Flynn Pleads Guilty

Earlier in the year I wrote about Michael Flynn being fired by President Trump. Now the story continues, as he has pleaded guilty to lying to the FBI. Now, if I were writing about this in a novel, it would be important to construct the plot so that there was a reason why Flynn would plead guilty, but in real life, why would that be?

In a novel, one reason might be the noble acceptance that he knows he lied, so he will take what follows on the chin. Strictly speaking, we do not know that this is not what has happened, but the media seems to think he has done a deal with Mueller, and will tell all that will bring down the current administration. That may be wishful thinking, even if Flynn has done a deal, the reason being that while Flynn may have lied, the truth would have had to be sufficiently serious to bring down the administration then.

Another reason may be that he is going to tell what he knows, but given what he has admitted to already, what could that be that will not get him into deeper trouble. Of course Mueller could have dealt immunity, on the basis he tells all and truthfully. That raises the question of what is all Flynn knows?

So, what will happen to Flynn? A detailed account of the Plea Agreement is at https://www.justice.gov/file/1015121/… . As it stands, the sentencing guidelines are estimated as imprisonment for between zero and six months, and if a fine is imposed, that fine will be between $500 and $9,500. As to what Flynn is accused of doing:

(a) On January 24, 2017, Flynn made materially false statements and omissions during an interview with FBI agents who were investigating whether the Russian government interfered with the 2016 Presidential election. These false statements included that following President Obama’s executive order announcing sanctions against Russia, he initially denied receiving a question from the Russian ambassador (Kislyak) relating to Trump’s policy (recall he had campaigned about getting better relations with Russia), then he omitted to mention that he spoke with the Presidential Transition Team (PTT) about this, and received the response that they did not want Russia to escalate the situation by making counter moves. Flynn then passed this request on to Kislyak, and subsequently reported back to the PTT the substance of the conversation. Then, about December 30, Putin announced he would not take retaliatory action.

(b) Flynn made false statements to the effect he did not make specific requests regarding an Egyptian resolution to the United Nations Security Council regarding Israeli settlements. A senior member of the PTT directed Flynn to learn where each government stood on the resolution, and to try to delay the vote or defeat the resolution. Flynn informed the Russian ambassador that the incoming administration opposed the resolution. The Russians responded by telling Flynn that Russia would accommodate the new administration.

(c) When he filed for his company in accord with the Foreign Agents Registration Act, his company did not know the extent to which the government of Turkey was involved in the Turkey project, a project focused on improving US business opportunities in Turkey, and omitted mentioning that officials from Turkey provided supervision and direction over the Turkey project.

My personal view is that Flynn was wrong to lie, but he would have good cause to believe that details of the future policy of the US government is not something to be disclosed to FBI agents. Simply saying, “That is classified,” would have been preferable. Both (a) and (b) are merely acts where he tried to make things easier for the new administration. After all, was it all that bad to ask Russia not to impose some sort of counter punishment on US companies? How is that working against US interests? More to the point, Obama had plenty of time to impose sanctions before the election, but he did not. If that was to make things easier for Clinton, and then he imposed them to undermine Trump, that in my view is just plain wrong. Similarly, the actions to try to improve things for US business in Turkey can hardly be crime of the century. The filing errors were naughty, but this is low-level stuff really. So why did Flynn plead guilty? My guess is he knew there was incontrovertible evidence that he was guilty of some things, including false filing and fibbing, and while he might have been able to defend these to some extent, it would be a lot cheaper to plead guilty, save the legal fees, and most importantly wipe the slate clean.

My guess is also that when this is over for Flynn, he can recover most of his costs by writing a book. I am sure he would get a good deal. So he can’t write? No worries; I am sure a lot of writers would be only too willing to provide their services. Name recognition alone would justify it.

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Infested with Panamanian Rorts!

By now, most people in the reasonably developed world will have heard of Mossack Fonseca, the Panamanian law firm whose activities have led to New Zealand being called a tax haven. Well, right now it doesn’t feel like it to me, as it is time for me to start preparing my tax return. However, the history of this is quite interesting. After the first release of information, our Prime Minister, John Key, did his usual performance when something is not going his way: he smiled and said sort of derisively that NZ is not a tax haven, and there was nothing in this. His standard operating protocol is to dismiss the accusations and say not much more, on the basis that if he says nothing, it all runs out of steam. This time, however, it did not.

