Jim Armitage: Wealthy behemoths flock to its mountains – but isn’t it time Switzerland cleared up its commodities trading set-up?
The suspicion is, on a gargantuan scale, deals may be mispriced in order to minimise local taxes
Jim Armitage is the City editor of The Independent and London Evening Standard group of newspapers. He has been a reporter and editor for more than 20 years and was recently shortlisted for the Press Gazette financial journalist of the year and The Society of Editors financial journalist of the year awards. He contributes news, investigative reports and comment to the Independent titles plus a daily column in the Evening Standard.
Saturday 08 March 2014
Transparency is not Switzerland’s strong point. Unless you’ve got something to hide, in which case, it’s a point as strong as the Matterhorn.
With that in mind, witness the annual turnover reported this week by the Switzerland-based, London Stock Exchange-listed commodities and trading giant Glencore Xstrata: $232.6bn (£139.1bn). Sometimes, numbers that big are easier to visualise when simplified and written out in words, so I will – more than quarter of a trillion dollars. Set against that, the fact that $180m or so brushes off into the bank account of chief executive Ivan Glasenberg in the form of a dividend seems almost inconsequential.
The sums involved raise a couple of questions. Firstly, given the relative youth of the company, (whose Glencore half was formed from the sometimes murky dealings of its fugitive founder, the late Marc Rich, in the 1970s and 1980s), combined with such vast turnover of the world’s resources, how on earth did the world’s industries cope before it existed? Answer: quite easily actually, by finding ways to deal with producers directly and cutting out the middleman.
Secondly, why would such a vast company, gathering resources from Africa, Asia and Russia, and trading them all around a China-dominated world, choose to locate itself in a small, landlocked country in Europe with no mining resources, thousands of miles away from the world’s commodities consumers? Come to think of it, why do all Glencore’s rival commodities trading behemoths like Trafigura, Vitol and Gunvor plus dozens of smaller ones also base themselves among the mountains?
You can see the logistical sense behind the commodities industry’s other major trading hubs: Rotterdam, one of the biggest ports in the world, Houston, deep in Texan oil country, Hong Kong, a stable antechamber to vast China. London, world centre of banking and access to capital. But Switzerland?
This was the question that taxed the authors of a recent report by the Centre for Global Development, who puzzled over some extraordinary statistics about tiny Switzerland’s share of the world commodities trade. More than one in three barrels of oil traded anywhere in the world are sold through Switzerland, including 75 per cent of the black stuff from Russia. Sixty per cent of the world’s coffee is sold through its cantons, not to mention half of all the sugar produced across the globe.
Obviously, Switzerland’s über-low taxes are one key factor. The commodities industry has negotiated particularly favourable treatment in the country, where cantons compete with each other to offer the lowest taxes in the race to attract big employers to their meadows. Its willingness to remain politically neutral helps too – historically useful to those wanting to bust sanctions in the apartheid-era South Africa or US-embargoed Iran, for example. Who knows, Swiss neutrality might come in handy if the west musters the cojones to put sanctions on Russia.
But it was that lack of transparency, along with a snowflake-light regulatory regime, to which the report keeps returning. The financial secrecy and weak control mechanisms, which enables companies to work there behind an impenetrable veil.
The Centre for Global Development is concerned about the impact such opacity has on the prices of commodities traded through Switzerland. Particularly the way that goods dug out of the ground in the Third World seem to enter the Swiss trading system at a low price, but get sold on to the buyers in wealthier regions at a high one.
The suspicion is that, on a gargantuan scale, deals may be mispriced in order to minimise local taxes and maximise the trader’s profit. I say suspicion because we will probably never know the truth, and I should state that the report does not point the finger at the giants I referred to at the start of this article but concludes: “We find support for the hypotheses that i) the average prices for commodity exports from developing countries to Switzerland are lower than those to other jurisdictions, and ii) Switzerland declares higher (re-) export prices for those commodities than do other jurisdictions.”
If that is true, you have to conclude that, somewhere in Switzerland, there sticks an Alp-sized profit. Or, to look at it another way, a glacier-deep loss of potential tax income for the exporting Third World.
Take Zambia. The report claims that, as Zambian copper output grew in the booming noughties and prices exploded, Switzerland went from trading none to more than half of the African country’s exports. But, as that happened, so the prices Zambia was receiving from Swiss traders for its copper became, in most grades of the mineral, massively lower than the price at which Switzerland exported.
In the year 2008, had Zambia achieved the sale price Switzerland put through, its GDP would have increased from $14.3bn to $25.7bn – 80 per cent, the report claims. That’s a lot of schools or hospitals in a country where eight out of 10 people at the time were living on less than $2 a day.
It’s far too simplistic simply to subtract one figure from the other to come up with a “rip-off” figure. Transport costs can be huge and the underlying data out of Zambia could be unreliable. But the main reason such figures are potentially wrong (and therefore so deniable for the industry) is that most of the stuff never physically arrives in or leaves Switzerland.
That’s nothing new for London, which has been running such “transit trade” for hundreds of years. But the opacity of Switzerland makes it far harder for exporting countries to keep track of how much the goods they sell into Swiss trading entities are sold for to their eventual buyers. The report’s authors suspect this has led to industrial scale “mispricing” of international trade through Swiss commodities houses. Mispricing is a polite way of saying a deliberate manipulation of prices.
This is illegal, and, again, there is no suggestion in the report that the companies I named in the top of this article are involved in any such activity. Indeed, Stock Exchange listings have increased the transparency from the bigger traders like Glencore Xstrata.
Why would traders want to misprice trades? There are many reasons, but the biggest is tax. By conspiring with the seller in Africa to underdeclare the trade’s price, they can massively lower their tax bill – both for the buyer and the seller. The beauty of it from the trader’s perspective is it’s so easy to do and simple to hide, especially through Switzerland.
As such, the report can only hazard an extremely wide range of calculations about the scale such mispricing transiting through Switzerland – a range of $8bn to more than $120bn is its best guess. The lost tax implications for the world’s poorest exporting countries is severe in the case of the lower figure, scandalous if the higher is more accurate. Wealthy countries could be suffering too from the flows their way of illicit, untaxed cash – potentially as much as $575bn a year.
The report recommends two things: Switzerland should provide fuller data on the transit of commodities through its traders to the UN monitoring system used by other territories. And countries should litigate against Switzerland for change through the WTO.
Switzerland has been forced into making major concessions on banking secrecy. Could the commodities industry be next?
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