WHISTLEBLOWERS ALLEGE ANNUAL $1.4 BILLION BARCLAYS BANK TAX AVOIDANCE SCHEMES – LONDON GUARDIAN MUZZLED FROM PUBLISHING DOCUMENTS19 March 2009
Further detailed allegations about tax avoidance schemes set up by Barclays Bank emerged Thursday night from whistleblowers who said the bank made close to $1.4 billion profit a year from a series of elaborate deals.
The schemes are similar to those detailed in documents published by the London Guardian newspaper this week which have been the center of a three-day hearing at Britain’s high court, and are the subject of a gagging order.
The internal Barclays memos were leaked by a mole to the Liberal Democrats. The new allegations reiterate claims that the bank’s main purpose in entering into these schemes was to make profit from tax avoidance through an intricate circuit of offshore Cayman Islands and Luxembourg companies. The profits are said to be enormous and the deals so complex that HM Revenue & Customs (HMRC) struggles to unravel them.
Barclays has vigorously denied the claims and earlier this week won an emergency injunction forcing the Guardian to remove internal bank documents from its website. Earlier Thursday a judge confirmed the ban, saying the documents contained confidential commercial information and legal advice. The Guardian is also banned from giving information about other publicly accessible sources of copies of the documents.
Vince Cable, the English Liberal Democrat Treasury spokesman, said of the ruling: “This is a sad day for democracy. British taxpayers are being asked to underwrite Barclays’ loans. I believe full disclosure of these documents, showing how Barclays use tax havens for tax avoidance, would be in the public interest. Banks use the finest legal brains money can buy to avoid tax, but HM Revenue & Customs is underpaid and overstretched, so it is far from a level playing field.”
Barclays declined to comment directly on any of the detailed allegations. It said it complied with taxation laws and disclosed deals with tax implications to HMRC “in a prompt, transparent and timely manner”.
It added: “This has enabled HMRC to carry out detailed and robust assessments of our tax affairs with an emphasis on our structured capital markets transactions. We provide them with further explanations and documentation as required.”
Barclays is currently in negotiation with the Treasury to secure insurance from the government – taxpayers’ money – to protect it against losses. Pressure has been mounting on banks to unwind tax avoidance schemes at a time when they are taking money from the public purse. Royal Bank of Scotland, in which U.K. taxpayers own 70% of the shares, has disbanded its department responsible for creating tax avoidance schemes.
“The idea that we could take support from the Treasury with one hand and somehow pick their pocket with the other would be wrong on every level,” said an RBS source.
Sources with detailed knowledge of the Structured Capital Markets division of Barclays told the Guardian Wednesday that its main purpose was to make profits from tax trades.
“Every single thing SCM does is a tax trade,” said one. “The deals start with tax and then commercial purpose is added to them. We were told that in one year SCM made between £900 million and £1 billion profit from tax avoidance.”
The sources painted a picture of a brutally competitive environment at SCM, source of a major part of Barclay’s past profits. One describes high-rolling poker games, abrupt sackings, and a “motivation” game in which an executive was strapped into a mock electric chair.
Barclays numerous tax trades have been voluntarily listed to the Revenue following a £300 million-plus deal between the bank and the authorities in about 2005 to settle an outstanding tax dispute, several sources say.
One whistleblower said, however, that the Revenue would typically get a one- or two-page summary of a deal, with all legal advice on tax and information said to be commercially sensitive removed.
“It was impossible for them to work out the true picture. There’s an understanding that we tell them about each deal so long as they don’t stop them. I have never been able to see what’s in it for the Revenue.”
The Barclays team expected the Revenue to obtain some tax payments on their deals but felt confident they would not be fully challenged, sources said. They knew they had a big budget and could afford top tax lawyers.
Up to 40% of the Barclays SCM tax profits came from past transactions with the U.S., say sources. Once the tax authorities there clamped down, newer trades focused on the low-tax jurisdiction of Luxembourg to exploit a ruling from the European court of justice that the U.K.’s tax rules on profits from foreign companies were discriminatory and not applicable unless trades were wholly artificial.
One Luxembourg-based scheme, Project Knight, had two parallel arms. One involving “fixed income” loan deals was intended for trades worth up to a total of $16 billion, which were expected to generate $240 million a year in tax benefits. A separate arm was set up to trade similarly in market equities. The trades were initiated for tax avoidance, the source said, but genuine commercial activities were also added as necessary. Half a dozen or more variations of this particular project were developed. Five or six further projects called STARS were bringing in profits from tax avoidance of around £300 million a year.
See Related: BANKING CRISIS
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