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How CIBC keeps money from the taxman- Offshore accounting
National Post ^ | February 23, 2002 | Derek DeCloet

Posted on 02/23/2002 9:14:47 PM PST by Bayou City

How CIBC keeps money from the taxman

February 23, 2002

Offshore accounting

Derek DeCloet

Financial Post

When John Hunkin takes the stage in Halifax next week for the Canadian Imperial Bank of Commerce's annual meeting, he'll describe an eventful year marked by the same difficulties other banks have faced.

And yet its results were respectable. CIBC earned $1.69-billion -- an 18% decline from the year before but still a better showing than Bank of Montreal.

Its results were as good as they were because it did an unusually good job of keeping its money out of the taxman's hands. The bank reported paying just $92-million in income taxes -- an effective tax rate of just 5%. No other major Canadian bank paid less than 27% of its profit in income taxes, according to calculations in a report by National Bank Financial.

In effect, CIBC saved hundreds of millions of dollars in tax in 2001 -- preventing a much larger decline in its earnings.

How did it do it?

Nearly three months after the release of its year-end results, even some of Bay Street's most-respected bank analysts say they don't fully understand it. At least one institutional investor has refused to buy CIBC shares until it provides a better explanation. One official at a rival bank calls it "pretty amazing."

No one has suggested the bank is doing anything wrong. But after the collapse of Enron Corp., investors are highly sensitive to accounting matters -- leading some to ask if CIBC is being aggressive in its tax accounting.

The bank's explanation of its unusually low tax rate is complex. But the primary factor is the geographic distribution of its profit -- that is, where it makes its money.

During the 2001 fiscal year, CIBC earned very little money in North America, where corporate income taxes are relatively high. Its pre-tax profits in Canada were almost completely wiped out by its losses in the United States, so it earned just $240-million in North America.

So where did the rest of its $1.69-billion in profit come from? Most of it -- $1.2-billion -- came from its West Indies operations, according to a note in the bank's financial statements.

CIBC maintains subsidiaries in the Bahamas, Barbados and the Cayman Islands, among other offshore locales.

Corporate taxes in these places are low. By making almost three-quarters of its profit offshore, it was able to keep its overall tax rate low. That much is clear. What's less easy to figure out is how CIBC reaped so much money from its West Indies subsidiaries.

Part of it can be explained by the bank's investment in Global Crossing Ltd., the Bermuda-based builder of telecommunications networks. Global Crossing filed for bankruptcy protection last month, but CIBC has already used hedging strategies to secure a multi-billion-dollar windfall from its investment in the company.

In the past three years, CIBC has booked more than $2-billion in Global Crossing revenue. "The holding company [for that investment] is in the West Indies, so all the revenue flows through there," said Stephen Forbes, director of investor and financial communications for the bank.

But Global Crossing doesn't account for all of the bank's apparent prosperity in the region. In fact, CIBC has reported almost $4.5-billion in revenue from its West Indies operations in the past three years. And some $2-billion of that is interest income (the gains from Global Crossing are non-interest income, Mr. Forbes said).

CIBC has a retail and banking presence in Caribbean, but with 42 branches it is small. (By comparison, it has 1,170 branches in Canada.) It also has a wealth-management arm, a treasury group, and "some other small operations," Mr. Forbes said. Overall, the bank's West Indies division is not large; it accounts for just 2.3% of the bank's non-interest expenses.

How can a bank earn so much money in low-tax countries with few staff and minimal expenses?

That's the part that remains a mystery. The bank does not disclose anything more about the nature of its West Indies operations.

One investor says he has asked the bank for details on why its tax rate is so low. "They provided us with an explanation that wasn't an explanation," said the investor, who spoke on condition on anonymity. "But it's all supposedly legal."

Colin Litton, national director of KPMG LLP's banking and finance practice in Toronto, said scrutiny of Canadian banks is so tight that it's practically unthinkable any bank would risk the wrath of tax authorities in Canada by bending the rules.

"These banks are under continuous audit from revenue authorities because, obviously, they're big taxpayers," Mr. Litton said. "You can rest assured that whatever figure is [reported], is what the figure is."

Even so, the anonymous investor complains CIBC's disclosure is not good enough to make him comfortable.

In any event, CIBC's low tax rate is probably unsustainable. With a better economy, its losses in the high-tax U.S. ought to shrink. Its Global Crossing position is nearly exhausted, meaning the bank's offshore revenue will decline in the future.

Mr. Forbes described last year's low tax rate as "an aberration" and said CIBC expects to pay out 20% to 25% of its pre-tax profit in income taxes in fiscal 2002.

Assume that the bank's projections are right and CIBC pays 22.5% of its profit in income taxes to various governments during this fiscal year. That means it will have to increase its pre-tax earnings by 18%, or more than $330-million, to show the same profit this year as last year.

