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Crisis Pits Vatican Against Offshore Bankers

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By Lucy Komisar
Inter Press Service (IPS)
, Dec 22, 2008

The financial crisis has the U.S. swirling with charges about the immoral greed of some corporate executives who recklessly bet their companies’ futures to line their own pockets. The popular fix for this international calamity stops at the nation’s borders: decouple top-line salaries and bonuses from stock prices and institute more transparency and regulation.Vatican shield

However, last month, the Vatican, in a groundbreaking statement, linked the financial crisis to a much deeper problem largely ignored in discussions of the crisis here. It underlined the need to consider carefully “the hidden but crucial role of the offshore financial system in light of the emergence of the global financial crisis”.

The Nov. 18 statement, drafted by the Papal Council for Justice and Peace and endorsed by the Vatican Secretariat of State which speaks for the Pope on foreign affairs, called offshore markets “an important link, both in the transmission of the present financial crisis, as well as in maintaining a host of mad economic and financial practices.”

Among them it said were the movement of money to evade taxes and recycle profits from illegal activities and also gigantic capital flight.

The Holy See issued its “note” on the causes and consequences of the world financial crisis on the eve of the United Nations General Assembly Conference on finance and development in Doha. Its prescription: “a drastic reduction of offshore financial practices”.

Dr. Flaminia Giovanelli of the Papal Council in Rome told IPS that this is the first time it has made such a statement.

She explained that the Council had been studying the problem of financing for development at the moment that the financial crisis occurred. She said the statement talked about tax havens because the Council’s study connected the fact “that many companies don’t pay taxes” to both financing for development and the financial crisis.

The Papal statement was published in Observatore Romano, the Vatican newspaper. Dr. Giovanelli said there have been “positive reactions from Catholic development organisations” around the world.

The statement asked, “How have we arrived at this disastrous situation, after a decade in which speeches have multiplied on the ethics of business and finance, and in which the adoption of ethical codes has spread?”

A few weeks later, on Dec. 8, in ironic counterpoint, 17 major U.S. corporations signed on to a list of ethical practices. Their statement, which appeared aimed at assuaging public displeasure at corporate misbehaviour, was built on non-controversial hot-button issues — in essence, “we won’t bribe, we won’t despoil the environment”. The issue of offshore money flows and tax evasion was nowhere to be seen.

The Vatican came to its knowledge of offshore painfully. Italy’s Banco Ambrosiano, of which the Vatican was the main shareholder, collapsed in 1982. Its CEO Roberto Calvi, in collaboration with Bishop Paul Marcinkus, the U.S. national who headed IOR, the Vatican Bank, had siphoned off multi-millions of dollars to offshore accounts.

Ambrosiano lost 3.5 billion dollars of customers’ deposits. Calvi, who fled Italy, was murdered and found hanging from Blackfriars Bridge in London. Marcinkus was protected from Italian indictment by the Church and later returned to the U.S. where he lived until his death in 2006.

A few years later, in a 1985 essay on morality and economics, Cardinal Ratzinger — the future Pope Benedict XVI — warned that the decline of ethics “can actually cause the laws of the market to collapse”.

Ethics and offshore. The Vatican now gets it, but U.S. corporations don’t. The U.S.-based multinationals that signed on to yet another ethics pledge included General Electric, The Hartford, Pepsi, Wal-Mart, Accenture, Dell, and United Airlines. Their prescription: comply with laws against fraud, corruption, and bribery; practice transparency; avoid conflicts of interest; be accountable to customers and protect the environment.

Ethics, according to the 17, does not include rejecting the use of the offshore system to evade regulation as well as taxes. Like the Vatican, U.S. corporations have experience with offshore. It’s understandably a sensitive issue.

General Electric cuts its taxes drastically by selling its exports to offshore subsidiaries which then sell them to the real customers. That’s called “transfer pricing”. The corporation transfers profits offshore. GE spokesperson Gary Sheffer declined to comment on ethics and taxes or on the ethics of GE transfer pricing.

Dell, the computer company, has moved patents on intellectual property developed in the U.S. to subsidiaries in Ireland where no taxes are charged on royalties. Regarding Dell’s view of ethics and taxes or the ethics of avoiding taxes on patents, Michele Glaze, spokesperson for Dell on corporate social responsibility, said, “I don’t know the answer.” She didn’t obtain it.

PepsiCo, the global soft drink company, has 10 subsidiaries in Luxembourg, a notorious tax haven. However much soda Luxembourgers drink, that market would not seem to require ten Pepsi companies to serve it. Such companies are routinely used for financial transactions that launder profits. PepsiCo declined to discuss the purpose of its Luxembourg subsidiaries or the degree to which using offshore companies to reduce taxes is consistent with an ethics pledge. Public relations spokesperson Dave DeCecco provided a written statement: “PepsiCo manages its tax affairs in a prudent and lawful manner.”

The ethics pledge was organised by Alex Brigham, founder and head of the Business Ethics Leadership Alliance of the Ethisphere Institute. He said that paying fair taxes “wasn’t an issue that we brought up with these companies in large part because we’re focusing on a lot of non-financial items.”

