Tilting at windmills: the boom in dummy directors

Citco origins: Dutch tax haven Curacao

BHP Billiton – after its incredible feat of being challenged by Panamanian law firm Mossack Fonseca for compliance breaches in the British Virgin Islands – has turned up as a client of a another tax haven facilitator, the shadowy Dutch group Citco.

Mossack Fonseca, the Panamanian law firm vilified around the world for promoting tax avoidance via sham tax haven structures is but a bit player in the murky world of “corporate services”, a convenient scapegoat for the rampant global industry of tax dodging.

This is not to say Mossack Fonseca has been dragged through the mud undeservingly. It is to say there are bigger, more blue-chip players doing the same thing: setting up secret entities in tax havens and stacking them with sham directors.

The leading lights in this industry of delivering directors for tax haven companies are Citco and Intertrust, so-called “corporate services” juggernauts which serve multinational companies in most of the world’s tax havens.

The public float documents of Intertrust, which was spun out of US private equity group Blackstone last year, lets the cat out of the bag: “We offer our clients the possibility to appoint us or our employees as director, proxy-holder or company secretary for a corporate entity”.

A phoney company with phoney directors in other words.

Citco does the same, and ironically, good old BHP, which was outed as a client of Mossack Fonseca in the PanamaPapers scandal, is also a client of Citco.

Searches of the Dutch companies registry, Kamer van Koophandel (KVK), show the Big Australian has 15 corporate relationships with mysterious Citco subsididary and director-provider CCT Finance (Luxembourg) S.a.r.l. It appears Citco provides BHP with directors.

This is no historical thing either; BHP’s coal and base metals spin-off South32 also turns up with three entities linked to the Citco subsidiary.

Source: Intertrust prospectus

To be fair to Citco and Intertrust, their business model is mostly though not entirely preoccupied with facilitating multinational tax avoidance. There are legitimate reasons for being in tax havens such as eliminating double tax.

A good deal of their activity though is hiding things for large corporations and helping them avoid tax in their home countries.

Infamous tax dodger and arch-foe of the Australian Tax Office (ATO), Chevron, also turns up as a client of Citco, as do a slather of other multinationals such as Microsoft, Verizon and hotel chains Marriott and Ritz Carlton, and insolvency practice FTI Consulting, a subsidiary of the former top 20 Australian conglomerate Pacific Dunlop and Guiness Peat Group.

For BHP, once deemed a corporate cleanskin, yet another tax haven tie-up only further shakes confidence that the company is doing the right thing on the tax front.

“A good deal of their activity though is hiding things for large corporations and helping them avoid tax in their home countries”

Arising from the Panama Papers imbroglio – a leak of 11.5 million Mossack Fonseca documents uncovered by the International Consortium of Investigative Journalists (ICIJ) in Washington, BHP was outed as a client of Mossack.

Buried in the trove of documents was evidence that Mossack’s compliance division in Panama told BHP in June last year that its activities in the British Virgin Islands had put on of the company’s subsidiaries there in a “high-risk” governance category.

That followed a reprimand by the Senate committee in charge of the Inquiry into Corporate Tax Avoidance for BHP’s “marketing hub” activity in Singapore.

These euphemistically named “marketing hubs” in Singapore are commonly deemed to be entities set up for the purpose of avoiding tax. The way it works is the commodities mined in Australia are sold to a marketing hub on the cheap – thereby lowering both tax and royalties as the price is lower – before being onsold again to another destination at a higher price.

“Directors to suit your requirements”

Back to the corporate services players however. The publicly available materials of Citco and Intertrust provide an illuminating window on both the growth in the tax avoidance industry and the means by which tax avoidance is facilitated via dummy companies.

This from Intertrust: “We want your new venture to hit the ground running by providing you with a registered address, furnished offices and directors to suit your requirements, and ensure you’re compliant with every local regulation.

