Posts Tagged ‘financial crime’

Challenges await Australia’s new Tax Commissioner

by Miranda Stewart

In January 2013, Mr Chris Jordan AO starts as Federal Commissioner of Taxation in charge of the Australian Taxation Office (ATO). He follows Mr Michael D’Ascenzo AO, who was not reappointed after his seven-year term.

Mr Jordan will be only the 12th Commissioner and only the second external appointment in the ATO’s history. All appointments have been male. The first Commissioner, George McKay, appointed from the New South Wales public service in 1910, seems to have died from overwork in 1917 after administering on a shoestring the federal land tax and income tax introduced in 1915 to help fund World War I. The next Commissioner, Robert Ewing, appointed an assistant commissioner to help. In his 22 year innings until 1939, Mr Ewing oversaw a new federal estate tax, payroll tax, and the turbulent time before World War II, when the federal government took over the income taxes of the States.

Mr Jordan is a former chairman of KPMG and company director. His appointment has been widely welcomed especially by business and professional groups. He has been on the Board of Taxation since its establishment in 2000 and was appointed chairman in June 2011. His early working life as a policeman may also stand him in good stead.

So what are the challenges facing Mr Jordan in his new appointment?

Today, the ATO is an organisation of 25,000 people that collected net tax of $273 billion in 2010-11. Mr Jordan will be responsible for the income tax, GST, fringe benefits tax, petroleum and mineral resource rent taxes, medicare levy, fuel taxes and higher education levies. The ATO also administers parts of the superannuation system, child support, the Australian Business Register and Valuation Office.

The ATO is under constant pressure to increase revenue collection. Most revenue is collected through its highly effective income tax and GST withholding systems. These ensure electronic transfers from taxpayers to government coffers throughout the year. The ATO manages these systems at a remarkably low administrative cost of a little under $3.5 billion a year, a cost to revenue ratio of about 1 per cent. This does not include compliance costs of taxpayers and business and we know that these are significantly higher than direct governmental costs of tax collection, and regressive in their impact.

Mr Jordan’s main responsibility – and biggest challenge – is to keep this efficient organisation running well. He will have to manage his staff so that sick days are kept to a minimum and make sure the next computer roll-out stays on budget. He has lost one valuable support in this task, as Jennie Grainger, former Second Commissioner in charge of Compliance, has just taken up an appointment in Her Majesty’s Revenue and Customs in the UK. Several other leading ATO staff are also retiring, including senior legal experts.

Some have suggested that Mr Jordan can – and should – lead a change in ATO culture, presumably to make it more business and taxpayer-friendly. One commentator, for example, suggests that he will better understand the plight of small business.

It is true that the ATO has a strong organisational culture. Being the subject of widespread popular dislike will do that. ATO staff also understand their importance to government. Still, caution is needed: that strong culture contributes to the morale of ATO staff, and that helps keep the revenue rolling in.

Mr Jordan has demonstrated his effectiveness in liaison with government and business. He will no doubt strengthen the work begun by Mr D’Ascenzo in engaging with taxpayers and the tax profession about most aspects of administration and interpretation of tax law.

But it is important that the Commissioner of Taxation is – and is perceived to be – absolutely independent both of the government of the day, and of undue professional or business tax influence.

Mr Jordan faces the challenge of handling revenue collection in relation to high wealth individuals, including investigations into international tax evasion started under Mr D’Ascenzo. He must oversee controversial large corporate audits that challenge cross-border transfer pricing activity and tax planning. He becomes Commissioner in an era of unprecedented and expanding inter-governmental tax cooperation.

Mr Jordan will be in charge of new risk-based audit, settlements, and real-time information disclosure arrangements with large business. UK Secretary of Taxation Mr Dave Hartnett was at the forefront of these developments. He recently retired amid public controversy that he took “enhanced relationships” with big business too far. Within limits, a prickly relationship between business, the profession and the Commissioner is probably healthy. It won’t be Mr Jordan’s job to be liked.

What of Mr Jordan’s role in tax reform? That is only a small fraction of the job. In 2002, Treasurer Peter Costello moved the tax legislation function into Treasury. Mr Jordan will keep his seat on the Board of Taxation, but only as an ex officio member. He may be able to strengthen the voice of the core administrator in Treasury’s tax law reform processes. That would be a good thing. But his main job is to keep that revenue – about $750 million per day – rolling in to fund government to do what the public wants it to do.

Miranda Stewart is a Professor at Melbourne Law School, University of Melbourne.

This article was first published at www.theconversation.edu.au

 

Loud thunder, little rain: China’s new leaders target corruption

by Kenneth Chern

China’s new leaders are aware of the danger that corruption poses to the nation’s social stability and economic development.

But entrenched corruption at the local and national levels, including among the families and friends of those very leaders, will make it difficult for them to break the link between money and power that frustrates the masses but sustains the power of a Communist Party that long ago abandoned political belief for economic gain.

