Category Archives: Finance
The frequency of exposures and the political impact of corruption scandals appear to be increasing all over the world, says Gideon Rachman in the Financial Times.
Despite their holier-than-thou aura, he notes that bankers, lawyers, real estate agents and PR firms in the US, UK and EU often share in the proceeds of corruption.
As former US vice-president Joe Biden was reported to have said, at a Defend Democracy conference in Copenhagen, globalisation has deepened rifts, divorced productivity from labour and created less demand for low-skilled labour:
“When people see a system dominated by elites and rigged in favour of the powerful they are much less likely to trust democracy can deliver”.
The most recent example of corruption highlighted on this website follows:
After an initial denial (left, Financial Times), Economia confirmed that in an official response to the French government dated 30 March 2017, a HMRC official noted that Lycamobile is “a large multinational company” with “vast assets at their disposal” and would be “extremely unlikely to agree to having their premises searched”, said the report.
The letter from HMRC to the French government added, “It is of note that they are the biggest corporate donor to the Conservative party led by Prime Minister Theresa May and donated 1.25m Euros to the Prince Charles Trust in 2012”.
This is an ongoing saga: in 2016 Economia noted: “The Tories have come under fire for continuing to accept donations of more than £870,000 from Lycamobile since December, while it was being investigated for tax fraud and money laundering”.
Many senior British politicians have taken bribes and many ministers and civil servants move to lucrative positions with companies who have benefitted from legislation supported by these new colleagues – through the revolving door.
The unspoken ethic:
- In South Africa president Jacob Zuma was compelled to resign because of corruption scandals.
- Dilma Rousseff, the President, was impeached in Brazil in 2016.
- The Atlantic Council, whose largest funders include the United Arab Emirates, the Abu Dhabi National Oil Company, Airbus Group SE, Crescent Petroleum & the Foreign & Commonwealth Office of the United Kingdom describes the ruling United Russia party as the “party of crooks and thieves”.
- Narendra Modi came to power in India with a pledge to crack down on corruption among the elites. He has since abolished about 80% of the country’s currency, in an effort to ruin the black economy.
- In China, President Xi Jinping’s anti-corruption drive has seen more than 100,000 officials arrested.
- Mariano Rajoy has been forced to resign as prime minister of Spain after seven years in office, following a scandal in his political party.
- Malaysia’s ruling party lost power after allegations that the prime minister, Najib Razak, had embezzled vast sums.
Rachman believes that corruption has become more common and also easier to expose:
“The globalisation of business and finance opened up opportunities to make corrupt profits in fast-growing emerging economies.
“Industries that often need official involvement, such as natural resources and infrastructure, are particularly lucrative targets. There are contracts to be awarded and development projects that need official approval. And the money for bribes can always be deposited offshore.
“But such malpractice can be exposed. Strong, independent prosecutors and judges such as Brazil’s Sérgio Moro and South Africa’s Thulisile Madonsela have done heroic work in driving forward anti-corruption investigations. Press freedom in Brazil and South Africa has also been critical in keeping up the pressure on corrupt politicians. Even when the national media are muzzled, the internet provides an alternative medium for airing corruption allegations. The “Panama Papers”, which detailed the offshore financial affairs of many prominent politicians, was the result of an international journalistic project and based on hacked documents”.
He adds that new forms of international co-operation and transparency have also made would-be crooks more vulnerable to exposure. Changes in the Swiss laws on banking secrecy — made under pressure from the US — were crucial to allowing Brazilian prosecutors to uncover the proceeds of corruption. International investigations by the Swiss and Americans also kept up the pressure on Malaysia’s Mr Razak.
Lasting progress, Rachman writes, requires strong institutions that can survive changes in the political climate:
- independent courts and prosecutors with training and resources;
- a press that cannot easily be bought off, jailed or killed;
- efficient civil servants who cannot be fired at the whim of a corrupt boss.
He points out that if any of those elements are removed, corruption seeps back into the system.
The “clean hands” investigations in Italy in the early 1990s swept away many powerful figures — and were seen as a watershed. But Rachman cites the case of Silvio Berlusconi, tried 22 times on charges ranging from tax evasion and bribery to corruption and association with the Cosa Nostra. He was convicted of tax fraud in an Italian court and sentenced to four years’ imprisonment – served as community service – but has now been cleared to stand for election as prime minister once again.#
George Monbiot recently pointed out that the Commons report on the Carillion fiasco is one of the most damning assessments of corporate behaviour parliament has ever published. It trounces the company’s executives and board and laments the weakness of the regulators.
But, as Prem Sikka said in his April article, it scarcely touches the structural causes that make gluttony a perennial feature of corporate life.