“Intertrust’s services include … directors or proxy-holders …”

“We have leading market positions in key geographic markets of our industry, including the Netherlands, Luxembourg, the Cayman Islands and Guernsey”

Intertrust clients include 38 per cent of the Fortune Global 500 and 60 per cent of Top 10 – the biggest of the world’s multinational companies.

With 36 officers in 26 jurisdictions, Intertrust notched up revenues of e296 million in 2014 and between 2011 and 2014 earnings growth 13 per cent.

“Value of the global trust and corporate services market … was estimated at approximately €5.6 billion”

This tax cheaters market is big. The IPO documents for Intertrust estimate in 2014 the “total value of the global trust and corporate services market … was estimated at approximately €5.6 billion in revenue.

The market is fragmented with a slew of small firms but also divisions of banks such as HSBC, and Big Four accounting firms EY and KPMG. The top three players are Intertrust, Citco and TMF and the trend is for increasing market consolidation by takeovers.

While global GDP has grown by 5 per cent since 1990 (till 2014), this corporate services market has grown by 9 per cent a year.

It is little wonder there are trillions of dollars locked away in tax havens while Western governments such as Australia struggle with their budget deficits.

The Intertrust documents also disclose a raft of legal claims. The “Risks” section of the prospectus notes, “As a provider of trust and corporate services, we operate in a litigation sensitive environment and are susceptible to litigation and claims.

“Many of these (actual) claims allege breach of directors’ or trustees’ fiduciary duties, fraud, misappropriation of funds, wilful misconduct, (gross) negligence or breach of contract.”

“The bulk of these tax haven entities are artificial structures

Again, in “Risks”, there is a warning about the dangers of the EU’s “Parent Subsidiary Directive which requires the member states of the European Union to include in their domestic legislation provisions against hybrid financing arrangements and to implement a general anti-abuse rule, pursuant to which the benefits of the directive are withheld in case of artificial structures …”

Artificial structures? the bulk of these tax haven entities are artificial structures. What the blazes is BHP doing in the British Virgin Islands anyway, except hiding things? It is hardly there to sell iron ore.

In Australia, Part 4a of the Tax Act deems that the principal purpose of a transaction should be commercial (rather than tax driven). In light of the proliferation of tax haven activities by Australian companies this law, Part 4a, must be the most highly disregarded and disobeyed law in the nation, perhaps only topped by traffic offences.

“As usual the Big Four accounting firms, EY, PwC, KPMG and Deloitte are there with bells on”

As usual the Big Four accounting firms, EY, PwC, KPMG and Deloitte – both as auditors and as tax structurers – are there with bells on.

The Intertrust materials show the way it all works. “Business partners” is the key term.

In addition to our cross-selling efforts, we rely on our business partners, which include financial institutions, law firms, auditors and financial advisory firms, to refer new business to us.

“Trust and corporate services providers typically do not provide legal or tax advisory services, but instead implement legal and tax advice given by external lawyers, tax advisers and accountants. These external advisers often act as business partners, referring clients to trust and corporate services providers.”

The Big Four accounting firms, the architects of global tax avoidance, structure the tax schemes and refer their sham entity business to the likes of Citco.

For its part, Citco has its corporate origins in the Second World War when its founder sought to shift Dutch money offshore so the Nazis couldn’t get their hands on it. Hence the picturesque tax haven of Curacao was established.

And what a resilient industry – hiding wealth and cheating on tax – this has been.

Intertrust: “As an illustrative example of the structural historical growth in the industry, the number of client entities in the Dutch market has experienced 40 years of uninterrupted growth with the number of client entities increasing from approximately 1,400 to approximately 24,300 from 1970 to 2014.

“We believe this reflects the resilience of our industry through economic cycles and changing regulation. Although growth rates have been affected by macro and regulatory events, the net inflow of client entities, meaning the number of newly incorporated entities minus the number of liquidated entities in the relevant period, has remained consistently positive in the Netherlands during the 40-year period.”

Read Michael Hibbins, former Big Oil executive, on multinational tax avoidance and how tax authorities should tackle it.

Multinational sham: how Australia was hoodwinked