Financial Crime: Legislation

Lord Phillips of Sudbury Excerpts

Thursday 17th March 2011 Lords Chamber

[Lord Phillips of Sudbury]

My Lords, I should start with a sort of disclaimer. This is, I think, my 53rd year full-time in the law as a solicitor—although I am not doing very much these days. Like a previous speaker, I have to say that, in the whole of that time, no one has offered me a bribe—I feel a bit resentful of that—and only twice have I been asked to do something corrupt by a client. I suspect that there is no other jurisdiction in the wide world where someone of my longevity could say that, and I have spent a lot of that time in the commercial world.

However, let us not kid ourselves: standards of probity and integrity are falling with a rapidity that should give us all cause for pause and alarm. If you look at the statistics of crime, you see that the incidence of financial fraud is on the increase in all respects in all quarters of our society and none is exempt. There is no way of denying that corruption is highly infectious. It is a bit like spiritual dry rot. Once you have crossed the threshold of corruption, it is very difficult to go back and very easy to go forward.

Nor should we overlook or consign to the past, as Mr Diamond wants us to do, the astonishing events of the past two or three years in the City—in effect, the partial collapse of the banking system, which would have collapsed totally but for the putting-into-the-pool of trillions of pounds of funds from here, from America and elsewhere. At the root of that—again, let us not deceive ourselves—was an increased level of straightforward corruption: insider dealing, concert parties rigging the markets long enough to get in and out and make a killing, and so on.

I have practised more than 40 years in the City of London. Anyone who you know well who is deeply involved in the City will privately tell you that it is unfortunately true that corruption is on the increase everywhere. The more globalised the market becomes, and the greater the diversity of nationalities, with little common cultural cohesion, the more the corruption spreads. That is why this debate, for which I thank my noble friend Lady Williams, is of such importance.

I shall touch briefly on the role of legislation, because “the United Kingdom’s record on legislation” is in the title of the debate. Legislation can be an impediment to integrity. Too much of it plays into the hands of the smart boys, the lawyers and the accountants. For people who are involved in the different aspects of the City, it reduces their sense of their own moral autonomy, their own ability to distinguish right from wrong and to do good rather than bad.

You have only to look at the statistics. We legislate between 200 per cent and 400 per cent more than any legislature in the democratic world. Forty per cent of our tax legislation is anti-avoidance. If you were to stuff all our tax legislation into a single volume, you would not be able to carry it. For example, the Charities Bill, a consolidation Bill, which has just had its First Reading in this House, is longer than the entirety of the legislation of 1905—charities, for God’s sake. There is no substitute for individual moral integrity, and I have to say that the huge corporations are not great encouragers of that.

I have some proposals. I entirely agree with what the noble Lord, Lord Haskel, said in relation to the Bill just introduced in the other place by Caroline Lucas. If companies domiciled or paying tax here had to disclose year by year where else they were operating, what the turnover was, how many employees they had there and what tax they paid, it would be a huge disincentive to the ludicrous exploitation of tax havens. Let us look at Barclays. It has admitted to some 150 subsidiaries in tax havens—I think that the true figure is more than 300—and that is true of so many organisations. There is no morality or sense of fairness in corporate tax-paying in so many instances. So let us have that.

Let us have principles-based tax law, because we are disappearing out of sight with trying to block one loophole after another. I accept that there are difficulties about principles-based tax legislation in terms of certainty, but with the support for and confidence in our courts that people have, it would be a far preferable solution to the problem of tax.

Next, I suggest that any contractor with any state agency should not be allowed to bid for a contract unless they have a clean tax record over the previous five years. Lastly, we cannot hope to deal with corruption, bribery and all the rest of it unless we have the people to do the job. The Serious Fraud Office has only around 300 staff and I am told by someone in there that it is losing some of its best people right now. The Inland Revenue is scheduled to lose 40 per cent of its entire staff over the next three years. What sense can that make if we are trying to implement the laws we have? The failure to implement tax legislation in particular is devastating. On official estimates, we lost £42 billion of tax that should been paid last year for want of the people to enforce the law.

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[The Commercial Secretary to the Treasury (Lord Sassoon)]

My Lords, we have had an excellent debate and I thank all noble Lords who have spoken. I particularly thank my noble friend Lady Williams of Crosby, who comes at this whole subject from a position of great authority.

The noble Lord, Lord Davies of Oldham, has pointed out the challenge that I face in attempting to respond to the huge number of points that have been made. This has been a more than normally physically challenging debate to sit through. It is one thing to watch a tennis match that is being played out in front of me, but it is even more challenging to watch one that at times has been played out intensively behind me. However, it has been a fascinating debate.