Both agree that the problem begins with an issue the report does not once mention: the extreme nature of limited liability. Sikka points out that this system, under which executives are only financially accountable for the value of their investment, has also benefited frauds and led to the self-enrichment of executives at the expense of workers, consumers, creditors, pensioners and citizens.
Monbiot adds that the current model of limited liability allowed the directors and executives of Carillion to rack up a pension deficit of £2.6 billion, leaving the 27,000 members of its schemes to be rescued by the state fund (which is financed by a levy on your pension – if you have one). The owners of the company were permitted to walk away from the £2 billion owed to its suppliers and subcontractors. (Left: the former Carillion chief executive Keith Cochrane in Westminster after appearing before the Commons work and pensions select committee)
Monbiot continues: “There is no way that fossil fuel companies could pay for the climate breakdown they cause. There is no way that car companies could meet the health costs of air pollution. Their business models rely on dumping their costs on other people. Were they not protected by the extreme form of limited liability that prevails today, they would be obliged to switch to clean technologies”.
So what is to be done?
Prem Sikka (right) proposes that the bearers of unlimited risks and liabilities should be given rights to control the day-to-day governance and direction of companies.
He advocates including employees and citizen/consumers on company boards – because both ultimately have to bear the financial, health, social and psychological costs associated with environmental damage, pollution, poor products, industrial accidents, loss of jobs, pensions and savings. Through seats on company boards, they could secure a fairer distribution of income, challenge discrimination, curb asset-stripping and influence investment, training and innovation.
Across the 28 European Union countries (plus Norway), most have a statutory requirement for employee representation on company boards – unlike the UK, Belgium, Bulgaria, Cyprus, Estonia, Italy, Latvia, Malta and Romania.
George Monbiot proposes a radical reassessment of limited liability.
He points out that a recent paper by the US law professor Michael Simkovic proposes that companies should pay a fee for this indemnity, calibrated to the level of risk they impose on society. He adds, significantly, that as numerous leaks show, companies tend to be far more aware of the risks they inflict than either governments or the rest of society. Various estimates put the cost that businesses dump on society at somewhere between 4% and 20% of GDP
His own ‘tentative’ and ingenious proposal is that any manager earning more than a certain amount – say £200,000 – would have half their total remuneration placed in an escrow account, which is controlled not by the company but by an external agency. The deferred half of their income would not become payable until the agency judged that the company had met the targets it set on pension provision, workers’ pay, the treatment of suppliers and contractors and wider social and environmental performance. This judgement should draw on mandatory social and environmental reporting, assessed by independent auditors.
If they miss their targets, the executives would lose part or all of the deferred sum. In other words, they would pay for any disasters they impose on others. To ensure it isn’t captured by corporate interests, the agency would be funded by the income it confiscates.
Monbiot then says “I know that, at best, they address only part of the problem” and asks, “Are these the right solutions?
- support them,
- oppose them
- or suggest better ideas.
He ends: “Should corporations in their current form exist at all? Is capitalism compatible with life on earth?”
New Fleet Solid Support ships: cash-strapped MoD should look at the total cost-benefit of building in Britain
Jeremy Corbyn is in Glasgow today, where – reversing New Labour policy – he will call for Navy shipbuilding contracts to stay in the UK.
The contract could lead to over 6,500 jobs in the UK, 1,800 of those in shipyards: “Our proposal would both sustain existing shipbuilding and supply chain jobs and create new ones – right here in Scotland and also across the UK.”
The MOD, which is alleged to have ‘lost controls of costs’, hopes for a cheaper option. Its spokesman added: “We are launching a competition for three new Fleet Solid Support ships this year and strongly encourage British yards to take part”.
“Until the new Fleet Solid Support Ships (FSS) arrive, these hardy veterans must stagger on into the mid-2020s”
The three currently supporting ships supply ammunition, food and spares are “antiques built in the late 1970s and saw action in the Falklands War”. Corbyn warns:
“By refusing to help our industry thrive, the Conservatives are continuing their historic trend of hollowing out and closing down British industry. Over the course of the 1980s under the Tories, 75,000 jobs were lost in UK shipyards, leaving just 32,000 remaining.
“Our shipyards used to produce half of all new ships worldwide. Our current market share is now less than half a per cent. The Tories seem hell-bent on accelerating and deepening this industrial decline.”
SNP MSP for Glasgow Anniesland, Bill Kidd, is sceptical, saying: “Workers on the Clyde and people across Scotland haven’t forgotten Labour’s betrayal of the industry in 2014.
