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Joint Committee on Finance, Public Expenditure and Reform, and Taoiseach díospóireacht -
Wednesday, 1 Jun 2022

Use of Section 110 by Russian Firms: Dr. Jim Stewart

At our meeting a short time ago, the minutes of the previous meetings of 18 May, 19 May and 25 May were agreed. We now move to No. 7 on our agenda, an engagement on the use of section 110 by Russian firms. I welcome Dr. Jim Stewart to the meeting. The format is that Dr. Stewart will give an opening statement and then the members will ask some questions on it. I ask members and witnesses to observe the note on privilege. I remind them of the long-standing parliamentary practice that they should not criticise or make charges against any person or entity by name or in such a way as to make him, her or it identifiable.

Dr. Jim Stewart

I thank the committee for inviting me. I am an adjunct professor in finance in the school of business, Trinity College. Previous to this, I was an associate professor in finance there. My interest in this topic stems from research interests in the area of corporate tax, shadow banking and regulation of financial firms.

Revenue defines a section 110 firm as “an Irish resident special purpose vehicle that holds and/or manages 'qualifying assets'". Firms that have section 110 tax status are self-declared, that is to say a firm informs Revenue that it qualifies as a section 110 firm.

There are very valuable tax benefits to being a section 110 firm. Interest paid abroad is tax-free while interest paid in Ireland is tax-deductible. This is because interest payments may vary and become a distribution of profits and are treated as a dividend when paid abroad. They are referred to as a form of hybrid finance. Due to this tax treatment, section 110 firms were a very attractive form of finance for Russian-based firms. Capital could be raised at interest rates that were relatively low given the risks of providing finance to Russian-based firms. There was relatively little regulation, apart from a requirement to comply with the Companies Acts, and there were no restrictions on the use of funds raised. Corporate profits, net of interest, are low or zero, hence corporate tax payments are also low or zero. This is often described as "tax neutrality".

To keep within the time limit, I will skip to the section of my statement on the funds raised. Total funds raised by Russian-connected section 110 firms amounted to €118 billion for the period from 2005 to 2017. A further €17 billion was raised on the Dublin Euronext market in the period from 2018 to 2021.

I will move on to the assets of Russian firms in Ireland. Table 2 in my written submission shows a very partial inventory of Russian-connected assets located in Ireland. A full inventory would be very useful because the number of Russian firms and individuals subject to sanctions, including the freezing of assets, is likely to be extended. In addition, assets may be not just frozen, but confiscated. The European Commission has published a draft directive on criminalising the evasion of restrictive measures and has also published a draft directive on asset recovery and confiscation from criminal activities.

Table 2 shows that Russian-connected section 110 firms comprise the largest component of Russian-owned assets in Ireland. The next largest component is made up of Russian aircraft leasing firms. The value of these assets in 2020 is likely to be far larger than the €5.4 billion shown in table 2 as 15 of the 20 firms identified, although active, have not filed accounts. All of these firms are subject to tax at 12.5%, unlike section 110 firms, and account for around 85% of aircraft leased assets in Ireland. Even though they are similar to section 110 firms, the Central Bank collects no records or data on these firms.

I will now address the issue of holding companies. The use of holding companies in Ireland by Russian-connected companies has changed over time. A former US expert on organized crime in the former Soviet Union gave evidence to the US House Committee on Financial Services that identified Ireland as a major location for wealth leaving Russia in the post-Soviet period. A search of Companies Registration Office records for directors of companies with a Russian address, for example, an address in Moscow, shows several hundred companies incorporated in Ireland in the period from 1992 to 1996. Most of these firms were dissolved without filing accounts. One estimate is that 50% of the total financial wealth of Russia is held offshore. This wealth is most likely held by incorporated entities and holding companies. A report published by Chatham House states that incorporated entities and trusts are also used to layer ownership through chains of ownership in financial centres such as Ireland, the Netherlands, Malta and Cyprus. The purpose, of course, is to hide the source and ownership of assets.

I will skip to my comments on establishing ownership and sanctions. In order to impose sanctions, Governments rely on professional firms such as corporate service providers, CSPs, to correctly identify the ultimate ownership of a company. A CSP may, for example, believe that the ultimate owner is located in the Cayman Islands, whereas in fact the Cayman Islands firm is a subsidiary of the ultimate owner, resident in the State of Belize. Even if the ultimate owner was correctly identified at the date of incorporation, ownership may subsequently change at any point along the chain. Similar issues arise in respect of money laundering. Reliance on a "know your client", KYC, process can lead to difficulties in identifying the owner of cash.

I will skip to my final remarks, which are on the future of section 110 firms. Post the Ukraine war, the use of section 110 firms may decline due to increased regulation at an EU level and restrictions on the global movement of financial flows. Section 110 firms may be regarded as tax neutral in Ireland but they can result in large tax losses in countries which receive interest payments. For this reason, the use of hybrid finance has resulted in a number of EU anti-tax avoidance measures, for example, interest limitation rules. The proposed EU directive on shell companies is also likely to impose restrictions on firms that have no fixed assets or employees.

I call on Senator Higgins.

I am having a little bit of a technical issue with my computer. Perhaps Deputy Mairéad Farrell would like to go first. I will be ready in two minutes.

Gabhaim míle buíochas leis an Dr. Stewart as teacht os comhair an choiste seo. I thank Dr. Stewart for coming before the committee. I know this is something he has been focused on for quite some time. It really came into the spotlight in the wake of the Russian invasion of Ukraine. There was then a lot of talk of financial and economic sanctions and, as a result, the spotlight was turned on the role of the International Financial Services Centre, IFSC, as one of the main finance hubs for Russian State-owned and oligarch-controlled companies. It is thanks to Dr. Stewart's work that we are fully aware of this situation so I really thank him for coming before the committee. The collapse of the Soviet Union resulted in a lot of capital flight and offshore financial centres such as the IFSC were absolutely key to this. Some estimates suggest that approximately 50% of Russian wealth is held offshore.

I have a number of questions. In 2018, The Sunday Business Post carried a story on its front page that cited Dr. Stewart's research. It noted how Russian-connected companies funnelled billions through the IFSC. Following this, the former deputy governor of the Central Bank, Stefan Gerlach, said Irish politicians were "mindlessly in favour" of the growth of the IFSC. He went on to say that they did not recognise the risks involved in the facilitation of massive influxes of cash to companies such as Russian banks and oil giants.

He also said they were much too positive about the benefits of the IFSC, such as employment for lawyers and accountants. Does Dr. Stewart share this view and, if so, is that mentality out of step with the efforts currently being undertaken at European level like the forthcoming EU shell company directive?

Dr. Jim Stewart

It is difficult to know what the issues are with section 110 companies and indeed other aspects of the operation of the IFSC. There is certainly a case that there is relatively light-touch regulation. That is a problem not just for the IFSC but also other countries as well, unfortunately. It is difficult to trade off various points that employment will be affected and certainly the IFSC employs people but there are also certain activities that are not very productive for Ireland or indeed for the EU generally. You can certainly say there could be much greater regulation but there are issues with regulation because Ireland is a small country and the IFSC is very large. It would cost a huge amount of money and you would need considerable legal resources to properly regulate all the activities in the IFSC.

I thank Dr. Stewart. His research was widely covered in the media four years ago and a former deputy governor spoke about the significant risks he had identified and went on to say the Central Bank needs to be appropriately staffed and have teeth to monitor such opaque activities. One thing that has come out of all the decisions we have had so far is the opaque nature of this. On the back of that, is Dr. Stewart aware of any regulatory action taken by the Central Bank in the wake of this to tighten up the regulation of these firms, when this issue was highlighted four years ago? What is his view on whether the Central Bank is sufficiently staffed, has appropriate sanctioning powers and in some ways has the resolve to tackle this kind of activity?

