Cornucopia

by John Francis Kinsella

PART TEN

  PIMLICO – LONDON

  Kenneth McLaughlin, a life long Labourite, could not hide his chagrin when he discovered that his fallen hero, Tony Blair, who according to the father of a dead soldier, should be dragged in shackles before a war crimes tribunal, had become a multimillionaire and his wife, Cherie, a budding business tycoon.

  Cherie had in effect taken over the entire top floor of an office building overlooking Hyde Park, a short distance from the couple’s magnificent home on Connaught Square, where she was developing her end of the family business, and from where her son Euan ran a recruitment agency.

  Besides her law firm was the Cherie Blair Foundation for Women, a laudable venture, which received considerable donations that no doubt helped pay, in part, the rent for the offices that housed her other activities, one of which was Omnia Strategy, which had recently opened an office in Washington.

  Amongst the foundation’s backers was Accenture which donated to a training project in Rwanda for women. Window dressing was of course essential for the Blair’s business in Africa, where the former PM advised a number of governments including that of the despotic ruler of Rwanda, the leader of oil rich Gabon whose family had ruled the country for near on half a century, as well as businesses in Nigeria, Ghana and Djibouti.

  Omnia was in effect a law firm which was authorised by the Solicitors Regulation Authority to operate as what was described as an alternative business structure … providing a wider range of services to clients, than a traditional firm.

  It was curious Omnia, owned by the socialist couple, had hired the granddaughter of an English lord, and none other than the Duke of Wellington, to develop its business.

  Tony Blair was no slouch when it came to business. His fortune was estimated at one hundred million dollars, a remarkable exploit for a socialist politician, who a decade earlier was said to have difficulty repaying his home loan.

  The former PM, who had rushed the UK into a dubiously justifiable war, and had been to a large degree responsible for policies that had led to a catastrophic banking crisis, was proving to be more of a successful businessmen than national leader, with an undeniable talent for moneying the contacts he had established during his time in power.

  Five years after the Labour Party was voted out of power the country was still suffering from its policies which had greatly contributed to creating a two speed Britain. The rich had become very much richer just as the poor sank into a hand to mouth existence surviving on allowances and handouts. Two million Britons had jobs characterised as zero hour contracts, two million more were unemployed and another two million had dropped out of the job market. Incomprehensibly, since Blair had been elected prime, minister four million immigrants had arrived in the UK, working for low wages and often undeclared.

  For the better off things had never looked so good. The price of London prime property had soared, with property in most inner London boroughs beyond the reach of all but a small fraction of the population, forcing residents of modest means out to distant ever expanding commuter belts.

  Kenneth McLaughlin, following the early death of his father, a family tragedy that left his mother in a desperate situation, quit Dublin in 1950 to find work in London. The lad was lodged by his uncle, Jim Foley and his Aunt Kitty, in the Pimlico district of the capital. Uncle Jim found him a job with British Railways where he himself worked in accounts. The sixteen year old was engaged as an apprentice electrician in the railway company’s maintenance workshops situated just outside Victoria Station.

  It was a time of full employment as Britain rebuilt after the destruction wreaked by the war. The boom attracted many young Irish men and women who crossed the water to flee the impoverished conditions at home as the demand for labour grew in England and especially in London.

  When Jim Foley launched his nephew on his career, he was the owner of a Victorian corner house on Alderney Street, in Pimlico, bought in the late forties. He repaid the bank loan with the rents collected from his lodgers, mostly young nurses, both Irish and English, who worked at the nearby Westminster Hospital.

  Kenneth remembered the large ten roomed house at that time, a rather neglected property. It was, however, not different from neighbouring properties, in a district that was at the time largely working class and where most of the large houses were rented out by absent landlords. In fairness to Jim, his place was almost certainly in better state of repair than many others, certainly due to the fact it was occupied by its owner and his carefully selected tenants.