A 2007 report of the Carnegie Endowment for International Peace by Minxin Pei called the level of Chinese corruption “astonishing,” noting that it cost $US86 billion a year, more than China’s annual education budget. Things have not gotten any better. The Bo Xilai affair – Bo’s wiretapping of other top Chinese leaders, his son’s privileged lifestyle abroad, and his wife’s murder conviction — was but the most lurid case of rampant corruption that has shaken the trust of the Chinese people in their government.

Other high-profile cases have left the public seething: the melamine-laced milk that poisoned hundreds of infants; the Wenchuan earthquake that toppled “tofu schoolhouses” onto pupils while government buildings stood firm; the bullet train crash in Wenzhou that disgraced railway czar Liu Zhijun; and the sale by Wukan officials of prized farmland to real estate developers that triggered villager demonstrations and violence.

In his speech to the 18th Party Congress last week, outgoing President Hu Jintao stressed the need to fight corruption, warning that if the issue is not addressed, “it could prove fatal to the party, and even cause the collapse of the party and the fall of the state.” Significantly, he warned leading officials to “strengthen education and discipline over their family and staff.” Along the same lines, incoming Party general secretary Xi Jinping in 2004 instructed, “Rein in your spouses, children, relatives, friends and staff, and vow not to use power for personal gain.”

But Chinese leaders have made similar warnings for years without making serious headway. That’s because of what Kenneth Lieberthal of the Brookings Institution terms the “marriage of wealth and political power” which supports an economic strategy based on rewards to local officials for “producing rapid GDP growth while keeping a lid on social unrest.” Put another way, the breakneck speed of Chinese economic development provides wealth that is distributed as patronage and provides support for the Party’s continued political monopoly. And campaigns against corruption evoke the Chinese proverb, “Loud thunder, little rain.”

More specifically, Minxin Pei cites two characteristics of corruption — the corruption of local state institutions through the purchase and sale of government appointments, and “collusion among local ruling elites” or “groups of local officials who cooperate and protect each other.” These practices drain the economy and feed public cynicism but they nurture the political and economic ambitions of entrepreneurs and government officials who thrive in a poorly defined regulatory and policy environment.

This is the social context in which Chinese leaders and their families operate, which is why the calls of Hu Jintao and Xi Jinping for discipline of families and staff is so interesting. Politicians, their relatives, staff, and friends use their political clout to build businesses and line their pockets. The average wealth of the richest 70 members of the National People’s Congress in 2011 was over US$1 billion. China’s central bank reportedly has evidence that up to 18,000 officials and employees of state-owned firms have fled China since the mid-1990s, taking $127 billion with them.

And recent reports have shown how relatives of top Chinese officials have grown wealthy. Xi himself reportedly has sisters and brothers-in-law with “huge interests in China’s real estate, minerals and telecommunications sectors.” And the family of Premier Wen Jiabao, perhaps the strongest reform advocate of all China’s top leaders, has been reported by the New York Times to have US$2.7 billion in wealth.

The reality is that Chinese leaders, even those who call for (and may sincerely believe in) reform and a crackdown on corruption, find themselves in a social web of political influence and enrichment that sustains the status quo. That reality will make it just as hard for the new leaders as it was for their predecessors to make a serious tilt at corruption.

Corruption and influence peddling are as old as the Chinese nation, and as old as human history. What is new is the demand of poor farmers, workers, and China’s growing middle class for a level playing field and a fairer chance for opportunity. Growing social tensions and environmental stresses make the current system unsustainable for the long term.

How Ji Xinping and the new Politburo meet that test will determine history’s verdict on whether they are authentic leaders with the courage to take the needed steps for the common good of the Chinese people and the welfare of the Chinese nation.

Kenneth Chern is Professor of Asian Policy at the Swinburne University of Technology and Executive Director of the Swinburne Leadership Institute.

This article was first published at www.theconversation.edu.au

 

The Unrepentant And Unreformed Bankers

By Phil Angelides

Money laundering. Price fixing. Bid rigging. Securities fraud. Talking about the mob? No, unfortunately. Wall Street.

These days, the business sections of newspapers read like rap sheets. GE Capital, JPMorgan Chase, UBS, Wells Fargo and Bank of America [2] tied to a bid-rigging scheme to bilk cities and towns out of interest earnings. ING Direct , HSBC and Standard Chartered Bank  facing charges of money laundering. Barclays caught manipulating a key interest rate, costing savers and investors dearly, with a raft of other big banks also under investigation. Not to speak of the unprecedented wrongdoing that precipitated the financial crisis of 2008.

Evidence gathered by the Financial Crisis Inquiry Commission clearly demonstrated that the financial crisis was avoidable and due, in no small part, to recklessness and ethical breaches on Wall Street. Yet, it’s clear that the unrepentant and the unreformed are still all too present within our banking system.

A June survey of 500 senior financial services executives in the United States and Britain turned up stunning results. Some 24 percent said that they believed that financial services professionals may need to engage in illegal or unethical conduct to succeed, 26 percent said that they had observed or had firsthand knowledge of wrongdoing in the workplace, and 16 percent said they would engage in insider trading if they could get away with it.