Dr. Jim Stewart

As I think the Governor has said before this committee, the Central Bank is not responsible for regulating section 110 firms. One might say it should be made responsible but currently it is not. There is a kind of gap here because who is actually responsible for regulating section 110 firms? It seems to fall between a number of different stools. Again, the problem really relates to the huge size and range of activities being performed in the IFSC. It would take a huge amount of resources to properly regulate all these activities, so that is an issue. Maybe the issue would be more appropriately tackled at an EU level if the ECB or some other agency became responsible for regulating financial firms. The EU is moving in this sort of direction.

I thank Dr. Stewart. The IFSC appears to have a long-standing relationship with the Russian economy. I am aware Dr. Stewart's research detailed the period of 2005-17 but in the 1990s the use of Irish-registered non-resident companies by those from Russia attracted much adverse comment in the international media and even in Dáil debates. Here the IFSC seems to focus as a conduit for purposes like capital flight, money laundering and other illicit flows. That is money that was leaving Russia and entering the West. The use of section 110 over the last two decades shows the relationship seems to have maintained but now the flow seems to move in the opposite direction, that is, from the West back into Russia. What does Dr. Stewart think explains the pattern of this flow of funds and is there any possible relationship to the Russian Government's policy?

Dr. Jim Stewart

It is important to understand Ireland is only one of the centres dealing with Russian assets abroad. As they are so large, the use and control of these assets is spread over a number of different financial centres. One aspect of the section 110 financing of Russian firms is there is a case to be made this is really recycled money. Huge amounts of wealth have left Russia in recent years through Estonia, Latvia and other countries. Some of the funds, though not all of it by any means, has flowed back to Russia to help with the financing of Russian firms. That is kind of new and section 110 tax status has given particular advantages to Russian firms in the sense of lowering the cost of capital, lowering the risk of investing in Russia and hence making it easier for firms like the Russian railways company to raise large amounts of money using section 110 status.

I thank Dr. Stewart. It is quite interesting to note the IMF in a 2019 paper found 60% of all FDI into Russia is made by empty brass-plate holding companies, which are the type of companies Dr. Stewart's own study examined. Do we have any idea what proportion of that 60% would be comprised of investment from the IFSC? As a broader point, and one very relevant to us, do FDI statistics need to be interpreted with greater calculation than they are usually treated in the media, for instance?

Dr. Jim Stewart

It can be difficult to interpret FDI flows because of this issue of firms flowing back to the country of origin of the funds in the first place. It is very difficult to work out exactly what the flows of funds are. They are very large indeed. They are coming from different directions and may be channelled in different ways. These are difficult questions to answer.

Obviously they are difficult questions to answer and it is good in a sense the spotlight has been put on this whole issue now. This is something that has gone into all sorts of media and there has been more of a focus on it.

I ask about the lack of transparency around the ownership of certain types of company structures operating in the IFSC. This State introduced its register of beneficial ownership as part of the EU's fifth anti-money laundering directive. However, as has been noted by Transparency International it permits the use of legal trustees to list themselves as beneficial owners when we know they are not the beneficiary but rather acting on behalf of them. It also only requires those with a shareholding of over 25% to record their ownership. In a company with four owners with an equal shareholding of 25%, none of them would be recorded as beneficial owners. This being the case does Dr. Stewart believe this State's register of beneficial ownership is fit for purpose? Do we need to lower the ownership thresholds? Should we allow trustees to be recorded as beneficial owners? We know some of these Russian-connected companies did not merely use trust ownership structures. Some even used charitable trust ownership structures and from what we can see these companies are not exactly the Red Cross, so does he think that is appropriate?

Dr. Jim Stewart

Hiding the beneficial owner applies not just to the IFSC but to lots of other regimes as well. Treating a 25% shareholding as a beneficial owner can easily be circumvented by splitting this into 10%, 12% or whatever. I noticed that for some section 110 accounts I have examined, while they state they are owned by a charitable trust, they also state they are controlled as part of a group structure of another firm and they appear in the consolidated accounts. This seems to be a recognition of the fact these supposedly independent section 110 firms are in fact part of a group structure and they are fairly tightly controlled. That is the reality and the idea they are owned by a charitable trust is a bit of a smokescreen.

Yes, it appears that way. I understand what Dr. Stewart means about this not just being an issue for the IFSC but as the finance committee of the Oireachtas that is where our focus needs to be. It is about what we can do to make things as transparent as possible.

Dr. Stewart has highlighted the role of corporate service providers in providing the know-your-client function but presumably this can be quite difficult given the complex ownership chains of companies we see nowadays, which can span multiple jurisdictions. Economists like Thomas Piketty propose establishing a Europe-wide asset registry because of the gaps and weaknesses in the registries of beneficial owners of EU member states.

What is Dr. Stewart's view on that?

Dr. Jim Stewart

The proposal by Thomas Piketty and others that there should be a European register is a good one. The problem is that it may be very difficult to implement. Different countries have different regulatory and disclosure requirements for companies. There might be all sorts of difficulties in making those comparable. There is still the issue of who is the beneficial owner. If somebody is rich enough and has enough resources to disguise the beneficial owner, he or she can do so. We saw that in recent media reports of the attempts to seize the yachts of various oligarchs. Those are very visible assets and yet there have been difficulties with seizing them and establishing ownership. The ownership of those yachts can change overnight. It is a tricky issue and involves a considerable pooling of information at a European level. That requires a lot of money. It must be resourced and investigated properly.

There were revelations in the Panama Papers, the Paradise Papers, the Luxembourg leaks and the Cum-Ex trading scandal, as there were in Dr. Stewart's own research. There appear to be well-paid professional networks acting, in some senses, as enablers. While fines can sometimes be imposed, we rarely see any kind of criminal sanction. Do we need harsher penalties for those who are willing to act as enablers within this kind of system?

Dr. Jim Stewart

It would be difficult to impose fines on enablers as long as they are acting within the law. That is a major issue that requires changes in the law and regulation of those changes rather than an attempt to fine enablers. The job of the professional firms that are performing services for oligarchs and others is to perform those services for their clients. What the client does with those services or how it behaves in other jurisdictions cannot be a part of the legal remit or requirement of those professional firms. They have a moral duty as opposed to a legal duty to ensure they are behaving in an ethical way.

I noted in Dr. Stewart's opening statement a reference to the fact that section 110 firms may be regarded as tax neutral but can result in large tax losses in countries which receive interest payments. I am aware that one of the issues the domestic tax base erosion and profit shifting, BEPS, process of the OECD was intended to tackle was the risk of double non-taxation. Would it be fair to say that the use of section 110 gives rise to risks of double non-taxation?

Dr. Jim Stewart

That is certainly the case, as it is with regard to all hybrid instruments. That is why the European Union in response to the BEPS initiative has imposed restrictions on the use of hybrid instruments. It has, for example, limited interest payments that may be made by hybrid instruments. They can involve double non-taxation and for that reason, I think their use will tend to be phased out. In addition, EU commitments and attempts to reduce the use of shell companies may also affect section 110 companies. It defines a shell company as a company with no employees and no fixed assets. Both those forces may reduce the number of hybrid instruments and their use in financing companies.

I thank Dr. Stewart for joining us. A number of the issues I was going to raise have been raised by Deputy Farrell but I will follow up on a few points. I am interested in the issue of double non-taxation. Perhaps Dr. Stewart could comment further on that point in the context of the conversation around the effective tax rate. There is a push on the idea of an international effective tax rate. It was out of step with proper processes in the past but perhaps Dr. Stewart could comment further in the current context where there is meant to be that push towards a global effective tax rate.

