies starve? One way to imagine the possibilities is to look back at how money was wasted in a microcosm of military spending: the war in Afghanistan. Now, it’s not exactly the same. We’re talking about spending money in a combat zone — a considerable complicating factor — and the U.S. Agency for International Development and the State Department were involved in the mess, too.

Still, back in 2015, ProPublica was so gobsmacked by the staggering reports from the Special Inspector General for Afghanistan Reconstruction detailing the waste in individual projects that we decided to do the math. Adding up just those projects the IG had evaluated — a fraction of what was spent in the country — we found $17 billion of likely waste. Like the $25 million blown on a military headquarters that was never used. Not once. And commanders were pretty darn sure before they started that it wouldn’t be. Or the police building that was so poorly constructed it melted in the rain. Or the $8.4 billion spent on counter-narcotics programs that resulted in — drumroll — Afghanistan producing more heroin than it did before the war started.

Even when faced with such absurd examples, though, the idea of waste is still pretty abstract. So we came up with a game to answer the question: What does the waste mean to me? We wanted to show taxpayers in real terms what that money could have bought at home. With the game you can look at the $486 million worth of cargo planes that couldn’t fly, and figure out that the cash would have put 57,000 low-income children in preschool with enough money left over to treat thousands at mental health clinics. Or it could have gone towards building clinics and community centers for veterans.

So take the game for a spin while picturing how much waste might come from, say, Trump’s big-ticket wish — worth billions and likely to have plenty of its own F-35-like problems — to increase the Navy fleet from 272 ships to 350.

— source by Megan Rose

Panama Papers: Who were the big players?

The Panama Papers revealed a systemic challenge to global governance, in which the big players are major banks, multinationals and the biggest financial centres of all. Unsurprisingly, much of the coverage of the Panama Papers focused on juicy, individual stories: political conflicts of interest, criminal money laundering and HNWI tax evasion in exotic locations. But when you look at all the data, you see a different picture.

With a few friends of TJN, we’ve been running some of the numbers on Panama, to see just where this small jurisdiction fits in the global game. The picture is inevitably partial – a leak from Jersey or Delaware would show other angles. But what is revealed is a clear snapshot of one part of the systemic business making use of secrecy. Not necessarily for corrupt purposes… but when your business is not engaged in some sort of unsavoury activity, you don’t need secrecy, so the use of secrecy is a pretty good red flag for further investigation.
The banks and their country backers

First, we asked Daniel Haberly, an economic geographer at the University of Sussex, to look at the role of banks in the database from the Panama Papers, which includes the earlier Offshore Leaks data that relates to a network of company formation agents primarily in the British Virgin Islands. The analysis looks at the home country of banks that act as intermediaries to set up anonymous companies, and the host country role – where local affiliates of banks (from anywhere) are the intermediaries.

The graphic (click for full size) shows clearly that Switzerland is the biggest player, being home to banks that account for half of all the entities looked at; and also one of the leading host economies for intermediary banks. The UK is home to more than a quarter of the bank intermediary activity, but hosts very little; while Singapore shows a reverse picture, hosting a quarter but being home to less than 10%. As suggested in earlier analysis, the US role here is relatively small – with so many of its own states providing anonymous company formation.

Bilateral relationships are also revealed, sometimes less predictable than others. For example, Jersey’s disproportionately large role is due to business from UK banks; while its fellow Channel Island of Guernsey, in contrast, is largely reliant on business from Swiss banks. German banks support activity in Hong Kong and above all Singapore.

Of course the data is for one law firm over 40 years and one network of company formation agents up to around 2010, so may not be a great guide to current business models. But what it does show is that the role of individual clients, or of particular small jurisdictions, is almost incidental: the structural driver of the secrecy business has been the global banks, and the rich countries that they call home. Responsibility for offshore entity banking is not evenly distributed throughout the rich world, however, but rather seems to be heavily concentrated in Switzerland and the UK, whose banks have a combined 76% market share for this particular dataset. The scale of activity by British banks also underscores that even though a jurisdiction may curtail offshore banking activities at home, its banks may nevertheless be leading players in these activities overseas.

The strong third-place position of Singaporean banks as offshore entity intermediaries, together with Singapore’s first place ranking as a host jurisdiction within which foreign banks operate, also lends credence to arguments that increased international pressure on traditional wealth management centres such as Switzerland may be displacing activity to up-and-coming centres in Asia. This underscores the need for a global approach to transparency – as of course does the rise of the US as a tax haven of choice for many.

The multinationals

Taking a wider lens, economist Yama Temouri of Aston Business School used ORBIS, the biggest global database of corporate balance sheets, to look at the sort of multinationals that have subsidiaries in Panama. Two countries which feature relatively little in the Panama Papers are seen now as prominent: multinationals based in the USA and Spain are responsible for around a fifth each of all the recorded Panama subsidiaries, with the UK and Switzerland following behind with less than a tenth between them.

The analysis also shows that while banks are important players in Panama, confirming the findings above, the use of this secrecy jurisdiction is common to all the major industry sectors. ‘Other services’ including is by far the biggest category, and taken together with banking and insurance makes up around half of all Panama subsidiaries – but beyond that, the full range from construction to telecoms, and from machinery to tobacco, is represented.

Of course we’re not claiming for a moment that all the multinationals using Panama entities are aggressively avoiding tax, nor that they are committing any crimes. But the alarm bells should ring when such entities are seen: why would global businesses set up in jurisdictions that combine such limited real economic activity and such powerful secrecy characteristics, if not for the purpose of hiding things from regulators and/or tax authorities elsewhere?

