Treasure Islands: Tax Havens and the Men who Stole the World ( 2011)
By Nicholas Shaxson
Tax havens are the most important single reason why poor people and poor countries stay poor. They lie at the very heart of the global economy, with over half the world trade processed through them. They have been instrumental in nearly every major economic event, in every big financial scandal, and in every financial crisis since the 1970s, including the latest global economic downturn.
Without understanding tax havens we will never properly understand the economic history of the modern world.
Nobody disagrees that Britain sits, spider-like, at the centre of a vast international web of tax havens, hoovering up trillions of dollars’ worth of business and capital from around the globe and funnelling it up to the City of London.
Despite some vigorous efforts, nobody has come close to overturning the research or analysis showing the sheer scale of the harm wreaked on the world by these elitist, criminal-infested libertarian paradises; these silent battering rams of tax-cutting and financial deregulation.
Who will resist this? So far, there has been no grand political re-alignment on the scale of what happened after the Great Depression 80 years ago. The government is embracing offshore, not fighting it. Despite all that’s happened since 2007, we are as in thrall to the bankers, and to the tax havens, as ever.
To say something is good because it’s hard to tackle is no argument at all: it’s a reason to fight harder. If we surrender to hostile forces without even a fight, what kind of people have we become?
Offshore connects the criminal underworld with the financial elite, the diplomatic and intelligence establishments with multinational companies. Offshore drives conflict, shapes our perceptions, creates financial instability and delivers staggering rewards to les grands, to the people who matter. Offshore is how the world of power now works.
Over half of all banking assets and a third of foreign direct investment by multinational corporations, are routed offshore.2 Some 85 per cent of international banking and bond issuance takes place in the so-called Euromarket, a stateless offshore zone that we shall soon explore.3 The IMF estimated in 2010 that the balance sheets of small island financial centres alone added up to $18 trillion – a sum equivalent to about a third of the world’s GDP. And that, it said, was probably an underestimate.
Nobody agrees what a tax haven is. In truth, the term is a bit of a misnomer, for these places don’t just offer an escape from tax; they also provide secrecy, an escape from financial regulation, and a chance to shrug off laws and rules of other jurisdictions, the countries where most of the world lives.
Insulated from domestic challenges and alternative viewpoints, these places have come to be steeped in a pervasive inverted morality, where turning a blind eye to crime and corruption has become accepted as best business practice, and alerting the forces of law and order to wrongdoing has become the punishable offence. Rugged individualism has morphed into a disregard, even a contempt, for democracy and for societies at large.
Offshore is a project of wealthy and powerful elites to help them take the benefits from society without paying for them.
The world contains about sixty secrecy jurisdictions, divided roughly into four groups. First are the European havens. Second, comes a British zone centred on the City of London, which spans the world and is loosely shaped around Britain’s former empire. Third is a zone of influence focused on the United States. A fourth category holds a few unclassified oddities, like Somalia and Uruguay.
The second offshore group, accounting for about half the world’s secrecy jurisdictions, is the most important. It is a layered hub-and-spoke array of tax havens centred on the City of London. As we shall see it is no coincidence that London, once the capital of the greatest empire the world has known, is the centre of the most important part of the global offshore system.
The City’s offshore network has three main layers. Two inner rings – Britain’s Crown Dependencies of Jersey, Guernsey and the Isle of Man; and its Overseas Territories, such as the Cayman Islands – are substantially controlled by Britain, and combine futuristic offshore finance with medieval politics. The outer ring is a more diverse array of havens, like Hong Kong, which are outside Britain’s direct control but nevertheless have strong historical and current links to the country and the City of London. One authoritative account estimates that this British grouping overall accounts for well over a third of all international bank assets; add the City of London and the total is almost a half.
The offshore world is not a bunch of independent states exercising their sovereign rights to set their laws and tax systems as they see fit. It is a set of networks of influence controlled by the world’s major powers, notably Britain and the United States. Each network is deeply interconnected with the others.