Are section 110 vehicles onshore entities? They are marketed as such but seem to meet the criteria the IMF has set out for offshore financial centres. The IMF describes those as countries or jurisdictions providing financial services to non-residents on a scale that is incommensurate with the size and financing of the domestic economy. That is important because, as was touched on, there is a danger of their distorting the measurement of our financial economy. Should section 110 vehicles be recognised as offshore in that context? If they are being treated as onshore but do not touch the real domestic economy in any meaningful way, that will throw off our foreign direct investment, FDI, figures. Perhaps Dr. Stewart would comment on that onshore or offshore piece.

I am also interested in the beneficial ownership piece. The following is related to but does not touch directly on section 110. Investment limited partnership legislation went through approximately a year and a half ago. What was particularly notable was that it seemed for that particular form of company the legislation increased the powers of non-beneficial ownership while diminishing liabilities. One was not considered to be a beneficial owner unless one hit the 25% threshold, yet one was allowed to sit on the board, make decisions and engineer hiring, which one would not have been allowed to do in the past. How is control measured? We only have the blunt measures around the 25% ownership and the control of 25% of voting when there are other mechanisms for control such as, for example, seats on boards. I would love for Dr. Stewart to elaborate further on the case he mentioned because this issue extends beyond the question of Russian assets. There are also questions around parent companies and group companies, and the control a group may exercise on a charitable trust that comes under that group even though the trust is registered as a charity. Are we monitoring control effectively and in the right ways? Do the beneficial ownership rules, the 25% rules and even the 25% voting rights rules evade the proper monitoring of control?

How section 110 companies lend their money seems to be one of the main mechanisms over which there is little monitoring. There seems to be little monitoring of what section 110 companies do with their money in respect of things such as loans. This is not my normal area to expertise but we know that in the past a sanctioned company was able to receive loans through a section 110 structure. Will Dr. Stewart comment in respect of loans from a section 110 company to another entity?

Dr. Stewart touched in his opening statement on the aircraft leasing sector. That is an interesting sector which requires much more scrutiny. I am a member of the Joint Committee on Environment, Climate and Communications and, in an area that is slightly related, I am aware that one of the major beneficiaries of financial subsidy from the State is jet kerosene. Some €600 million goes to jet kerosene tax relief every year. That is an enormous subsidy for fossil fuels and public moneys are forgone in tax in that sector.

Given that the Joint Committee on Environment and Climate Action is considering this matter, I am very interested in the scrutiny of aircraft leasing structures and those company structures. Dr. Stewart touched on the issue briefly and I would appreciate hearing more. He will be able to take the more useful questions from my questions.

Dr. Jim Stewart

I thank the Senator for asking very interesting but rather challenging questions. She is right that the issue of beneficial ownership is very difficult, particularly the supposed ownership by a charitable trust or a trust. This is a legal fiction because the firm is tightly controlled. It might be tightly controlled by the trust deeds. It can be described as an orphan structure as it has no parent or subsidiaries that try to restrict it in what it may do. Nevertheless, I have noticed that lots of the section 110 aircraft leasing firms have a financial deficit. For 2020, out of the 171 firms examined, 23% had a financial deficit of 10% or more. How do they continue to operate if they are effectively insolvent? It is understood that the control company will step in to provide funds to the firm. The problem is that there is a legal fiction that such firms are independent. They are actually part of a group and the group advises a way of efficiently financing the firms in an equitable and cheap way.

There is an issue about raising funds and then the purpose for which they are used. That is a serious issue, particularly for the Russian-financed firms, where funds were raised and used for military expenditure by certain banks in the IFSC. We do not know how much, but we know it was a certain amount. Again, that is a problem with the use of funds by section 110 companies. How can one police what happens to the funds? Are the funds used in a way that is compatible with Irish laws and international laws?

There are huge issues with the financing of these firms and how they are structured. The structure of firms' assets is constantly changing. Finance constantly evolves in terms of tax incentives and market conditions. One must be constantly vigilant as to how these firms raise funds and how they are being used. It is a problem that there are too many tax incentives - in section 110 about aircraft leasing and in other areas. It is difficult to justify these tax incentives given the costs of the tax reliefs not so much to Ireland - they might be tax neutral in Ireland - but to other countries, which they cost a lot in terms of tax reliefs and a lack of taxable income.

On the tracking of parent companies, Dr. Stewart mentioned group structures and the control mechanism. Are there examples of how we can strengthen them? The liabilities seem to have disappeared into one company but the control is exercised elsewhere, so the liabilities and the control are quite separated. Is it a matter of dismantling this form of section 110 company and having greater tracking of parent companies or group structures? Dr. Stewart has mentioned companies that are technically insolvent where money just moves in and out of them. What mechanism can we, as a committee, press for? Besides calling for greater scrutiny in these areas, are there examples of countries or processes that are better in terms of tracking control between group structures other than through the blunt instruments of beneficial ownership and voting weight?

Dr. Jim Stewart

It is hard to know. In my opinion it would be a good idea if the section 110 tax deal was removed. Certainly, Russian section 110 firms are not going to raise finance anymore.

Dr. Jim Stewart

As much as 85% of aircrafts that are leased in Ireland do not use section 110 tax status because they are 12.5% companies and they have all got very valuable tax incentives as 12.5% companies.

I have noticed, and I do not understand why this happens, that many aircraft leasing firms are owned through Bermuda or the Cayman Islands. Many branch companies that are aircraft leasing firms, which I have come across in Ireland, are branches of a parent company that is located in Bermuda or the Cayman Islands. Why do they locate there? That is not obvious. They are part of a group structure but what is the advantage? I can only surmise that it is because of a lack of transparency and tax reasons.

I think that there could be moves made to ensure that the parent of the subsidiaries in Ireland are not owned by a particular tax jurisdiction but that is very difficult to do. For example, the OECD has grappled with this issue and has failed to come up with a reasonable definition of a tax jurisdiction so Bermuda, the Cayman Islands and other jurisdictions are not regarded as tax havens. It is difficult to tackle these issues. One needs more of an EU-wide regulatory system to examine these issues, and let us remember that we must compete with Luxembourg and other financial centres. It is often the case that a tax change in Ireland is justified by the argument that it happens in Luxembourg or it helps us to compete with other tax centres such as Malta and Cyprus. We need more EU-wide initiatives to control this activity and examine the benefits that can be generated by these activities.

I apologise to Dr. Stewart for asking him for a way to solve everything. I have asked about the onshore and offshore aspect.

Dr. Jim Stewart

Yes.

These companies are marketed as onshore but seem to fit the IMF's definition of offshoring - they are non-resident and separated, to a large degree, from the domestic economy and its activities. I ask Dr. Stewart to comment on this matter.

To follow up on the charitable trust piece, in another area of work we look a lot at the regulation of charities. Actual charities are subject to quite onerous and rigorous regulation. Do we need to rigorously re-examine what constitutes a charitable trust? How does the term "charitable trust" relate to registered charities and their activities in Ireland or elsewhere? What type of relationship should a parent group have with a charitable trust within its group in terms of how the assets of a charitable trust may be used by a group structure and how liabilities are dealt with? Is that a specific area? I am speaking about the definition of a "charitable trust" and the relationship between a parent company and a charitable trust in the context of the examples of tighter regulation in other countries.

With the charitable trust piece, I am not simply thinking in terms of the Russian assets and those structures because charitable trusts are used quite a lot in Ireland, and very often as part of large groups of companies, and this is done in a way that is questionable. I ask Dr. Stewart to outline where there are better examples of tighter regulation.

Dr. Jim Stewart

I am not quite sure why companies should make a major distinction between onshore and offshore. From the point of view of marketing and selling various financial products, it might be easier to sell them if they are marketed as being onshore but, in fact, for tax and other reasons they are effectively offshore.

