Britain’s tax nexus: able fraudsters, useful idiots

Christopher Harvie
24 September 2006

I Brown, Mack, Kerner

In 1975 the rector of Edinburgh University and his associates produced a symposium which if little read (tiny print, many pages, variable authors) staked its claim as a manifesto of "left devolution": The Red Paper on Scotland. In Glasgow an elderly sociologist, with a Dutch colleague, published a study (also little read, though one of its readers was perhaps the best British crime novelist of the 20th century) whose view of society was a lot less idealistic. These resembled the Titanic and her iceberg. They have now collided.

We'll come back to Gordon Brown. But John A Mack and Hans-Jürgen Kerner: who are they?

The Crime Industry was a study commissioned originally by the Scottish home department, then published by the Council of Europe. It was read by Eric Ambler (1909-99) the doyen of crime writers, and figures in his penultimate thriller, Send No More Roses (1977). Ambler's book is far more ingenious than anything by John Buchan, Ian Fleming, or John Le Carré. It is also chillingly predictive of the crime of the (new) century, which must haunt the chancellor as he contemplates the promised land of 10 Downing Street.

Mack and Kerner's thesis was that out of globalisation and computerisation, dodgy business practices and tax havens, there was evolving a resilient and almost uncatchable type, the "able criminal." He was like the poison-proof super-rat, said to be thriving off the fast-food culture of our streets: specialising in difficult-to-detect frauds, ripping off other criminals who wouldn't for obvious reasons go to the police, and implicating the police themselves, who had to protect their grasses and sleepers. Based in the likes of Jersey or Monaco or (these days) Dubai, he dealt in millions.

But in the crime that Gordon Brown must now deal with - long after the acclaim for his speech on 25 September from delegates to the Labour Party's conference has subsided - the counting starts in billions.

Also by Christopher Harvie in openDemocracy:

"Journeys to the Rhine" (January 2002)

"Looking into Wales: a nation displayed"
(March 2002)

"Remembering Robin Cook" (August 2005)

"The German solution? " (September 2005)

"A Scottish-Chinese dream: Maglev made easy" (January 2006)

"Gordon Brown's Britain" (January 2006)

"A German dream: some day my prince will come" (June 2006)

"Red Clyde and Yellow press" (August 2006)

Among Christopher Harvie's many books are A Short History of Scotland (OUP, 2002), Deep Fried Hillman Imp (Argyll, 2004) and Mending Scotland (Argyll, 2005).

Christopher Harvie's homepage is here

II Carousel!

On 15 August 2006, 500 police and revenue officers descended on sixty addresses in the United Kingdom and arrested twenty-two people, fifteen of them (apparently of middle-eastern provenance) in Glasgow, on charges related to value-added tax (VAT) fraud (see Ashley Seager, "Raids on VAT fraud gangs lead to 22 arrests across UK," Guardian, 16 August 2006).

This was a tsunami which had been building up for years. Initially it had been to do with fraudsters importing small hi-tech items such as mobile phones or microchips free of VAT, selling them plus VAT but both avoiding VAT payment - "missing trader fraud," or "carousel fraud" - and through forged invoices reclaiming fictive VAT payments from the tax authorities.

By 2005 the business had become a "virtual carousel", directed to a great extent from Dubai, in which the items never moved themselves but the deals were done on a greatly-increased scale with specially-constructed computer programmes (see "Scams steal £8.4 billion from taxpayer," James Oliver, BBC Panorama, 22 September 2006).

Michael Voudouri, a businessman from Bridge of Allan, Scotland, was imprisoned for four years for a fraud of £3 million in June 2004. A tiny sum compared with two cases which concluded with the conviction of two hoods in July 2006: Clive Saunders, an organiser of "entertainment security executives" (bouncers) in Stoke-on-Trent went down for £68 million, and "Riviera" Ray Woolley, another bouncer-boss from Stoke, for £38 million - out of a probable turnover of £555 million. There were rumours of a far bigger fish who had escaped with a clear billion.

The Scottish tabloids, including the Labour loyalist Daily Record, were emphatic:

"Carousel frauds reap organised crime syndicates massive rewards and are less risky than running Class A drug-trafficking operations. Law enforcement agencies have seen an alarming trend recently whereby gangs involved in narcotics are switching their attention to such frauds" (see Richard Elias, "Take VAT! Customs smash £500 million tax fraud," Daily Record, 16 August 2006).

The impact was by then immense. According to KPMG's head of forensics in Scotland, Ken Milliken:

"It's getting so big now that it is beginning to affect the country's balance of payments. £50 to £60 million a time ... makes our overseas trade figures seem higher than they are, because of the same goods going around and around" (see Craig Brown, "City targeted in swoop on tax fraud criminals," Scotsman, 16 August 2006).

"(Her Majesty's) Revenue and Customs," writes Ashley Seager, "has estimated that 10% of the country's exports are related to carousel fraud ... the tax losses to the government have grown to billions of pounds. The most recent estimates are for losses of £1.1 billion-£1.9 billion in fiscal year 2004-5. But since then activity has increased tenfold."