The world’s most important tax havens are not exotic palm-fringed islands, as many people suppose, but some of the world’s most powerful countries.
Inside this ecosystem, each jurisdiction struggles constantly to stay abreast of the others. When one degrades its taxes or financial regulations or hatches a new secrecy facility to attract hot money from elsewhere, others then degrade theirs, to stay in the race.
As this has happened, supposedly onshore jurisdictions have increasingly taken on the characteristics of offshore, and in the large economies tax burdens are being shifted away from mobile capital and corporations, onto the shoulders of ordinary folk.
When the billionaire Warren Buffett surveyed his office he found that he was paying the lowest tax rate among his office staff, including his receptionist.
Recently, however, think tanks and non-governmental groups have sought to assess the scale of the problem. In 2005, the Tax Justice Network estimated that wealthy individuals hold perhaps $11.5 trillion worth of wealth offshore. That is about a quarter of all global wealth, and equivalent to the entire gross national product of the United States. That much money in dollar bills, placed end to end, would stretch 2,300 times to the moon and back. The estimated $250 billion in taxes lost on just the income that money earns each year is two to three times the size of the entire global aid budget to tackle poverty in developing countries. But that just represents tax lost on money wealthy individuals hold offshore. Add to that all the corporate trade mispricing, and you start to get a handle on the size of illicit financial flows across borders.
Aside from having created a gigantic global hothouse for crime, the global offshore system was one of the central factors that helped generate the latest financial and economic crisis since 2007.
First, they provided financial corporations with what the accountant Richard Murphy calls a ‘get out of regulation free’ card. This escape route from financial regulation helped financial firms grow explosively, achieving ‘too-big-to-fail’ status and gaining the power capture the political establishments in Washington and London.
Second, as the secrecy jurisdictions degraded their own financial regulations they acted as berserkers in the financial system, forcing onshore jurisdictions to ‘compete’ with them in a beggar-thy-neighbour race to towards ever laxer regulation.
Third, huge illicit cross-border financial flows, much of it unmeasured by conventional national statistics, have created massive net flows into deficit countries like the US and Britain, adding to the more visible global macroeconomic imbalances that underpinned the crisis.
Fourth, offshore incentives encouraged companies to borrow far too much and helped them hide their borrowings.
Fifth, as companies fragmented their financial affairs around the world’s tax havens for reasons of tax, regulation or secrecy, this created impenetrable complexity which, mixed with offshore secrecy, foxed regulators and fed the mutual mistrust between market players that worsened the financial and banking crisis.
Trust is a central ingredient in any healthy economic system – and there is nothing like the offshore system to erode trust. It is no coincidence that so many of the great houses of financial trickery like Enron, or the empire of the fraudster Bernie Madoff, or Long Term Capital Management, or Lehman Brothers, or AIG, were so thoroughly entrenched offshore.
Serial tax avoiders are made knights of the realm; journalists seeking guidance in this complex terrain routinely turn to these very same offshore cheerleaders for their opinions. Bit by bit, offshore’s corrupted morality becomes accepted into our societies.
By allowing the cream of society to escape, tax havens undermine the rules, systems and institutions that promote the public good, and they undermine our faith in those rules. They are corrupting international finance.
This fight needs an international perspective, to build new forms of international cooperation.
Wherever you live, whoever you are or what you think – this affects you.
Offshore prevents effective oversight of financial markets, makes crises more likely and enables rich insiders to shift all the risks and the costs of bailouts onto the working majority and away from the investing minority. The efficiency that boosters of the offshore system claim for themselves is bogus. Capital no longer flows to where it gets the best return, but to where it can secure the best tax subsidies, the deepest secrecy, and to where it can best evade the laws, rules and regulations it does not like.