Most of the activities in the IFSC are offshore. They have nothing to do with the Irish domestic economy and for that reason they are not subject to regulation or there is minimal regulation by the Central Bank. The distinction between offshore and onshore with regard to IFSC activities is minimal. I do not understand why one would wish to make a distinction.

With regard to charitable trusts, it is quite obvious that section 110 companies are not charities in the way the Society of St. Vincent de Paul or other charities are. Corporate law has evolved to allow companies to be termed charitable trusts and to be taxed and regulated as charitable trusts when they are not, in fact, charitable trusts. The Charities Regulator certainly does not look at section 110 firms, yet they have the legal status of being a charity. I suspect the reason for that is to try to protect the assets. If it is a charitable trust and if other parts of the firm go into liquidation, the trust keeps its assets intact. They cannot be touched by other creditors. The problem is that if the assets of the charitable trust fall below the debt that has been raised to fund those assets, then it becomes effectively insolvent. For example, a number of the aircraft leasing firms may become insolvent or suffer large losses because of the Russian action in respect of aircraft leasing firms from Ireland to Russia. It is a thing that puzzles me. How is it that charitable trusts have become such a key component of corporate finance and how have they become integrated into company law and used alongside companies that are subject to the Companies Acts?

There was a military manufacturer in the UK a few years ago that had a section 110 company in Ireland, if I recall correctly, that was registered as a charitable trust but it was very much a subsidiary of the military manufacturer. I recall that case.

I thank Dr. Stewart. Those are very interesting areas to follow up.

I welcome Dr. Stewart to the committee once again. A number of questions that I am interested in have already been asked. I have a question about the issue of tax residency. We know the challenges in defining tax residency, where they arose in the Apple case and the so-called stateless income tax strategy that was in operation at that time. Some argue that the tests of tax residency in Ireland, namely, the central management and the control test and the incorporation test, are quite complex. What are Dr. Stewart's thoughts on the need to reform this area or is there a need for reform in this area? Are there any jurisdictions we should look at as examples of best practice?

Dr. Jim Stewart

Can the members hear me okay?

Yes, go ahead..

Dr. Jim Stewart

To answer the question, the OECD did not go near the question of where one is located for tax purposes. It has run with the idea that one is located for tax residency purposes where one is managed and controlled. The problem with that is: what is the definition of being managed and controlled? This is in contrast to the national statistical agency which defines one's location as the country of residence, where one is incorporated. That is why there is such a large gap between US estimates of profits of US firms in Ireland and the Revenue Commissioners' estimates. The US would say that if one's profits are made in Bermuda and the company is owned in Ireland, the profits are attributable to Ireland, whereas the Revenue Commissioners would say the profits are attributable to Bermuda. That is a huge problem in how one defines tax residency. The OECD decided to go with where it is managed and controlled.

The problem is that in an era in which meetings can take place by telephone, where are the directors meeting? They may all be living in California, Ireland or in other countries and the meeting supposedly takes place in Bermuda via telephone, so this has become a type of legal fiction or a moveable feast. We decide where we are located and we can bolster this by where meetings of directors take place. I do not have the solution to this. It is an area of corporate tax planning that is very widely used. It featured in the Apple case, as we saw, and will feature in other cases as well.

Would I be right to assume that the only or best way to deal with this is through an OECD process and that there has to be a common approach to this at global level? What is Dr. Stewart's view of a regime such as section 110 which facilitates a type of tax neutrality? Is that in step with the OECD's BEPS process for dealing with corporation tax, minimum effective rates and addressing base erosion? Does he believe that the section 110 structure is out of step with the reforms we are seeing internationally?

Dr. Jim Stewart

There are problems with the OECD reforms. Some of the reforms are very good and I thoroughly support them. Some of them are not so good. One of the problems is that the OECD reforms require consensus. They cannot be implemented unless all countries agree. This is why the OECD's most recent reforms relating to a minimum tax rate have run into difficulties. However, there is a possibility that the European Commission, through its directive implementing the OECD proposals, could implement what the OECD has not done. This would require unanimity at the Council. The Deputy knows the names of the countries that would object if this directive was voted on at the Council. It would involve various changes.

Regarding the OECD initiative, section 110 firms are certainly at variance with this. The hybrid initiative, the directive the EU has introduced, is basically a transposition of what the OECD recommended. The hybrid directive is attempting to ensure there is no double non-taxation, and this is effectively what section 110 allows. I notice there are concessions given to aircraft leasing, but the hybrid directive, if implemented, will certainly reduce the advantages of using section 110 finance.

I thank Dr. Stewart. I refer to the financial crisis and the steps that were taken in the aftermath of the financial crisis of 2008. The Financial Crisis Inquiry Commission was set up in the US in the wake of that crisis. That inquiry commission identified shadow banking as a significant contributory factor to the crisis. Returning to today, a fortnight ago the Financial Times carried a story about how shadow banks are threatening the global economy. The article went on to discuss how many companies rely on expensive junk-rated debt just to survive and how the coming interest rate increases could put them in real jeopardy. The IFSC holds a lot of junk-rated debt. Are there concerns here? Are there issues or red flags about which we should be worried? Are there risks that we could see a repeat of something similar to the last crisis? While no crisis would be identical, are there concerns here about that?

Dr. Jim Stewart

Yes, there are concerns with shadow banking. There is no doubt that shadow banking is a huge area of risk to the global economy. It is not so much to the Irish economy because most of the shadow banking activities relate to other countries. It may well be the case, as in the financial sector, that what happens in Ireland has more effect in other countries than within Ireland. The growth of shadow banking and its unregulated nature lead to risks. Shadow banking is a huge area and there is no doubt that some parts of shadow banking are very high risk, while others are of less risk.

The problem is if there is a chain of lending, failure in one area can lead to failures in other areas as happened in the case of Lehman Brothers and other cases. An era of rising interest rates and credit shortages could pose risks to shadow banking and the sorts of funds that are being raised by shadow banking and provided to other sectors.

Regarding the size of the shadow banking sector in Ireland, in his opening statement Dr. Stewart identified assets in excess of €1 trillion, which is enormous. The banking assets held by section 110 companies are staggering. Given the problem of that, there is very little research into how our shadow banking sector is operating. The Committee on Budgetary Oversight wanted to examine some of the tax expenditures and was told it was not possible to examine section 110 which is concerning in this day and age.

My colleague, Deputy Mairéad Farrell, has been championing this section 110 issue since she was elected. She has raised this a few times with the Taoiseach. When she raised the issue of section 110 being used by Russian companies with the Taoiseach recently, he said he had no problem with a cost-benefit analysis of section 110 being undertaken. Does Dr. Stewart believe it would be timely to undertake such an analysis of section 110 companies?

Dr. Jim Stewart

A cost-benefit analysis of section 110 or of any other areas is dependent on the assumptions made, including issues such as employment. If firms locate in the IFSC because of an array of products that are used here including section 110 financing, for example, will it affect their decision to locate here? Given that they employ very few people and that there are many other ways of financing a firm, maybe some activities would move to other financial sectors but I do not see any inherent problem if section 110 companies close down. We need to remember that most of the employment provided through section 110 firms must be indirect. It is law firms, corporate services agencies and accounting firms providing services to these companies. I do not believe any single law firm or accounting firm is dependent solely on auditing section 110 accounts. It must be a fraction of such firms' income. Some corporate services firms may be more dependent but the vast majority are dealing with companies other than section 110 companies.