[We’ve been having a comical non-exchange with Monsanto, in which despite numerous requests through various channels, the agri group refused to provide even a ‘no comment’ to the question of whether or not a particular Panama-registered company with that name is or was part of their structure. We were interested in part because the entity in question is claimed to have a director who died many years ago. Which wouldn’t suggest very high standards of governance…]

Even this quick run through the data makes clear the systemic involvement of banks and multinationals in the global secrecy business. Central too, rather than helpless victims or innocent bystanders, are the rich countries and their dependencies which run the game. And we shouldn’t forget the big 4 accounting firms (on whose association with tax haven use, Yama Temouri’s paper has incidentally won an award).

The locus of corruption

Finally, the Panama Papers confirm – for anyone who still needed this to be confirmed – that corruption is not a poor country problem. It might be closer to the mark to say instead that corruption has long been a rich country way of doing business. What is exciting now is that this is increasingly understood, by policymakers and public alike. The Panama Papers have made concrete for many what was already felt: that financial secrecy offers impunity and an escape from laws and taxation, for elites at least.

Analysis of the data by Matt Collin, a research fellow with the Center for Global Development, confirms this. Matt concludes that the Tax Justice Network’s Financial Secrecy Index, our ranking of ‘tax havens’, is:

“one of the most reliable predictors of a country’s dealings with Mossack Fonseca… A 10% increase in a country’s FSI is associated with an approximately equivalent increase in the number of entities from that country named in the Panama Papers. A one standard deviation increase in the FSI – roughly equivalent to moving from Norway to Jersey – leads to about a 90% increase in the number of entities. Other measures carry less predictive power”.

The challenge ahead

So, one year on from the Panama Papers what have we learned about how the offshore world uses secrecy?

Responsibility for offshore entity banking is not evenly distributed throughout the rich world, but seems to be heavily concentrated in Switzerland and the UK, whose banks have a combined 75% market share for this particular dataset. The scale of activity by British banks also underscores that even though a jurisdiction may curtail offshore banking activities at home, its banks nevertheless appear to be leading players in these activities overseas.

The Panama Papers are a snapshot of the major banks and leading financial centres, that have made a business for decades from the provision and exploitation of secrecy structures; with major multinationals high up on the client list. (And we haven’t mentioned the frequency with which big 4 accounting firms appear in the data – that can be for another day. Everything from billion-pound property transactions to the flightiest of fly-by-night, blink-and-they’re-dissolved operations…) The forces invested in the current system, and so allied against change, include some of the most powerful private sector actors in the world – and by extension, many of the jurisdictions in which they operate.

A year on, we still need a step change in international financial transparency as a necessary precursor to global progress against impunity and tax injustice. While policymakers increasingly pay lip service to the specific measures needed, real progress remains painfully slow.

— source

Corruption in Africa

Misleading index and bribery by foreign companies

Internationally, African countries are considered to be particularly corrupt. This reputation amounts to an immense oversimplification of a much bigger problem and partly results from questionable methods of measurement. Tax avoidance by international corporations costs African governments far more money than the corruption of politicians and civil servants.

The best-known instrument for measuring corruption is Transparency International’s (TI) Corruption Perceptions Index (see article, p. 7). The index does not measure corruption directly, but rather compiles people’s perception of corruption within a country. The index is problematic in two ways:

It defines corruption as the bribability of public officials and politicians, thus neglecting corrupt practices within the private sector.
It does not rely on a survey of a country’s people, but basically uses information provided by business people and so-called country experts.

The people surveyed share views and information among one another, however, and they tend to adopt the perceptions of their peers. This is especially so if they have little personal experience of the country in question. Such feed-back loops can boost the perception of corruption in unjustified ways. Moreover, media coverage of corruption can similarly inflate the perception of corruption in African countries or Brazil for example. The index is, therefore, a topic of debate within TI itself.

It matters that the international dimension of corruption does not get adequate attention, even though corruption is often driven by western structures. The implications of the corrupt behaviour of international corporations must not be underestimated. African states lose more money due to tax avoidance by international corporations than they receive as development aid.

The UN Economic Commission for Africa estimates that illegal financial flows cost Africa around $ 50 billion per year. If one takes OECD estimates as a basis, more than $ 30 billion (or two thirds) stems from “commercial transactions”, including tax avoidance and tax evasion. Only an estimated 2 to 3 billion dollars result from corruption in the sense of officials’ bribability, as assessed in TI’s Corruption Perceptions Index.

Tax havens facilitate the large outflow of potential tax revenues, and they are by no means limited to the Caribbean and Switzerland. According to the Tax Justice Network’s Financial Secrecy Index, the USA ranks third, Germany eighth, Japan 12th and Britain 15th. A global network of “safe havens” has evolved for the capital of international corporations and corrupt politicians.

Bribery by foreign companies

A recent UN report sheds light on cases of cross-border corruption in Africa. In 99.5% the cases involved non-African firms. This means that African companies active in neighbouring countries are not the main culprits who pay bribes to “host” governments. Mostly multinational corporations do so. It is true, however, that the report only examined cross-border corruption, making no assertions concerning domestically paid bribes.

Nonetheless, the report does expose another deficiency of the TI Index. It does not include the predominantly international financial actors that pay bribes, but only focuses on the public officials and politicians who accept them. This one-sidedness makes “the Africans” appear more corrupt than multinational corporations even though the corporate money is what drives corruption in the first place.

— source by Nico Beckert