  Jim Foley had bought the property thanks to cash deposit and a hard to get bank loan of one thousand two hundred pounds, for the five level property, a very substantial sum for a working man in those days.

  Young Kenneth married a nurse, a pretty girl from Norfolk, to his aunt’s approval. It was an almost inevitably destiny given the fact that most of his neighbouring lodgers were girls. When their son was born the young family was offered a new flat in Churchill Gardens by the Westminster City Council. The comfortable modern flat overlooked the Thames and was just a ten or fifteen minute walk from their respective work places.

  With a few years solid experience to his credit Kenneth moved on, a step up, hired by the newly built Hilton Hotel on Park Lane in central London. He saw the new job, assistant maintenance engineer, at the prestigious hotel, as the promise of a bright future compared to that at the sclerotic, strike ridden, national railway company. He was right and remained loyal to the hotel group until he retired in 2000. By then Kenneth McLaughlin had become the group’s UK property maintenance manager, responsible for almost seventy hotels across the country.

  Churchill Gardens – Pimlico – London

  The Foley’s were childless and considered Kenneth as their son. When Kitty died from cancer, Jim followed less than a year later, leaving the house to Kenneth, his only remaining close relative.

  In 2015, Kenneth McLaughlin was a rich man. However, he did not owe this to his successful career as a manager, or the fact he had paid off the mortgage on the house he owned in Finsbury Park, North London, or his savings and investments, or even the house he had inherited from his parents in a Dublin suburb, all of which would have given him a net worth of almost two million pounds.

  A handsome sum for the lad who had arrived at Paddington station fifty years earlier with ten Irish punts in his pocket.

  It was Uncle Jim’s house on Alderney Street in Pimlico that increased his worth by another magnitude. The house his uncle had bought shortly after the war, in bomb damaged, run down Pimlico, was now worth an estimated four and a half million pounds. In terms of monetary inflation his initial investment in 1948, nearly two thousand pounds, would be worth two hundred and fifty thousand in 2015; the London average house price index would make the house worth half a million; but in Pimlico, situated in the heart of London, the investment was multiplied by over two thousand.

  The Alderney street house was divided into five spacious two room apartments with kitchen and bathroom, which McLaughlin rented out for a total of twelve thousand pounds a month.

  His total annual income from the rent of his London and Dublin properties plus his pension was over two hundred and fifty thousand pounds a year, and his net worth a spectacular six and a half million pounds.

  Alderney Street – Pimlico – London

  Kenneth blessed his good fortune; he who had often doubted the luck of the Irish, was living proof of the hackneyed saying’s veracity.

  He was more fortunate than certain of the neighbouring owner occupiers on Alderney Street, who were asset rich and cash poor, and faced crippling taxes forcing them, one by one, out of their homes as the value of their properties rose. The former middle class owners of property in central London districts, described as prime by real estate specialists, were slowly constrained to quit the homes they had lived in for decades, ceding their place to a growing class of well-heeled professionals and wealthy foreigner buyers. The traditional middle classes were priced out of the market, exi
led to distant commuter belts.

  HONG KONG

  Lili was worried, normally Pat called her two, three or more times a day when travelling, but since he had arrived in Panama his calls had been less frequent and now he hadn’t called in almost three days. She trusted Pat, after three years she had got to know her husband well, but recently he had been under considerable stress following the changes at INI and his relationship with Michael Fitzwilliams which had become difficult since the start of the Ukrainian troubles when the CEO accused Pat of going too fast with the Russians.

  It was true that Pat Kennedy’s interest in things waxed and waned, and at times with surprising speed. He was not a staid, stuffed shirt City banker; it was neither in his character nor his role. It was Fitzwilliams who had pointed him in the direction of China, leaving the bank’s day to day affairs and relations with INI in Moscow to more conventional managers.

  Who could have foreseen the turn of events in the Ukraine, the sudden about-turn of Viktor Yanukovych? Perhaps seasoned Russian watchers? Who could have predicted the Maidan Revolution, the flight of Yanukovych and the reaction of Putin?