The number of companies in Ireland which have no assets or employees, shell companies, is vastly larger than section 110 firms. The Central Bank defines shadow banking as being equivalent to section 110. This is not true. Special purpose vehicles exist for all sorts of different reasons, such as holding assets, patents etc. They may be used for various financing purposes. It is likely that there are many thousands of shell companies in Ireland given that definition of no fixed assets and no employees. However, they may be doing useful commercial tasks, particularly holding assets or patents, or buying and selling property. These sorts of activities tend to shade into the shadow banking sector. To equate shadow banking with section 110 is rather misleading. The shadow banking sector is much larger than that and is quite pervasive in many different areas of the economy.

As Dr. Stewart said, these section 110 special purpose vehicles do not employ anyone. There is no contribution to income tax, PRSI or USC, nor do they pay any corporation tax because their interest payments can be used to write down taxable profits. They do not pay any dividend withholding tax, capital gains tax or stamp duty. In an Irish context, the real beneficiaries are the professional service firms, whose fees are also tax deductible. Is there an argument that section 110 firms really function as taxpayer subsidies to a select group of professional services firms operating in the IFSC?

Dr. Jim Stewart

There are financial benefits to firms that have used section 110. They have lower costs. For example, the Russian firms that have used section 110 have paid a lower rate of interest on their debt given their relative risk because they use section 110. It was not just the advisers who made a lot of money on this. The Russian firms themselves were able to raise finance that otherwise would probably not have been available.

It is quite likely that section 110 clients only represent a minority of the income of any law firm or accounting firm involved. While they have benefited, I do not think they benefit exclusively.

I thank Dr. Stewart for the work he did in preparing his paper and appearing before the committee this afternoon. Section 110, introduced I believe back in 1991, was originally to promote securitisation for the financial sector operating in the State. It was designed as a tax-neutral regime for securitisation transactions. Before looking at the Russian firms' use of section 110, I have a question about the orphan ownership structure that exists. Are there valid commercial reasons for this State to have on its Statute Book as scheme such as this, which permits orphan ownership?

Dr. Jim Stewart

Orphan ownership is also used in other countries. It is very common in the Netherlands, for example, to have these structures where there is no parent and no subsidiaries. The commercial advantage to orphan ownership is that it places a tighter control over the use of assets. There can be no subsidiaries. The parent company can have no claim over the assets and the creditors of the parent company can have no claim over the assets. It is less risky to a lender. Lawyers, accountants and all their advisers set up these companies because they are lower risk for the lender.

When Dr. Stewart says they are lower risk, does he mean that they create a bankruptcy-remote structure and because of that there is less risk involved?

Dr. Jim Stewart

Exactly. If a firm had raised finance and was part of a group structure and if the group gets into difficulty, then the creditors could attack the assets of the firm raising the finance. However, if it is separate, if it is bankruptcy remote, it cannot be attacked in that way. They are not remote from bankruptcy in the sense that if their assets fall in value, the debt owners are subject to liability. A write-down in assets is associated with a write-down of debt. In that sense they are not bankruptcy remote, but in some sectors they are. If an aircraft falls out of the sky, for example, who is liable? Is it the insurance company that is asked to cough up? Who actually pays for this? In the case of leased assets seized by Russia, the leasing industry is trying to claim the insurance companies are responsible for this, whereas the insurance industry might suggest that the firm leasing the assets is responsible. Ultimately it is writers of debt who will bear the loss.

Is Dr. Stewart aware of circumstances where, for instance, the European Central Bank might require orphaning for the purpose of some of its regulatory schemes?

Dr. Jim Stewart

I am afraid I do not know the answer to that.

I only mentioned that because the Revenue Commissioners issued a manual which, curiously, identifies valid commercial reasons for using an orphan structure. One of the points mentioned was that certain parties such as the European Central Bank may also require orphaning but Dr. Stewart is not aware of that.

Dr. Jim Stewart

I could imagine that if the ECB thought that orphaning would protect the assets of the structure raising debt, it might go for that. It might say that this is a risk-free vehicle. My point is that if the assets the structure owns fall in value, the providers of the debt are exposed. You cannot protect them from all exposures.

Obviously, section 110 only applies to Irish resident firms. For that purpose, does Revenue look to see that there is a bona fide migration of a securitisation to Ireland and does it have to be for genuine commercial reasons?

Dr. Jim Stewart

That is one of the problems in that if you are a section 110 firm because you apply to Revenue, you self select. You say "we are a section 110 firm" and Revenue tells you have that status. I have not read of any case where Revenue has said to a section 110 firm "sorry you do not meet these criteria and you are no longer a section 110 firm". Having said that, I notice that there some section 110 firms that have migrated to being 25% companies. They no longer state that they are section 110 firms. This might be because they no longer meet the requirements of Revenue. I am not quite sure about it. The number of such companies is very small. I think I have come across about a handful of firms in hundreds of cases I have examined.

Is Dr. Stewart aware of any public decisions or findings by Revenue indicating that certain section 110 firms have not met the criteria and as a result, have been disqualified?

Dr. Jim Stewart

I am not aware of any. A reply to a 2019 parliamentary question stated that there was one audit of a section 110 firm by Revenue in 2017 and 2018. There was no question of firms being disqualified or penalised in any way.

I will move on to the assets of Russian firms and whether or not any of those assets come within the section 100 structure. Are we aware of whether or not any assets of sanctioned Russian individuals have been frozen in Ireland because those assets exist within the section 110 structure?

Dr. Jim Stewart

I am aware that there have been some statements about the amount of assets seized but I do not think that was broken down into the kind of firm from which those assets were seized. Looking at the Russian section 110 accounts, I notice that a minority of them have banking facilities within Ireland. Very few of them have cash on their balance sheet. I am not sure whether you can step in to seize flows of funds, dividends or interest being paid. I do not know the answer to the Deputy's question. As far as I am aware, the information is not in the public domain.

If they do not have bank accounts or cash on their balance, in effect, it is very difficult to sanction or freeze anything consequently.

Dr. Jim Stewart

It is very difficult. One of the issues with trying to sanction a Russian firm is that you have to identify the firm. What is a Russian firm? There is no inventory or list of Russian investment in Ireland. I suspect it is rather large but there is no definitive list.

There would be no shareholding because they are being held on trust. That is the orphan ownership. Is that not correct?

Dr. Jim Stewart

That is correct but even if you take a firm that is not set up as an orphan trust, the beneficial owner might be based in Bermuda or wherever. The beneficial owner could be a holding company that is just at 12%. There are a number of these holding companies that have far less than 25% shareholding. Together they control the company but you would have to go through registries in many different jurisdictions, including tax havens, to find out who is the actual owner of the firm. It can be very difficult and complicated.

I assume that this is an issue that would affect other jurisdictions and non-section 110 firms because very many assets can be held by Russians through beneficial ownership.

Dr. Jim Stewart

For sure. It affects the UK in particular. The UK has difficulty in identifying assets of Russians. It has identified property and it can identify yachts but other assets are difficult to identify. This is supposed to be true of lots of other countries.

Even if we manage to freeze sanctioned Russian assets, Dr. Stewart made a very interesting point in his paper about confiscation. Obviously confiscation is distinct from freezing. I noticed he referred to a draft directive of the European Commission. Are there rules in place dealing with the confiscation of frozen assets or is it simply that they are frozen and nothing further happens?

Dr. Jim Stewart

As far as I am aware, assets that are frozen cannot be confiscated. Confiscating assets is very different from freezing them. Regarding an asset that is frozen, you might put pressure on to sell it as is the case with a football club such as Chelsea but it is a very different legal process. The Commission has proposed that breaking sanctions becomes a criminal activity. Assets that come from criminal activities can be confiscated. A breach of the criminal law means that the assets can be confiscated.

It is an interesting point. To a certain extent, it shadows the system that operates here in respect of the Criminal Assets Bureau. Initially, the Criminal Assets Bureau will freeze proceeds of crime but simply because it freezes them does not mean that they are subsequently confiscated, although I think such an application can be made seven years later. Would Dr. Stewart agree with that?