If the European Union guessed at total losses of €50 billion (£34 billion) a year - approximately equal to the cost of the hugely expensive common agricultural policy - then the UK had turned out to be the centre of this mega-crime. Neither Saunders nor Woolley were Napoleons of crime, yet the crooks, fitting into nests of legitimate import-export firms, were difficult to nail. This meant in turn that attacks by government or European agencies ended with the prosecutors facing proceedings from aggrieved traders.

Glasgow, the fortress of Scottish illegalism, was already awash with drug-dealing (Scotland's drug problem is three times the European average), counterfeit sales, and money-laundering (see Christopher Harvie, Mending Scotland, 2004). Fraud in Scotland had risen 370% between 1995 and 2005, but Ken Milliken reckoned the sum of £18 million surfacing in the courts was only a fraction of a total which might reach a billion (Craig Brown, Scotsman, 30 January 2006).

By mid-September 2006, further figures were becoming available. The good news was that in July 2006 the tax losses through carousel fraud had fallen to £1.6 billion, thanks to an emergency doubling (to 1,000) of revenue investigators. The bad news was that these losses had been running at an average of £3 billion a month until then. The 2006 total so far was far from the estimated £1.9 billion: it might go as high as £23 billion (see Ashley Seager & Ian Cobain, "Customs cracks £5 billion VAT fraud," Guardian, 21 September 2006).

III Water in which the fish swim

John A Mack and Hans-Jürgen Kerner argued that the able criminal required water in which to swim, and the UK treasury had already been fingered for - wittingly or unwittingly - providing it. In 2005 the financial journalist Nick Kochan (who had written a sympathetic study of Gordon Brown's first year) published a work that was available in the United States, but not in Britain. The Washing Machine: How Money Laundering and Terrorist Financing Soils Us concluded depressingly:

"London increasingly looks like an offshore center serving many dubious financiers while at the same time claiming to have regulations which put it among the world's top onshore jurisdictions ...

London's vulnerability is not in its laws but in their implementation. Government has failed to invest in sufficient skilled law enforcement officers or regulators to curb its sprawling financial system. But this is no accident. The UK's economy cannot afford to curb its income from the 'invisible' financial sector while its industrial sector becomes anorexic. As the UK feeds its addiction to finance and hot money, its regulators bluster ever less convincingly about the security of its financial system and its antipathy to money launderers."

After the 2002 "dot.bomb" slump there was an inflow of hard American dealers and managers demanding harder cash, the latest in a long stream of wealthy incomers whom London's financial district was desperate to recruit; they would join those in flight from disorder in their various homelands (Lebanon, Indonesia, Nigeria, Argentina) who had established themselves in London or the various British tax havens.

The very wealthy (who could, uniquely in Europe, claim a non-resident, tax-free status) had traditionally included members of imperial élites, South African gold- and diamond-magnates, Latin American dictators, Balkan arms-merchants: more or less the toxic cast of Ambler's 1939 classic The Mask of Dimitrios. To them was added the nouveaux riche of the Arab oil world (in the 1970s), in the the first Russian oligarchs (in the early 1990s) and Hong Kong Chinese and the mafiosi of the former Yugoslavia (in the late 1990s).

By 2005 two further inflows impended, borne in on a culture of private equity and hedge-funds. The first was composed of Sarbanes-Oxley refugees: Wall Street types trying to avoid the regulations brought in to stop the recurrence of Enron and WorldCom.

The second was another wave of Russians. A new set of statistics from the Bank of England, published in June 2005, was remarkable. Russians had £5.8 billion invested in the UK in 2002, and £14.4 billion in 2004, but by March 2006 this had rocketed to £49 billion. One-third of London's "super-prime" properties were going to Russian buyers (see Rory Cellan-Jones, "London's growing super-rich," BBC Radio 4, 23 June 2006). These were the fortunes made by apparatchiks in the privatisation of the command economy.

The historian Tony Judt writes that by 2004: "36 Russian billionaires ('oligarchs') had corralled an estimated $110 billion, one quarter of the country's entire domestic product. The distinction between privatisation, graft and simple theft all but disappeared: there was so much - oil, gas, minerals, precious metals, pipelines - to steal and no-one and nothing to prevent its theft" (Postwar: A History of Europe Since 1945, 2005).

By 2006, there they were, and influencing the political scene. In Germany, during the football world cup of June-July 2006, a reporter from Stern magazine tried to interview Roman Abramovich, of Sibneft and Chelsea fame, while he was stationed at Kiel on his 5,500-ton yacht Pelorus. Not a chance (Zygmunt Dzieciolowski had to travel as far as Abramovich's fiefdom of Chukotka in Russia's far east to have only slightly better luck). But the reporter did meet Abramovich's political adviser, one Gregory Barker, Conservative MP for Lewes and the British opposition party leader David Cameron's shadow environment minister, who has extensive Russian business links.