TOPICS: Crime/Corruption; News/Current Events
KEYWORDS: globalcrossing
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If I remember right, there were two or three Global Crossing board members representing CIBC, they also worked with Winnick and Milken at Drexel, Lambert. Folks, this is a huge insider trading scam.
1 posted on 02/23/2002 9:14:47 PM PST by Bayou City
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To: Black Jade;Tumbleweed_Connection;*GlobalCrossing;Ernest_at_the_Beach; JohnHuang2; terilyn...
2 posted on 02/23/2002 9:15:55 PM PST by Bayou City
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To: Bayou City;GlobalCrossing
GlobalCrossing :
To find all articles tagged or indexed using GlobalCrossing , click below:
  click here >>> GlobalCrossing <<< click here  
(To view all FR Bump Lists, click here)

3 posted on 02/23/2002 10:37:26 PM PST by Ernest_at_the_Beach
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To: Ernest_at_the_Beach; Bayou City
With all the wealth from commerce and production in the Carribean, NOT, it sounds like CIBC is a pretty good money laundering operation.
4 posted on 02/24/2002 1:14:13 AM PST by meenie
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To: Bayou City; shermy
BC thanks for the post.

Shermy fyi. More for your files re the potential evils of off shore banking.

5 posted on 02/24/2002 7:07:49 AM PST by Grampa Dave
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To: Bayou City;Liz;Grampa Dave;Dog
I going to have to do some digging, but my memory tells me that CIBC is where the BCCI folks set up shop after being slipping out of the 'Congressional investigation'(Kerry/Brown-1992) here in the US.
6 posted on 02/24/2002 1:18:14 PM PST by d14truth
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To: Bayou City
CIBC Chief Risk Officer Robert Mark Interview

BCCI revisited by our neighbors to the north, hey?

7 posted on 02/24/2002 3:24:31 PM PST by d14truth
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To: Grampa Dave;Liz;Dog;Bayou City

Nothing on the surface, but I still think I'll find the connection to BCCI eventually, besides Adnan Khashoggi/Bermuda.

8 posted on 02/24/2002 3:34:37 PM PST by d14truth
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Comment #9 Removed by Moderator

To: Black Jade
Is there some "insider trading"?

Seems that's all these people know how to do.......couldn't
play it straight if their lives depended on it........{{{{barf}}}}

10 posted on 03/04/2002 3:59:50 AM PST by Liz
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To: Bayou City, Black Jade, meenie
One word: Banamex.
11 posted on 03/04/2002 4:05:48 AM PST by Wolfie
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To: Wolfie
One word; GREED
12 posted on 03/04/2002 6:43:18 AM PST by B4Ranch
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To: Black Jade;Grampa Dave;Liz;Dog;Tumbleweed-Connection;Bayou City;Howlin
Good pickup on the Husky Oil and CIBC. I saw the 95% Chinese ownership somewhere else as well, but hadn't picked up on the CIBC 5%.
13 posted on 03/04/2002 6:56:48 AM PST by d14truth
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To: Bayou City
Thanks for your research and posting this latest thread.

Is Canada investigating CIBC?

Have they sent their Mounties out to find and arrest the criminals involved?

Or is CIBC a protected corporation in Canada like Global Crossing was during X42's term?

14 posted on 03/04/2002 7:07:05 AM PST by Grampa Dave
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To: Black Jade; d14truth
Kudos to both of you for your diligence in digging and exposing the trash on this emerging snake pit!

The skills, knowledge and tenacity of Freepers is awesome.

This is why we all need to support Free Republic on a monthly basis/pledge to keep it strong and vibrant!

Would any of us even know about this mess if not for the skill of Freepers in finding this mess and posting their results on FR?

15 posted on 03/04/2002 7:12:23 AM PST by Grampa Dave
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To: Black Jade
Good find!
16 posted on 03/04/2002 7:30:19 AM PST by Bayou City
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To: Black Jade
17 posted on 03/04/2002 7:47:08 AM PST by mafree
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To: mancini; native new yorker
What do you make of this scam?
18 posted on 03/04/2002 7:57:22 AM PST by aristeides
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To: aristeides; habs4ever
Something's fishy, obviously.

I can't imagine how an "investment" in Global reaped that much profit for CIBC.

One missing piece is CIBC's ownership of the old Oppenheimer investment/brokerage house. Another is any kinks in the Canadian tax code.

19 posted on 03/04/2002 8:13:25 AM PST by NativeNewYorker
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To: Grampa Dave
" CIBC a protected corporation..."

Gramps, you don't know what a protected corporation is until you acquaint yourself with the Canadian Big-6 Banks.

Think of Greenspan's Fed without the accountability. ;^)

20 posted on 03/04/2002 8:15:18 AM PST by headsonpikes
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