Dr. Jim Stewart

I am not an expert on what the EU is proposing - I have only read drafts - but that would seem to be the road it is going down. It is still open to debate. Much of debate is ongoing because there is a feeling that Russian assets and wealth held abroad should be partly used to fund repairing the enormous damage done to Ukraine.

I do not know if Dr. Stewart is aware of this - I only became aware of it a number of days ago - but the Parliamentary Assembly of the Council of Europe passed a resolution on 28 April 2022 stating that member states should seek to use the assets of targeted and sanctioned Russians to compensate Ukraine and its citizens for any damage caused by the Russian Federation's war of aggression. I am sure this is something Dr. Stewart thinks would be important.

Dr. Jim Stewart

I agree that it would be important.

I thank Dr. Stewart for his time.

I thank Dr. Stewart, who has given us some very useful information. Is it a widely used practice of Russia to invest in shell or investment companies off shore? In what countries, is Russia known to invest most regularly?

Dr. Jim Stewart

Russian wealth going abroad to be invested in different assets is a widely used practice. There is a focus on yachts owned by the oligarchs and works of art but I would say that the bulk of Russian wealth abroad is held in the form of holding companies and companies owning various assets. Such assets could be property or other kinds of assets. We do not know. It is very difficult to know what countries are involved and it is quite likely that there is no single country involved. Rather there is a chain of ownership. For example, the real asset is in the US and is owned by a subsidiary in Canada, which is in turn owned by a subsidiary in Ireland or Bermuda, which in turn is owned by five different companies. The chain seems to stop with the Ireland or Bermuda company but the reality is that it is not where it stops at all. It is carefully disguised. What you can certainly say is that Russian oligarchs are very well-funded and can afford the best brains to develop corporate structures that are very well hidden and very difficult to track down.

Have we the expertise in this country to track down possible offshore Russian investors in the shape of holding companies or perhaps financial funds that may well operate within the country? I am aware that there are several such funds operating legally in this country but what about those that are operating illegally? Is that an area that we need to look at?

Dr. Jim Stewart

The short answer to that question is "No". We do not have the resources. The US Treasury has enormous resources and legal power and it appears to have difficulty in tracking down the assets of Putin and other Russian oligarchs. Perhaps it knows and is not saying. This is something that cannot be done by Ireland alone.

If one thinks of the chain of ownership, every country where part of the chain hits its location must combine and use their resources together with those of others in order to try to track down the ownership of these.

This needs an EU-wide initiative which includes other countries within the EU, which run into the difficulties as to why they would comply. If the EU can get an agreement and a directive at the Council, then this will have the force of law in every country such as Malta, Cyprus, Ireland and Denmark. They will all then have to comply with the EU directive. That might be a way that this issue could be tackled.

Would it be possible at European level to unveil the secrecy surrounding the whole Russian offshore investment in various countries or should this responsibility go to the IMF?

Dr. Jim Stewart

The problem here is that this needs the rule of law. One has to say that unless a person does this, they will be committing a criminal act, or whatever. The IMF cannot do that because each country has its own sovereignty in respect of tax and all of those sorts of issues. I do not believe it would fully solve the problem but if these assets could be identified, it would be good way to proceed. Once they are identified, one can then ascertain if they are owned by a sanctioned individual, whether they could be seized or not only seized, whether they could then also be confiscated.

Assuming that the EU could take action, how long does Dr. Stewart believe that it would take the EU to put a structure in place to combat the activity of Russian offshore funds?

Dr. Jim Stewart

It would take some time because even amalgamating the various registries of companies and working out who owns these assets or whatever would take a substantial amount of time and would involve intercountry co-operation. It is not something that will be done in the next six months or year but it is possible that one could start off with certain areas where one believes there are Russian assets, try to track the ownership of these assets and see then if they could be subject to sanction or confiscation.

Would it be possible to presume that they were Russian assets until proven otherwise?

Dr. Jim Stewart

I suspect that people, authorities, registries or other individuals may suspect that an asset is Russian-owned but moving from suspecting to proving that might be quite difficult.

I thank Dr. Stewart very much and I also thank the Chairman.

I thank Dr. Stewart for his attendance. During the course of his opening statement I was looking at his comments on the treatment of the section 110 firms. Can he add a comment to that section where capital could be raised at relatively low interest rates given the risks of providing finance to Russian firms where there was little regulation? What does Professor Stewart mean by saying that capital could be raised?

Dr. Jim Stewart

Well Chairman, let us consider that one is looking for a yield from an investment and supposing that that yield is 5% or let us say 10%. One is then told then that the after-tax yield will only be 5% and one will not be paying any tax on that. If the yield was 10%, one would pay tax on that of perhaps 50%, or whatever, possibly a third, hence the yield after tax would be 6% or 7%. If one is told that there is this yield, that it is 6% and there is no tax, this will reduce the cost of capital for those investors. It makes it a much more attractive investment for firms or individuals who may think of purchasing debt being issued by these companies. For that reason, it facilitates the raising of debt at a lower rate of interest and lower cost of capital.

Is there any evidence out there of the amount of capital that is raised by these firms or has any research been carried out into that whole area?

Dr. Jim Stewart

Yes, Cillian Doyle and I have estimated that the total capital raised to Ireland by section 110 firms from 2005 to 2017 was €118 billion. I have extended this period from the year 2018 to 2021, and have found that €17 billion was raised by section 110 firms. That amounts to €135 billion in total. Most of that, not all of it, was raised on the Dublin market through loans that are quoted but not necessarily, or very rarely in fact, traded on the Irish Stock Exchange. There is, therefore, evidence of the amount of money raised using section 110 firms.

Dr. Stewart then goes on to mention the general features of these firms and that they vary considerably in size. I can understand that but on one of the tables he has provided here, in the area of employees, for example, Table 2 which refers to assets of Russian firms in Ireland, there was a significant number of these section 110 firms in Ireland in 2020 which had zero employees. The aircraft leasing firms, which involve a great deal of money, had, I believe, 32 employees. The Vtb Commodities firm had zero and Aughinish Alumina had 459 employees. There is not any great number of people actually employed in these firms with the exception of that one company.

Dr. Jim Stewart

That is absolutely true. Russian special purpose entity, SPE, firms or conduits employ nobody. They have no fixed assets or employees. That is a feature of all section 110 firms where they have no fixed assets or employees.

Most aircraft leasing firms also have no employees either. They have assets, obviously consisting of aircraft, but no fixed assets by way of office buildings and whatever. It is true that the section 110 firms have no employees and many firms set up to fund finance and are not section 110 firms will also have no employees. These are referred to as brass plates companies which are firms with no employees or fixed assets. There are many thousands of them incorporated in Ireland as there are, incidentally, in many other countries. The Netherlands is probably the major country where one would have these types of structures, not Ireland or Luxembourg.

Dr. Stewart has aircraft leasing firms’ employees numbered there at 32. Is that correct?

Dr. Jim Stewart

That is right. If one looks at those aircraft leasing firms, these are the Russian-owned ones. There are thousands of aircraft leasing firms in Ireland and these are the ones that we have identified as Russian owned. There may be other Russian-owned aircraft leasing firms which we have not identified but these are the ones we have.

Is it that you have not been able to identify them?

Dr. Jim Stewart

The way we have identified them is that we have gone through the records of the Companies Registration Office, CRO, and we have used various techniques to try to identify these firms.

