“When Azerbaijan’s biggest bank wanted to raise hundreds of millions of dollars from funds in neighbouring Kazakhstan, it headed 2,700 miles in the opposite direction – to Ireland”, wrote Donal Griffin of Bloomberg News back in June this year.
New research by Trinity College Dublin’s Jim Stewart and Cillian Doyle provides a fascinating glimpse into this opaque world.
Stewart and Doyle investigate Financial Vehicle Corporations (FVCs) – which usually borrow funds on behalf of particular institutions – and the broader category of Special Purpose Vehicles (SPVs), which buy and sell a variety of financial assets.
The terminology may be obscure but the money involved is real, and mind-bogglingly big; at the end of 2015, Irish-registered FVCs alone held assets of €431.1 billion, over 20 percent of all such assets in the entire Eurozone. They do so despite rarely having any actual employees based here in Ireland.
FVCs and SPVs avail of section 110 of the 1997 Irish Finance Act, which confers significant tax advantages on them.
Most are owned by charitable trusts, which allows them operate with a high degree of freedom and flexibility – even though they typically serve no real charitable function. (Incidentally, according to Charities Institute Ireland, “the Charities Act is being amended to make it compulsory for charities to be fully financially transparent” – it will be interesting to see how that applies to the trusts that own SPVs.)
I have discussed the 110/charitable status two-step routine before: property vulture funds and aviation leasing companies, among others, use these (legal) dodges to minimise tax liabilities. Under pressure, the government has moved to limit vulture funds that are active in Ireland from exploiting the provisions.
But for operations (nominally) based in Ireland and making their money internationally, the show goes on. Stewart and Doyle cite the Irish law firm Matheson as declaring Ireland to be the “jurisdiction of choice for the establishment of… SPVs”, due to its benign (for the shadow bankers) taxation system and the very limited level of regulation.
Pretty much anything can be written off against tax by section 110 companies – not just the usual fees and expenses, but also profit pay-outs in the form of interest. Yes, you read that right: shadow banking profits in Ireland are not treated as taxable income, they are treated as offset-able allowances for tax purposes.
Stewart and Doyle hone in on 81 Russian-linked but Irish-based SPVs, which generated income from loan interest of €3.57 billion in 2015, but which paid tax of just €11,400.
In 2012, the Minister for Finance claimed that the Irish authorities were not really losing out on any tax revenue because such firms would not be here at all were it not for section 110. But because Ireland operates double taxation treaties with other countries, this means that the firms pay almost no tax anywhere in the world – global tax revenues are subsequently diminished, whatever about Ireland’s own.
Not only is tax avoidance the order of the day, other potentially dubious practices may also be facilitated.
VPB Funding Ltd was established in 2013 and raised $225 million in finance for the Russian bank Vneshprombank. As Bloomberg journalists have put it, “Based in a drab office building in Dublin  down the road from a pub frequented by [then] Taoiseach Enda Kenny, VPB Funding Ltd had no employees but one function: selling bonds.”
The Russian Central Bank later found a $2.2 billion hole in Vneshprombank’s balance sheet, with former executives accused of asset-stripping the operation. The debt owed to the Irish partner (and whoever they in turn raised the cash from) has duly been defaulted upon.
Another Russian bank – Peresvet – was declared to be in default in October 2016 and its chief executive disappeared. Lenders to Peresvet face losses of $1.2 billion. Peresvet Capital Ltd (with an address in Dublin 2) – availing of section 110 status and owned by a charitable trust – had been busily funnelling money to the Russian operation from its Irish base.
Many other such examples could be cited, by no means all related to Russia. Azerbaijan’s largest bank – IBA – used Dublin firms as conduits to borrow from the state pension fund in Kazakhstan in 2014.
Bloomberg reports that IBA has defaulted on its debts and its chief executive is in jail. Kazakh pensioners are out of pocket to the tune of $250 million on a bond bought via the quaintly named Emerald Capital of Dublin.
Of course any loan can go bad – that is not the issue. The issue is whether there is sufficient transparency and regulation to ensure that lenders, in particular, are properly apprised of risks.
The Azeri case sparked Dublin City University Professor of Finance Shaen Corbet to claim that “The lack of oversight within this system is generating an environment where questionable, immoral, unethical and downright illegal funding channels can flow undetected.”
He has a point, and it remains to be seen whether new moves by the Central Bank of Ireland (CBI) to better monitor the sector prove effective. Stewart and Doyle note that published CBI data appear to significantly under-report section 110 activity here.
So who gains from all this? Lawyers, accountants and bankers based (at least nominally) in Ireland do – they earn significant (if unspecified) amounts of money from greasing the wheels of the shadow sector.
Are their profits enough to justify Ireland’s participation in massive tax avoidance and unregulated lending on a scale that could again threaten the stability of the global economy?