“Transocean, shifted its headquarters for tax purposes to the Cayman Islands from Houston, though a vast majority of its executives still work in Houston. [T]hen, in 2008, for tax purposes, it moved its headquarters again, this time to Switzerland from the Cayman Islands.”
http://www.nytimes.com/2010/07/08/business/global/08ocean.html?hp

Like transfer pricing, shifting corporate headquarters is part of the game of tax avoidance by multinational companies.

This practice is not new. Barnet and Muller documented it in Global Reach, nearly forty years ago. The current financial crisis is responsible for renewed interest in transfer pricing, because governments are desperately seeking to increase tax revenues. The New York Times reports that “the charity Christian Aid, which is concerned with the effect [of transfer pricing] on developing countries, estimated that governments lose $160 billion a year when companies working across borders misapply the rules” (NYT, Jan. 4, 2010). According to Bloomberg news “Transfer pricing lets companies such as Forest, Oracle Corp., Eli Lilly & Co. and Pfizer Inc., legally avoid some income taxes by converting sales in one country to profits in another — on paper only, and often in places where they have few employees or actual sales” (bloomberg.com, May 13, 2010).

Disputes over transfer pricing are symptomatic of intensifying conflict between national governments and global companies. Indeed, these disputes reflect a struggle for economic and political dominance. Just as kings gained the upper hand over landed aristocracies with the progress of industrialization in the early modern period, global firms are gaining political power at the expense of existing national governments. The reasons are similar: kings won out because wealth shifted from possessors of land to possessors of factories; multinationals will eventually win the game because wealth is shifting from static resources to dynamic resources, i.e., wealth is becoming increasingly global in scope. The shift in power will be a slow process; governments are not yet toothless tigers, and can fight back against the multinationals. But the ultimate outcome is not in doubt – a new political economy resembling the pre-modern feudal system is in the making (see Virtual Organization, chapter 8).

One of the great ironies in history is the inability of entrenched power to anticipate basic change in the conditions of economic and political life. The Bourbon kings’ proverbial failure to forget and their inability to learn led to the French Revolution in which at least one of them lost a head. The Maginot Line, erected by the French to deter German aggression after World War I, has become symbolic of the failure to anticipate altered conditions of warfare. French strategic military thinking in the 1920s was guided by the experience of the static confrontations of massed forces characteristic of the First World War, and failed utterly to take account of the innovations in mobile, lightning warfare perfected by the Germans in the period between the world wars.

Contemporary governments are making the same kinds of fatal errors in dealing with global companies. Based on past experience, governments are trying to control the activities of multinationals through fiscal and monetary policy. But these companies are more agile and innovative than governments and are able to circumvent control measures. Occasionally they are excessively clever and carry things too far as did Enron by using virtual organization to obfuscate their financial condition. Such excesses bring down the wrath of government on particular firms but do not alter the basic shift of power to global business.

Transfer pricing is a powerful element in a global company’s bag of tricks, and like sophisticated financial instruments it can be modified to overcome restrictions that governments might impose. The current furor triggered by the recent precipitous decline in government revenues will run its course and transfer pricing will continue to serve the interests of global business.

Like the character Howard Beale in the 1976 movie “Network”, Mr. Katz says in effect “I’m as mad as hell, and I’m not going to take this anymore!” Maybe his efforts will spawn a movement that goads Congress into enacting legislation that curtails the abuses of debt farming.

“The bill collectors, when they call, make you feel like the only option you have is to lay down and play dead. That’s not true,” said Mr. Katz said, who does not charge for his advice. “Nothing validates this more than getting a check.”

Call this movement revenge of the (alleged) deadbeats. Even as collectors try to recoup debts from millions of Americans struggling to pay their bills, a small but growing number of lawyers and consumers are fighting back against what they describe as harassment, unscrupulous practices — and, most important to their litigiousness, violations of the Fair Debt Collection Practices Act.

from NYTimes 4/23/2010, by Andrew Martin

If, for example, ABC Farmers, Inc. pays as much as twenty cents on the dollar, the firm will make a gross profit of 20% by collecting on two out five of the outstanding bills. The more ABC collects, the greater its profit. Expenses are quite modest since all that is needed for this debt collection business is a computer for producing and emailing statements, a phone for calling ‘customers’ and a bank account for accepting payments. Also helpful is the tenacity of a pitbull in the collecting process.

This type of ‘farming’ is reminiscent of tax farming in the Roman Empire. An ancient tax farmer made an advance payment to the state in exchange for the privilege of collecting taxes within a given territory. The more the taxes collected, the more the profit. Once the ‘contract’ was let, the state effectively washed its hands of the matter. Much the same conditions hold for debt collection today.

It is not in the interests of the modern debt collectors to try to determine how much, if anything at all, is actually owed on a particular account. A bill included in the portfolio purchased by ABC, for example, might be for a debt that was cleared through a legal bankruptcy proceeding. The interest of ABC is to try to collect regardless of the disposition of the debt. It costs little to send threatening letters, and if the alleged debtor eventually succumbs to all the badgering, ABC adds a bit more to its coffers.

Potential for abuse grows as obligations to pay are detached from the original transactions in which they were incurred. A company selling a product or service has some incentive to treat its customers fairly, if only to promote return business. The owner of an abstract debt obligation has no such incentive. Cynical practices are rewarded since people sometimes pay off balances that are not due simply to escape further harassment.

