Hamstrung SFO not capable of holding bankers to account

Prem Sikka

Iceland has sent four former directors of its bank Kaupthing to prison for fraud. But the chances of similar legal action happening in the UK are low, where fraud investigators have a poor record.

The Serious Fraud Office (SFO) is the main agency for investigating and prosecuting major fraud. It was formed in 1988 after a spate of high-profile cases. A government-sponsored inquiry into share price rigging at Guinness in the 1980s concluded that too many executives at major corporations had a “cynical disregard of laws and regulations … cavalier misuse of company monies … contempt for truth and common honesty. All these in a part of the City which was thought respectable”.

But rather than changing corporate laws, amending personal liability of directors, or creating an effective enforcement agency, the government created the SFO.

Last week, the SFO’s case against businessman Victor Dahdaleh collapsed because at the last minute it could not provide evidence of alleged graft. This is not the only case the SFO has botched. It spent between £25-40m investigating price-fixing by pharmaceutical companies supplying the UK’s National Health Service (NHS), but the case collapsed because of errors in the interpretation of law.

Previously, the SFO was very slow in taking action against BAE Systems over allegations of corrupt practice. The SFO mislaid 32,000 documents relating to the case. It is currently facing a lawsuit for damages from the Tchenguiz brothers after dropping a three-year investigation into the collapse of Icelandic bank Kaupthing.

Bigger beasts

In 2012-13, the SFO brought 12 cases covering 20 individuals, eventually securing 14 convictions and recovering £11.4m from fraudsters. But it rarely went after the bigger beasts. Money laundering and sanctions busting by British banks did not appear on its radar. The SFO has hardly been visible in investigating and prosecuting the misdemeanours of bankers who brought the UK economy close to collapse.

In mitigation, it might be argued that the SFO’s failures are the outcome of the politics of government cuts. In 2008-09, the SFO had an investigations and prosecutions budget of £52m. Despite the banking crash, LIBOR rigging and other scandals, the UK government has drastically reduced SFO’s resources.

For 2013-14 its budget is £30m and will decline to £28.8 million for 2014-15. That is a cut of over 44% since the start of the global financial crisis.

Faced with a reduced budget and pay freezes, the SFO has been losing experienced staff and outsourcing a lot of its legal work, often paying very high fees. Such practices make it difficult to build in-house expertise and an institutional memory.

Other countries seem to assign higher priority to fraud investigation. The US equivalent, the Securities and Exchange Commission (SEC), has an annual budget of US$1.674 billion (about £1.1 billion). It is therefore in a far stronger position to take on the bigger beasts. The SEC has its shortcomings, but it is more likely to get a result than the SFO.

Ineffective patchwork

The SFO’s failures are indicative of Britain’s failure to build durable and effective institutional structures to fight financial crime. Rather than a single powerful and well resourced agency, there is an ineffective patchwork of institutions.

These include the Financial Conduct Authority (FCA), the Office of Fair Trading (OFT), The National Crime Agency (NCA) Her Majesty’s Revenue and Customs (HMRC), the Crown Prosecution Service, the London Stock Exchange and the Financial Reporting Council, to name just a few. The overlapping and often unclear boundaries result in duplication, waste, obfuscation, delays, poor accountability and outright failures.

Any effective fight against globalised financial crime needs to streamline its institutional structures. In the age of globalisation the UK cannot fight financial crime on a shoestring, with puny organisations. Large parts of the patchwork should be replaced by a UK equivalent of the SEC.

But a new organisation would not be able to combat wealthy elites or giant corporations without significant resources. This might be expensive, but it is an investment that would pay off.

• This article originally appeared on The Conversation website

Autumn Statement 2013: Evaluating Osborne ... 15% successful!

Are the austerians right and the opponents of austerity proved wrong? Is Osborne's strategy vindicated?

Let's judge by his own standards. In June 2010, just as the ink had dried on the coalition agreement, George Osborne rushed to the House of Commons to deliver an 'Emergency Budget'.

"It supports a strong enterprise-led recovery. It rewards work. And it protects the most vulnerable in our society. Yes it is tough; but it is also fair."

With this rhetoric, Osborne opened his remarks. But the devil was in the detail of the accompanying forecasts. So how has he done 3 years on? We evaluate:

Osborne predicted that economic growth would be 2.8% this year - a target he may get close to (we'll find out next month), but that was on the back on growth of 2.8% last year as well (instead, in 2012 the economy grew by just 0.2%). The OBR predicts that growth will be 1.4% in 2013 (but this is still an underestimate)

Far from being back on track, the UK economy still lags 2.5% below where we were in 2008. So at best half marks for Osborne on economic growth. And that's before we factor in growing concerns about the sustainability of George's recovery. Half marks.

