Sports and Money Laundering

The legal and fiscal status of FIFA might come under the scanner once again (Read French version here.)

Priti Patnaik, Geneva

Bilan, June 5, 2014

The clean-up at FIFA has begun, fuelled by forces far away from the city of Zurich where it is hosted. The resignation of President Sepp Blatter is a sign of things to come. The city of Zurich and the government of Switzerland, might inevitably be drawn into these world-wide efforts to make the world governing body of football, more accountable.

It is not just the sports community, the sponsors and law enforcement officials who are watching FIFA closely. It is likely that this time round, Swiss Parliamentarians, the international community, and everyone else who has a stake in preserving the integrity of the sport, will use the latest round of allegations as an opportunity to reform governance at FIFA.

From a Swiss perspective, there are two issues: the legal status of FIFA that categorises it as an association giving it enormous latitude and its consequent fiscal obligations in Switzerland. Second, more important is whether and how the Swiss are going to connect charges of money laundering at FIFA to its tax status.

FIFA moved to Zurich in 1932 and was established in the legal form of an association under article 60ff of the Swiss Civil Code. Being an association means flexible legal terms, a reduced tax burden and so far, an exemption from Swiss anti-corruption laws.

Sports organizations like FIFA, have a four year accounting cycle. As per FIFA Statutes, the financial period of FIFA is four years, beginning on January 1st in the year following the final competition of the FIFA World Cup. The revenue and expenditure of FIFA is managed so that they balance out over the financial period. All major duties at FIFA is guaranteed through the creation of reserves. As a non-profit organization, it is obliged to spend its cash reserves on the game of football.

During the reporting period of 2011-2014, FIFA had revenues of $5.1 billion, with an operating profit of $338 million. (Profit from the 2014 World Cup was $4.8 billion, with expenses of $2.2 billion, it made a net profit of $2.6 billion.) Most of FIFA’s revenues is generated through television rights, marketing, hospitality and licensing rights for the World Cup. By the end of 2014, FIFA’s had reserves of $1.5 billion.

Mark Herkenrath of Alliance Sud says, “Given FIFA’s substantial income, its status as a not-for-profit organization is highly questionable.” FIFA enjoys reduced taxation due to its status as an association. It pays taxes at 4.5% and 4% respectively at federal and cantonal level.

A spokesperson at FIFA said in an email to Bilan, “As stated in the 2014 Financial report, FIFA accounted for USD 75 million in taxes for the past four years (2011-2014).” There are no publicly available numbers on what this reduced tax status of FIFA as a result of its classification as an association, has cost the government of Switzerland.

“Unfortunately, we cannot tell you anything about the specific case FIFA for reasons of confidentiality,” Thierry Li-Marchetti, communication specialist at the Swiss Federal Tax Administration, told Bilan in an email.

That FIFA pays taxes in Switzerland, is used a reason to excuse itself from paying taxes in host countries where the FIFA World Cup is held, critics have said. This costs host countries dearly given the substantial investments for hosting the World Cup.

Although, FIFA has clarified in the past that it does not make any demands for a general tax exemption for sponsors and suppliers, or for any commercial activities in the host country. It has admitted that it needed “easing of customs procedures” and that “all of these exemptions are comparable in scope to those requested by organisers of other sporting or cultural events”.

Jens Sejer Andersen, international director at Play the Game, an international conference and communication initiative that works for ethics and transparency in sports, said on phone, “What needs to change is FIFA’s legal status as an association that gives it exceptional freedom. The status is being abused as a shield to protect its flagrant malpractices – standards of corruption that is a class of its own. A global billion dollar business should not be classified as an ordinary association.”

However, more importantly, the question for the future is, will FIFA continue to enjoy reduced taxation in light of the money laundering allegations that have surfaced following the recent crackdown by the U.S.’s Department of Justice.

Over the last few years, there have been efforts from a number of quarters to change governance at FIFA. The Federal Sports Office released a Report on Corruption in 2012, which recommended a series of legal measures that came to known as Lex FIFA.

Several initiatives were brought in over the years by a range of parliamentarians including Géraldine Savary from Vaud in 2006, Roland Rino Buechel, the member of Parliament for the Swiss People’s Party, Cedric Wermuth of the Social Democratic Party of Switzerland, also representative from Aargau, elected to the National Council of Switzerland, to critically look at privileges that FIFA enjoys in Zurich.

But these efforts have not amounted to much, possibly driven by fears that tinkering with FIFA’s tax status might actually encourage it to move to more favorable jurisdictions elsewhere in Switzerland or even outside such as Qatar or Malaysia.