Companies sell accounts receivable for far less than the face value of the accounts because they believe the return on investment in pursuing delinquent accounts is not worth the cost. Possibly this policy helps the company’s bottom line in the short term, but it does not help to stimulate customer loyalty and has the long term social cost of reducing trust in the economic and political system.

FRIAR BARNARDINE. Thou hast committed–
BARABAS. Fornication: but that was in another country,
And besides, the wench is dead.
- from “The Jew of Malta,” Christopher Marlowe, 1589/1590

Wars and calamities breed predators. Morality is almost always a casualty of the disorder following upon conflict and social upheaval. So we should not be surprised, however disgusted, that a new breed of predator has crawled out of the current financial wreckage. Desperate people facing the loss of their homes through foreclosure are an easy target. Some of the same unscrupulous operators who peddled subprime mortgages to people who could not afford them are now selling fraudulent remedies that purport to help homeowners avoid foreclosure.

According to the U.S. Federal Trade Commission:

Fraudulent foreclosure “rescue” professionals [aim] to make a quick profit through fees or mortgage payments they collect from you, but do not pass on to the lender. Sometimes, they assume ownership of your property by deceiving you, the homeowner. Then, when it’s too late to save your home, they take the property or siphon off the equity.

The scammers extract money from distressed homeowners in several different ways: by obtaining a fee in advance for promise of service; finagling a transfer of the property title to the ‘rescue’ firm by allowing the owner to remain as renter; claiming special relationship with or pretending to be the lender and having mortgage payments sent to the scammer’s address; and (illegally) charging a fee for modifying a mortgage under the new federal relief plan.

Greed and unscrupulous behavior are certainly not new phenomena. But today there are many more opportunities and much greater scope for financial predators. The increase in opportunities is largely a consequence of the growth of intermediaries and agents in financial transactions, which in turn results from specialization of function in the financial sector. In an effort to make operations more efficient and flexible, the financial services industry has copied long standing practices in the goods producing sector. For example, mortgage lenders use a variety of brokers to bring in customers; they rely on external appraisers to assess property values; they use external credit reporting agencies and in-house specialists to determine the credit worthiness of borrowers; they outsource the record keeping for their loan portfolios; and they contract with securities specialists and underwriters to assist in creating bundles of mortgages to offer to the investing public.

Each of these specialized functions creates distance between lender and borrower and enlarges the role of intermediaries. With each new intermediary comes an opportunity for exploitation or fraud, as the financial transactions in which intermediaries play a role become increasingly obscure to individual consumers. Making matters worse is the increased scope for mischief stemming from the use of the new interactive media available on the Internet. It is much easier than ever before to reach and interact with masses of consumers. Web advertising and email have democratized information access, but at the same time have empowered crooks. The anonymity of the Web gives license to commit acts of fraud that might be more difficult in traditional social contexts where face-to-face interaction often inhibits unacceptable behavior.

Action at a distance facilitates a diminished sense of responsibility. Of course there are crooks who steal from family, friends and neighbors, but many more who steal from people at a distance whom they don’t know and are not likely to encounter. Virtual organization requires loose coupling between actors to achieve its promised flexibility and efficiency. Unfortunately this requirement has the disadvantage of distancing people from each other and thus incurring the cost of reduced trust and responsibility.

LORD POLONIUS
Neither a borrower nor a lender be;
For loan oft loses both itself and friend,
And borrowing dulls the edge of husbandry.
- from “Hamlet,” William Shakespeare, 1599/1601

Few of us have been following Lord Polonius’ advice. Credit is the lubricant of the modern economy. In the throes of a major financial collapse triggered by excessive credit formation we are being urged to spend and assume yet more debt to stimulate economic activity and job creation. If it is impossible to operate on a strict pay-as-you-go basis, the next best thing is to make sure you borrow from people or organizations you know and trust.

The relationship between borrower and lender has become so attenuated that even legal authorities have a hard time determining the identity of the lender. A lender of record on a mortgage may not be the property owner since the mortgage might have been bundled together with other such loans to form an asset base for a mortgage backed security that was sold to investors. “We don’t own the property,” [said] a spokesman [for a bank]. “We’re the owner of record, but the investors who bought the mortgage-backed securities own it” (NYT, March 8, 2009).

Borrowing from a known party, company or individual, entails a moral obligation to repay because the transaction is based on a relationship of mutual trust. Lending entails the complementary moral obligation to serve the borrower by delivering accurate accounting and record maintenance. Central to these complementary obligations is the relationship of trust between parties who are known to each other. Trust is rooted in human relationships and becomes attenuated when those relationships weaken. The perceived obligation of an individual to an organization is not generally as strong as to another individual, but certainly much stronger that it is to an unknown party. Obligation and trust evaporate completely when the unknown party is several levels of remove from the individual. This is precisely what has happened with borrowers and lenders in the housing boom that preceded the current economic crisis.

Securitization of loan portfolios – packaging loans such as mortgages and selling them to investors – is an instrument of metamanagement, designed to improve efficiency and profits by leveraging money. Such practices can drive a wedge between borrowers and lenders, attenuating the social bonds needed to motivate the parties to a financial transaction to discharge their respective obligations.