The next step was that the reason for the accusation became public. Part of New Zealand tax law is, if you do not earn anything in New Zealand and you do not reside here, you have no tax obligation. That seems reasonable. But what has happened, apparently, is that thanks to Fonseca and an Auckland law firm, Bentleys, a number of foreign trusts have been set up here. Now, since they have no tax obligations, they do not have to file a return, and that means there is a small black hole between the money and the owners of said money, and Fonseca has complicated the issue by having the New Zealand entity owning trusts elsewhere, and so on. What it does is to make it very difficult to track down who the rich are that are using such mechanisms to evade tax. It is also important to note there are sometimes good reasons for foreign trusts. If you live in a country where dictators are likely to confiscate everything if your political views are wrong have good reason to put their money offshore.

The answer to this, of course, is reasonably simple: the trusts should have all their owners and their activity declared. Total transparency does not worry the legal (given that tax authorities must maintain confidentiality, other than for prosecuting for tax evasion). If there is a chain of trusts, the chain should be explicitly declared. So, why has this not been done?

Here comes the problem for Key. Apparently two or so years ago, our IRD started to consider what it should do about such trusts, as they were blossoming. A certain Mr Whitney, Key’s personal lawyer (at least that was how it was described in the media initially, but there seems to be some accusations that he is no longer a lawyer) approached Key and asked about the issue. (Nothing wrong there.) What Key replied is unclear; he says there were no current plans as far as he knew and Whitney should see the appropriate Minister. Fair enough. Then it is unclear what happened because there is some accusation that Whitney asserted to the Minister that there should be no action. We have no real idea what happened, but the next thing is the Minister stopped the IRD from future action on these trusts. Whitney, it appears, was another lawyer running such trusts.

Then, suddenly, Key bounces back, triumphant. Some of these trusts that people are complaining about, says he, have the Red Cross, or Greenpeace, or Amnesty International as beneficiaries. In an attempt to dispose of another problem with one brush, there are arguments that Auckland’s property boom is being driven in part by foreign trusts. Key announces that only 3% of sales are to foreigners. However, perhaps he should have thought before putting mouth into action. It turns out that the Red Cross, Greenpeace, Amnesty, etc, know nothing about these trusts. What the likes of Fonseca, or whoever draws up the trusts, have done is to name beneficiaries on these trusts to allay the tax authorities, but they are fraudulent. Then for the property sales, it turns out that foreign trusts were excluded from the statistics. Why do house sales matter? Well, it appears people of unknown origin have turned up with suitcases of hundred dollar notes to pay. Soon after, the house is sold, and since there is a bubble progressing, at a profit. Now, New Zealand has an excellent banking system, so what’s the betting this is money laundering?

Obviously, we need more action from the government to make all this transparent. Tax evasion by the very rich is bad; the laundering of drug money is certainly worse. At this point I should emphasize that I am not in any way accusing Key of corruption. On the other hand, he has made a personal fortune as a trader in one of those banks, so he is hardly likely to mount a crusade against such activities. And herein lies the problem. Sloth and indolence from those who we vote in to make life fairer for all is just as bad, if not worse, than actual involvement. A further curse of what we call democracy (but is not) is that politicians want to stay in power, and they have a vested interest in not annoying the people that give their party the big donations to mount election campaigns.

Of course, on the world stage, so far New Zealand’s role is rather small as far as New Zealand citizens go, at least as far as we know. But the impact of slothful regulation might be huge. As Ellen Zimiles, a former New York federal prosecutor noted, fraudsters like offshore because the lack of transparency makes it very difficult for investigators to get at the ultimate beneficiary. And, of course, New Zealand is hardly the only guilty party.

Exposed Trusts

I found there were two major items of interest this week on the news. The first was the fact global warming was much worse than expected, but I shall leave that for a later post. Also interesting was the disclosure of some files that somehow or other leaked from a Panamanian law firm, and were about prominent people who had foreign trusts, most presumably for the purposes of tax evasion. Some of the media made a great fuss about some people associated with Putin having these trusts, as if this was somehow Putin’s fault. It might be, but we have more spectacular examples. There was the Premier of Iceland who was directly involved, and had to resign, despite his asserting he had done nothing wrong. If he had really done nothing wrong, why resign? Why not simply explain his position? Then there was David Cameron, Prime Minister of Britain. His father apparently uses such a haven. Now, you cannot be blamed by association, he would say, but it is not exactly a good look.

My favourite, though, is Poroshenko, Premier of Ukraine, the man who asserts he is there to stamp out corruption. When he took office, he promised to sell his confectionary company, worth billions. So he sold it. Well done? Well, no, he sold it to a trust that one way or another ends up with there being only one owner of this company: Poroshenko. He sold it to himself, but moved it to a tax haven. Sneaky!

