Lawyers and accountants share in €100m fees from SPVs in IFSC

Lawyers, accountants and bankers collected almost €100 million in fees from hundreds of unregulated special purpose vehicles (SPVs) in Dublin's IFSC which are designed to pay little or no tax on their activities, according to Central Bank estimates.

The Central Bank moved last year to increase its understanding of the world of SPVs as it joined the global hunt by regulators for risks in the shadow banking sector, a growing area of lending activity that occurs outside the traditional banking industry. The Financial Stability Board and International Monetary Fund in Washington have been pressing for regulators internationally to collect and share data on non-bank financing activities following the financial crisis.

Tax

While the Central Bank established that some 822 SPVs, set up under section 110 of the Irish Taxes Consolidation action, 1997, held €324 billion of assets at the end of last year, it concluded that less than €152 billion qualified as shadow banking assets.

"The contribution from domestic SPVs to Irish [gross domestic product] is very limited," said Dominick Barrett, Brian Godfrey and Brian Golden of the statistics and markets supervision areas of the Central Bank in a report, published on Tuesday.

“They are generally designed to be tax neutral and most are established as companies with Irish directors but no dedicated employees. Their contribution arises indirectly through fees to resident professional services, primarily in the legal and financial sectors.”

Last month the Government moved to clamp down on the use of section 110 companies for tax benefits by so-called vulture funds to hold property loans acquired in Ireland during the financial crisis.

Last week the IMF raised concerns in a report about instances where individual bankers and lawyers were appointed to hundreds of boards of SPVs, which can hold various financial assets from distressed debt to greenhouse gas credits and catastrophe bonds sold by insurers. It said that questions were raised during a mission to Ireland this year about the suitability of such appointments.

One form of SPVs involved in debt securitisation, known as financial vehicle corporations (FVCs), has been obliged to file data on assets and liabilities with the European Central Bank since 2009 given how this sector contributed to the global financial crisis. FVCs held about €400 million of assets at the end of 2014.

Survey

The Central Bank publication is the first since it began to survey SPVs that fell outside the ECB definition.

The report highlights that Russian banks and companies, particularly in the energy and transport sectors, have been fond of using Irish SPVs to list debt securities on various stock markets, including the Irish Stock Exchange. They have typically structured the SPVs so that their shares are held by charitable trusts, which keep the assets and liabilities off the balance sheets of parties that use them.

Many other types of SPVs, such as those linked to asset management funds domiciled in Ireland, the treasury departments of large multinational companies and banks are ultimately consolidated into the wider group. This means that the assets ultimately fall under the supervision of the bank’s regulator.

“The new database addresses a significant data gap on SPV activities, and enhances the Central Bank’s ability to assess any financial stability risks arising from these,” the authors of the report said.

“The need to co-operate across borders and to improve data-sharing capabilities is essential to fully understand the rationale underlying SPV activities and any associated risks.”