Measuring the offshore game

To gain a greater understanding of how football is financed by offshore, the Offshore Game team undertook a study to find out how much finance in the UK professional football leagues came from offshore companies. We focused on companies rather than people because if a person directly owns a club that is the most transparent ownership structure you can get.


To undertake this exercise we first of all looked through the annual return for every club in the UK professional leagues to see if any offshore companies owned more than 10% of the club. If the club was majority owned by a UK based holding company we also checked the shareholders of that company too.


We relied on returns filed for 2013/14, so that we can judge all clubs on the same basis. Unfortunately this means that where there has been more recent change in finances - Rangers is a particularly glaring example - the results are out of date.


In total we found significant offshore ownership in the UK holding structure of 34 clubs. These clubs were spread out across all levels of professional football, from giants like Manchester City, to Southend United, an Essex seaside club owned in the British Virgin Islands.


We then set out trying to quantify how much finance each of these clubs had from offshore. To do this we used the concept of enterprise value, and looked at the enterprise value of the top holding company in the UK for which consolidated accounts were available. This is because football clubs are not always one company but a number of companies grouped into one ownership through a holding company. The consolidated accounts of the top company incorporates all of the information about the subsidiary companies so it gives the best overall picture of the worth of the operation as a whole.


Enterprise value is one way in which financiers value companies. It looks at the entire value of the finance of the club, rather than the assets in isolation. Enterprise value broadly is defined as being the sum of the value of total debt and share capital of a club. The idea that this reflects is that when you buy a company you not only take control of the equity, but you also take on the responsibility for paying back its debt.


Often the value of share capital is measured by looking at the market value of the company’s shares multiplied by the number of shares that exist, but this is only feasible if the company in question is quoted on a recognised stock exchange. This is not possible for most football clubs as only a few clubs sell their shares on the stock market. Most football clubs are private companies where the shares are not for sale on public markets and so there is no readily available price that is published for each share in the company.


For the purposes of the Offshore League we therefore looked at the shareholder funds of the company instead. Shareholder funds represent the amount of money the shareholders have actually invested in a club plus the accumulated profits or losses of the company over time that have not been paid out to the shareholders. In other words, they are the assets of the club, minus what is owed in debt. These two figures must be the same because that is what a ‘balance sheet’ of a company always implies. For our purposes this figure is the best indication of the value of the club owned by the shareholders that we can get. We accept that the value of the shareholder funds may be different from the market value of the shares, as a potential owner may be willing to pay over the odds to gain control of the club. But as all companies in the UK publish the value of their shareholder funds it provides us with a good comparison between clubs which are listed on the stock market and clubs held privately.


It is important to note that the value of shareholder funds can be negative: this means that the club has more debts than assets. This implies that if a club went bankrupt and all its assets were sold off the company would still not be able to pay off its loans. As debt holders are paid before shareholders in a bankruptcy, negative shareholder funds effectively makes the value of shares in the club worthless, at least in the event that the company hit hard times and had to be wound up.
Out of the teams in the offshore league, there were 12 with negative shareholder funds. In these cases we counted the equity value of the club to be £1.


Once the shareholder funds of a club had been established, the value was split by the jurisdiction or jurisdictions owning the shares. For example, if a club had shareholder funds of £10m, and 70% of the shares were held by a company in Bermuda and 30% by a Cayman company we attributed £7m of equity to Bermuda and £3m to the Caymans.


We then looked at the loans made to a club. In order to get a value for the amount of loans coming from offshore jurisdictions we looked though the accounts for identifiable loans from offshore companies.


UK companies are required by UK law to record transactions with related parties, which are companies connected to their owners or directors. This includes loans made to the club from companies related to the owners of its shares. So it is possible to see when loans are made by offshore companies are from entities connected to the club.


The reason why clubs are often funded by loans from the owners has a lot to do with the financial structure of the game. As we noted earlier, a company which does not have large profits will find it difficult to attract loans.
Football clubs do not often make profits because spare cash is reinvested into wages and transfers. So loaning money to a football club is usually a much higher risk investment than loaning money to let’s say, a water company, which has very stable revenues and good profit levels.


It is a fact of financial life that when companies make loans to riskier third parties, they will either seek a greater interest rate, or more security. Security can come in the form of a right to claim one of the company’s assets to repay the debt owing in the event that the company fails to do so. This is, of course, equivalent to a mortgage on a person’s home from a bank or building society.


Football clubs have few fixed assets that are suitable for use as security for loans. By far the most important is the stadium, and there are a number of clubs that have mortgaged their grounds. Other assets of the club are mostly player’s contracts. These assets depreciate quickly and are difficult to finance. Although some countries do have third party player ownership as a way that outside companies can finance players, this practice is officially not allowed in the UK.
In addition in football there is also the “football creditors rule”. This means that in the event that a football club goes bankrupt, players wages, transfer fees to other clubs and any payments outstanding to the league need to be paid off before anyone else – including the tax man and people who have loaned the club money.