Natural England – sponsored by the Department for Environment, Food and Rural Affairs – is responsible for ensuring that England’s natural environment, including its land, freshwater and marine environments, geology and soils, are protected and improved.
The Farmers Guardian reported that in 2016 Natural England’s payment record was rated even worse than that of the Rural Payments Agency (RPA) as it also failed to deliver the required Countryside Stewardship payments for work already done.
Its performance did not improve in 2016; farmers were kept waiting for their first Countryside Stewardship payment. Though Natural England had pledged to make advance payments to 2016 mid-tier and higher-tier scheme holders between November 2016 and January 2017, with final payments due between January and June 2017, the NFU said exasperated members were calling the union demanding to know why their payments had not arrived. Farmers Weekly understood that ongoing delays in processing payments were because of problems with IT systems and processes at Defra.
A spokeswoman for Natural England declined to comment on the number of 2016 scheme payments already made.
FW added that farmers are yet to receive the first tranche of their 2017 payments for work done. Parliament’s Public Accounts Committee was scathing in its criticism of the RPA’s failure to distribute basic farm subsidies whilst requiring prompt applications from farmers (below left).
The extent of the Rural Payments Agency’s failure to pay farmers in England on time and in full is now clear. The RPA paid only 38% of farmers under the Basic Payment Scheme on 1 December 2015—first day of the payment window—compared with over 90% in previous years.
By the end of January this had risen to 76%, but at the end of March 2016 there were still 14,300 farmers (16%) who had not received any payment.
Government agencies should honour their own injunction: don’t leave it too late.
Over 10,000 farmers who had received a payment had not been paid in full. Two thirds of the additional payments made to these farmers were in excess of €1,000 and were first paid in September 2016, over 9 months after the first payment should have been received.
Farmers Weekly reported in February this year that the RPA boss was ‘blasted’ over farm payment delays and mapping.
At a NFU council meeting on 30th January at Stoneleigh Park, Warwickshire, farmers took RPA’s chief executive Paul Caldwell to task over BPS payment delays. More than one in 10 farmers are still waiting, according to an NFU survey (see “Survey uncovers extent of delays” right) – although the RPA’s own statistics suggests that figure is nearer to one in five. NFU vice-president Guy Smith said: “When you look at current payment performance and the levels of outstanding issues from previous years you could describe the RPA as ‘just about managing’.
In March 2017, having received what Miles King described as a ‘verbal beating’ (Countryside Stewardship in front of the EFRA committee) Guy Thompson, Chief Operating Officer, left Natural England and now works for Wessex Water.
Natural England announced in the autumn that it would increase first tranche payments, traditionally paid in the autumn, from 50% to 75%, with the remaining 25% following later, reflecting payment reductions or penalties.
Missing payments have reduced cashflow, leading some to take out bank loans
According to farm leaders, many claimants are still waiting for that first payment, with some now being forced to take out bank loans because of their resulting cashflow difficulties. Max Sealy, NFU county delegate for Wiltshire and a consultant with the Farm Consultancy Group, said some farms were waiting for substantial sums of money for work which they had already completed.
“What we need is clarity on the situation and better communication,” he said. But a Natural England spokesperson declined to clarify how many payments were still outstanding and when farmers could expect to see them.
Farmers who have signed up to Countryside Stewardship, or still have an old Higher-Level or Entry-Level Stewardship agreement, have yet to receive the first tranche of their 2017 payments. Farmers Weekly reports that farmers want to know when they can expect to receive their agri-environment scheme payments, with ongoing delays leading to budgeting problems and growing resentment about the way the schemes are being managed.
The Farmers Guardian then reported that Defra is to transfer delivery of the Countryside (agri-environment) Stewardship scheme from Natural England to the Rural Payments Agency (RPA) – more confusion?
NFU Deputy President Guy Smith (right) said:
“The Countryside Stewardship scheme has been plagued by poor delivery from its launch in 2015 and the NFU has been raising these concerns from day one. It seems almost every day we have complaints from members about the muddled application process, wrong maps, moving goalposts, late start dates and delayed payments. All this has undermined farmer confidence in the schemes leading to very poor uptake. Plans to improve delivery have to be welcomed but until we see improved delivery we will withhold judgement.
“I know many farmers will not be reassured that delivery is moving from NE to the RPA, which is notorious among farmers as the organisation which comprehensively screwed up the payment of the as then new Basic Payment Scheme back in 2014. A highly complex new IT system was commissioned to enable farm payments to be moved online. 7 years later the system is still not working properly.
