EU: Money-laundering Directive

Lord Phillips of Sudbury Excerpts

Thursday 3rd April 2014 Grand Committee

[Lord Phillips of Sudbury (LD)]

My Lords, this is an interesting debate and we should thank the noble Lord for introducing it. It concerns a series of issues that are still very much in the air because, as I understand it, the European Parliament has approved the directive but has made amendments to it. One of those amendments is of particular concern; namely, that the right of access to the information has been widened from “competent authorities” such as Governments and “obliged entities” such as banks, lawyers and so on to the general public. I think that the noble Lord, Lord Willoughby de Broke, is particularly concerned about it. I wanted to make that clear because there is a long way to go. Negotiations will be held between the Parliament, the Commission and the Council of Ministers, and then it will come here. Being a hoary old lawyer, I am cautious about being at all definitive until I see the final wording and have the opportunity to discover precisely what the disclosure requirements will mean.

I think that the noble Lord, Lord Willoughby de Broke, has somewhat exaggerated the potential breach of privacy. Charities, for example, are themselves public bodies. They comprise the biggest body of trusts in the country and, since they are essentially public bodies, there is no earthly reason why any aspect of their affairs should not be made public. However, I do accept the position with regard to family trusts. Here I should say that I spent several years during the late 1960s and early 1970s dealing with a great deal of family and business work that involved a considerable amount of trust work, particularly with what are called discretionary trusts. I am well aware of the background to those sorts of trusts and why they have a particular relevance, as has been explained to us.

However, I must also be plain. I am deeply concerned about the continuing decline in public trust which I am afraid is afflicting virtually every aspect of our establishment. Perhaps, mercifully, only the judiciary is free of public suspicion and mistrust. One institution after another has lost credibility. I need not go through all the institutions in our country, but it is necessary for us to remember that we ourselves have contributed to the decline in public trust through the events of a few years back, which the public have certainly not forgotten. That want of public confidence, if you like, is now being played on. I do not say this with any disparagement, but UKIP is definitely plugging into that sentiment, just as I believe Alex Salmond and his Scottish colleagues are doing north of the border.

I understand perfectly why there is disaffection and disconnection between the body politic and the ordinary citizen. However, one crucial, central element of that is corruption—using that word in its broadest sense—by big business, particularly among the banks, which frankly has been stupendous, and in the other areas I have touched upon. I want to see a radical attack on corruption, and anything that weakens the ability of the prosecutorial authorities to deal with this corruption must be remedied by us here in Parliament.

I am not as big a fool as to believe that passing laws is a substitute for achievement on the ground; indeed, in this area, I am afraid, the gulf between legislation and implementation is tragically wide, which is something that this House really has to concentrate on in the coming months and years, because what is going on is a farce. Look at Her Majesty’s Revenue and Customs: it had 96,000 staff in 2005 but by next year that will be down to 56,000. Even if you are inclined to believe that there is a great deal of inefficiency et cetera, that is way beyond anything that is at all compatible with the need of the country to see tax avoidance in particular, and fraud in general, dealt with.

Just before he retired, I had lunch with Richard Alderman, the former head of the Serious Fraud Office. He was almost crying into his soup, telling me that he had met one of his former senior staff the month before to find this gentleman bewailing the fact that he had left the SFO and rather wishing he was back rather than being employed by a firm of American lawyers in London at 500% of his salary. At the Serious Fraud Office, as at HMRC, the senior cadres of people are so far outgunned by their opposites in big business, particularly the banks, that it is not just David and Goliath, it is David without his sling against Goliath. It is not a joke. It is a scandal and we should be ashamed of it.

I want ultimately to see the fine print but at this moment I am definitely in favour of strict disincentives for fraudulent activities—money-laundering or anything else you can name—utilising the trust mechanism. I am too experienced a lawyer and know just how convenient the trust is in nefarious activities, precisely because it is informal, fluid and has little statutory law bureaucracy around it.

We all know that the extent of tax evasion has dispirited this country. In the excellent report put out by our colleagues in the Select Committee on Economic Affairs in July last year, Tackling Corporate Tax Avoidance in a Global Economy, the public were able to read about Amazon, Starbucks, Thames Water, Vodafone, Cadbury before being taken over by Kraft—would not its Quaker forefathers just fall out of bed?—and, of course, Google. Citing just the example of Google, the report tells us that in the years between 2006 and 2011 in the United Kingdom, it generated £80 billion of business and paid—can your Lordships believe it?—£16 million tax. It is conceivable that that was done legally but the truth is that most tax avoidance is fraudulent when done on a major scale.