I start by reminding noble Lords that Britain is, and continues to be, a great trading nation. This Government are committed to encouraging British business to seize opportunities around the world. We all know that globalisation brings huge opportunities not just for businesses themselves but for all those who work in those businesses and for the consumers of goods. However, there are significant threats and risks in this globalised world. We have discussed some of the most insidious threats that jurisdictions around the world face. My noble friend Lady Williams talked about the most serious issues. I certainly agree that some of the most insidious threats are those posed by bribery, corruption and money-laundering. I shall take in turn bribery, tax avoidance, corruption, if I have time, and money-laundering, which were the main areas covered in the debate.

I make it absolutely clear that the Government are committed—lest anybody doubts it—to implementing the Bribery Act. We are determined to ensure that it is implemented in a way that tackles corruption while not imposing unnecessary cost and uncertainty on legitimate business and trade. Bribery should not be considered an acceptable way to win business. It distorts free markets and causes immense damage in developing and emerging economies. The Government believe that the Bribery Act will have positive benefits for UK business through an enhanced reputation for ethical standards, reduced costs incurred in doing business and a clearer business framework. The Act will contribute towards a level playing field internationally. The UK stands alongside our partners, whether in the OECD, the UN, the EU or the Council of Europe, in recognising that bribery needs to be met with robust criminal offences. Indeed, the Act modernises and clarifies the existing law, which has rightly been criticised as complex, fragmented and out of date. However, I hope that the main issue concerns not the Government’s commitment to implementation but when the Act will be implemented and whether there has been unreasonable delay, as some have painted it.

I fully respect the views on both sides of the argument. On the one side, we had the pithy intervention of my noble and learned friend Lord Mackay of Clashfern and the contributions of my noble friends Lord Thomas of Gresford, Lord Marks of Henley-on-Thames, Lord Goodhart and Lady Williams. I very much appreciate their sentiments. However, I find it slightly harder to accept the criticism of the noble Lords, Lord Eatwell and Lord Davies of Oldham, on the timetable for implementation given, as we have been reminded, that it took until 2009 for the previous Government to introduce the relevant legislation.

On the other side of the discussion, we have heard powerful and relevant interventions from my noble friends Lord Hodgson of Astley Abbotts, Lady Wheatcroft and Lord Eccles—the noble Lord, Lord Hannay of Chiswick, also recognised this—regarding some of the difficulties for business in this area. We should not minimise those. There was a depressing lack of mutual appreciation by the two camps in this debate, with one notable exception. I am grateful to my noble friend Lord Newby for his contribution, to which I listened with interest. He recognised that two distinct interests are involved in implementation that need to be reconciled and that the implementation of the Act will indeed—certainly, in the short term—impose costs on business.

One of the questions asked by my noble friend Lady Williams concerned responsibility. Responsibility for implementation is with my right honourable friend the Justice Secretary, who is concerned to ensure that the Act is implemented in a way that tackles bribery effectively but avoids imposing costs or uncertainty on business and certainly does not make this another gold mine for lawyers advising on either implementing or picking up the consequences of the Act. It is the intention of my right honourable friend and the Government to publish guidance shortly. Implementation of the Act will follow publication after three months, in order to give businesses time to prepare themselves. On the other question about responsibility, I can confirm that enforcement of the legislation will be a matter for the Serious Fraud Office and the police.

[Lord Phillips of Sudbury]

Is it fair or unfair of me to ask my noble friend what his answer is to the circumstance enunciated by the noble Lord, Lord Hodgson of Astley Abbotts, where a business is faced with either compliance with the Bribery Act or losing a valuable order?

[Lord Sassoon]

My Lords, that is a perfectly fair question, but I am not going to stand at the Dispatch Box—no Minister would—and suggest that anyone should break the law. I hope that that is a clear answer to the question.

The point that I wanted to make about implementation was that I know that my right honourable friend the Justice Secretary has been speaking regularly to the secretary-general of the OECD, because there has rightly been reference to the OECD’s important contribution to driving forward standards in this area. My right honourable friend has been speaking regularly, including this week and last month, to the secretary-general to keep the OECD informed and updated on our plans for implementation.

My noble friend Lord Phillips and the noble Lord, Lord Eatwell, mentioned the fall in the UK’s ranking. The noble Lord, Lord Eatwell, leads with the chin, but it is interesting to note that that fall in the ranking happened under the previous Administration. I hope that implementation of the Bribery Act will contribute to the UK’s ranking increasing again.

I acknowledge the point made by my noble friend Lord Hodgson about SMEs. In all that the Government are doing in the regulatory space, we need to be sensitive to the particular needs of SMEs. It is the intention to publish a quick-start guide, as it will be called, that focuses particularly on the needs of small businesses. UK Trade & Investment and overseas posts will be geared up to provide guidance and support on managing risks of corruption in particular export markets.

