24/07/2011
NEWS STORY
On Friday, Pitpass ended months of speculation by exclusively revealing that F1 boss Bernie Ecclestone did indeed pay jailed German banker Gerhard Gribkowsky. Earlier in the week prosecutors claimed that Gribkowsky received £27m from someone they named as "Bernard E" and a company owned by the Ecclestone family trust. The F1 boss confirmed this but says he didn't pay the money as a bribe and it wasn't connected to shares in the company which runs F1 as had been reported. Instead it was paid after Gribkowsky threatened to report false allegations about Ecclestone's relationship with his family trust to the UK tax authorities. This revelation by Pitpass' business editor Christian Sylt has got worldwide media coverage but some reporters don't yet seem to understand the key issue.
Ecclestone told Sylt that Gribkowsky's threat of informing the tax authorities came in the "very early days when they were dealing with the trust before it was set up." Accordingly, Ecclestone's lawyers advised him to pay Gribkowsky rather than be faced with three years of legal battles as a result of his allegations.
One F1 sports blogger drew from this the false argument that "the legal profession is well known for its expensive tastes, but three years of legal bills are unlikely to have added up to more than $44 million." Several sports reporters made a similar error which, to be fair, is understandable since this is a complex situation. So, to get to the bottom of the flaw let's start right at the beginning.
The origins of this story actually begin way back in 1985 when Ecclestone got married for the second time. His new wife Slavica, was a Croatian and this fact proved to be significant. A decade after his marriage, interest in F1 soared following the death of Ayrton Senna and the sport's finances exploded. Ecclestone's company Formula One Promotions and Administration was managing the F1 rights and taking a cut. It was big enough for Ecclestone to pay himself an annual salary of £54.9m in 1995 making him the world's highest-paid company boss. However whilst F1's finances were rosy Ecclestone's health was not.
In 1995 Ecclestone turned 65 and suffered from heart problems which culminated in him having a triple bypass four years later. When Ecclestone had his operation Slavica was 41 and had two young children with him. His two concerns were ensuring that his family would be financially secure if he were to die and also ensuring that F1 grew even bigger than it was at the time. Ecclestone's first move helped him achieve both of these aims.
On 19 December 1995, F1's governing body the Fédération International de l'Automobile (FIA) transferred to Ecclestone's company F.O.C.A. Administration (now known as Formula One Management) the rights to F1 for 14 years beginning on 1 January 1997. Ecclestone owned 100% of F.O.C.A. Administration so this gave him 100% control of F1's rights for the first time in history. It is thanks to this move that he has been able to steer F1 to huge commercial success as, unlike some other sports, it has not been run by a committee and this allowed it to make quick decisive decisions.
It also allowed Ecclestone to float or sell his business to generate enough money to ensure his family would be financially secure if he died. Previously this was difficult to do since his company had only managed the rights and not owned them directly. Owning the F1 rights gave F.O.C.A. Administration assets which generated £218.6m in annual revenue in 2007 and in excess of £5.5bn over the lifetime of its 14-year contract with the FIA. These lucrative assets formed the basis of several flotation attempts followed by sales of stakes in the business, most recently to F1's current owner, private equity firm CVC, in 2005.
The sales of stakes in companies which owned F.O.C.A. Administration raised a total of £1.5bn according to Sylt's industry guide Formula Money, and although this gave Ecclestone's family a huge fortune it also raised another problem. Normally in the UK if someone dies their spouse does not pay tax on inheriting money from them. However, because Slavica was Croatian and, by 1995 had not lived in the UK long enough to be domiciled there, she would have had to pay a whopping 40% inheritance tax on any money she received from Ecclestone if he had died.
Ecclestone had a simple solution to this which was moving his shares in F.O.C.A. Administration into an offshore trust in Slavica's name so that she, and the children, would directly receive the money from selling F1. The trust was in the name of Slavica and her children so they would not need to inherit money generated from selling its asset (F1) since they owned it already. So if Ecclestone had died they would not have needed to pay inheritance tax as any other spouse would also be exempt from doing.
As Ecclestone himself told Sylt earlier this year, "I was advised to give the shares because at the time Slavica was non-domiciled because you have to be here 18 years to be domiciled. If I had died during that period, normally a wife could inherit money without paying tax but in that case she would have had to pay tax so the easy way to deal with it was give her the shares."
So on 6 February 1996 Ecclestone transferred his 100% stake in F.O.C.A. Administration to a company called Petara which itself became owned by a company called SLEC (the initials of SLavica ECclestone) and in turn this was owned by Bambino Holdings - the investment vehicle of the offshore trust formed for the benefit of Slavica and his children. However this was just the start of the process. The trust received its first payment in 1999 when SLEC received a loan of £870m secured on the future revenues of F1. This led to the UK tax authorities starting to check that the complex company structure had been set up correctly.
