PART 1: Banks bailed out by UK taxpayers control hundreds of firms in tax havens
By Paul Hutcheon, Investigations Editor

The UK banks that will benefit from the publicly-funded bailout have hundreds of subsidiary firms in tax havens such as the Cayman Islands, Jersey and the Bahamas, the Sunday Herald can reveal.

A Treasury crackdown on UK citizens channelling their income into bank accounts held in offshore firms has already yielded £400 million in lost revenues.

A coalition of charities and trade unions has called on the government to use its stake in the banks to close the offshore entities and clamp down on tax avoidance.

The government has tried to limit the effect of the credit crunch on the UK economy by injecting £37 billion of taxpayers' money into the ailing banking sector.

The cash, which was made available in exchange for a stake in the banks, will help household names such as HBOS, Lloyds TSB and the Royal Bank of Scotlandcope with the global economic downturn.

The government is now being asked to use its influence with the banks to stamp out financial practices that are not deemed in the public interest.

One of the areas in the spotlight is the way UK banks set up a complex web of subsidiary companies in low-tax, or no-tax jurisdictions.

Favourites for financial institutions include the Cayman Islands, the Channel Islands and Bermuda, all of which levy derisory levels of taxation.

The Sunday Herald can reveal that while the banks covered bythe bailout pay billions to the Treasury in taxation, each firm has offshore subsidiaries.

The Royal Bank of Scotland Group, one of the so-called "jewels" of the Scottish economy, has beneficial shareholdings in at least 128 companies incorporated in tax havens, according to its annual return.

Included in its portfolio are 62 firms in the Cayman Islands, 29 in Jersey, 11 in Guernsey, seven in the British Virgin Islands (BVI) and four in the Bahamas.

A small number of the firms are listed as dormant or non-trading, while others are marked as "active", "holding" and "nominee" companies.

Lloyds TSB Group plc, a bank that is in the process of taking over HBOS, also has a lengthy list of offshore "subsidiaries and other undertakings", according to its 2008 annual return.

The document lists more than 100 firms in tax havens, including 59 in Jersey, 17 in the Cayman Islands, four in Gibraltar, one in Panama, seven in the BVI and six in the Bahamas.

Most of the firms have innocuous sounding names: Conclave Investments Limited in Cayman; Larmoran Participations Inc in Panama; and Warwick Lane Finance Limited in BVI.

In addition, Bank of Scotland International, which is ultimately part of HBOS, is based in Jersey.

Banks that will not participate in the government-supported recapitalisation scheme also have dozens of offshore firms.

HSBC plc has a Jersey-based subsidiary for international banking, while Barclays plc has around 125 subsidiaries or joint ventures in tax havens.

According to the firm's latest annual return, it has 79 companies in the Cayman Islands, 29 in the Channel Islands, one in Lichtenstein, one in Liberia and three in Gibraltar.

Included in its collection of offshore firms is Pippin Island Investments Limited in Jersey, Aspin Investments Limited in the Cayman Islands, and Barclays Private Clients International in the Isle of Man.

Aside from the effect on corporation tax revenues of setting up offshore subsidiaries, the banks' complex corporate structures have unarguably drained the government of resources for improving public services.

This is because some UK citizens have opened offshore bank accounts to hide their income and hold onto the interest-payments generated.

In 2007, Her Majesty's Revenue and Customs (HMRC) clamped down on UK citizens who used the tax havens by obtaining details of their offshore bank accounts.

Using data provided by Barclays, HSBC, Lloyds TSB, HBOS and RBS, the government launched 11,582 investigations and reaped £400m in extra revenues.

The same agency is now stepping up its drive to recover more of the income lost as a result of money moving offshore, with a further 80,000 investigations planned.

TUC General Secretary Brendan Barber said: "It would be absurd for banks reliant on government aid from taxpayers to be allowed to advise their clients on how to avoid paying their fair share of UK tax.

"There needs to be a major clear-out of the tax-dodging activities of the big banks, particularly those like RBS and HBOS/Lloyds with big government stakes. This must involve closing their tax haven operations, shutting down their structured finance operations and repatriating off-shore profits and paying proper tax on them."

Richard Murphy, the research director of the Tax Justice Network, said: "I think these banks should close down their offshore subsidiaries. This is because the government cannot have a stake in companies that undermine the government. Closing them down could be done as it is a commercial choice to operate in tax havens."

A spokesman for Oxfam said: "Tax havens play a negative role in the problem of global poverty. Companies are able to use tax havens to avoid paying the taxes they might otherwise owe to governments in the countries where they operate, so these havens are depriving developing countries of income they could otherwise be using to fund things like education and health care."

A spokesman for HMRC said: "We are working through the offshore account data which we have collected, ensuring everyone pays the right tax. It's important that those with undisclosed offshore assets come forward as soon as possible as this will mean paying a reduced penalty on any outstanding tax."