Lastly in this area, questions relating to extractive industries were raised by the noble Lord, Lord Hannay of Chiswick, and my noble friend Lord Newby. It is a topic that my right honourable friend the Chancellor has recently addressed. He drew particular attention to it at the February G20 Finance Ministers’ meeting in Paris, where he raised the issue of new international rules; he believes that this was the first time that that has happened. My right honourable friend, along with my right honourable friend the Business Secretary, will be arguing for a European agreement that matches the new standards set in the US in this area. This is very much on our agenda.

Let me turn now to the issue of tax avoidance. For the avoidance of doubt—I am sure that the noble Lord, Lord Haskel, has no doubt, but he raised the question—let me say again clearly that the Government are fully committed to making sure that everyone contributes to reducing the deficit by paying their fair share of tax. Tax avoidance and evasion damage the ability of the tax system to deliver its objectives. They impose additional costs on all taxpayers and undermine the tax system.

The noble Lord, Lord McFall of Alcluith, and others raised a number of questions about HMRC resources. I was grateful to the noble Lord for drawing attention to the announcement last year that more than £900 million will be made available to HMRC over the spending review period to raise additional revenues by tackling non-compliance. This is expected to bring in around £7 billion in additional tax each year by 2014-15. However, I recognise that the noble Lord bracketed, as did other noble Lords, recognition of that approach by HMRC with concerns about its resources more generally. That point was mentioned in particular by my noble friends Lord Newby and Lord Phillips of Sudbury. It is the case that HMRC workforce levels are projected to reduce. That reflects continuing improvements in the underlying efficiency in the way in which HMRC conducts its business. I should point out that, since the 2005 merger between the Inland Revenue and Her Majesty’s Customs and Excise, a reduction in headcount has had no negative impact on revenue flows. As with many other parts of the public sector, although there is a big challenge on management and implementation, HMRC has recently proved that it is able to rise to that challenge.

The noble Lords, Lord McFall and Lord Parekh, and others drew attention to the size of the tax gap, which is estimated to be around £42 billion, but I was pleased that there was recognition for some of the important steps that the Government are taking in this area, including the specific case to which my noble friend Lord Palmer of Childs Hill referred on the arrangements with Liechtenstein. That was the best answer to some of the concerns raised by my noble friend Lord Dykes. The steps that are being taken are very practical and raise considerable sums of money. In respect of Liechtenstein, the facility will run until the end of March 2015 and it is forecast that it will raise £940 million. These are considerably important initiatives to make sure that we tackle offshore financial centres and repatriate tax revenue to this country.

I recognise the questions around tax transparency. My noble friend Lord Goodhart touched on this area, but I will not repeat the names of all noble Lords who mentioned it. In the past year, we have seen unprecedented progress on tax information exchange. More than 500 tax information exchange agreements have been negotiated to the international standard. This means that there are fewer and fewer places for evaders to hide their money.

The noble Lord, Lord Haskel, raised the question of Caroline Lucas’s Bill in another place. My understanding is that the Second Reading of that 10-minute rule Bill is scheduled for June. The Government will decide at that stage whether to support it. I understand its import.

In my final couple of minutes, I will deal with the remaining two issues that were raised. The noble Lord, Lord Hannay of Chiswick, raised the issue of corruption. At the risk of stating the obvious, I stress that the Government recognise that corruption is bad for development, bad for people in developing countries and bad for business in those countries. As we maintain our aid budget, looked after by DfID, there will be great focus on raising standards of governance. It is very much on the agenda of my right honourable friend the Secretary of State.

I turn lastly to money-laundering. I am grateful to my noble friend Lady Williams for recognising that the Government have been assiduous on asset freezing. I say to the noble Lord, Lord Hannay, that we should not rely too much on reports in the newspapers. As my noble friend Lord Howell of Guildford said in the House a couple of days ago, we are investigating and watching carefully to see what links there may be between pirates and terrorism in the region linked to Somalia. However, as he said, we have no firm evidence of particular patterns of transactions, although we recognise that there may be personal, entrepreneurial or other links between groups. The noble Lord is right to emphasise that we need to be on the case, as we are. The noble Lord, Lord Parekh, raised general concerns in this area. As we discussed in the House recently, particularly in the context of Libya but also of other countries, the Government have been and continue to be at the forefront of calling for and implementing asset freezes against corrupt regimes.

My time is up. I have attempted to answer as many points as possible. It has been a very stimulating debate in which important questions were asked. I end by thanking my noble friend Lady Williams of Crosby for stimulating such an interesting two and a half hours.