Neoliberalism and corruption: hidden in plain sight

BHS was subject to “systematic plunder” by former owners and corporate raiders, Sir Philip Green, Dominic Chappell and their respective “hangers-on”, according to MPs. This led to the collapse of a company that once employed 11,000 people. There was little evidence found to support the reputation for retail business acumen for which Green was rewarded with a knighthood.

Green had “systematically extracted hundreds of millions of pounds from BHS, paying very little tax and fantastically enriching himself and his family, leaving the company and its pension fund weakened to the point of the inevitable collapse of both.”

Green was found to hold prime responsibility for the pensions black hole after years of refusing to provide sufficient funding, despite pleas from the fund’s independent trustees.

A damning report published in 2016, after weeks of evidence from former executives and advisers, says the “tragedy” of BHS was the “unacceptable face of capitalism” and raises questions about how the governance of private companies and their pension funds should be regulated.

Ahead of a joint Business and Work and Pensions Select Committee meeting, Green called the inquiry “biased”, and stated that he “therefore required [its chair, Frank Field] to resign”. Field pointed out that the size of the pensions deficit is a fact, not a matter of opinion, and that Parliament and not Green decides who chairs Committees.

Referring to the conduct of Green, Angela Eagle, the shadow business secretary, said: “In this situation it appears this owner extracted hundreds of millions of pounds from the business and walked away to his favourite tax haven, leaving the Pension Protection Scheme to pick up the bill.”

The wider business culture illustrated by BHS’s collapse – ruinous loans from multinational financiers, the bullying of suppliers, complacency and quiescence from highly paid company directors such as Lord Grabiner – has gone largely unaddressed.

The wider framework of corruption

Earlier this month, faced with amendments in the House of Lords to its post-Brexit anti-money laundering Bill, the UK government continued to block and delay vital reforms to address the UK’s role in global corruption and money laundering.

Another amendment, also backed by Lords, would require the Overseas Territories – which include some of the most notorious UK’s tax havens – to publicly reveal the true owners of the companies registered there. Revealing these true, beneficial owners, would tackle the secrecy that currently shelters and enables the criminal and corrupt.

The UK has already introduced a register of the beneficial owners of UK companies, and in December last year all EU countries agreed to do so too. This amendment would bring the Overseas Territories with financial centres, places like the British Virgin Islands and Cayman Islands, into line with the UK and the rest of the EU.

Rather than backing the amendment, which would bring these tax havens up to what David Cameron once described as the “gold standard”, the government yet again sought to block proposals to combat the UK tax haven’s central role in global corruption and money laundering.

Corruption is “the abuse of entrusted power for private gain.” Many people assume that corruption is something that happens mostly in developing democracies.

McMafia is multi-million pound series by the BBC, based on the book of the same name by Misha Glenny, who is an Advisor to Global Witness. The show focuses on corruption as the common thread linking the corporate and the criminal.

It explores how lawyers, politicians and the intelligence agencies join forces with money launderers and international crime rings to move funds around the world from London. Although the content is fictionalised and not based on any particular individual from real life, the themes it draws on are very real. The corrupt activities it seeks to expose is happening – in the UK, as well as right across the world – and it is destroying the lives of millions of people.

For those of you who don’t believe that the UK has a problem with corruption, ask yourself this: Would there still be commercial banking sector in this country if it weren’t for corruption? Remember the high-profile scandals: Libor rigging, insider trading, mis-sold pensions, endowment mortgage fraud, the payment protection insurance scams, and so on. Then ask yourself whether conning and squeezing the public is simply an aberration or is it in fact an established and embedded business model.

Where are the senior figures whose established practices, high risk-taking behaviours contributed significantly to triggering the global financial crisis – none of them have been held criminally liable or disqualified for reckless practices. There were no laws in place to regulate and restrain them. Cameron nonetheless continued with the ‘bonfire of red tape’, seeing regulation as a hindrance to “getting things done”. I wonder what sort of “things” he had in mind when he decided that public consultations, judicial review and impact assessments were yet more obstacles for “getting things done”.