There is no public registry of the names of their names. Revenue cannot publish the names of firms that are section 110. There is no public register of the ownership of these firms. The Central Bank does not collect any data on aircraft leasing firms that are subject to 12.5% tax. It collects data on aircraft leasing firms that are part a section 110 tax regime. We argue that the huge firms are almost identical in structure, as in size. It seems that tax data are ascertaining whether the Central Bank collects data. That does not seem to make a lot of sense if one is trying to measure the shadow banking sector.

Is the Limerick firm just a regular firm?

Dr. Jim Stewart

That is right.

Dr. Stewart is not raising any questions about that.

Dr. Jim Stewart

The Limerick firm is just a regular firm. It is owned by a Russian oligarch who has been subject to sanction. The Government has been in some negotiation with the Commission about how it may continue to operate because there are now more jobs involved. One can see that the assets of the Limerick farm are relatively small. It had €400 million for 2020 but it has most employees. Most of the assets are very large but there are very few or almost no employees.

The corporate service provider looks after the administrative functions of the various companies. Is that sector subject to regulation?

Dr. Jim Stewart

Yes, it is subject to anti-money laundering regulation, but these corporate service providers are expected to know the beneficial owner of the firm of which they are producing the record. They are doing all of the administration for this firm. This may be very difficult for them to provide. They may have done this some years ago. It may have changed over time. It is likely that with the data they produce with the best of intentions - they are not trying to evade - they cannot actually work out who the beneficial owner of a firm is. They may say it is a firm in Bermuda, but this may not be the case. They have onerous data requirements to provide. They are required to fill in a 27-page report for the Central Bank four times per year. The Central Bank collects all these data. It does not regulate these firms. Why is it collecting all of these data? It is a puzzle. Corporate service providers are regulated. They perform all of the administrative functions, including quite onerous data submission to the Central Bank.

Are the corporate service providers in breach of the regulations because they cannot name the company that is responsible or they do not know where the make-up of that company or trust ends? In terms of the information collected by the Central Bank, is that a standard form that is completed? Is it extensive? Although the Central Bank does not publish the form, because the form is collected, it should have extensive information on these firms.

Dr. Jim Stewart

The corporate service provider is supposed to provide the beneficial owner of a firm for which it is doing the administration to the Central Bank in order that the Central Bank knows that it is a breach of sanctions. The point I am making is that the corporate service provider may firmly believe that the owner is located in Bermuda, but this is when the corporate service provider did that work one year ago or even six months ago. It may change in the meantime, because the owner wants to hide the assets or whatever. The corporate service provider may firmly and honestly believe that it knows the beneficial owner, whereas the truth is that it does not know the beneficial owner.

It may also be the case that the beneficial owner is disguised in a way in which the ownership of the asset is split among five or more companies, thus reducing the threshold for the definition of a beneficial owner, which is 25%. If it is split among five different owners, the corporate service provider is returning that the firm is owned by one company but, in fact, that company is owned by five other companies. If one amalgamates those, one can work out who the real beneficial owner is. It is very difficult to work out who the true beneficial owner is.

The Central Bank collects largely data to do with financial flows, financial assets and other aspects. The Central Bank does not collect data on beneficial ownership. It collects data on whether the firm is a charitable trust but it does not collect other data on the firm. It is basically collecting data relating to its function as a monetary authority and this is a requirement, certainly for financial vehicle corporations, by the European Central Bank, ECB.

The question for the Central Bank is on what it is doing with the data that it collects. Does it store them? Does it read them? Does it have a picture of what is going on? It may be a matter between the Central Bank and the Minister for Finance or, generally speaking, this committee could ask the Central Bank. In terms of the negative equity and large losses which Dr. Stewart spoke about in his opening statement, it is the debt providers that suffer those losses. Is there a record, anywhere in the system, of a company registered as a section 110 firm having to renege on its debt? Is there any record of what firms and how much?

Dr. Jim Stewart

The statement I made there is based on our own research which involves identifying section 110 aircraft leasing firms and extracting data from their accounts over a number of years. The point I made is that for 2020, of 171 firms that were identified, 23% had negative equity of greater than 10%. These firms are still solvent. They still say they are solvent. They are still trading but, effectively, they are insolvent because their liabilities are far in excess of their assets. The firm has not gone into liquidation, but it may in fact be forced into liquidation. This is due to the Covid crisis and the crisis in the air travel business. It is compounded by Russia seizing all of these aircraft and the loss is being borne by Irish aircraft leasers. What will happen there? It is very difficult to know.

We should also note that a large portion of aircraft leasing assets in Ireland, the precise fraction of which I do not know, is owned by Chinese companies. It is difficult to work out what would be the reaction of Chinese companies to aircraft seized in Russia which are owned by Chinese companies via Ireland. That will puzzle me as to what exactly the reaction to or effects on the Irish aircraft leasing firm which is owned by a Chinese firm will be.

Some 3,125 section 110 firms have assets of €1.3 trillion in 2021. Any layperson reading that would certainly wonder why these firms are not regulated extensively by the Central Bank. Am I wrong?

Dr. Jim Stewart

No, the Chairman is right. They are not regulated by the Central Bank, because it does not have the remit to regulate them. The Central Bank's focus is on the domestic economy and on performing certain functions, at the request of the Government. There seems to be no agency which is responsible for regulating these firms. Revenue regulates them in the sense that they ensure their tax status but it is self-declared. A firm tells Revenue it is a section 110 firm and then it becomes a section 110 firm. It must meet certain requirements, but it is difficult to know to what extent the Revenue checks these requirements out. A firm is supposed to have what I think is €5 million or €10 million when it sets up but, within a period, this can fall away. The problem is that these firms are largely unregulated. One should say that somebody should regulate them and they should be regulated by the Central Bank. However, one would probably have to introduce legislation to require that.

The total figure for assets is €1,031 billion. What sorts of assets are held by these companies?

Dr. Jim Stewart

It always involves aircraft leasing. In some cases, firms specialise in leasing jet engines or other aircraft equipment. Their other assets would involve financial and legal corporations and comprise loans they have made to other companies and assets they have purchased. Within that €1,031 billion, there is a variety of securitisation firms, which probably make up the bulk of it, and non-securitisation firms. The latter category comprises the aircraft leasing firms, Russian conduits and other firms. There is an amalgam of real assets and assets resulting from securitisation.

That is fascinating. The first table refers to funds raised on Dublin Euronext between 2018 and 2021 in the billions of euro. Will Dr. Stewart talk us through that table and comment on the fact Russian Railways, RZD, raised a total of €10.1 billion in the years 2010 to 2021, inclusive? He stated that in addition, banks availing of section 110 raised finance for the Russian military. Firms that are based in Ireland, because of whatever way they have been made up, are in a position to raise €10.1 billion for the Russian Railways and God knows how much for the Russian military. Is that correct?

Dr. Jim Stewart

Yes, and we have to remember that Russian Railways was a key part of the invasion of Ukraine. The first table show the sums raised each year, amounting to €2.1 billion in 2018. I think September 2021 was when a Russia-connected firm last raised funds on the Dublin Euronext market, bringing the total for that period to €17.1 billion. The number of firms involved, ranging from six to 11, is outlined below that. These are the sums these firms have raised through the Irish market. Ireland has, effectively, been a key part of financing many firms in Russia.

An interesting question relates to who provided the finance and which investors bought those loans. Our hypothesis is these are Russian investors reinvesting in Russia. They are happy to do so and to take that risk because the returns are tax free. In addition, the loans are often raised under the laws of the UK, which may give greater protection to the owners of the funds than if they were raised in another country.

Dr. Stewart gave a specific figure in respect of Russian Railways, of €10.1 billion, but he stated a number of banks raised money that went to the Russian military. Can he quantify that? Where did the money come from for that specific purpose? Was that from Russian investors as well?