All this makes financing clubs from third parties a difficult exercise, and that is why very often loans to football clubs come from the owners of their shares, who have control over the club. Control is the ultimate security.


Where we were able to identify a loan to a club from an offshore company we added the amount of that loan to the amount of equity owned by that jurisdiction from which that loan appeared to have come. So for example, if a club was worth £10m, and 70% of the shares were owned by a company in Bermuda, and the club also had a £30m loan from that Bermudan company then the total amount of finance attributed to Bermuda was £37m.


Occasionally we also found loans from non-shareholding companies listed in the accounts which we were able to identify as being from offshore companies. Where these were found they were also added to the total.


It should be noted this means that the total amount of offshore loans that we have recorded is probably an underestimate. What we found was limited to what we could identify in the accounts of the clubs, and it is quite possible that there will have been more loans made from unrelated offshore parties than we will have identified.


For example, there is a company called Vibrax Corporation based in the British Virgin Islands which has loaned money to clubs like Everton, Southampton and West Ham. We do not know who owns that company. These kinds of loans were beyond the scope of our study.
However for the reasons stated above, the vast majority of loans are likely to be from the owners of clubs and so the amount of finance that we can identify is a good starting point for this study.

Measuring Financial Secrecy

Not all offshore financial centres are equal in terms of the amount of secrecy they offer. For example, Switzerland has for a long time had strict laws on banking secrecy. This allows individuals to hide their private bank accounts. The offshore speciality of The British Virgin Islands, in contrast, is company secrecy. It is extremely easy to form a BVI company and extremely difficult to find out who is behind it.


The Tax Justice Network created the Financial Secrecy Index as a tool for looking at the various levels of secrecy of offshore financial centres. The FSI was launched in 2009 and is published every two years.


It is underpinned by a vast database which looks at 202 different criteria for each secrecy jurisdiction. The criteria cover legal structures, administrative powers, tax and regulations. The database is collected and updated by a team of dedicated researchers and covers 82 different financial centres.


The TJN’s Financial Secrecy Index contains two components; a Secrecy Score and a Global Scale Weight. The Secrecy Score is a score based on how secretive and lightly regulated a financial centre is. The Global Scale Weight looks at the amount of finance which passes though a particular offshore centre. These values are then combined to create the Financial Secrecy Index.


The volume score is included to give a fuller picture of the importance of an offshore financial centre to the world economy. Clearly some secrecy jurisdictions have a much greater impact on global financial flows than others.


So for example although the tiny Pacific Island nation of Nauru has a relatively high secrecy score of 79 out of 100, the amount of finance passing through Nauru is so small it doesn’t register on the Global Scale Weight. This means Nauru features at the bottom of Financial Secrecy Index.


The Index also demonstrates the importance of some major financial centres, such as the United States to the offshore economy. The United States is a secrecy jurisdiction as some states offer highly effective secrecy services.


Delaware is the most important state in this regard. In Delaware, a small state on the highway between New York and Washington, it is incredibly easy to set up a business. There is no requirement that you have any physical presence in the state and no requirement to disclose who owns the company.


Delaware companies as a result have become incredibly popular. Delaware has more companies than people. At just one address, 1209 North Orange, there are 285,000 registered businesses.


These businesses include American Airlines, Bank of America, Coca-Cola, Ford, Google and other top companies. It has also been used as the address of convicted fraudsters and gun runners.


You can get more information about the Financial Secrecy Index and a full breakdown of the methodology from the FSI website.

Creating the offshore league

In order to create the Offshore League, like the FSI, we looked at both the amount of finance coming into clubs from offshore, and the level of secrecy granted by the offshore jurisdictions providing that finance.


To do this we created a league based on a score which has multiplied the amount of finance from offshore jurisdictions by the secrecy scores from the Tax Justice Network’s FSI in order to create an offshore game score that the teams were ranked by.


The FSI secrecy score plots the secrecy of a financial centre on a range from 1 to 100. Because the amount of finance can run into hundreds of millions, an index that simply multiplied the two would lead to the final scores being overwhelmingly weighted towards the size of the club in financial terms. Instead we take logs (base 10) of the amounts of finance from each jurisdiction, and use these to weight the secrecy score for that jurisdiction.


When we could not find where a holding company of a club was based we gave it the maximum secrecy score. In the case of Sheffield United, where one of the holding companies is simply listed as being in “the West Indies” we used the top secrecy score for a secrecy jurisdiction in that region of the world.


So if we take for example a club with a total finance of £10m of which £6m comes from the Luxembourg and £4m from St Kitts in the Caribbean then the Offshore Game score of the club would be 6.778 (log10 of 6,000,000) multiplied by 0.6 (the proportion of finance coming from Luxembourg) multiplied by 67 (by the Financial Secrecy Index secrecy score of Luxembourg) plus 6.602 (log10 of 4,000,000 from St Kitts) multiplied by 0.4 (proportion of finance from St Kitts) multiplied by 80 (Financial Secrecy Index secrecy score of St Kitts). In total this club would have an offshore game score of 484.

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