"The [Inland] Revenue obviously had to check everything. It took five years going through that. I didn't deal with it. The trust had to show it was correct," says Ecclestone. It began in 1999 when SLEC received the £870m loan. Then, on 31 December 1999 12.5% of SLEC was sold to investment firm Morgan Grenfell. By 2005, when CVC had just bought 25% of SLEC from Bambino, the UK tax authorities were still poring over the details of the trust and Ecclestone says that Gribkowsky seized the opportunity.
Ecclestone says he paid Gribkowsky £27m after he "threatened that he was going to say that I was running the trust." The F1 boss adds that Gribkowsky "wanted to borrow money to leave the bank and start up," and he implied if he wasn't paid he would suggest Ecclestone was connected to the trust. Ecclestone says he asked his lawyers "if this guy was to do that what would happen? They said, I tell you what would happen, the revenue would assess you and you would have to defend it, because you could defend it, and you would be three years in court and it would cost you a fortune. Better pay."
Ecclestone was not allowed any control over the offshore trust and it has been demonstrated on many occasions that he has no connection with it, let alone control. However, Ecclestone says that Gribkowsky knew that all it took was for him to call the UK authorities and suggest that they should look into his relationship with the trust and at the very least this would delay the process of it being declared valid to proceed. "All he needed to do was to write a letter to the revenue in England," says Ecclestone adding "the revenue opens everything up and they assess you."
The worst case scenario would be that the authorities could start an unnecessary and protracted court case to decide whether Gribkowsky's claim had any substance. Although it clearly did not, this is not a hard and fast guarantee that the court would come to this conclusion. Even courts can make mistakes and no matter how small the risk was, it was not worth Ecclestone taking it. He stresses that "nothing was wrong with the trust. Nothing at all," but "I didn't want to take a risk."
The reason he didn't want to take any risk is simple: if a court had come to the wrong conclusion and claimed that the trust could not proceed, Slavica would have had to pay 40% tax on inheriting the money raised by SLEC. The 1999 loan and all the subsequent sales of stakes in SLEC raised a total of $3.9bn (£2.4bn) so the 40% tax payment would have come to a cool $1.6bn (£1bn) and it would have been completely unnecessary. Accordingly, it is easy to see why Ecclestone was advised to pay the £27m and, as he told Sylt, "the difference between that and a few billion is quite a big amount."
So, back to the misguided suggestion that "three years of legal bills are unlikely to have added up to more than $44 million." We can now see that Ecclestone's reason for paying the £27m was not just the legal fees which would have been incurred if Gribkowsky had made false allegations to the UK tax authorities. Instead, Ecclestone's other concern was over the risk, no matter how small, that a court would wrongly rule that the trust was not fit to be given the green light.
It should be stressed that this is far from the only error in the reporting of this subject. For example, in an article in today's Times, the motor racing correspondent fails to accurately report the basic fact of how many shareholders there were in SLEC when it was sold to CVC. Bearing this in mind it is little wonder that Ecclestone told Sylt that he specifically wanted to tell all to him before he spoke to any other journalist (and he spent hours doing this) so he could write it up for the Telegraph and Pitpass.
Given that the £27m paid to Gribkowsky represents just 1.1% of the money which flowed into the trust, it is not hard to see why Ecclestone was advised to pay it. Since it was a loan Ecclestone should even have got it back from Gribkowsky. "He said he had lots of business already lined up and he was going to do wonderful things, he could have made money and he could have given me the money back," says Ecclestone.
It is much harder to see what would have been the point in trying to report Gribkowsky for blackmail. This is because Ecclestone says that Gribkowsky never directly said he would contact the tax authorities if he wasn't paid the money. This isn't the only reason as Ecclestone adds that "you need to have witnesses or somebody to say 'I heard the guy ask' and anyone who is going to shake you down isn't going to be stupid enough to let that happen."
Ecclestone has not been charged and says he will be cleared of any accusations of wrongdoing. Gribkowsky is unlikely to be so lucky. The £27m was paid into the account of an Austrian company ultimately owned by Gribkowsky. However, Gribkowsky is a German resident so he should have either paid the money into an account in Germany, or declared it there, where tax would have been payable on it at a higher rate than in Austria. One of the three charges against Gribkowsky is tax evasion and it could well be tough for him to shake that off.
This could be made more difficult by the news coming to Sylt from one of his sources in Germany that Gribkowsky "has changed his lawyer." Calls and messages to Reinhard Hoess, who is believed to be Gribkowsky's lawyer, were not returned on Wednesday though it is not known whether this is because he is no longer working with the jailed banker. Sylt's German source adds that "there are some more people besides Gribkowsky and Ecclestone, that are accused." So although Ecclestone's admission is the biggest news which has come out in this case, it looks like there will be more tidbits to come.