The UK’s unreformed political funding system permits the very rich to buy the success of political parties, and also, there’s the revolving door that permits vulture capitalists like Adrian Beecroft and corporate executives to draft the laws and re-write policies that affect their profits. There are politicians with vested interests in privatisation, some who find additional “outside” work that compromises their role as representatives of the public and presents conflicts with democracy.

Then there are the small matters of the Panama and Paradise Papers. The praetorian and mercenary outsourced delivery of the NHS, welfare, children and prison services by vulture capitalist private contractors, some of whom also administer controversial government policy, while shielding the government from scrutiny for the consequences.

There’s the phone-hacking scandal and the media bribing the police, there’s the price-fixing by energy companies, the Libor rigging scandal, and many other such cases.

Barclays Bank, JP Morgan, Swiss bank UBS, Royal Bank of Scotland and Deutsche Bank have all been fined by financial regulators for rigging practices, which are seen as market manipulation and corrosive to trust in the financial markets.

Corruption has in fact become an everyday part of British national life, it is systemic within leading institutions.

A former Conservative minister ran HSBC while it was engaged in systematic tax evasion, money laundering for drugs gangs and the provision of services to Bangladeshi and Saudi banks linked to the financing of terrorists. However, rather than prosecuting the bank, the head of the UK’s tax office went to work for it when he retired.

We tend to see corruption as isolated incidents of pathology, rather than an endemic disease of the model of socioeconomic organisation.

Neoliberalism: the institutionalisation of self interest and normalisation of private gains at public expense

Neoliberalism is the ‘doctrine that market exchange is an ethic in itself, capable of acting as a guide for all human action’. (David Harvey, 2005.) A key set of ideas that fuelled the New Right’s neoliberal project are those of public choice theory. Various versions of public choice theory portray the whole idea of public service as itself corrupt. Public choice economists each make the same assumption – that although people acting in the political marketplace have some concern for others, their main motive, whether they are voters, politicians, lobbyists, or bureaucrats, is self-interest.

A public sector that aims to serve the general public interest and not serve the private interests of individuals is problematic for neoliberal theorists, and among them are the radical libertarian right, who strongly support private property rights and defend market distribution of natural resources and private property.

James Buchanan, (see: James McGill Buchanan. The man who served the plutocrats, wrecked countries and brought victory to the radical right ), one of the key theorists of public choice economics, discusses this issue specifically:

“There’s certainly no measurable concept that’s meaningful that could be called the public interest, because how do you weigh different interest of different groups and what they can get out of it? The public interest as a politician thinks it does not mean it exists. It’s what he thinks is good for the country. And if he’d come out say that that’s one thing, but behind this hypocrisy of calling something the public interest as if it exists. (See: The Trap (1/3): Fuck You Buddy! by Adam Curtis).

Within the neoliberal idiom, there is a fundamental inability to consider collective public interests. Buchanan says:

“We’re safer if we have politicians who are a bit self-interested and greedy than if we have these [collectivist] zealots. The greatest danger of course is the zealot who thinks that he knows best or she knows best for the rest of us. As opposed to being for sale, so to speak.”

So the theory of public choice runs like this: bureaucrats are inevitably self-interested, but if they deviate towards an ideology of “public service” they are not self-interested enough. Public choice theory attempts to discredit all conceptions of the public or general interest and a central strategy seems to be the introduction of mechanisms promoting institutional corruption.

Furthermore, there is no direct political reward for fighting powerful interest groups in order to confer benefits on a public that may not be aware of the benefits or of who conferred them. The incentives for good political management in the public interest are therefore seen as weak.

In contrast, interest groups are organised by people with very strong gains to be made from government action. They provide politicians with donations, campaign funds and campaigners. In return they receive the attention of politicians and very often gain support for their policy goals.