Jean-Loup Chappelet, Professor for public management at the Swiss Graduate School of Public Administration (Institut Des Hautes Etudes En Admistration Publique, IDHEAP), said, “The cantons are sovereign in terms of taxes. Only a Swiss (federal or cantonal) law could change things but would have to be discussed with/by the cantons. It is up to the cantonal Government of Zurich to take such a decision not the Swiss Government.” But it will be politically difficult for a canton to provide tax privileges to organizations or persons guilty of money laundering, he added.

The issue at hand is potentially larger than just the tax burden on FIFA vis-à-vis its profits. The implication of connecting charges of money-laundering at FIFA to its tax status is crucial. Mr Wermuth of the Social Democratic Party feels there is no political will to do this. “Switzerland and its government aren’t FIFA victims – they have always been their allies,” he said.

Roland Meier, spokesman for the Federal Department of Finance (FDF), said that FIFA doesn’t have any tax privileges by the Swiss Confederation.

Depending on who you talk to, one can be led to believe that this time around, a variety of factors might come to bear upon the Swiss government including amendments to domestic legislation to curb money laundering and international pressure to clean up. Some of these measures were also part of the Lex FIFA set of reforms suggested earlier.

In June 2015, the Swiss Parliament will consider amendments to the Swiss criminal code  submitted by the Swiss government that will criminalize corruption in sports. In addition, persons exercising important functions in international sports federations will come under scrutiny as “Politically Exposed Persons”.

This flows from recommendations of the Financial Action Task Force (FATF), an inter-governmental body in charge of setting standards, through non-binding recommendations, to combat money laundering. The implementation of these recommendations is led by a system of peer review, with a threat to blacklist countries that do not follow suit. (The EU, for example, includes the FATF recommendations in its Anti-Money Laundering Directive which sets a legal framework to prevent money laundering for all 28 member states, and in specific cases goes further than the FATF recommendations.)

To be sure, money laundering is forbidden in Switzerland by the criminal code (as in many countries) and one can be prosecuted for it. But these new changes could empower the Swiss Attorney General Office to start an investigation without a complaint being filed for corruption, even based on serious rumors. It will also allow for complaints against unknown persons.

“If the amendments are adopted all organizations in Switzerland (all associations, foundations, corporations, cooperatives, etc.) and persons could be investigated for private corruption by the Swiss Attorney General Office without a complaint being filled against them for corruption,” Mr Chappelet said.

Some experts are of the view that the FIFA officials who were arrested should already have been considered PEPs by banks because some are already government officials and all are closely associated with government officials.

Not all are optimistic about the power of domestic legislative changes. Mr Wermuth Aargau’s representative at the National Council of Switzerland, from the Social Democratic Party said, “It won’t change a lot actually. The problem is that central problem with bribery is that nobody notices. So without a strong whistleblowing law there won’t probably be a great impact. Although the vote (in the upper house only for the moment) is important. It opens a – theoretical – way for the authorities to monitor and intervene.”

He however hopes that the condition-free support in Parliament will break down after these events. This may result in changes according FIFA’s tax status, regulatory measures for more transparency and a strengthening of anti-corruption and anti-bribery laws.

“The issue is that FIFA is organized as a normal association. This means that their tax burden is half the burden of a normal company. We will try to reform the law concerning associations,” Mr Wermuth said.

Moreover the pressure on the Swiss government to improve regulatory scrutiny is increasing. “Pressured by the public and forums such as the Council of Europe, the EU and OECD, the Swiss government may decide on increased scrutiny on the activities of FIFA. The role of Switzerland in addressing some of these issues, is often discussed on international platforms. These international discussions to protect the integrity of sports do matter, because Switzerland would like to have good relations with other countries,” Mr Andersen at Play the Game, said.

The adoption in 2006 of the Criminal Law Convention of the Council of Europe on Corruption by the Swiss government means that there is pressure from the Groups of States against Corruption at the Council of Europe (Groupe d’Etats contre la corruption, GRECO). GRECO follows the compliance of states like Switzerland which have ratified the anti-corruption convention.

“International pressure is the key. As it has been the case – unfortunately – with the banking secrecy,” Mr Wermuth said. “The only pressure that could work is one with a political leverage –  a painful measure concerning banking or tax issues by the EU or the US,” he added.

Koen Roovers, EU Advocate for the Financial Transparency Coalition, agrees. “There is an interesting dichotomy at play here: on the one hand there’s the hands-off approach regarding sports’ associations based in Switzerland that are seen as non-profit organisations like any other, and on the other hand the massive reputational risks that come with FIFA as the world’s most prominent representational body for one of the most popular sports around. It only seems logical that the international pressure will increase if a sport that is so important to so many nations is seemingly thoroughly corrupted.”

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s