What are we doing vis-à-vis foreign so-called investors? The crooks from across the world come to this country, but why do they come? It is on record, if noble Lords doubt it. Look at the Migration Advisory Committee report from February this year. The principal reason that the big crooks bring their black money to London is because it is safe here.

Noble Lords should consider, too, the rights that anybody who invests £1 million in government bonds for five years and spends 180 days a year in this country acquires. He or she, and their families, have indefinite leave to remain in this country, while knowing that they will not pay tax on their rotten money, because they make damn sure that they do not. They will not use lawful means, most of the time. The sort of people we are talking about are driving up central London property prices so that decent, ordinary Londoners cannot get near staying in London and have to get out of the city in order to live. That is all part of a world that we have to deal with, and part of dealing with that world is to attack trusts.

--- Later in debate ---

[Lord Willoughby de Broke]

My Lords, some noble Lords, including the noble Lord, Lord Watson, and to a certain extent the noble Lord, Lord Davies, have missed the point that I was trying to make. There are already, under the Money Laundering Regulations 2007, absolute requirements on financial intermediaries and lawyers to report to the relevant authorities if they suspect that there is any illegal use of trusts. They already have the weapons; the idea that there is absolutely no legislation to deal with trusts is entirely misplaced.

[Lord Phillips of Sudbury]

The regime is ineffectual.

[Lord Willoughby de Broke]

That is not right.

--- Later in debate ---

[Lord Newby]

My Lords, the approach I set out would mean that we would have a different way of reporting the majority of trusts. Therefore, there would not be a common system across the EU. The Government’s view is that it is very important that, across all the EU, there is a requirement for both companies and trusts to be more transparently described than they are at the moment. That is why we put a huge amount of effort into pursuing the concept of the mandatory requirement on beneficial ownership of companies. We want to ensure that, as far as possible, information about trusts that could be problematic for money-laundering purposes will be more generally available. Our proposals would do that in respect of the UK without having a full mandatory register in the same way as we propose for companies. We accept that there is a difference in nature between the two, but we think we can have the best of both worlds by having that difference of approach between them.

In response to the question from my noble friend Lord Dykes, trusts would not become default alternatives to companies because there are the requirements to report financial information to HMRC and to pay tax where appropriate and also for the automatic exchange of information where the beneficiary is a foreign national.

[Lord Phillips of Sudbury]

Would the requirement on the trustees and trust extend to revealing who the beneficial owners are?

[Lord Newby]

I am not sure I can give my noble friend a definitive answer now. I may be able to, but in any event I will write to him about that.

My noble friend Lord Dykes referred to the challenges of making a risk assessment in this area. Of course, it is almost an impossible task. I do not think that the risk assessment is a key part of the process. We do it because we have a broad sense of what the risks are, without being able to get to the nearest pound or euro.

In answer to my noble friend Lord Phillips’ earlier question, I should have been clearer: the answer is yes.

My noble friend Lord Dykes also asked about third country equivalence. Commission proposals do not include provisions for listing of third countries as having equivalent money-laundering or terrorist-financing regimes. Under the third money-laundering directive, this proved to be a problematic process, and the white list of equivalent jurisdictions was difficult to keep up to date. The FATF peer reviews of member states heavily criticised this white-listing process, and we support the Commission’s view.

My noble friend Lord Phillips of Sudbury discussed the reductions in HMRC staff. It is not a question of whether they are more efficient at doing the same jobs. The truth is that the way in which we manage the tax affairs of the vast bulk of individuals and companies is now online. A huge number of staff whose jobs were essentially related to dealing with paper are no longer necessary. The reduction in staff is largely in response to changed circumstances. I remind my noble friend that we put in an additional almost £1 billion in this Parliament for staff working on tax avoidance and evasion. That has already generated several million pounds-worth of additional revenue beyond what we believe would otherwise have been obtained. There has been a change in gear, if you like, in the way that HMRC operates.

To sum up, given that my time is very brief, the UK is leading from the front on an agenda that places a practical emphasis on transparency and accountability. The Government are working to ensure that the EU shows similar ambition on what is a cross-border issue, with serious implications for developed and developing countries alike. We want the outcome to be fair and proportionate, but we also require it to be effective. That is what we are working towards and what I am optimistic that we will achieve.