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Financial Integrity, Tax Havens

Dermot Desmond’s contribution to the GFC

Dermot Desmond degree

Synopsis

Dermot Desmond was the major conceiver of IFSC [International Financial Services Centre] in Dublin which was a major contributor to the Global Financial Crisis, due to the lax regulation by the Irish regulator.  His company, International Investment &Underwriting [IIU], boasts of his involvement and he has accepted accolades and an honorary degree for creating the IFSC.  However it’s impact on the financial world and the economic health of nations has been disastrous.

I’ll not go into Dermot Desmond’s attendances at some of the Irish corruption Tribunals, incl. Moriarty, which were attempts by Ireland to clear up the corruption which occurred during Charles Haughey’s prime ministership & beyond.

The Tribunal reports are amazing documents. Even though they state the corrupt acts, transactions, untrustworthy evidence & actors, including Dermot Desmond, they don’t say outright ‘these persons are corrupt’ – that is left unsaid. One reason for this is obvious – a large contingent of Ireland’s political [PMs, Ministers, civil servants] & business elite [investment bankers, stockbrokers, bankers, accountants] who were involved are still around. It was so pervasive. It’s a secret, a shame, everyone knows. As we’ve seen, Ireland knows how to keep secrets. The other reason is that Ireland, bankrupt as it is, cannot be seen to be ‘officially’ corrupt. That would destroy Ireland as a location where multinationals setup their EU HQs. It would also harm the reputation of the main Irish financial centre, the International Financial Securities Centre [IFSC] in Dublin which was created by Dermot Desmond. It is still operating and being promoted to attract more financial companies to base themselves in the IFSC: http://www.ifsc.ie/page.aspx?idpage=6.

IFSC

The IFSC is an essential element in world offshore shadow banking. Used by UK, European & Swiss banks, but mainly US banks & Hedge funds, to get around banking restrictions [capital requirements] at home & to go after higher returns on leveraged investments looked for where they could setup shop – beyond the prying eyes of their regulator, the SEC [Securities Exchange Commission] and they found it in Ireland specifically in the IFSC.

Looking at the listing of companies in the IFSC http://www.ifsc.ie/listing.aspx?id=239 you see subsidiaries of all the major US, UK, EU & Swiss banks and Hedge Funds. The IFSC is the in-country tax haven within the Irish Tax Haven.  At one time, as stated on their website, the IFSC company tax rate was 10% but it has gone back to the normal corporate rate of 12.5%. However most companies would pay single digit tax rates after deductions are taken and ‘At least 20 percent of Ireland’s G.D.P. is from “ghost corporations” that have little or no real activity in Ireland’. http://economix.blogs.nytimes.com/2010/11/25/will-ireland-default-ask-belgium/?src=busln

Tax Havens

Although these financial subsidiaries are established in the IFSC, some funds listed on the Irish Stock Exchange and/or listed there for tax purposes with most of their operations in London. Welcome to the world of tax havens where costs are moved to high taxing countries and profits are moved to low taxing countries like Ireland or non paying havens like Gibraltar & Cayman Islands with secrecy & lax regulation.

Why is Google HQ based in Ireland?  Answer: To minimise tax: http://www.dailymail.co.uk/news/article-2185427/How-Google-avoided-paying-218m-tax-Internet-giants-cash-saving-deal-2-6bn-UK-earnings.html. Google’s motto is ‘ Don’t be evil’ – well not paying your fair share of tax is evil.  Companies like Apple, Facebook & Google use the ‘Double Irish and a Dutch Sandwich’ method to avoid paying tax where Irish & Dutch Antilles{N.V.} companies based somewhere like Curacao in the Caribbean are used to minimise tax: http://www.nytimes.com/interactive/2012/04/28/business/Double-Irish-With-A-Dutch-Sandwich.html?ref=business

The three technology giants make a big thing about their Corporate Social Responsibility [CSR] policies & being good corporate citizens but say nothing about tax avoidance & refusing to pay their way as responsible members of our communities.

Bear Stearns, Lehman Bros, Parmalat, AIG, German Banks collapses and IFSC

Bear Stearns and Lehman Bros, whose demise precipitated the GFC, and other financial failures had their origins in the IFSC:

“Bear Stearns had several investment vehicles listed on the Irish Stock Exchange. These consisted of two investment funds (Bear Stearns Offshore Fund of Hedge Fund Series and Bear Stearns Offshore Leveraged Fund of Hedge Fund Series), and seven debt securities divided into 69 sub funds with a total issued value of $7.069 billion. Bear Stearns also operated three subsidiaries in the IFSC, Dublin through a holding company (Bear Stearns Ireland Ltd.)”

“Bear Stearns is not an isolated example in relation to the use made by US financial institutions of the IFSC . Lehman Brothers had four debt securities with approx. $27 billion issued and five funds administered from the IFSC and quoted on the Irish Stock Exchange in September 2009.” http://www.schumpeter2010.dk/index.php/schumpeter/schumpeter2010/paper/viewFile/374/185

“When the Italian food giant Parmalat collapsed in 2003, it turned out that it had been involved in massive faking of accounts – through its IFSC-based subsidiary, Eurofood. And in 2005 the chief executive of the IFSC-based arm of the global finance group Cologne Re pleaded guilty in the US to charges of creating sham deals in order to cook the books of the insurance giant AIG”: http://www.guardian.co.uk/commentisfree/2009/feb/27/liechenstein-liffey-tax-avoidance-dublin