Was the migration of about a fifth of Russian GDP a crime? If so, it was on a scale rarely acknowledged by the optimistic apologists for the late-Soviet transformation of 1989-91. But this was a crime that was wholly within the paradigms of Mack and Kerner's "able criminal" in his chosen milieu. If an estimate for the UK's total GDP in 2005-06 is accepted at around £1,000 billion, Prem Sikka, professor of accounting at Essex University, reckons that tax evasion and other malfeasances constitutes upwards of 10% of it (see Prem Sikka, "Accountants: a threat to democracy," Guardian, 5 September 2005). The fact that all this dubious geld was sloshing around, under the nominal control of time-and-cash-poor politicians and overstressed civil servants, would see to that.

IV "Useful idiots"

The late and little-lamented VI Lenin is said to have created a category among the Soviet Union's fellow-travellers: the "useful idiots". This used the original Greek meaning of "idiot": someone apolitical and even if well-meaning, clueless. It's difficult not to see Britain's chancellor Gordon Brown, as indicted by Nick Kochan, in such a role.

Brown, after all, had drafted the regulatory legislation, ticked the compliance boxes, but was otherwise underfunded, undermanned and out of his depth. His staff in the Bank of England (retreating) and the Financial Services Authority (advancing) was coping with restructuring, which inevitably damages departmental cohesion, and overall rather resembled the British board of trade's tiny petroleum department when confronted by the oil giants over the North Sea in the early 1970s (see Christopher Harvie, Fool's Gold: The Story of North Sea Oil, 1994).

Could the rot be traced further, into the very constitution of New Labour? What, after all, was the state of cabinet government after the "Granita compact," the agreement in a north London restaurant in 1994 where Tony Blair and Gordon Brown mapped out the separate - and mutually untouchable - political domains they would govern after New Labour's election to office? Whatever were the precise details of the much-discussed compact, it is a long way from Walter Bagehot's "efficient part of the constitution."

How much of the paralysis over "carousel fraud" is owed to the awe the government had of international tycoons, not just in the media? Here, the dire quality of the current British political imagination compares ill, not just with intellectually agile Labour cabinet ministers of the 1960s and 1970s such as Richard Crossman or Anthony Crosland, but even with the four rather right-wing, middle-ranking Labourites - Harold Lever, Edmund Dell, Robert Sheldon and Joel Barnett - who sorted out public finances and North Sea oil in the horrendous circumstances of the mid-1970s.

It gets worse. On 21 September 2006 a Guardian report claimed that since May 2005 the inland revenue (tax authorities) had known that the cash from the carousels was leaving the UK via the First Curacao International Bank (see Ashley Seager & Ian Cobain, "Customs cracks £5 billion VAT fraud", Guardian, 21 September 2006). The FCIB, representative of a type of "shell bank" thought to have been squashed after the 2002 slump, had seen its transactions rise from $60 million in 2004 to $6.5 billion by mid-September 2006, when the UK government closed it down.

Until August, this outfit had still factored cash through respectable banks, including Barclays; the last being UBS, as the 2,500-odd "carousel hoods" among its British customers were silly enough to plump for the same money-launderers. This wasn't a game for Professor Moriartys, but for provincial villains, who still ran rings round the treasury's finest (see Ashley Seagar & Ian Cobain, "Customs cracks £5 billion VAT fraud", Guardian, 21 September 2006).

The chancellor told the International Monetary Fund conference in Singapore, 15-16 September 2006, that the government was "getting to grips with the problem". He kept clear of the history. The statistics showed that in tax year 2004-05, at the end of which the revenue fingered FCIB, VAT losses ran to a total of £1.9 billion. The real escalation in the frauds would come in the next financial year, when the Belgian anti-fraud regulator Eurocanet assessed the British losses at £8 billion, about five times the European average. The Guardian, focusing particularly on early 2006, went as high as £4 billion a month for four months, until the decline in July.

In his pre-budget statement of December 2003, Gordon Brown had announced that VAT fraud, then estimated at £2.75 billion, was "in decline". From then until the March 2006 budget, there were only generalities about strengthening legislation, otherwise silence.

So, over almost a year, during which the treasury had known about how the fraud worked, the villains were allowed to pull off their biggest-ever heist, whose cost equalled at least a year's fighting in Iraq and might amount to the same as the budgeted cost of the Trident II nuclear system. Throughout, the chancellor remained schtumm. Why?

For a moment, ending this piece, and thinking about New Labour's conference in Manchester on 24-28 September and the contest for the party leadership (and thus prime ministership) that will soon follow, I remembered the place and voice of Old Labour: the post-war health minister and inspirational figurehead of the party's left, Aneurin Bevan, who in denouncing the Conservative prime minister responsible for the misbegotten overseas adventure in Suez in October 1956, flexed that devastating stammer in a Trafalgar Square speech:

"Sir Anthony Eden has said that he has invaded Suez in order to strengthen the authority of the United Nations. This is like a b-burglar saying he is breaking into a house to train the p-police. Now, either Sir Anthony Eden is lying to us, or he is telling the truth. And if he is telling the truth, he is t-o-o s-s-stupid to be prime minister."

Bevan's seat, Blaenau Gwent in south Wales, is now held by an independent MP and an independent member of the Welsh assembly. A friend of mine from the Welsh nationalist party Plaid Cymru, driving a loudspeaker van through Tredegar during the June 2006 by-election, was hailed by a local. "Plaid? That's okay. If you'd been New Labour we'd have smashed your windows in."

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