Currently appearing in the high court are an ex-Pompey director, past owner and recent manager on various charges of tax-evasion. Charged with fraud and unfair trading practices at  court an ex-Cardiff City director and Plymouth chairman, whilst at Wrexham a consortium containing a solicitor debarred on eighteen counts attempts a take over. That’s just so far this month. Not to mention the shenanigans at Port Vale and Plymouth reported by m’colleagues elsewhere on this site.

The values demonstrated by the West Ham trio of Gold, Sullivan and Brady with their ‘tactful and understanding’ management style also made interesting reading this week. One comment on Phil McNulty’s blog after the insensitive manner of the sacking of Avram Grant by this conglomerate shows the esteem in which they are held. It suggests that Sullivan’s ‘abuse of the players … is typical and it won’t be long before he gets stuck into the fans who, in his mind, never appreciate his largesse and mastery of the football business.’ I gather fans at Birmingham (what IS going on there?) nurture the same level of affection for their ex-owners. That the largesse so described is derived from the porn industry is a matter often used to deride any team they are involved with and often seems more of a joke than a moral issue.

Meanwhile at Pompey in recent times we have had the suspicion of Russian Mafiosi, arms dealing, money-laundering and loan sharking at the margins of the club to go along with the tax-evasion charges. Then there are the allegations of Panorama 2006 … Most delicious irony here is that at Pompey we also now have the Football Association’s ex-head of integrity as CEO. To coin an oft used cliché in Pompey these days – you couldn’t make it up.

Back in January at the launch of the government’s enquiry into football governance, Sports Minister Hugh Robertson called football, ‘The worst governed sport in the country, without a shadow of a doubt’.  Dr John Beech takes this further in stating, ‘football in general is not a sector which has placed a great deal of stress on ethics.’ That this is patently true has been highlighted by the stark contrast between the football establishment’s evidence to the enquiry and that of most other groups. Whilst Scudamore et al talk of the quality of the product, increasing audiences and turnover; groups such as Supporters Direct highlight the vulnerability of the sector to unethical practices.

Supporters Direct (SD) launched two briefing papers in parliament this week addressing these issues outlining the susceptibility of English football to the ‘unethical, dishonourable or ill-advised owners’ which will continue unless adequate regulation is in place. Reports on Twohundredpercent and the above quoted instances surely do enough to illustrate the need for such regulation. Excuse me for saying so, but Supporters Direct are really only pointing out the ‘bleeding obvious’ to those who should know better by now.

In July 2009 the Financial Action Task Force (FATF) published a paper describing the vulnerability of the football sector to money laundering and tax evasion which, they clearly pointed out, use pretty much the same mechanisms. In it they detail advice given by the FA to their member clubs in 2008 on the ‘Money Laundering and the Proceeds of Crime Act’. In this guidance they list questions to ask about payments received, such as ‘Do you know exactly who you are dealing with?’ and ‘Have you properly identified and verified the persons that you are doing business with?’ as well as (here’s the crunch question) ‘Do you know how (the person) has found the funds to pay you?’

If the irony of this has not hit you yet, you are probably not a Pompey fan.

Whilst it is true that football clubs are not directly subject to anti-money laundering legislation, some of their activities do fall within the scope of the act, and that includes player transfers. Yet despite this guidance and FATF’s warning that these practices that may be money laundering or tax evasion operate not only in the area of player transfers but also in that of club ownership, the Premier League still managed to OK the ownership of the elusive Ali al Faraj at Pompey in October 2009. Did they know who they were dealing with? Well they may have done – eventually discovering after the take-over that Al Faraj was in fact any number of people. Did they properly identify and verify the person they were doing business with? Well, yes, if a passport photocopy does that. Did they know how Al Faraj had found the funds … you get my drift.

Have the football authorities learned from the Portsmouth situation? Looking at the case of Leeds United, Richard Scudamore claimed the PL would be far more stringent than the FL currently are if Leeds got promoted… well he did when he was talking to the government enquiry, but seemed to retrench later. Certainly, once Ken Bates had declared his ownership the PL seemed to imply that everything was alright then and that the opacity of ownership up to that point no longer mattered.

All this bears out the visit of SOS Pompey to the Premier League in February 2010. By all accounts this was an interesting meeting to behold as the Premier League intimated they knew far more about the tangled web of ownership at Pompey than SOS did, and SOS had a detailed matrix describing the same. More worrying was the sense that the Pompey representatives at the meeting got from the members of the PL present that they were unconfident in their application of the powers they did have to regulate the ownership of clubs. However, as a result of the meeting the new Owners and Directors Test was formed. The one by which Mr Bates will be tested I assume …

As Supporters Direct explain in their briefing paper, the main problem with FA/PL/FL regulations is that they are re-active, not proactive. In merely punishing misdemeanours when they are proven they allow situations such as Ridsdale working at Plymouth whilst facing charges of fraud from his Cardiff days. They punish a club in new ownership for the misdemeanours of past directors and they allow those that have placed clubs into administration to re-acquire them once a CVA is agreed. At Pompey, not only did the main secured creditor do this but he instantly re-secured some of his debt on the club’s ground when he obtained the club out of administration, thereby putting himself at the head of the queue again should there be a further ‘insolvency event’ at the club. One could assume that he is somewhat risk averse, suggesting that maybe football is not the best business for him to be in.