• Economic growth 0.5/1

That same June 2010 forecast predicted that average wage growth in 2013/14 would be 4.9%. With average wage 'growth' currently at just 0.7% there is no gentle way to put this, that was woefully wrong.

While this year the FTSE100 directors will see their seven-figure salaries increase by an average of 14%, for the rest of us there is no recovery. People's incomes have been cut in real terms. The ONS points out that the median household income has dropped 6.4% for working age households over the last five years. Fail.

• Wages 0/1

Unemployment has declined marginally in recent months, but is still high at 7.6% of the economically active population. That figure however conceals stubbornly high youth unemployment and long-term unemployment - failed by shambolic government programmes.

In 2010, Osborne told us unemployment would today be just 6.8%. So 250,000 fewer people should be unemployed today had Osborne hit his target. Fail.

• Unemployment 0/1

Given Osborne erroneously said he would deal with "our country's record debts" (they were nowhere near record levels) with austerity, one would assume he would have at least had some success in reducing our debt (or at least stemmed the rate of rising debt).

By now, predicted Osborne in 2010, our debt should be 73.7% of GDP. Instead it's 75.5%.

But much of that is because GDP is far lower than predicted, so not even half marks for getting close, so quarter marks.

• Debt 0.25/1

The reason the Chancellor is not reducing the debt, is because the deficit has not been closed at anything like the rate he predicted. By now the deficit should have been just 5% of GDP. Today Osborne announced it would be 6.8%. In cash terms they predicted £63 billion in 2010, but today it's £111bn - 75% higher than the 2010 forecast. So he'll borrow £198 billion more than he planned. Fail.

• Deficit 0/1

Overall 0.75 out of 5 (or 15%)

Are you really worse off? Er, yes.

Labour has recently made some headway with its message that there is a cost of living crisis - which has continued despite Osborne's recovery. This feeds a number of other important messages, including that this is a recovery for the rich, and that you're being ripped off - and so the energy price freeze fits into the same narrative.

The average non-retired household is today 6.4% worse off since the recession - that was the finding of a report by the Office for National Statistics out earlier this week. It showed that the average household income fell from £37,900 to £32,600, in real terms over the last five years.

In fact, the average household is £300 a year worse off than it was in 2002/03. There is therefore a 'lost decade' of stagnation for household incomes.

This decline in income triggered entitlement to extra benefits (e.g tax credits) so that benefits rose from providing 7.6% to 12.3% of gross income for the median household. This is fundamentally a redistribution in the cost of living from the employer to the state - as a result of pay freezes and pay caps. So when Labour talks about a structural welfare spending cap (not individual benefit caps which are disgraceful) it is alluding to this phenomenon, and pledging to deal with the structural issues - and advocating the living wage is a part of tackling low pay subsidies like tax credits.

The resonance that Labour has had with this line has rattled the Tories.

So, in a blatantly politically-driven misanalysis, HM Treasury has produced data that shows compensation for workers has stayed the same, but what they don't see is that employers are paying more in national insurance and pension contributions. The idea that wages have been cut to sustain or even increase profits is, apparently, a myth.

Sky's economic correspondent, Ed Conway, says the Treasury report explains:

"Overall compensation includes not just wages but also the social contributions made by employers, including pension contributions and National Insurance Contributions. Technically-speaking, these are forms of payment, except that because they don’t go straight into your pocket they don’t feel particularly obvious."

In fact a less kind interpretation of this Tory spin - still not on the Treasury website - is that because it doesn't goes into your pocket, it's not really payment.

So the Tory argument is that pay has gone down (Ed Miliband's cost of living crisis) due to NI contributions going up (all Gordon Brown's fault) and pension contributions going up (your fault for living longer).

However, the argument doesn't really stack up for several reasons:

1. Pension contributions have only gone up in real terms for funded pension schemes - which most workers don't have
2. Part of the reason extra pension contributions are needed are due to pension holidays taken by employers in the 1990s
3. Is the logic of the Treasury analysis of NI rise that a cut in NI would be passed on to workers in higher wages
4. If that's the case why have the cuts in corporation tax not been passed on to workers then? Because corporation tax has fallen from 33% to 28% under New Labour, and now down to 22%.
5. If we're all actually no worse off why - by official figures - are a million more of us living in poverty? Why are half a million of us using food banks this year?