  There were as few crystal ball gazers who could predict the future as there were investors who could anticipate the movement of stock markets. Men like George Soros or Nouriel Roubini became famous for getting their bets or forecasts right … once. Few got it right twice, not to mind being consistent. Of course Warren Buffet had become immensely rich, but that was by steering his funds wisely through the shoals of change.

  Michael Fitzwilliams had taken risks, dangerous risks. But he had forgotten the saying: one day the future will be the present, in his pursuit of growth. He had used Kennedy, his willing instrument, to further his ambitions. He was not the first banker and certainly not the last to be drawn by the lure of huge gain, not very different from the gamblers Lili had watched in Macau, or those ordinary Chinese who blindly bet on the Shanghai Stock Market.

  In the last weeks the Wu family had quietly cashed in their gains on the Shanghai and Shenzhen markets, just as they had reduced their exposure to property in China over the previous eighteen months. Markets were dangerously overheated.

  It was the old Wall Street story: when the shoeshine boys started giving hot tips, it was well past the time to get out.

  Such was the case of China’s stock market and Pat was no where to be found.

  Punters, ordinary people, many of whom looked as if they had dropped in after a game of mahjong or go in the local park, could be seen earnestly scanning the stock market index boards in Shenzhen, or heard placing orders on their cell phones on Shanghai streets, others could scanning the pages of the China Securities Daily on the Hong Kong waterfront. But all were avidly following the movement of their shares.

  A survey carried out by the Hong Kong Stock Exchange, showed one in three adults in the city had invested in shares.

  Astonishingly retail investors accounted for some eighty percent of China’s trading volume, however, the Chinese stock market was dwarfed by London or Wall Street. Which did not prevent every imaginable kind of punter, even students and pensioners, from plunging into the market and often on borrowed money. The stock market had reached boiling point, and the chance of winning even better than in a Macau casino as each day trading volumes reached new heights and share prices went through the ceiling.

  Daily trading volume on combined Chinese markets had exceeded that of Wall Street by several degrees of magnitude with index’s surging more than fifty percent in 2014, then another twenty percent since the beginning of 2015.

  The Beijing News reported a cleaning lady at China Securities had opened an account to buy and sell shares in the mad scramble to get a piece of the action. As the frenzy reached its peak nearly a million new accounts were being opened a week, ominously the greatest number since 2007.

  For many Chinese it was an alternative to the real estate investment market, which was caught in the doldrums after the government had tried to cool the seriously overheated market, the advantage was the price of the stock market entry ticket was so much lower than that of real estate. It was as if every Chinese without or without ready cash was caught up in a stampede to get a piece of the action. As always, the only sure bet was, sooner or later, the euphoria would turn into tears, and the consequences for the government nasty, very nasty.

  Lao Wu had seen more than one crash in Hong Kong, in real estate and the stock market. But, when the next crash came it would hit the Mainland, where people were not used to losses and their reaction unpredictable.

  SHADOW BANKING

  Shadow banking was loosely defined, in technical jargon, as credit intermediation involving entities and activities fully or partially outside of the conventional banking system.

  In other words lending outside of normal banks and credit companies, and Ireland was part of the world’s shadow banking system which played an important role in the Emerald Isle’s economy. However, few people saw Ireland a tax haven, but it was, and as such Irish banks, stockbrokers, accountants and law firms provided services to foreign businesses and individuals.

  Surprisingly, over the three percent of the world’s shadow banking funds were held in Ireland, putting it in the same class as the City of London, Luxembourg, the Cayman Islands and Liechtenstein, to name a few. An astonishing achievement for a small economy, perceived by many as one based on tourism, dairy farming, or a small low tax manufacturing centre for pharmaceuticals or electronics.

  It was a well guarded secret, as discretely hidden as was Ireland’s cool, damp, rainy climate from would be tourists.