As far as finance goes, SD explain in quite clear language the basis of the situation that FATF highlighted two years ago. It is quite simply that:

Where companies are in common ownership or in a subsidiary/parent relationship (defined as the ownership of at least 75% of a company’s shares), losses in one company can be offset against profits in another.

The effect of this in a football context is that someone who owns a successful trading business and a football club can use the losses in the football club to reduce tax on the profits in the successful business. This can encourage or allow those running football clubs to do so in a way which is not sustainable were that club to be independent of any group because they can spend more than they earn. Indeed, it turns clubs which might otherwise seem unprofitable and unsustainable enterprises into useful vehicles for the purpose of tax-efficiency within a group of companies.

Of course, if the business that holds the football club is also in trouble, the assets of the football club could also become very useful means of raising capital. Certainly the status of being a football club owner can be useful in a business sense and may help the creditability of individuals in that respect. Otherwise it seems difficult to explain why some otherwise disinterested people become interested in buying a football club. Particularly those who seem to be interested in any club that happens to be on the market at the time. Owners whose chief stated aim is simply to make a profit could be seen as somewhat naïve, at least according to recent Premier League figures published in the Guardian.

However, as pointed out by FATF,  this complex network of stakeholders, diversity of legal structures, the considerable sums of money involved, the irrational and unpredictable character of income and the substantial flow of money into and out of the country via the football sector leave it wide open to abuse in terms of financial irregularities.

SD’s paper continues:-

A related consequence of this is that corporate governance in clubs suffers as the strategic and operational decisions become concentrated in the hands of a limited number of beneficial owners and trusted executives, and innovation in these clubs becomes secondary to securing regular ongoing subsidies from parent entities. These losses, though, remain on the club’s balance sheet, and the potential for sudden withdrawal remains a key source of instability for clubs, ….

Furthermore, this encouragement to run up operating losses is a critical contributor to the systemic levels of instability in football’s finances…

All of this, of course, mitigates severely against any club wishing to run its business in a sustainable and ethical manner and against the ownership of clubs by supporters groups organised into co-operatives, as is advocated by SD. Further, it contributes to the uneven competitiveness of the game through the facilitating of the financial doping of some clubs, whilst others are ruthlessly asset stripped either to balance the books or for other, less sporting, reasons. In between are the carefully run clubs conducting a balancing act between these two extremes, whilst trying to compete in a sporting sense.

It needs to be made clear that none of what SD describe is illegal, and is, in fact common business practise, indeed seen as shrewd in many businessmen’s eyes. This brings me back to the ethics of the sector. In line with the earlier assessment of Gold and Sullivan’s attitude to fans is the stance described by a businessman friend of mine:

The financing of football is now such a major leisure/media industry that it is dominated by people of financial means or connections… My business experience tends to suggest that those who have wealth/power do not often indulge in charity to those who have not, and… have never quite understood why fan groups believe they have a right to put nothing into a business yet expect a say in how it is run, beyond the rather clichéd “it’s our club”. Sorry and all that but it isn’t, it is their club, like it or not .. (Fans) seem therefore to have espoused some divine belief of a right to determine what someone else should do with their money because they happen to be occasional paying customers.

Seen in this way, competition in a business sense does not marry with competition in a sporting or social sense in any way. There are owners of football clubs who see dialogue with fans as of no significance to them in the management of their business affairs. We have a case at Portsmouth where the owners refuse point blank to meet with fans, who appear to instruct the CEO rather than consult with him, thereby rendering any attempts to meet with fans on his behalf next to pointless. That such owners have misunderstood the nature of the business they have bought into is apparent, but the point is that the whole governance structure, both financial and cultural, of English football allows them to manage their business in the way my friend, FATF and SD describe, antithetical though it may seem. The rift between business ethics and footballing ideals is created by the very structure of the sector.

SD makes a strong case for the need reform of the governance of football – for the sake of football and the communities in which it resides. If we are not concerned for the ethical nature of this need above all, then what is the point of a football club? And if we are concerned with ethics, then how can football continue to operate as it does? Will it really take a big club to go to the wall and be allowed to fail, as in Lord Sugar’s solution, before football wakes up to the widening pit at its feet? Nineteen years ago, so the cliché goes, football sold its soul to the devil when the Premier League was formed. In the legend, Faust was allowed to live ‘in all voluptuousness’ for twenty four years before the devil claimed his soul and dragged him down to hell. The thought of Ken Bates getting Leeds into the Premier League within the next five years could be interpreted as taking on a whole new meaning if nothing is done.

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