(There's a more detailed and wonkish analysis by the TUC's Duncan Weldon here)

So was this just a political attack to try to blunt Labour's resonant cost of living line? If so, it's another sign of the civil service being used for party political purposes (and not the first time either).

But it's an indication that ahead of this year's Autumn Statement, Osborne has only spin to offer.

Tax justice undermined by cuts

As Margaret Hodge MP, chair of the Commons Public Accounts Committee, recently pointed out, the UK is at bottom of OECD league table when it comes to tax take.

Hodge specifically took aim at the government: describing the tax system for corporations and the super-rich as "increasingly voluntary".

She said there was a "growing gap between rhetoric and reality" from this government (we've pointed out there are several reasons why you shouldn't take this government seriously on tax justice).

And the HMRC's own half-year report should give further cause for concern - highlighting the impact of staff cuts. Their target is to 'clear' 80% of post within 15 working days. They achieved only 77%. This may not seem like much of a failure until you find the reason: "the deployment of teams from post to phone lines during peak periods of customer demand".

So how did call handling get on? They answered only 72.7% of calls, far short of their 90% target. If self-employed people, small and medium sized businesses don't get their inquiries, requests and queries answered - and answered satisfactorily - are they more or less likely to comply correctly with their tax obligations? And if the message is sent that the department is under-resourced, will wealthy individuals and big business be more or less likely to attempt to dodge their taxes?

It's not just the HMRC's call and post handling that is struggling. Last week it was announced that 1,500 staff in personal taxes and compliance and 480 in debt management are being targeted for a voluntary exit scheme to cut staff costs. These are the staff who collectively bring in billions of pounds of taxes - which fund public services.

As the PCS graphic shows, HMRC is suffering massive staffing cuts - with the latest tranche announced just this week with 3,000 staff brought in to cover short-staffing in the firing line. Since 2005, 34,000 jobs have gone from HMRC and another 10,000 are planned by 2015 under the government's spending cuts.

What's clear is that if we are serious about tax justice, then a big part of that campaign must be to ensure that HMRC has the staff required to take on the £75 billion of tax evasion, £25 billion of tax avoidance and over £20 billion in uncollected taxes.

The tax dodging of Amazon, Starbucks, Google, Boots and others has rightly come unders scrutiny. But there also needs to be rigorous scrutiny about the political undermining of our tax revenue collection system.

The problem of the buy-to-let parasites

There was a good report out yesterday by the Intergenerational Foundation (IF), which found that 'UK taxpayers provide £5bn annual subsidy for buy-to-let landlords', as the FT headlined its piece.

One of the key thrusts of the report is that buy-to-let properties are treated as businesses for tax purposes, although the IF believes they are more comparable to investments.

In tax terms, this means buy-to-let landlords can deduct interest on the mortgage of their rented property from taxable rent income. In addition, property owners can deduct 10% from rent received to account for repair and depreciation expenses - without having to provide any evidence of spending on the property.

It also found a number of 'loopholes' exploited by landlords, including that if the landlord occupies the property for as little as six months in the 36 months before it is sold, any gains accrued on the property in that period will not be subject to capital gains tax.

Having said all that, the framing of this by the IF is appalling. Ashley Seager, co-founder of the Intergenerational Foundation gave this quote to the media to coincide with the report's release:

"It is clear that most of these tax write-offs go to older landlords keen to take advantage of both the lack of housing supply and the demand for properties to rent by the under-35s"

As if the prime issue here is the old exploiting the young! No, no, no. This is an issue of a few wealthy individuals (the report says 4% of the population are landlords, which seems high) exploiting the mass of people who can't afford to buy.

The issue is the structures that allow the accumulation of wealth, and further allow those with accumulated wealth to live parasitically from the work of others. This is about wealth, not age (income inequality has a cumulative effect so of course those with wealth are likely to be older).

And it's not only an issue for those tenants (young and old) paying ever increasing rents, and increasingly unaffordable rents (especially in London as this website shows). It's an issue for us all as an increasing proportion of tenants are having to be bailed out by housing benefit - as wages have fallen relative to rental prices - and so the welfare state is helping to fund landlords too. In the last two years, 93% of new housing benefit claimants have been from households in which at least one person works.

To try to fit this good analysis and report within the IF's intergenerational divide narrative is mistaken and misses the point. (This is not the first time we've taken issue with IF analysis and the National Pensioners' Convention's Dot Gibson responds well to intergenerational divide framing in the Guardian letters page today).

The IF rightly argues that landlords' housing is comparable to an investment (and should be taxed as such), but housing is a basic human need. It is not comparable, morally, with other investments like stamp collections, fine art, wine collections, shares or savings accounts.