So because legislators have the power to tax and to extract resources in other coercive ways, and because it is assumed that voters monitor their behavior poorly, legislators behave in ways that are costly to citizens. More recently, there has been a growing public awareness, however, that ordinary citizens are paying a pro-rata share of a variety of catastrophically inefficient projects – the political justification for austerity, for example, is one consequence of a deregulated finance sector and subsequent reckless behaviours of various self-interested actors – that clearly do not benefit more than a small proportion of the population.

Public choice economics has shaped the neoliberal reforms to the civil service and public institutions, resulting in the slippery sloped internal market in the NHS, the dismantling of the welfare state and outsourcing of many other state functions, student fees in higher education, and the deregulation, bonfire-of-the-red-tape approach of the pro-market regulatory agencies of many other areas of public life, including the financial sector.

Sociologist David Miller, in Neoliberalism, Politics and Institutional Corruption: Against the ‘Institutional Malaise’ Hypothesis, says: “The process of opening the machinery of government to private interests required the influx of new ideas and practical ways of putting them into practice. As a result the neoliberal period saw the rise of a whole range of new policy intermediaries including management consultants, lobbyists, public relations advisers and think tanks. All work mainly for corporate interests, all have had material impacts on neoliberal reform, and all have as part of the same process expanded massively as a result.

“Lobbying and PR are omnipresent policy intermediaries. The PR industry grew, initially on the back of privatisation contracts. Lobbying and PR firms and their principals (mostly corporate actors) aim to dominate civil society, science, the media, politics and policy.

“[…] In the United Kingdom, the lobbying industry has – despite recurring controversy about its activities – been largely protected by government, which has refused to adequately require transparency from lobbyists and other influence peddlers.”

Right wing libertarians have a profound dislike of welfare states, they don’t like to pay tax and generally loathe public services, prioritising private property rights above all else. Individual liberty and personal responsibility are their mantras.

However, they do like the idea of enforced hierarchical power structures. David Cameron identified himself as a libertarian paternalist, implying a change in direction for his party. He also claimed the brand of red toryism, though this interpretation of ‘compassionate Conservatism’ was a rhetoric style only, rather than a change in policy direction. That has remained staunchly neoliberal.

Noam Chomsky has criticised neoliberal ideology as being akin to “corporate fascism” because all methods of public control are removed from the economy, leaving it solely in the hands of authoritarian corporations.

Chomsky has also argued that the more radical forms of right-libertarianism are entirely theorectical and could never function in reality due to business’ reliance on government infrastructures and subsidies. Yet many right-libertarians claim big business is “a great victim of the state”, and with a straight face.

Neoliberalism can be seen as a system of reforms that directly enables corruption and the unbridled pursuit of private rather that public interests. Neoliberalism also hides corruption in plain view, by the use of divisive narratives that justify greed, wealth and privilege on the one hand, and inequality, growing povertyon the other. This is based on flimsy and simplistic notions of meritocracy – incongruent notions of “deserving” and “undeserving” lie at the heart of these narratives, along with prescribed, discrete, class-differentiated systems of “incentives” embedded in policies that ensure wealthy people are rewarded and poor people are punished have become normalised.

In David Milner’s words “corruption was deliberately introduced to serve particular (class) interests.”

Last year, The EU announced an investigation into a British government scheme that provides a loophole to help multinational companies pay less tax. The inquiry centres on a change to the UK’s “controlled foreign company” rules announced by the then chancellor, George Osborne, in 2011. The new rules were described by one expert at the time as a huge change, which meant companies could assume they were exempt from the anti-avoidance rules unless specifically caught.

The rule change, which came into effect in 2013, means a multinational company resident in the UK can lower its tax bill by shifting some taxable income to an offshore corporation, known as a “controlled foreign company”. CFCs are offshore subsidiaries that multinationals use to move capital around their global operations.

Although CFCs are not illegal, the European commission believes that the UK breaks EU competition rules, by giving an unfair advantage to multinationals, compared with British companies without foreign subsidiaries. HMRC revealed last year that multinationals avoided paying £5.8bn in taxes in 2016, some 50% more than government forecasts. This figure, which was reported by the Financial Times, does not include treasury losses from changes to the CFC rules that are now being investigated by the European commission.