Conservationist Miles King went further, calling for the abolition of the Rural Payments Agency before the introduction of the government’s England Agriculture Policy which is expected to be published this spring: “We need a publicly-funded independent champion for nature (as Natural England was intended to be when it was set up) and a new body which will deliver the public goods for public money”.
We don’t think enough about local government, one of whose jobs it is to mend potholes. When in our own lives our nearside front tyre is shredded, the pothole, Parris believes, represents “a momentary twitching-back of one tiny corner of a great curtain, behind which lie, no, not potholes, but a million anxious human stories, caused in part by cuts in public spending”.
He adds that accidents due to potholes are usually relatively trivial compared with cuts which for others may have meant:
- the loss of social care in dementia,
- no Sure Start centre for a child,
- the closure of a small local hospital
- or the end of a vital local bus service.
Potholes are a parable for others that matter even more. Unfilled potholes put lives at risk and have become a symbol of the damage done to every walk of life by spending cuts.
All the pressures on those who run government, local and central, are to worry about the short-term. it is usually possible to leave issues like road maintenance, decaying school buildings, rotting prisons, social care for the elderly, Britain’s military preparedness or a cash-strapped health service, to tread water for years or even decades. “They’ll get by,” say fiscal hawks, and in the short-term they’re often right.
- Nobody’s likely to invade us;
- the NHS is used to squeezing slightly more out of not enough;
- cutting pre-school provision is hardly the Slaughter of the Innocents;
- the elderly won’t all get dementia at once;
- there’s little public sympathy for prisoners;
- teachers can place a bucket under the hole in the roof
- and road users can dodge potholes.
Parris continues: “But beneath the surface problems build up. The old get older, and more numerous. Potholes start breaking cyclists’ necks. Care homes start going under. The Crown Prosecution Service begins to flounder. We run out of social housing. Prisoners riot. And is there really no link between things like pre-schooling, sports and leisure centres and local outreach work, and the discouragement of knife crime?”
“When New Labour was elected in 1997 we Tories groaned as it tipper-trucked money into the NHS, school building and other public services. Thirteen years later when Labour left office the undersupply was monetary, the red ink all too visible”.
Parris asks: “Must we forever oscillate like this?
One answer: Green & Labour Party leaders would meet these needs and avoid red ink by redirecting the money raised by quantitative easing.
As Toys R Us seeks shelter in the Pension Protection Fund (PPF) for its deficit, following the dumping of pension scheme liabilities by Bernard Matthews (now under investigation by the Pensions Regulator), BHS and Carillion, *Professor Prem Sikka comments that too many companies are using a procedure known as “pre-pack administration” to sell-off a company’s assets for the benefit of shareholders, banks and private equity concerns, abandoning pension scheme deficits in the process.
There is a general concern that the pre-pack administrator, in agreeing to the pre-pack in consultation with the company’s management team (and usually its secured creditors), favours the interests of the managers and secured creditors ahead of those of the unsecured creditors. The speed and secrecy of the transaction often lead to a deal being executed, about which the unsecured creditors know nothing and offers them little or no return.
Bad management can plan for a prepack months in advance, line up an administrator – and then be back running the business immediately. It means when retailers fail they are often being kept with the same directors when it would be much healthier if new management arrived and with fresh money to invest (Nottingham Law School Journal, Peter Walton).
Last year, the FT reported that some 148 pension schemes with £3.8bn of liabilities have been offloaded into the Pension Protection Fund (PPF, header above) through pre-pack administrations and that directors, shareholders and bankers extracted an extra £3.8bn from companies by dishonouring the contracts with employees. Another 20 schemes were being assessed and the numbers are growing.
Some companies use pre-packs to extract high executive remuneration, returns for shareholders and dump the pension scheme liabilities with the knowledge that 90% of the pension deficit may be made good by the PPF. The PPF was established by the Pensions Act 2004 to rescue distressed pension schemes, but the amount of compensation received is less than a member would have been entitled to under the rules of their original pension scheme.
Professor Sikka advises that all companies with a pension scheme deficit be required to submit an annual plan to the Pension Regulator explaining how they seek to eliminate it and there should be a binding commitment to reduce the deficit. To this end:
- All share buybacks, dividends and other forms of returns should be conditional on a plan to eliminate the pension scheme deficit.
- This plan needs to be approved by the Pensions Regulator.
- Each year the company should explain whether the previous promises to reduce the deficit have been delivered.
- Whenever a company with a pension scheme deficit engages in a merger or takeover it should be required to seek approval from the Pensions Regulator.
And is the pensions regulator to blame for the Universities Superannuation Scheme crisis?
