Fifty shades of tax avoidance, or, what are the bankers doing with our schools and hospitals?

Huge sums that are supposed to fund the National Health Service are finding their way into yet more offshore tax havens, channelled through Private Finance initiative (PFI) projects. 

Joel Benjamin
17 February 2015

Image: Kerry-Anne Mendoza

‘Too Big to Jail’ HSBC has been caught with its pants down yet again, this time by stashing around 180 billion of clients’ undeclared wealth in its HSBC Suisse branches.

Following a week of venomous press criticism and political posturing, HSBC the most secretive of the UK banks has been forced to come out with a non-apology from CEO Stuart Gulliver.

1 ceo quote.png

It's not the first half-hearted apology forced from HSBC. In 2012 a US Senate report found they had actively circumvented rules designed to "block transactions involving terrorists, drug lords and rogue regimes". "Their lax anti-money laundering policies had allowed Mexican drug money, Iranian terrorist money and even suspicious Russian money to enter the US and gain access to US dollar liquidity over the preceding couple of years", Forbes reported.

HSBC was forced to admit that "in the past, we have sometimes failed to meet the standards that regulators and customers expect."

That HSBC has allegedly helped the super-rich, drug cartels and even terrorists launder money and evade taxes is shameful.

While HSBC has attempted to spin ‘Swiss Leaks’ as a historical ‘legacy issue’, tax avoidance and financial secrecy remains central to ‘the worlds local bank’ HSBC. In 2012 Ethical Consumer reported HSBC operated more tax haven-based subsidiaries than any other FTSE 100 listed company, 556 in total.

But there is also a far more overt “vanilla” form of systematic tax abuse going on, plundering billions of pounds in profit from taxpayers, from right under our noses.

Nowhere is government-corporate collusion in tax avoidance more worrying than in the UK Private Finance Initiative (PFI) industry.

HSBC and its ‘offshore’ Guernsey based offshoot HICL (HSBC Infrastructure Company Ltd) have been major players in the PFI infrastructure game, alongside other high street banks - most notably Barclays.

HICL - set up by HSBC and now 'spun out' - has an ownership stake in somewhere between 27 and 43 UK PFI infrastructure projects - mostly NHS hospitals (including Barnet, West Middlesex and Stoke Mandeville) and numerous schools.  

I say somewhere between 27 and 43 PFI projects because as Xavier Riley of Open Corporates attests, the HM Treasury database which attempts to record the “secondary market” for the trading (also referred to as flipping) of “equity” ownership of PFI deals is: “hopelessly out of date.”

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Source: Treasury 2013/14 data for HICL-owned schools and hospitals

Many of your treasured public infrastructure assets, paid for by UK taxpayers, are now in the hands of the super-rich and the bankers. They are held in PFI “special purpose vehicle” shell companies registered ‘offshore’ for maximum ‘tax efficiency’ in the tax havens of Guernsey and Luxembourg.

HSBC provided the following offshore company structure diagram illustrating the relationship between HICL’s PFI administration, investment and management arms in the UK, Luxembourg and Guernsey.

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Source: HSBC

It is not just HSBC’s Swiss Branches providing the utmost in secrecy. The PFI contracts entered into by HSBC itself, its offshoot HICL and other such PFI partners are deemed “commercially sensitive” meaning the PFI contracts and their exact terms and conditions are closely guarded secrets by Government authorities, unavailable for public scrutiny.

Sunlight is the best disinfectant. But the use of complex offshore tax structures for PFI stops us from knowing exactly how much these companies are (legally) avoiding in UK taxes.

We do know that HSIL Investments Ltd which controls a large PFI infrastructure portfolio (including HICL) is incredibly profitable. HSBC boasted that actual rates of return for investors on such infrastructure projects comfortably exceed targets, with some exceeding 20% per year. Profits funded by your taxes, but squirrelled away into corporate shell companies located in tax havens rather than circulating within the UK economy.

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Source: HSBC

For an experts perspective on the tax arrangements of PFI projects, former tax inspector turned Private Eye hack and author Richard Brooks has the inside story.

Brooks first effort “Plundering the Public Sector” and latest book “The Great Tax Robbery” set out in jaw-dropping detail the culture of a “revolving door” of staff secondments between the ‘Big 4’ accountancy firms (such as PwC), HM Treasury and HMRC to set up and run schemes like PFI, simultaneously acting as advisors to both the public, and private sector partners of PFI deals, and then being rehired to clean up their own mess

PFI has long been considered terrible value for the UK taxpayer. But at least the PFI companies would pay tax on their hefty profits, the Treasury assured us in their ‘value for money’ calculations - entirely ignoring PFI companies' ability to then sell on the equity and profit streams to other entities based in offshore tax havens. The Treasury Select Committee report into PFI in 2011 stated that:

[The] “committee criticises the Treasury for assuming PFI contractors would pay tax, when many are based in offshore tax havens. Innisfree, one of the largest investors in PFI, told the committee that 72% of its shares were held by investors based in Guernsey.

Stella Creasy, a Labour MP on the committee who tabled a series of parliamentary questions about the taxation of PFI firms, said: "There is tax out there that the British taxpayer is owed and the Treasury is doing nothing to get it back."  Creasy pointed in particular to 33 PFI deals that had netted HSBC spin off HICL £38million profit in the preceding year, on which they had paid a mere £100,000 tax

Richard Brooks explains that:

 “All told by 2012, over 200 PFI companies were partly owned offshore, more than 70 of them running health service projects. By my calculations, 168 state schools, many of which are run under a single PFI contract are at least partly owned offshore. That so many public assets should be shunted into offshore tax havens is a remarkable outcome.”

And it’s not just our hospitals and schools owned offshore. Brooks sets out that 600 HMRC offices are owned by a PFI company based in Bermuda, while HM Treasury and HMRC’s head offices are 25% owned via PFI company lend-lease based offshore in Jersey.

Even the UK “Home Office” itself is 100% owned by HICL via the tax haven of Guernsey.

Can we really trust the UK state to crack down on tax avoidance, when its very offices are so intrinsically linked to the practice of tax avoidance by the widespread use of PFI?

Richard Brooks adds:

 “Britain’s public services are hawked around, getting passed on like kids dog-eared playing cards [while] the PFI companies have drunk in estimated gains of £4.4 billion, almost entirely tax free!!” 

We won’t know - unless the Guardian investigates its closely guarded list further - how many of the super-rich individuals abusing Swiss bank secrecy laws receive income from these vehicles (or indeed from other types of private health investments).

But what we do know is that HSBC, its offshoots, and our other high street banks have helped stash the profits from taxpayer funded NHS hospitals and schools, tax free offshore – aided and abetted by a complicit UK state.

And with £320 billion worth of PFI projects already commissioned in the UK and Labour’s Lord Adonis promising more PFI2 if Labour are elected – any Government promising a crackdown on tax avoidance whilst allowing the PFI tax dodge to continue unchecked simply is not credible.

Until the cosy ‘revolving door’ between Westminster, Government and the big 4 banks and accountancy firms which designed and profit from PFI schemes is closed down, our politicians cannot be trusted to clean up HSBC and prevent further tax evasion scandals.

Campaigns like 'People Vs PFI' are working to close down the shady PFI deals that are a big part of the problem. 

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