Hidden in plain sight

Recent research has uncovered around 85,000 properties across the UK that are “secretly owned” by companies incorporated in UK tax havens, including more than 10,000 alone in the London Borough of Westminster.

Campaigners are calling for a property register aimed at lifting the shroud of secrecy, to be put in place sooner than the date the Government has earmarked for its implementation, which isn’t until 2021.

Transparency International is a civil society organisation leading the fight against political corruption. In November last year, they published a report – Hiding in Plain Sight. It outlines Transparency International UK’s analysis of 52 cases of global corruption – amounting to £80 billion – and found hundreds of UK registered shell companies at the heart of these scandals. At the same time the UK’s system to prevent this abuse is failing.

The recent research found 766 companies registered in the UK that have been directly involved in laundering stolen money out of at least 13 countries. These companies are used as ‘layers’ to hide money that would otherwise appear suspicious, and have the added advantage of providing a respectability uniquely associated with being registered in the UK.

Transparency UK’s evidence has indicated that this is no accident. The UK is home to a network of Trust and Companies Service Providers (TCSP’s) that operate much like Appleby and Mossack Fonseca – companies at the heart of the Paradise and Panama Papers – who create these companies on behalf of their clients.

TCSPs register these companies to UK addresses, which are often nothing more than mailboxes. This has created ‘company factories’, where thousands of companies can be registered to unoccupied buildings with little to suggest any meaningful business occurs. We found half of the 766 questionable companies we identified were registered to only 8 separate addresses – in one instance a run-down building, next to a bank on Potters Bar High Street.

The recent Manafort indictment in the US also revealed that one of the companies alleged by the FBI to have been used to launder money was registered to a house in North London.

Duncan Hames, Director of Policy Transparency International UK, said:

“As fingers point to jurisdictions like Panama and Bermuda, it shames the UK that companies are being set up under our noses, with the sole purpose of laundering illicit wealth; money very often stolen from some of the poorest populations in the world, starving them of vital resources.”

“The UK is home to industrious company factories from which unscrupulous individuals provide the corrupt with the means to hide their ill-gotten gains. The UK should recognise it has its own Applebys and Mossack Fonsecas here on our doorstep.”

Weak Defences

With the UK as a destination of choice for those seeking to hide illicit wealth, the UK’s own defence mechanisms have proven to be woefully inadequate. Just six staff in Companies House are charged with policing 4 million companies, TCSPs have a poor track record of identifying and reporting money laundering with only 77 of the 400,000 suspicious activity reports filed last year coming from this sector.

Meanwhile TCSP’s can set up companies in the UK even if they are not registered or based here. This means they avoid being subject to UK regulation, and instead are bound by local laws, which are often unenforced or so weak as to be ineffective.

Duncan Hames said:

“Since the Panama Papers the UK has made some progress in targeting corrupt money but in a complicated and global system it’s often the case that as one area of weakness is addressed, more are discovered by those intent on channelling dirty money. Approaching Brexit it’s essential that the UK sends a clear signal that it won’t be a laundromat for corrupt individuals from around the world. It could start by ensuring it properly resources those who are meant to be our first line of defence, such as Companies House.”

Key Stats:

766 UK companies involved in 52 corruption and money laundering cases worth up to £80 billion
- Those 766 companies could have cost a total of just £15,000 to set up
- One quarter of these are still active today
- Half of these registered to just 8 different addresses
Just 6 staff in Companies House police the integrity of some 4 million UK companies
TCSP’s filed just 77 of the 400,000 suspicious activity reports last year, which are designed to flag possible money laundering.

Key recommendations:

Prohibit non-UK registered agents from setting up companies to avoid TCSPs with no presence here, circumventing UK anti-money laundering checks
Use financial incentives to encourage UK companies to hold a UK bank account, discouraging the use of offshore bank accounts
Provide Companies House with sufficient resources to identify suspicious activity
UK Government should seek to apply a “failure to prevent” approach to money-laundering, meaning TCSP’s are held more accountable for forming companies that are used to launder money
Overhaul the UK’s anti-money laundering system.