Of particular interest here was the revelation that New Zealand was listed as a tax haven. And in case you are thinking of moving here for the low taxes, think again. It is not a tax haven in the usual sense, but thanks to some inept politicians, it is a contributor, although in much the same way as many other countries. As an aside, what New Zealand does in this respect is very similar to what other OECD countries do, except New Zealand has a different approach to taxing them.

What New Zealand does is permit foreign trusts, and they can be owned by foreigners. The requirement is they are registered, which means they are recognized by the Inland Revenue Department, and they must have a nominated trustee. However, under New Zealand law, and this is different from the other countries, if a person or an entity does no business in New Zealand during a financial year and does not enter the country, they are permitted to file a nil return, i.e. if they are not physically in the country, and their business is done elsewhere, they pay no tax in New Zealand. That seems reasonable, but there is a catch. If the trust merely owns another trust somewhere else, and that one owns a company that is doing business in several other countries still, then as you can see, there is an impenetrable barrier to tracking the money. Our IRD states it will inform other tax authorities if they ask, but what can they ask? They have to know the answer to the ownership issue before they ask, and there is no record of any transaction to ask about.

Of further interest is the fact that lawyers and accountants here apparently make somewhere between 25 – 50 million dollars annually “monitoring” the trusts, acting as trustees, and filing nil tax returns. All of which to benefit the unworthy rich in other countries who refuse to pay their legally required share.

Of course there can be legitimate uses for such trusts. Apparently, such trusts started with the Crusades, where Crusaders left their property in trust while they were away. That was an obviously sound reason for creating the trust. Now the property is away and the rich are being trusted, and these men are anything but trustworthy.

The price of wanting more

The arrest of Martin Shkreli on charges of securities fraud has certainly attracted attention, and the internet is riddled with helpful advice, mainly directed to ensuring Shkreli has to pay a huge amount more than anyone else for the same service, especially lawyers’ fees, or bail fees. The reason lies in Shkreli having had control of Turing Pharmaceuticals, which purchased to sole rights in the US for the drug Daraprim. Daraprim is the go-to drug for treating toxoplasmosis, which, while not common, can be deadly for unborn babies and for people with compromised immune systems. He then decided to raise the price of a pill from $13.50 to $750, seemingly because he wanted more money. Don’t we all! Somewhat later, he stated that if he had the opportunity to do it again, he would have raised it higher. Now, there is compassion and contrition, Wall St style.

Naturally, this sort of person does not do something only once. Kalobios Pharmaceuticals acquired the licence for Benznidazole, the standard treatment fro a deadly parasitic disease in Central and South America, and has announced plans to increase the price from something like $200 for two months, to something more like $60,000. So far, it appears it has not done it, and with Shkreli where he is, maybe they won’t. He is also allegedly responsible for raising the price of Thiola from $1.5 per pill to $30. A deeper background can be found at http://www.bloomberg.com/features/2015-martin-shkreli-securities-fraud/

However, the current arrest has nothing to do with price gouging, but rather to do with fraud. Shkreli has a raft of companies, and he is accused of taking money from one to pay off debts of another. He is accused of backdating records, making phoney loan agreements between one of his companies and a hedge fund, and creating sham consulting agreements as a way to route cash from recent investors to earlier ones, which of course, is partly the structure of a Ponzi scheme.

Apparently in an earlier phase, he set up a hedge fund, trashed biotech stocks in online chat rooms, then shorted them, making lots of money. Meanwhile, lots of ordinary people were losing lots of money. This is, of course, the deep spirit of capitalism.

At this stage, we might wonder at the efficiency of the laws. The good news is that Daraprim may now have a generic alternative, from San Diego-based Imprimis Pharmaceuticals Inc. The drug is 60 years old, so it is clearly out of patent, and the only things stopping manufacturing generics is the question, is it worth it? Following Shkreli’s approach, most certainly, if only for the advertising.

One of the other things that impressed me about this is the antics the SEC accuses Shkreli of are very similar in nature to the antics I described in my novel Red Gold, which was about fraud during the colonization of Mars. It is always comforting to get confirmation from a good authority, and the SEC is a good authority on fraud, that the antics I described are indeed characteristic of frauds.

One unusual thing about fraud is that it takes quite a lot of thought and effort to carry it out successfully, and if the same effort were to be put into more respectable activities, the person might be hailed as a successful citizen. So the question is, why carry out fraud? At first sight, greed, but I don’t think that is enough. I think in only too many cases the desire to be seen as important, and to wield power, are also important.

This will be my last post for 2015. I live in the Southern Hemisphere, and here, Christmas is hot, and subsequent days are also hot, so working is less desirable and most people go on vacation. So, guess what I shall be doing? I shall be back about the third week of January.

Meanwhile, I hope you all have a very merry Christmas with friends and family, and I wish all the best for 2016.