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A Bank for the Taxpayer’s Buck?

Hi all,

I interrupt your regular blog viewing to bring you one of my infrequent posts, this time by a guest contributor — Alan Milner — who for reasons of job security, must remain anonymous.  With no further ado:

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A  Bank for the Taxpayer’s Buck?

The Canadian tax system provides a variety of incentives meant to support the productive players of our economy. But what if a particular type of tax incentive such as the dividend tax credit, initially intended to encourage investment and risk taking, became misused by Canadian banks to design riskless or unproductive operations? And what if these operations were engineered with the sole aim of making a profit at the expense of the public purse?

On April 2, 2012, the U.S. Commodity Futures Trading Commission (CFTC) filed a lawsuit against the Royal Bank of Canada (RBC). The U.S. CFTC alleges that a small group of RBC executives carried out hundreds of millions of dollars of “wash trades” between “at least” June 2007 and May 2010 in countries and tax havens where RBC maintains operations in a bid to claim dividend tax credits from Canada’s Revenue Agency (CRA) without financing productive activities.  According to the U.S. CFTC lawsuit, a few executives from RBC’s “Central Funding Group” based in various geographical locations worked to design schemes that took advantage of Canadian dividend tax credits related to common stocks.

In addition to the “wash trades” allegations, the U.S. CFTC alleges that these RBC executives set prices for the future contracts “internally”, which means the contracts were not subject to competitive market pricing as required by U.S. regulations, charges that the bank denied.

RBC did not deny that it took advantage of Canadian tax benefits associated with Canadian and U.S. stock dividends. But it was done at the expense of the real economy and is perfectly legal under the current Canadian regulatory regime.

Interestingly enough, the same week, on April 3, 2012, Terry Campbell, the head of the Canadians Bankers Association requested a “pause” on global financial reforms. These reforms were aimed at avoiding a repeat of the 2008 global crisis, which was triggered by elaborate derivatives trades very likely not too dissimilar in complexity from the alleged tax schemes for which RBC executives are now being sued by a U.S. regulator. Mr. Campbell cited the “unintended consequences” of those reforms, because “no one knows what impact the comprehensive reforms would have on the system”

In a stern and rather swift rebuttal to Mr. Campbell, Bank of Canada Governor Mark Carney stated in an interview with the Canadian Press in reference to the 2008-2009 global credit crisis:

“It was a good thing we didn’t press pause when we provided over $30 billion of liquidity to the Canadian banking system. It was a good thing the government of Canada didn’t press pause when it provided [ …] very timely and effective term liquidity to the Canadian banking system[…] Ottawa purchased tens of billions of dollars of mortgages from banks in an effort to free up cash to keep credit markets active.”

Governor Carney stated clearly that, during the global credit crisis, “Ottawa” (i.e. the Canadian middle class) subsidized the funding of Canadian Chartered banks to the tune of “tens of billions of dollars” by purchasing mortgages from Canadian Chartered banks and by engaging in a number of financial transactions to help them out. Governor Carney reiterated that banking reforms should continue until the structural changes needed to eliminate “irresponsible risk-taking” are completed.

In sum, the subsidized funding provided by Ottawa occurred in 2008 and 2009, a period that falls within the 2007 to 2010 timeline during which, according to the US CFTC, RBC’s executives allegedly funded hundreds of millions of dollars worth of trading schemes whose purpose was to profit from Canadian dividend tax credit.  In other words, at the height of the global credit crisis, executives working for a Canadian bank profited from the very same Canadian taxpayers who were throwing them a lifeline.

The Conservatives have been conspicuously silent on the matter since the U.S. CFTC filed against RBC the agency’s largest “wash trading” lawsuit in its history. No one expects a Canadian government official to comment on lawsuit allegations. But one should expect the Conservative government to address the genesis of the lawsuit on which no one can disagree: the fact that any large Canadian financial institution can enter into hundreds of millions of dollars of riskless transactions that span across several tax jurisdictions, including several tax havens, in order to take advantage of Made in Canada tax loopholes.