He explained, “We’re looking at the conflicts of interest; that’s a huge problem for companies.” He added, “I agree that off balance sheets assets are a major problem in the financial services sector. I know Citigroup moved massive amounts of assets off their balance sheet, but I don’t know if it was offshore.”

He said that the business ethics project did not anticipate taking on tax issues “either now or in the foreseeable future”. The Ethisphere approach to offshore tax evasion is typical of U.S. corporate-financed “corporate social accountability”: they ignore it.

However, the issue may get some attention when U.S. President-elect Barack Obama takes office. The amounts at play are huge. The Vatican cited estimates of taxes evaded from the wealth held in offshore centers as close to 255 billion dollars. U.S. tax losses from corporations are said by Senator Carl Levin, co-sponsor with Obama of the Stop Tax Haven Abuse Act, to be 50 billion dollars a year.

In his campaign, Obama spoke out frequently against corporations who don’t pay their fair share of taxes. He said he would deny tax benefits to former U.S. companies that reincorporate offshore to avoid paying taxes. He said he would crack down on companies that use operations in offshore jurisdictions to evade taxes.

Article on IPS site

4 Responses for “Crisis Pits Vatican Against Offshore Bankers”

  1. Stanley Richards says:

    This article is right on target. The solution is very simple. If you want to be an American corporation protected by American laws, all corporate income is taxable at a 20% rate. If at least 75% per cent of the product or services are produced in the U.S., all offshore income received by an American company is taxable at a 50% rate with no credit for foreign taxes paid to another government.

    All offshore entities must be disclosed and subject to regulation by the U.S. government. Failure to do so is subject to criminal penalties. To stop manipulation of commodity markets, all financial speculators, which includes individuals, all hedge funds et al, would be subject to 70% margin requirements. Industry commodity players would only be required to post a maximum of 25%.

    Stan Richards

  2. David Sogge says:

    This is encouraging. But might the Vatican also do a bit of casting of the beam out of its own eye while it pontificates about the motes in the eyes of others? In a 2006 report to the Dutch Ministry of Finance about worldwide money-laundering, economists from the Utrecht School of Economics and the Australian National University ranked the Vatican City as among the world’s more active and attractive places for laundering dirty money.
    url: http://www.cjpf.org/newsletter/spring_06/amountsandeffectsofmoneylaundering.pdf

  3. Polle says:

    There is a whole nother way to look at this issue folks:

    Shareholders provide capital in the hope that companies will make profit and pay them dividends.

    But when the company makes profit and pays shareholders dividends, IT GETS TAXED TWICE by the US governement and at least once by the States. The company FIRST pays corporation tax on the profits, then, after distributing all or part of what’seft to the shareholders in dividends, the shareholders pay tax on the dividends.

    Recognizing that this DOUBLE TAXATION is iniquitous, the Tax on “qualified dividends” was reduced to 15%. But that created a whole lot of new bookkeeping to decide what was a “qualified” dividend and what wasn’t. Ironically, ALL dividends paid by foreign corporations are cosnidered qualified dividends.

    Logically, this should be the way to avoid double taxation: The company makes profits, and that part whcih it distributes to shareholders should be taxed at shareholders tax rates.
    Then, if the company retains any profit, that should be taxed at the corporation tax rate.

    There are entities that aretaxed approximately this way already: Mutual funds, and Real Estate Investment Trusts. If they weren’t, a Mutual Fund for example would suffer TRIPLE TAXATION because, dividends received from companies whose stock it owned would firsta have been taxed at corporation tax rates; then the mutual fund profitsz would have been taxed at coroparation tax rates, then whatever they distributed to shareholders out of what was left would be taxed at shareholders’ tax rates. Clearly this is UNTENABLE!

    Therefore I would urge Obama to do the logical thing: Put every profit-making entity under the same, simple rules: Profit that is distributed to shareholders in the form of dividends is taxed ONLY at the shareholder, and retained profit is taxed ONLY at the corporation.

    The present regime was designed to take into account another iniquity: That when a company retains already-corporation-taxed profit to grow its business and the share price rises, when the shareholder sells and makes a capital gain, the gain is TAXED YET AGAIN.

    The solution is simple: When a company retains profit and pays corporation tax, the amount of retained, taxed profit per share shall be added to the shareholders’ costs basis for each share.

    Anybody disagree with the logic?

  4. MK says:

    Mr. Richards is right and the fact is that those who spend the most time avoiding taxes also consume the largest part of government services at all levels as well as finding ways to divert its revenues into their pockets. It is not just corporations that are doing these things. It is public officials who talk a good game while squirrelling money away taxfree.

    The simple truth is that if government was just peforming the basic services that most people want and not these grandiose “control” functions dreamed up by the Rockefeller/Bush/Rothschild oppressors, it would not cost so much to run government. What we need is less government that is more accountable to the people, less secrecy and more honesty. All of these things would make it cheaper to run government and the tax burden less onerous.

    MK

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