That too much of Wall Street remains unchanged is not surprising. Simply stated, the banks and their leaders have paid no real economic, legal or political price for their wrongdoing and thus have not felt compelled to change.

On the economic front, the financial sector has rebounded nicely from its brush with death, thanks to an enormous taxpayer bailout. By 2010, compensation at publicly traded Wall Street firms had hit a record $135 billion.

Last year, the profits of the nation’s five biggest banks exceeded $51 billion, with their chief executives all enjoying pay increases. By 2011, the 10 biggest U.S. banks held 77 percent of the nation’s banking assets.

On the legal front, enforcement has been woefully inadequate. Federal criminal financial fraud prosecutions have fallen to a two-decade low. Violations are settled for pennies on the dollar – the mere cost of doing business, with no admission of wrongdoing and with the bill invariably picked up by insurers or shareholders. (When it’s shareholders, that’s not someone else far away, that’s your 401(k), pension fund or mutual fund.)

When Goldman Sachs was charged with failing to set policies to prevent insider trading, it was fined $22 million, an amount the bank collects in about seven hours of trading. Goldman’s record $550 million penalty for securities fraud in 2010 amounted to less than 2 percent of that year’s revenue.

On the political front, after a brief stint in the penalty box, the big banks have resumed the political muscling that got them two decades of deregulation.

To block reform, the financial industry has spent more than $317 million on lobbying in Washington over the past two years and more than $230 million in federal political contributions in the 2010 and 2012 election cycles.

It’s been to good effect. Two-thirds of the regulations called for in the financial reform law passed two years ago are still not in place. And the House Republicans, the banks’ sturdiest allies, have slashed at the budgets of the Securities and Exchange Commission and theCommodities Futures Trading Commission to impede their ability to investigate wrongdoing.

Clearly, the present order is unsustainable. We need to demand fundamental changes now, breaking up the big banks to snap their stranglehold on our markets and our democracy, ensuring that the newly minted financial reform laws are implemented, and wringing out rampant speculation.

But true reform can only occur if we root out the corruption that has distorted our banking system and undermined the productive work of the many good people in the financial sector.

The system of financial law enforcement is clearly broken. Think of it this way: If someone robbed a 7-Eleven of $1,000 but could settle a few days later for $25 and no admission of guilt, would they do it again?

Only enforcement with real consequences will work. That means vigorous pursuit of criminal cases against individuals involved in wrongdoing, the surest method to deter malfeasance.

It means enforcement agencies eschewing weak settlements in civil cases and seeking remedies with teeth such as civil penalties, restitution and executives forfeiting their jobs. And, it means tougher financial fraud laws. In that regard, the bipartisan proposal by Sens. Jack Reed, D-R.I., and Charles Grassley, R-Iowa, to increase fines for securities fraud is a place to start.

To make any of this a reality, the U.S. Department of Justice and the federal regulators must have the will and the resources to do the job. President Obama has asked for additional funds for the Department of Justice, the SEC and the Commodities Futures Trading Commission.

Giving these agencies the tools to detect and prosecute wrongdoing will more than pay for itself – the Commodities Futures Trading Commission’s fine against Barclays for interest rate manipulation alone will pay for almost an entire year of that agency’s budget.

None of these changes will come easily, but this much is clear: We cannot allow Wall Street to continually flout our sense of right and wrong, to erode faith in our legal and political systems, and to put our financial system and economy in jeopardy.

Originally published in The San Francisco Chronicle.

Political Corruption in New York: Low Comedy and High Cost

by Dan Collins

It’s possible, what with the rush of the holiday season, that you have neglected to pay close attention to the city’s latest political corruption trials. I must admit my own attention was wandering until this week, when a Brooklyn Assemblyman was indicted for attempting to solicit bribes so he could pay lawyers to defend from charges of taking bribes in a previous corruption trial.

The star of that saga is William Boyland Jr., who exemplifies all the reasons the words “state legislature” make New Yorkers want to beat their heads against the nearest flat surface.

He has a completely safe seat, which he inherited from his father, William Boyland Sr., who inherited it from his brother. Junior has had a totally undistinguished career in Albany, starring only in the narrow but competitive area of filling out expense forms. But back home he’s apparently been very active in a business loosely described as consulting.

In Albany, consulting is generally a euphemism for being paid to get somebody state money.

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Using the Colombia Model in Afghanistan

by Paul Wolfowitz and Michael O’Hanlon

Why the Colombia model — even if it means drug war and armed rebellion — is the best chance for U.S. success in Central Asia.

President Barack Obama made clear this week that the remaining troops will soon come home from Iraq. Some 10 years after the first troops landed in Afghanistan, we’re now nearly back to a one-front war. But where are we, really? It’s clear that both citizens and Washington alike are collectively weary of war and frustrated by this particular mission, with its interminable timelines and uncertain partners in Kabul and Islamabad, even if it has only been three to four years since the United States intensified its collective focus and resources on this mission. 

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