  Fitzwilliams bank was at the heart of a system that had enabled Ireland become a major financial platform through which Russians could effect sophisticated capital transfers. Further, Irish financial entities, including INB, had loaned Russian companies, and households, a total of more than twelve billion dollars in 2012, making Ireland the fourth most important creditor of the Russian non-financial sector, ahead of the UK, Cyprus and Luxembourg.

  One of the most important conduits for the flow of Russian capital into Ireland was the City of London, whose financial system was closely linked to the Republic, and INI had fully profited from this arrangement, building up a huge position in Russian lending.

  In the world of offshore banking, finance and tax evasion, the Cayman Islands was well know as a base for shell companies, described as financial vehicles, where they were registered at discrete addresses by the thousand. But few outside of informed circles realised the importance of the role played by Irish based hedge funds, investments vehicles and money market funds, or the value of their investments, which exceeded a staggering two trillion euros in 2015.

  In fact more than a third of all global hedge funds were serviced in Ireland making it the largest hedge fund administration centre in the world with more than half of all European based funds, amongst them many of the most important hedge fund managers.

  Beyond a small number of financial specialists and hedge fund managers, few had heard of number 5, Harbourmaster Place, a modern glass building, which was no different in appearance to so many others, situated on the bank’s of the River Liffey, in what was once Dublin’s docks since transformed into Ireland’s International Financial Services Centre, know to certain wags as ‘Lichtenstein on the Liffey’.

  More than two hundred and fifty companies were domiciled at that address, including Google, Microsoft, and the pharmaceutical giant Abbott Laboratories. A number that was far greater than the building could have effectively housed. This was however not a problem as they had no employees, furniture or office equipment at that address, even though many of these companies had assets worth millions, hundreds of millions or billions of dollars, pounds sterling or euros, in addition to that they paid little or no taxes.

  Certain of these entities were were in fact financial vehicles created to house or trade in securitised investments, that is to say to raise and resell loans, in other words instruments of the shad
ow banking system, a murky unregulated universe beyond the control of any government or authority.

  Ireland’s shadow banking system controlled assets worth an astonishing ten times the value of its gross national product, that is the total value of all its goods and services produced in a single year. In addition it employed more than thirty thousand people, though due to the tax avoidance nature of the sector, little if any taxes were ever paid on gains.

  INI was part of the system and Fitzwilliams, a victim of his own ambitions, had like other interested parties had persuaded legislators, out of public view, to do what suited their plans, that is by not asking too many questions and avoiding awkward questions; let’s not rock the boat lads, as Pat Kennedy put it. In other words policy making was directed by financial interests.

  John Francis was of the same board, a free marketeer, he did not believe in the constraints of what he saw as socialist ideas, he knew in the long run they did not work, he believed economic prosperity went hand in hand with governments that ensured national wealth. Francis did not see Ireland as a tax haven, rather it offered a simple and transparent corporation-tax system that favoured investment, levelling the playing field as Pat Kennedy would have put it, enabling Ireland to compete with the City, Luxembourg and Switzerland.

  Kennedy, for example, envisaged setting up a vehicle in Dublin to finance selected parts of the Nicaragua Canal project, through different fund raising structures without putting the bank at risk. Such methods were employed by businesses to reduce risks via hedge fund securitisation, that is pooling loans, transforming the shares into into securities or tradeable assets that could be sold to investors in smaller parts.

  Setting up a fund in Ireland was child’s play for a bank like INI once authorisation from the Central Bank of Ireland was acquired; a formality that consisted of establishing an Irish based depository; an Irish regulated external auditor; an Irish based administrator; an approved management company, the form of which could either be an Investment Company, a Unit Trust, a Common Contractual Fund, or an Investment Limited Partnership; with of course two Irish resident directors.

  The beauty of it was Ireland was an onshore base which had the effect of attracting more and more funds away from, for example, Caribbean islands; a consequence of the European Union’s Alternative Investment Fund Manager directive that imposed severe restrictions on the marketing of funds domiciled outside the EU for European investors.