David Bailey, professor of industry at the Aston Business School in Birmingham and John Clancy, pensions analyst and former Leader of Birmingham City Council argue that the Pensions Regulator, not universities, is the driving force behind proposed cuts due to its nonsensical approach to discount rates.
Read their article in the Times Higher Education, which describes itself as the data provider underpinning university excellence in every continent across the world.
* Professor Prem Sikka, Professor of Accounting at University of Sheffield and Emeritus Professor of Accounting at University of Essex
Carillion paid only £94m towards the pension deficit but sent £162m in dividends to shareholders over 2015 and 2016.
Media reports agree with Debbie Abrahams, shadow secretary of state for Work and Pensions that Carillion have failed in their duty to ensure that their pension provision was adequately managed and resourced.
She is on record as pointing out that they could well have done so, in a letter to the regulator, asking whether they were aware of dividends payments to shareholders far higher than the payments to employees’ pensions.
The FT, BBC, Telegraph, Guardian, Reuters and Citywire online reports cover news of the deficit but fail to mention what appears to be preferential treatment for directors
Carillion’s last accounts, to December 2016, show there was a combined deficit on half a dozen defined benefits schemes linked to employees’ salaries of £811m but a surplus on a directors’ scheme of £6m.
Private Eye reporting this asked: “How could most of the company’s pension commitments, covering tens of thousands of employees, be so woefully underfunded when those for a small number were fully financed?”
It notes that the PR firm acting for the trustees (possibly Teneo Blue Rubicon taking over from Bell Pottinger) refused to provide a breakdown of the schemes’ positions, which in the secretive pensions world remain confidential.
Several former directors – who had received large salary, pensions and bonuses -were questioned by the Work & Pensions and BEIS select committees on 6th February, including former chief executive Richard Howson, former finance director, Richard Adam and current chairman Philip Green (above) in an informative article in The Construction Index.
A final PE comment: with ordinary workers facing serious cuts to their retirement incomes, MPs led by pensions select committee chair Frank Field are unlikely to take “no comment” for an answer.
Bank branches are closing all over the country, with huge savings in the upkeep of buildings and staff wages. This is due, it is said, to customers undertaking more transactions online. In many cases this is a result of firm persuasion by the banks urging customers towards the more profitable system.
A reader experienced this firm encouragement towards online banking a few days ago when phoning to transfer funds. The impression was given that this was essential, but when pressed the staff member admitted it was not. Indeed she wavered a great deal more when it was pointed out that her job could well be eliminated with the closing down of telephone operations.
America’s Central State Bank warns that – due to the open nature of the Internet – all web-based services are inherently subject to risks such as online theft of access codes/user ID/username, PIN/Password, virus attacks, hacking, unauthorized access and fraudulent transactions.
The National Audit Office records that the volume of online ‘card not present’ fraud increased by 103% between 2011 and 2016
Online banking security rated by Which? At best, a 16% chance of being defrauded
In 2015 online bank fraud was described in the Guardian as the UK’s fastest growing area of crime – doubling from £60m in 2014 to an expected total beyond £130m this year – and the losses to consumers have in some cases been of the life-changing order of £90,000 each.
50 banks were surveyed by Which? and its August 2017 report revealed that all had experienced fraud – the best were 84% free of fraud, the worst only 56%. So even customers using the ‘best’ banks have a 16% chance of being defrauded.
Defrauded customers should accept the blame and not expect automatic refunds
Ross Anderson (right: professor of security engineering at the University of Cambridge’s computer laboratory) has seen the mass take up of online banking, and more recently the explosion in fraudulent activity. Financial fraud cost £2m a day in 2016, with older people disproportionately hit.
According to Anderson and other security experts, banks are shifting liability away from themselves and on to the customer – aided by a Financial Ombudsman Service that they claim rarely challenges the banks following a fraud. Miles Brignall in the Guardian comments: “The bank is on the hook for credit card losses, but not most bank frauds”.
The Independent reported that RBS’s chief executive Ross McEwan caused a storm when he claimed that it is not banks’ responsibility if customers are defrauded in such circumstances. The bank boss – who as part of his role also runs the NatWest brand, which has 24 million retail customers – said he didn’t think the bank had “a duty of care” to victims. They should accept the blame and not expect automatic refunds, he argued. 5,000 of his customers who were defrauded of £25m during nine months in 2015 – and anyone else who has suffered such losses – should consider taking class action.
Anderson, one of Britain’s foremost experts on cybersecurity, says he has never banked online – and has no plans to do so. He believes that system has become so weighted in favour of the banks that the customers now carry all the risk.
Miles Brignall in the Guardian asks: “If a man who has chronicled the rise of online banking won’t use it, what hope is there for the rest of us?”