Housing is a human right. Amassing wealth is not. Yet, this government is prepared to cap benefits, not rents. Even if it means homelessness for some - and the indignity of temporary or overcrowded accommodation for many more - in the Tory mind, nothing must interfere with landlords' inalienable right to own as many properties as they like and leech off of the hard-working tenants and taxpayers.

The IF's policy proposals are good (p.37 of the report) but could go further: why not limit the number of homes an individual can own? Why not restore the right of councils to control rents (which they had until 1989) to protect tenants? Why not introduce a Land Value Tax so that disused property is brought into use, and to fund new council build? Or why not introduce a Wealth Tax (as advocated here by Greg Philo here) or greater inheritance tax? And why not, perhaps least radically of all, ensure a much more progressive system of general taxation to restrict the accumulation of excess wealth in the first place?

Until we challenge the right of a few to accumulate excessive wealth, we will never end exploitation in either the housing market or the labour market.

Should Osborne be praying for the economy to stall?

After three quarters of economic growth, George Osborne has already transitioned from cautious optimism to full-on self congratulation. "The UK has been singled out as an example of the improvement and there is recognition that we have stuck to our economic plan", he said last month.

Let's leave aside that he hasn't stuck to his plan at all (the deficit was forecast in 2010 to be far lower today than it is, and as a result of two flatlining years he is borrowing over £200 billion more than planned). Let's even underplay that even today's public debt figures £8.1 billion this October, down from £8.2 billion for October last year, are hardly impressive.

Nevertheless the level of UK economic growth in the last three quarters (nine months) has surprised and exceeded most independent forecasts. The Bank of England declared earlier this week that
the UK is in "sustained recovery".

Three consecutive quarters of reasonable growth (by historical standards) is fairly hard to dismiss. What economists now disagree about is not whether recovery has been sustained, but whether it  is sustainable.

There's a good analysis of this question by the Independent's Ben Chu here. The key point is that the recovery is driven (largely) by debt, which has been both encouraged (through schemes like Help to Buy) and enforced (through declining real wages, benefits and high unemployment). As the chart below, personal debt remains at crisis-era highs

The question therefore is can growth continue with debt at high levels and real incomes declining?  The unstable retail sales figures - with October registering a fall that confounded predictions - are a warning sign to the optimists.

So the question is whether the recovery will stall - due to people reining in their spending without any compensating surge in government or corporate investment - or will it continue to grow as people take on ever greater debts?

If the latter is the case, then the ultimate result may be a sharp crash, caused by unsustainable levels of debt. That scenario should make George Osborne pray for the economy to stall (while he devises a sustainable growth strategy - something some of his opponents have been advocating and outlining since 2010).

Once more on the great disappearing unemployment mystery ...

Last week we reported on the great unemployment disappearing act, focusing on growing divergence between the claimant count and the ILO measure of unemployment (see graph).

But this growing disparity isn't uniform across the UK. As the chart below shows, there is a massive regional disparity between the claimant count and ILO unemployment in some UK regions, but a close correlation in others.

To make matters clearer the table below shows, for each region or nation of the UK the claimant count as a percentage of ILO unemployment:

Our 13 November analysis highlighted the growing divergence between the two unemployment measures (showing that in 1993 the claimant count was 96% of ILO unemployment, but today is only 53%.

Health warning: the figures used are from the latest ONS Labour Market Survey stats, which for claimant count are October figures and for ILO measure are July-September. However, this difference in monthly accounting does not explain the sharp differences either within or between regions.

However, across the UK there are massive disparities. So why is it that in London and the South if you're unemployed you are far less likely to claim jobseeker's allowance than if you're in the North East or Northern Ireland? And why does jobseeker's allowance reach so many more of the unemployed than everywhere else in the UK?

What explains the differences? I honestly don't know, but I've posited some options below - please leave your views in the comments ...

• Unemployed people in London and southern England are more likely to be ineligible for JSA due to household circumstances or personal savings
• Bad data - the regional data for ILO unemployment is dodgy (the claimant count won't be as it's simply the number of people claiming JSA)
• Sanctions are being unevenly imposed across different regions - disproportionately reducing the claimant count in some regions
• The stigma of claiming benefits is stronger in some regions than others
• Something else? Let us know in the comments ...

UPDATE (21/11/13): As was pointed out by Labour market stats wonk, Paul Bivand, Northern Ireland has some devolved powers over social security - and the UK sanctions data (analysed here) doesn't include Northern Ireland. So is that the answer - is it due to a less stringent sanctions regime there?