Existing legislation

The main legislation governing bribery and corruption in the UK is Labour’s Bribery Act, 2010.

Initially scheduled to come into force in April 2010, this was changed to 1 July 2011, having been delayed twice following objections from, among others, the Confederation of British Industry. The Act repeals all previous statutory and common law provisions in relation to bribery, instead replacing them with the crimes of bribery, being bribed, the bribery of foreign public officials, and the failure of a commercial organisation to prevent bribery on its behalf.

The penalties for committing a crime under the Act are a maximum of 10 years’ imprisonment, along with an unlimited fine, and the potential for the confiscation of property under the Proceeds of Crime Act 2002, as well as the disqualification of directors under the Company Directors Disqualification Act 1986.

The Act has a near-universal jurisdiction, allowing for the prosecution of an individual or company with links to the United Kingdom, regardless of where the crime occurred. It was originally described as “the toughest anti-corruption legislation in the world” , however, some have raised concerns that the Act’s provisions may criminalise behaviour that is acceptable in the global market, and puts British business at a competitive disadvantage.

Guidance on the Bribery Act, released by the Ministry of Justice, included wording that could exclude some foreign companies listed in London from prosecution. Foreign companies that have subsidiaries in the UK could also escape the Act’s power.

One of the key aspects of the Bribery Act was its ability to catch both UK and foreign companies engaging in bribery anywhere in the world. The condition for the act to apply to foreign companies was that they had a business presence in the UK. Through the guidance on the Act the Ministry of Justice created what many see as a loophole that could insulate some foreign companies from prosecution.

In April 2016, the UK government published its action plan on anti-money laundering and counter-terrorist finance, setting out steps to address such risks and resulting in the commissioning of the Criminal Finances Act 2017 (the “Act”), which received royal assent on 27 April 2017. The Act came into force on 30 September 2017.

However, despite it being widely anticipated that a new offence would be created – of corporate failure to prevent economic crime (which would have incorporated the failure to prevent fraud, money laundering and false accounting) – disappointingly, the Act has not included this offence. It does, however, include two new corporate criminal offences for the failure to prevent the facilitation of tax evasion, whether in the UK (Section 45) or abroad (Section 46).

The Deferred Prosecution Agreement waters down the Bribery Act

In 2015, a landmark decision – the first Deferred Prosecution Agreement (DPA) was approved at the Royal Courts of Justice, by Lord Justice Leveson. The DPA was introduced as a means of alternative disposal following a criminal investigation into a corporate organisation back in February 2014, under the Crime and Courts Act 2013. It is only available to the Directors of the Crown Prosecution Service (CPS) and the Serious Fraud Office (SFO).

Under a DPA, proceedings are automatically suspended following charge, on the agreement that negotiated terms (which must be approved by the court) will be performed by the company. If the conditions are not complied with, then prosecution proceedings may be commenced. In order to enter a DPA the prosecutor must be satisfied that both the evidential test and the public interest test, as set out in the SFO DPA Code of Practice has been met.

The SFO reported that the DPA approved related to an SFO prosecution against Standard Bank Plc in relation to the alleged bribery of Tanzanian Government Members. Standard Bank Plc were indicted under section 7 of the Bribery Act 2010, for alleged failures to prevent bribery. Money talks and criminals walk.

As part of the DPA, Standard Bank paid US$25.2 million in financial orders and US$7 million in compensation to the Government of Tanzania. The bank also agreed to pay the SFO’s reasonable costs of £330,000 in relation to the investigation and subsequent resolution of the DPA. The bank’s fines were reduced by a third, because it brought the matter to regulators, and the agreement requires the continued cooperation of Standard Bank Plc with the SFO. They will be subject to an independent review of its existing anti-bribery and corruption controls, policies and procedures regarding compliance with the Bribery Act 2010 and other applicable anti-corruption laws.