The U.S. CFTC seems to be better informed, more efficient and up to the job than the Canadian government at deciphering and exposing Canadian tax schemes executed on a global scale. If only Canada’s Chartered banks deployed their ingenuity, precious capital and attractive funding available to them thanks to their quasi-protected retail market in Canada to support the real needs of the Canadian economy rather than devising unproductive “riskless” schemes aimed inflating their bottom lines as well as their CEOs’ and traders’ bonuses.

It is high time that the Conservative government shuts down the tax loopholes that give Canada’s banks the incentive to move away from their privileged mandate and seek Canadian tax benefits by designing schemes that the U.S. CFTC describes as “riskless” and “a financial nullity”. Ironically, it should be obvious to the Prime Minister, a former president of the National Citizens Coalition. This dividend tax credit, when it is not transferred to either Canadian companies or Canadian individuals but is instead used by a Canadian bank to pad its bottom line, and that of its traders around the world, is a pure waste of taxpayers’ money. The middle class, which is footing the bill, ends up being the ultimate looser.

Alan Milner

Enjoy and share:

Comments

Comment from MikeB
Time: April 19, 2012, 6:21 am

I’d like to hope that this example is an isolated incidence of a policy creating profits for the few and the expense of most of us, but I fear there are many more we don’t know about. Thanks Alan/Arun for the eye opening.

Question: Do issues like this contribute to the lack of funding available to REAL Canadian innovations and opportunities? I’m no expert in this, but I have been reading pieces recently that basically say something like ‘why would be make a real investment, it is easier and less risky to move money around in creative ways in order to make profit’.

Comment from Keith Newman
Time: April 19, 2012, 10:09 am

Good post by ”Alan Milner”. It is rather sad that many posts must be done anonymously (yourself, Alan Milner, Joseph Laliberté, Circuit) to protect your jobs.

I do take issue with one aspect however. The following excerpt in my opinion is not correct: ”…during the global credit crisis, “Ottawa” (i.e. the Canadian middle class) subsidized the funding of Canadian Chartered banks to the tune of “tens of billions of dollars” by purchasing mortgages from Canadian Chartered banks and by engaging in a number of financial transactions to help them out”.

This was not a subsidy in the normal sense of the word. First, it was an asset swap – mortgages for treasury securities. Unless the mortgages were toxic waste, which they were not, this was not a subsidy. But even if they had been toxic waste the federal government, via the CHMC, already guaranteed most of the mortgages anyway, so buying them was no more of a subsidy than the original guarantee.

That does not mean our banks are not heavily subsidised. They are. But it is not via the mortgage swap program. The subsidy is the shape of an oligopoly and limited competition, (hence very high profits) and a protected market in one of the wealthiest countries in the world. Personally I have no problem with the oligopoly nor the protection from foreign competitors. They allow us to fully control and regulate our banking system. What is unfair are the oversized profits the industry makes. They should be reduced by a combination of higher taxes, lower charges, and higher wages to bank workers. Failing that the banks should be nationalised.

Given this reality, admonishments by bank economists for fiscal austerity are hypocritical and annoying. Thankfully most don’t engage much in that, but some, such as Don Drummond, do pop up from time to time calling for cuts to the social programs they won’t ever use themselves.

In any event the mortgage swap program did demonstrate that the federal government, via its central bank, will do whatever is necessary to support our banks. They certainly aren’t prepared to do that for the unemployed, aboriginals, etc.

Comment from Arby
Time: April 27, 2012, 5:33 am

Nah. Let’s just take the risk free route that will result in benefits for all and harm to none. Let’s nationalize the banks.

We know that our bankers don’t like to behave or they wouldn’t have asked the government, as they did, to change the rules to allow them to behave more like U.S. banks, gulp. If that’s what they wanted, What’s changed? We have an uber capitalist system and, like socialized health care, a caring banking sector really is out of place. (Supposedly, politics is the answer. It’s the ‘easy’ answer. Politics, or push back from voters, is not controlled by the people whatever lazy reportage may have lazy news consumers think.) We know the uber capitalist system isn’t going anywhere, ergo…

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