Panorama secretly filmed a banker at Lloyds on Jersey
The undercover filming broadcast on Panorama: Banks Behaving Badly? highlighted concerns with some Lloyds Banking Group procedures. Here Panorama addresses some questions relating to those concerns:
Lloyds Banking Group has suspended one of its bankers on Jersey. Does that mean it was all his fault?
The banker who was secretly filmed made a number of comments that were embarrassing for the bank. However, the High Income Fund, which he was discussing, has assets of £300m and must have been approved at senior level. The fund avoids the European Union (EU) savings tax by channelling its dividends through China. This method of payment must also have had high level approval. It is hard to believe that the banker filmed by Panorama's undercover reporter was the only person at Lloyds who understood the tax implications of this arrangement.
What is the EU savings tax?
The EU savings tax was established in 2005 to try and stop tax evasion on savings income. As well as EU member states, tax havens like Jersey and Guernsey also signed up to the agreement. Banks in the Channel Islands are now supposed to either pass information about their customers to the relevant tax authority or levy a withholding tax on their accounts. But, in practice, some banks are exploiting legal loopholes which allow clients to avoid the savings tax altogether.
Was the High Income Fund deliberately set up to avoid tax?
The High Income Fund was established in 1995 and Lloyds says it "was not tax motivated". However, the fund would have been covered by the EU savings tax if Lloyds had not routed the money through China. The Lloyds' subsidiary in Hong Kong which makes the payments was set up just two weeks before the tax became law in 2005. And the banker we filmed told us that moving the money to Hong Kong and back was a "paper transaction" which was designed to "get round" the EU tax. Regardless of the bank's intent, the High Income Fund gives wealthy customers the opportunity to avoid the EU tax and keep their savings secret from the Inland Revenue. This means it can also be used to evade tax in the UK.
Is this legal?
At the moment, the EU savings tax only applies if the income is paid out in a country that has signed up to the tax directive, which China has refused to do. Lloyds is therefore exploiting a legal loophole which, in practice, could enable customers to avoid or even evade tax. The European Commission wants to close this loophole by making the tax applicable even if the income is paid by agents in places like Hong Kong.
Lloyds says the use of a non-EU paying agent is a "common solution" and that it discussed the arrangement with lawyers, tax advisers and the Jersey authorities: "The main purpose of these arrangements is to overcome the operational difficulties in being able to calculate the proportion of the total fund income that comes solely from bonds that fall within the scope of the EU savings directive, whilst at the same time not disadvantaging investors living outside the EU."
The bank also points out that both the prospectus and key features document state that customers are responsible for reporting any taxable income to the relevant tax authority.
If it's legal, then what is the bank doing wrong?
Even though the scheme may be within the rules, the bank has a legal duty under Jersey's Money Laundering Regulations to report customers if it suspects them of attempting to evade tax back in Britain. Our undercover businessman made it clear he wasn't planning to declare his savings to the taxman. Instead of turning him away, or reporting him to the authorities, the banker seemed happy to turn a blind eye to his behaviour. Lloyds says bank staff are trained to report suspicious behaviour and that it has robust anti money laundering systems in place.
So how many suspected tax evaders has Lloyds reported through these systems?
Lloyds says it cannot disclose that information, but banks across Jersey made a total of 301 Suspicious Activity Reports relating to tax in 2008. Despite these reports, however, it seems that bank customers are unlikely to be prosecuted for tax evasion. The States of Jersey Police Annual Report shows that there were no financial crimes recorded or detected under the Money Laundering Regulations in 2006. The police won't reveal whether any bank customers were convicted in 2007 or 2008, but they say there is a difference between suspicious activity and the level of evidence required to support a prosecution.
Editor's note: The response to the above question was clarified from earlier information supplied to Panorama.
How can a bank that took £17bn from the taxpayer behave in this way?
That is a question that the Treasury and HM Revenue and Custom may well be asking of Lloyds' senior management. The government has already proposed a new tax code for banks which would commit them to following the spirit, as well as the letter, of the law. In theory, this should stop the banks from exploiting legal loopholes in this way. However, the code is voluntary and it is unclear how many banks will sign up after the consultation period ends 25 September.
Editor's note: The response to