  Kennedy would appoint a hedge fund manager to administer the fund designed to attract high worth net worth individuals through a network of brokers, a great many of whom were based in the City of London. With its vast processing structure, the City disposed of lawyers, accountants, analysts and other experts: a nerve centre of a vast network that covered the entire planet, a vestige of Empire.

  However the City would have been nothing without the UK’s precious string of pearls, starting with those nearest to home: Jersey, Guernsey and the Isle of Man; further afield were its British Overseas Territories, previously known as British Crown Colonies, there were fourteen in total including Anguilla, Bermuda, British Virgin Islands, Cayman Islands, Gibraltar, Montserrat, Turks & Caicos, all of which were undisputed tax havens, conduits for the City’s most nebulous business transactions.

  They were known as the CDOTs - the UK’s Crown Dependencies and Overseas Territories. On maps they appeared no bigger than dots, but each year billions of dollars were hidden in the tens of thousands of offshore companies and accounts secreted away on these islands, part of it used to buy super-yachts, private jets, fine art and property.

  This precious string formed part of the City of London’s planetary network providing banks like City & Colonial, HSBC and UBS the means to set up thousands of offshore companies for their clients.

  Added to that was Hong Kong, a former colony, which in spite of the transfer of sovereignty to Beijing had never cut its close links with the City. Hong Kong’s web of guanxi stretched deep into the heart of China and served as the City’s principal Asian conduit, closely followed by another former colony, Singapore.

  A Black Swan

  There were few taxes on businesses and with bank secrecy guaranteed in Hong Kong, Kennedy could do whatever he liked for his clients, wherever their production bases were located, through the links he controlled between the former colony, London and Dublin.

  Smart phone owners would have been astonished to learn that many of their applications were produced by one of Pat Kennedy’s clients: an almost anonymous Chinese software firm that counted their global users in the hundreds of millions; one the world’s largest publishers of software applications; boasting an annual growth in the order ten percent; and profits of one billion US dollars. Their places of business situated in Beijing and Hong Kong and their registered offices in George Town. Yes! George Town in the Cayman Islands.

  Users across the world employed the software daily without realizing it was produced in China and that the profits were banked in one of the world’s most notorious offshore tax havens … British to boot!

  Michael Fitzwilliams as CEO of a large international banking group had been blithely unaware of the opacity of many of his clients, who businesses were entirely legal, but whose activities where hidden behind a formidable language barrier, incomprehensible to outsiders, safely hidden from preying eyes in the labyrinth of the Middle Kingdom.

  KALUGA – RUSSIA

  John Francis did not need to be convinced that rich Russians, who had not already moved abroad, were heading for the door, or at least making plans to do so. Those who could had no intention of hanging around to see what happened when Putin turned the screw, raising new taxes to cover the deficit caused by falling oil revenues.

  The problem for those whose intentions were to get out, was to do so without being seen to. A lack of patriotism was a grave sin in the eyes of Putin’s government.

  To make matters worse, if the nuclear non-proliferation negotiations with Iran ended in an agreement, the situation was likely to worsen; oil prices could fall to thirty dollars a barrel once Iranian producers came back into the market, adding to the pain already felt by Russia.

  One fifth of Russia’s wealth was controlled by one hundred and ten individuals, making it one of the most unequal countries on the planet. How long would Russians suffer such a regime?

  Vladimir Putin’s Russia was fast becoming a non-destination for foreign investors, and rich Russians who could have invested money at home wanted out. The difficulties were reaching alarming proportions as GDP fell and inflation rose at an eye watering pace. The prime concern of oligarchs and wealthy Russians was to do all that was in their means to conserve their wealth, which explained their interest in London; not very surprising given the UK tax system offered advantageous conditions to such exiles who could acquire an investment visa at the cost of two million pounds up front.