‘The collapse of the subprime market in turn led to large losses at subsidiaries of three German landesbanks (Sachsen Bank, IKB, and WestLB) located in the IFSC. The largest and potentially most serious losses occurred at Depfa Bank, an Irish registered bank located in the IFSC which became a subsidiary of Hypo Bank in 2007. Losses at these banks required large amounts of State aid from the German Government’ – The Hypo bailout on it’s own cost the German Govt $68 BILLION. http://news.bbc.co.uk/2/hi/business/7653868.stm

IFSC and Shadow Banking

The IFSC is the key element in the Shadow Banking system that has brought about the GFC collapse in Western Democracies which has already brought rioting in Athens & Spain. It was here, in the IFSC entities, that the funds were created for securitization of sub-prime mortgages/credit card debts which were parcelled together using trust structures to create Collateralized Debt Obligations [CDOs]. These securities were corruptly rated by Rating Agencies [another story elsewhere] and sold to mug counterparties [Other Banks, local authorities, your pension funds] and it was these that brought about the GFC.

Here is the source, the leverage point, the IFSC – and it’s still operating in Dublin. Why? – because this black hole is so big & hard to unwind – the liabilities & contingent liabilities are in the trillions of dollars. As well as the existing liabilities the next major instruments causing uncertainty are derivatives – OTC [Over the Counter] options which again were financially engineered through these IFSC entities. Collateral, the security backing these has not been marked to market i.e. priced to reality. This is why the depression is still around us and the US, UK and EU are printing more money. Nobody trusts the financial entities, Banks don’t trust each other.  Hence QE – Quantitative Easing – printing money to keep the system liquid. Heard the expression ‘kicking the can down the road’ – well this is the can. Countries bailed out their banks by creating Sovereign debt & now even that security, which once was thought riskless, is shunned. Greece, Portugal, Ireland, and now Spain & Italy are now close to default. Billions/trillions are at risk of being wiped out if/when the Eurozone collapses & GFCII will swamp all economies.

“The IFSC is a major centre for administering hedge and other funds in Europe. In 2008, 8,000 funds were located in the IFSC, with €1,560 billion of assets. Yet the Irish financial regulator has been quoted as saying in 2007 that the Irish regulator had no responsibility for entities whose main business is raising and investing in funds based on subprime lending.” http://thepressnet.com/2011/02/10/ifsc-nothing-but-a-tax-haven/

IFSC Concept & Promoter – Dermot Desmond

And who was the major conceiver/founder/promoters of the IFSC – one Dermot Desmond. His company International Investment & Underwriting [IIU] is in the IFSC http://www.iiu.ie/ and on their website http://www.iiu.ie/page1.htm it boasts: ‘He was the original promoter of the IFSC, which now has 400 companies operating in Dublin’s docklands.’

University College Dublin awarded Mr Desmond an Honorary Doctorate of Laws in 2007. ‘The latter award acknowledges his pivotal role as the visionary behind the IFSC.’ http://www.ucd.ie/news/0711_nov/261107_dermot_desmond.html

Desmond on creation of IFSC: ‘I said I would write up a paper setting out my thoughts on how to make Ireland a viable location for an international financial centre.’ Prior to 1987 General Election, Charles Haughey, Leader of Fianna Fial said to Desmond: ‘You know your concept of a financial centre – I would like to include it in our election manifesto’. http://www.finance-magazine.com/display_article.php?i=2300&pi=142

Condemnation of IFSC

The biggest condemnation of the IFSC and its role in the GFC, by coincidence, comes from Irish Professor,  Jim Stewart, of Trinity College Dublin. He points to the financial engineering & lack of regulation in the IFSC as a major factor in the GFC: http://www.youtube.com/watch?v=oyf7ppw3-lc

The following quotes come from Professor Stewart’s paper: http://www.schumpeter2010.dk/index.php/schumpeter/schumpeter2010/paper/viewFile/374/185:

“There are numerous connections between funds involved in the subprime crisis and the IFSC. There are over 4000 investment funds and many more subfunds, quoted on the Irish Stock Exchange. Many of these funds assets consisted of subprime loans.”

“Financial centres such as the Irish Financial Services Centre (IFSC) formed a major part of the shadow banking sector.”

“In 2008 IFSC investment was over 13 times the size of foreign direct investment and approximately 11 times the size of GNP.”

Conclusion

Rather than putting their hand up and admitting the impact of the IFSC, Ireland continues to prostitute itself as a tax haven and push the IFSC as a conduit to escape regulation.  Ireland is bankrupt financially & dependent on IMF funds [including from the UK] and bankrupt morally for contributing to the GFC. The father of the IFSC, Dermot Desmond continues accepting adulation for the creation of this monster. Without the IFSC it would have been harder for the shadow banking system to work and the GFC might not have happened or been as bad it has been & continues to be. Other tax havens exist but these structures were created in the IFSC to attracted all the major banks & hedge funds. It still in operation and the GFC II is coming. When it does and the banks require further bailout, you know who to point at. Except his money is stashed away in a tax haven and us mugs will be paying for their damage in subsidies to banks & paying dole cheques as we are currently doing now except it will be x100 times bigger.  The banking system exists only because of trust – the notes you carry are only based on trust – without it they are worthless. This trust is being destroyed.

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Discussion

One thought on “Dermot Desmond’s contribution to the GFC

  1. Stewart’s paper is an important piece. Read more about Dermot Desmond, the IFSC and the Irish tax haven here http://bit.ly/qbDgpY

    Posted by Nick Shaxson | November 2, 2012, 3:18 pm

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