Revealed: how UK banks exploit charity tax laws

GBP 234 billion of mortgages put in trusts supposedly for the benefit of good causes

by Ian Griffiths and Ian Cobain

The Guardian (December 05 2007)


Britain's high street banks have raised billions of pounds in funds through complex financial deals that use supposedly charitable trusts which are not donating a penny to good causes, the Guardian has learned.

A dozen of the country's best-known banks and financial institutions have raised funds on the back of GBP 234 billion-worth of home loans over the past seven years, using trusts which have charitable status but rarely give anything to charity.

Officials of the Charity Commission are already examining Northern Rock after the Guardian reported last week that it was using the name of a small charity for children with Down's syndrome. That inquiry now looks likely to be expanded, with the activities of up to eleven more banks coming under scrutiny, and the commission seeking to establish whether any have breached UK charity law.

The trusts were all set up during an elaborate process known as securitisation, which has increasingly replaced the traditional mortgage model in which banks made loans to home buyers and held on to the loans until they were paid off.

Over the last seven years, banks have been pooling many of their loans and turning them into mortgage-backed securities which can then be sold to large investors.

The banks have been doing this through trusts which they can control without owning, isolating financial risks, and keeping their liabilities off their balance sheets in a way that makes them appear more profitable. By giving the trusts a charitable status, they can be operated indefinitely. The trusts are not obliged to make any payments unless they are eventually wound up, and even then the amount any charity might receive would be only a small fraction of the sums raised.

Of the twelve institutions investigated by the Guardian, all admitted that their current series of "charitable" trusts had given nothing to charity. Abbey said it had donated GBP 30,000 from earlier wound-up trusts. Abbey currently raises funds on the back of home loans worth GBP 40 billion. Bradford & Bingley said it had given an unspecified amount to an unnamed charity from an earlier wound-up structure.

While most of the trusts do not name the charities which are the supposed beneficiaries of their trusts, one set up five years ago by the Halifax names the National Society for the Prevention of Cruelty to Children (NSPCC) as a beneficiary, and has since raised funds on the back of almost GBP 50 billion of home loans. The Halifax admitted that this trust had not paid a penny to the NSPCC, however, and the charity said it knew nothing about the arrangement.

Some of the trusts have names which may be regarded as an in-joke amongst some bankers. While Northern Rock's trust is known as Granite, the Abbey, with headquarters in Baker Street, London, names its trust Holmes, and the Cheltenham and Gloucester, a subsidiary of Lloyds TSB, uses the name of Arkle, a racehorse which won the Cheltenham Gold Cup three times.

There was anger and disbelief among MPs last night, with one accusing the banks of a form of identity theft. John McFall, Labour MP for West Dunbartonshire and chairman of the Commons treasury committee, said: "If the financial institution benefits, there is no reason why the charities shouldn't receive money. And if the charity's name is being used, there must be transparency, otherwise it could be seen as identity theft."

Last week it emerged that Northern Rock had raised GBP 71 billion through a Jersey- registered trust called Granite, which issued a prospectus that told potential investors: "Any profits ... will be paid for the benefit of the Down's Syndrome North East Association (UK) and for other charitable purposes".

Down's Syndrome North East, a small charity run by volunteers from a semi-detached house on the outskirts of Newcastle, was told nothing about this and did not receive any money. During the period that Northern Rock was using its name to raise billions of pounds, volunteers were raising a few hundred pounds through sponsored slimming and cycling tours, and primary school children donating similarly small sums.

When the Guardian asked Northern Rock for an explanation, the bank apologised to the charity for what it described as an "oversight" and promised that it would receive a donation in the future. The bank then told the Guardian that the charity might receive a payment - but only if its trust was wound up.

The Charity Commission is attempting to establish whether the bank breached the Charitable Institutions (Fund-Raising) Regulations, which stipulate that any such arrangement must be set out in writing.

Northern Rock not only failed to draw up a written contract, it failed to tell Down's Syndrome North East that it had set up Granite, and the trust has not paid a penny to the charity.

Although Granite is registered in Jersey, beyond the reach of UK charity law, Northern Rock may still have breached the regulations because the charity is based in Newcastle. A breach can result in a fine.

However, the Guardian has discovered that Northern Rock is far from alone. A similar trust called Permanent Financing was set up in 2002 by the Halifax, the former building society now owned by banking group HBOS. A prospectus published in February 2003 told potential investors that profits will be "paid for the benefit of The National Society for the Prevention of Cruelty to Children".

There was confusion at the NSPCC when the Guardian told the charity that for the last five years it had been the named beneficiary of a GBP 47.9 billion trust, with officials saying they could find no record of ever being informed of this by the Halifax.

A spokesman for HBOS said: "No monies are paid to any charity during the life of the securitisation programme. Monies would only be paid out when the programme is wound up. If there are residual monies of a nominal amount, then these would be paid to charity at that time." Asked whether it had told the NSPCC that it had used the charity's name when establishing its trust, HBOS made no response.

Standard Life's trust, named Lothian, says it operates "for the benefit of charities involved in the domestic and international wellbeing of children". Standard Life would not identify these charities, but acknowledged that it had not paid them any money.

Each institution approached by the Guardian admitted their current "charitable" trusts had given nothing to charity and would not do so unless they were eventually wound up. All denied any wrong-doing and insisted that they were not abusing charity law, and some defended their activities by describing them as commonplace.

The Alliance and Leicester, for example, said it was one of the last UK banks to enter the mortgage securitisation market, and protested it had merely copied its competitors. "When entering the market, we took legal advice and followed a well-established structure already in use by very many other UK banks", a spokeswoman said.

guardian.co.uk (c) Guardian News and Media Limited 2008

http://www.guardian.co.uk/money/2007/dec/05/banks.northernrock


Bill Totten http://www.ashisuto.co.jp/english/index.html