Dr. Jim Stewart

It would be interesting to quantify that, but all we can say from looking at the data is that banks that have raised funds on the Irish market have also indicated they provide funds to the Russian military. In fact, one bank that raised funds on the Irish market, whose name I cannot recall off the top of my head, was specifically tasked with providing funds to the Russian military. It is difficult to know exactly how much of the funds ended up with the Russian military and how much were used for other purposes.

These firms, based in Ireland with zero employees and paying little or no tax, are providing funds for the Russian military and Russian Railways. It is difficult to believe all this has gone on. Would any of that information have shown up in the information being collected by the Central Bank, or is it so general that it does not get down to the granular nature of the answer to that query?

Dr. Jim Stewart

I am not sure whether the Central Bank collates data on funds raised by these firms and on the assets. It would be easy to do given the prospectus is published. It can be downloaded and is fairly readily available. It would be possible to collect the data but I do not know whether the Central Bank collates them. Certainly, the information is in the public domain. Thousands of companies raise debt on the Irish stock exchange every year and anybody can check whether a named company has raised funds.

One aspect that is excluded from these data relates to Russian firms based outside Ireland that have raised funds on the Irish Stock Exchange. One firm, Vimpelneft, has raised €3 billion or thereabouts on the Irish Stock Exchange but is located in the Netherlands. Similarly, a Russian firm based in the UK, Evraz, has raised funds on the Irish Stock Exchange but is based in the UK.

In light of the current sanctions against Russia, should the Government step in and do something about companies that can clearly be identified as raising funds for either Russian Railways or the Russian military? Surely we have an obligation to stop this.

Dr. Jim Stewart

We have to remember these funds have been raised. They are then handed over to the Russian entity and, perhaps, the debt has been repaid given the structure is often one of rolling debt. The assets of these firms amount to about €35 billion and not all of that will be owned by sanctioned firms. It might be possible, therefore, to seize some of those assets but those assets largely comprise funds they have lent to Russian companies. The net cash held by these firms is very little indeed; there would be nothing to seize. If we decided we were going to freeze the assets, there would be nothing to seize. There are few assets in Ireland or, indeed, elsewhere. The assets comprise loans made to Russia and that is financed by loans made to the conduit, or Russian firm, in Ireland.

Moving on to the use of holding companies, which Dr. Stewart discussed in his opening statement, a former US expert on organised crime in the former Soviet Union, who was also CIA chief of base in that country, gave evidence to the US House Committee on Financial Services that identified Ireland as a major location for wealth leaving Russia in the post-Soviet period. I presume the wealth leaving Russia is based on cash and the transfer of assets. What action arising out of that knowledge can be taken, whether by US agencies, European agencies or Irish agencies?

Dr. Jim Stewart

That evidence to the US house committee related largely to the transfer of assets. Little can be done because these are historical data. Since the break-up of the Soviet Union, the ownership of these assets has changed completely. The ownership of assets with the break-up of the Soviet Union was very different from that under the current Russian regime. There has been a significant change in the ownership of assets. It may also be the case that any individual who made large sums, whether just after the Soviet break-up or subsequently, is suspect in nature and that questions should be asked about how he or she got hold of large amounts of cash or other assets.

Putting that matter to one side, there is nothing that can be done by this State. It is just an historic fact that Ireland was used at the time as part of the chain in transferring wealth outside of Russia. Many of the companies involved were liquidated within three years and there is little information about them, so we can only guess that they were doing this. The time period more or less coincides with the evidence given to the US Congress.

Will Dr. Stewart elaborate on the use of more recent forms of corporate entity, for example, limited liability company, LLC, and their likely use by the criminal groups he refers to as second order actors?

Dr. Jim Stewart

That was based on an excellent report by Chatham House on Russian oligarchs in the UK, where there are also LLCs. The team of experts who put together the Chatham House report concluded that it was unlikely that Russian oligarchs were using LLC structures in the UK and that it was much more likely that they were being used by criminal activities, or what the report refers to as second order actors. Where criminal assets are concerned, though, the largest ownership is by Russian oligarchs and oligarchs from other countries. These may be connected to illegal activities and assets that are owned illegally.

Dr. Stewart has provided notes relating to commentary earlier in his statement regarding structures in Ireland that became obvious in a court case involving intimidation and fraud. These are notes Nos. 2 to 4, inclusive. Will he comment on this matter generally?

Dr. Jim Stewart

This is interesting. There was a court case involving an asset in Russia that was owned outside of Russia and Ireland. A chemical firm called Toaz, based in Russia, was owned by a particular family or oligarch. Another oligarch tried to take it over and there was an allegation of intimidation and so on. The court case was heard in Ireland because it was deemed that this was where the asset was owned or held. The firm's ownership was actually held in Bermuda. Nevertheless, it was decided that the court case on whether compensation should be paid for the alleged intimidatory behaviour would take place in Ireland. It is an interesting instance of a dispute among oligarchs over the ownership of assets in Russia. This is happening all of the time, but often in Russian courts. Sometimes, it has happened in UK courts, where interesting information has been revealed. As far as I know, this was the first instance of such information being revealed through an Irish court case.

What I take from Dr. Stewart's opening statement and our discussion is that the Irish Government and regulators – the Government through legislating and the regulators through implementing legislation – have a great deal to do just to get a handle on some of this. It will be almost impossible to get the full picture. We need to take a far greater interest in what is happening and regulate it more.

Dr. Jim Stewart

That is true, but we must remember the size of the assets in question, the number of structures and the resources required to police and regulate them properly. It would take a large amount of resources and skill. Indeed, a great deal of skill is involved in examining this type of data. Given the cross-country nature of ownership, it would be much more efficient if that was done at group level. The EU is probably the most suitable way of doing it. Regulatory and enforcement powers must be backed by law. Regulation and enforcement cannot be done by an agency such as the IMF because it does not have the legal power to do so. The only way that this could be done in Ireland would be via an EU initiative, that is, a directive agreed by the Council. The EU has been moving towards that in its recent draft directives and in its moves to make it more difficult to operate shadow or brass plate companies that have no assets or liabilities. The idea that Ireland alone could handle this problem is not a runner, but Ireland should support and advocate for EU initiatives.

We must also remember that certain countries within the EU – Ireland, Luxembourg, the Netherlands, Malta and Cyprus – are key players in the ownership of Russian assets and facilitating cross-border movement. The way to ensure a resolution and the rule of law is at EU level.

I am inclined to agree with Dr. Stewart.

I have one more question. Given the large number of companies operating under section 110 in this country and the possibility of multiple beneficial ownerships of those companies, is there a danger that they could become a threat to the financial stability of the State?

Dr. Jim Stewart

As in the previous financial crisis, most of the assets and liabilities are owned outside Ireland. The Deputy will remember all of those German banking firms and conduits that folded, creating major difficulties for the German banking sector but not necessarily for the Irish banking sector. It is more likely that the problems will cascade and emerge in other countries where borrowers and lenders live and reside. That does not absolve Ireland of having some role in regulating these companies and activities, but it will require inter-country collaboration. When one examines a company's structures, one will often find a connection between ownership of an Irish company and the Netherlands or Luxembourg. Sometimes, all three are involved. Increasingly, we are noticing that Malta is fitting into complex corporate structures. Cyprus is important where the regulation of Russian-owned firms is concerned because I suspect that much of the cash that goes into the Russian conduits comes from Cyprus, where many Russian assets are held in banks and so on. Cyprus has historically been important for Russian banking activities.

I thank Dr. Stewart.

I thank Dr. Stewart for giving generously of his time and insight. This is an intriguing topic, and the more one goes into it, the more one wants to know about it. I thank Dr. Stewart for attending. I also thank members for their contributions.

The joint committee adjourned at 3.19 p.m. until 1.30 p.m. on Wednesday, 15 June 2022.
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