David Green, the SFO director, said: “This landmark DPA will serve as a template for future agreements. The SFO contends that this was not a private plea “deal” or “bargain” between the prosecutor and the defendant company. The agreement offers a way in which a company can account for its alleged criminality to a criminal court. It has no effect until a judge confirms in open court that the DPA is in the interests of justice and that its terms are fair, reasonable and proportionate. DPA’s are intended only to be used in exceptional circumstances and allow investigators and prosecutors to focus resources on those cases where a prosecution is required.”

In 2016, ‘XYZ Ltd‘ became the SFO’s second DPA , which was concluded with the unnamed SME (Small and medium-sized enterprises), referred to only as XYZ Ltd due to ongoing proceedings. The company agreed to pay a total of £6.5m, including a financial penalty of £350,000 and disgorgement of profits of £6.2m of which a significant proportion was paid by the company’s US parent.

The Rolls Royce DPA, was something of a surprising landmark in the SFO’s approach to dealing with the most serious bribery cases. The judge himself commented that the appropriateness of a DPA in a case of such “egregious criminality over decades” and involving vast sums in corrupt payments could be seen as surprising, begging the question as to whether there was any future for criminal prosecutions for bribery.

Other commentators accused the SFO of a failure of courage in offering a DPA instead of taking the case to trial. Sir Brian Leveson QC, the president of the Queen’s bench division of the high court, said the case raised questions about whether it would ever be in the public interest to prosecute a company as big as Rolls-Royce.

“My reaction when first considering these papers was that if Rolls-Royce were not to be prosecuted in the context of such egregious criminality over decades, involving countries around the world, making truly vast corrupt payments and, consequentially, even greater profits, then it was difficult to see when any company would be prosecuted,” he wrote in his judgment.

The DPAs seem to be “the new normal” for bribery cases, but the SFO claim this is so only where the company demonstrates an exemplary response to rooting out ‘the problem’ and assisting the SFO in its investigation, which the judge in the Rolls Royce case acknowledged had been the case. (See UK Anti-Bribery Newsletter –
Spring 2017 from Travers Smith).

In the case of Rolls-Royce, Robert Barrington, the executive director of Transparency International, said the SFO had presented “a poor case” for the DPA, saying: “This gives the impression that Rolls-Royce is too big to prosecute.”

He added: “There was talk about pensioners and employees, but no mention of the victims of corruption. The poor case could have been offset by details about the prosecution of individuals, but there was nothing about that. If these are not the circumstances for a prosecution, then what are?”

It seems that now, even the law is also open to market forces. People and organisations that have clearly broken the law can simply pay to sanitise their corruption and launder their reputation.

In the UK market economy, everything is for sale, with the wealthiest citizens finding considerable discounts on moral obligations and behavioural ethicality. It’s become very easy to lose track of why some things simply shouldn’t be. The Conservative’s privatisation programme has proved to be a theme park for economic crime and party profit; firms and politicians collude to ensure we have the ‘best’ system that money can buy.

We hear a lot from the right about how the market place extends liberty, but there is little discussion about the fundamental imbalance built into the system that has systematically disempowered many others who can’t afford to pay for their liberty. Or their legal fees and penalties. The market place is not neutral. It’s a place that where class discimination is rampant, traditional power relations are fortified and morally constrained behaviour is only ascribed to and required from the poorest citizens. All of this has profound implications for democracy.

The wake of scandals to date, in which large corporations, politicians, and bureaucrats engage in criminal activity in order to profit personally, facilitate mergers and block competition; in which officials accept private payments to facilitate private interests, and for public services rendered, demonstrates only too well the extent to which corruption is driven by the very economic and political reforms that are claimed to decrease it.

The Link Between Money And Corruption Is More Insidious Than We Thought

HIDING IN PLAIN SIGHT: HOW UK COMPANIES ARE USED TO LAUNDER CORRUPT WEALTH

The Paradise Papers, austerity and the privatisation of wealth, human rights and democracy

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