In a world of free capital flows, if you try to lower interest rates to boost struggling local industries, say, capital will drain overseas in search of higher returns. Investors hold veto power over national governments and the real lives of millions of people are determined by what the Indian economist Prabhat Patnaik has called ‘a bunch of speculators’.
Dismantling capital contols is one thing, but we have now taken a full step again beyond that, into a world where capital is not only free to flow across borders, but is actively and artificially encouraged to move, lured by any number of offshore attractions: secrecy, evasion of prudential banking regulations, zero taxes and so on.
Mainstream economics today embraces a simple theory that goes something like this. Poor countries lack capital and foreign investment can fill the gap, so it makes sense to free up capital, to let it flow into these capital-starved countries. This seems like a very good idea on the face of it, but what mainstream theory has failed seriously to address is that if you free up capital, money might not necessarily flow in; it might, instead, flow out.
The Marshall Plan set an ominous precedent – American taxpayers would foot the bill for policies that delighted Wall Street and its clients. What was presented as enlightened self-interest was substantially a racket, in the precise sense of a fraud, facilitated by public ignorance. As we shall soon see, the rackets have multiplied ever since.
The quarter-century that followed from around 1949, in which Keynes’ ideas were widely implemented, is now known as the golden age of capitalism, an era of widespread, fast-rising and relatively untroubled prosperity.
In the 1980s, as capital controls were progressively relaxed around the world and as tax rates fell and the offshore system really began to flower, growth rates fell sharply.
Average growth is one thing, but to get an idea of how well most people are doing, you need to look at inequality too. In the offshore era, from the mid-1970s onwards, inequality has exploded in country after country. According to the US Federal Bureau of Labor Statistics, the average American non-supervisory worker actually earned a lower hourly wage in 2006, adjusted for inflation, than in 1970. Meanwhile, the pay of American CEOs rose from under thirty times the average worker’s wage to almost 300 times.
Another study found that between 1940 and 1971, roughly the time of the golden age, developing countries suffered no banking crises and only sixteen currency crises; but in the quarter-century after 1973 there were seventeen banking crises and fifty-seven currency crises – not to mention a cavalcade of other economic disasters.
The golden age shows that it is quite possible for countries, and the world economy, to grow quickly and steadily while under the influence of widespread and even bureaucratic curbs on the flow of capital. China today – which carefully and bureaucratically restricts inward and outward investment and other flows of capital – is growing rapidly.
What has happened since the 1970s is not simply a return to free movement of capital, but financial liberalisation on steroids: the offshore system that tore financial controls apart from the 1970s onwards has served both as an accelerator for flighty financial capital, and also as a distorting field, bending capital flows so that they end up not where they necessarily find the most productive investment, but where they can find the greatest secrecy, the most lax regulations and freedom from the rules of civilised society.
It is hard now to imagine those days, an era when bankers fumed impotently at politicians’ mighty powers. Those few years after the Second World War were the only time in several hundred years when politicians had any kind of control over the banking sector.
In April 1947 Albert Hunold, a senior Credit Suisse official,10 brought together thirty-six scholars at the pretty Swiss resort of Mont Pèlerin near Geneva to plan for a revival of liberalism (in modern parlance, neoliberalism) under the guidance of Friedrich Hayek, an Austrian liberal economist who had published a best-selling polemic against socialism and big government entitled The Road to Serfdom.
One of the attendees was the American economist Milton Friedman, whose subsequent work inspired Margaret Thatcher and Ronald Reagan.
From the start, the Mont Pelerin Society had strong links to the City of London, via Sir Alfred Suenson-Taylor, later Lord Grantchester, chairman of a major insurance company in the City of London and brother of a British Conservative member of parliament. Suenson-Taylor not only provided a welcome link to a network of wealthy anti-government City financiers, but he also helped unlock Bank of England funds to support British delegations to the Mont Pelerin Society meetings.13 To actively support an overtly anti-government movement is a curious role for a central bank, but that was not the only peculiar thing about it.
The Bank of England had been set up 250 years earlier as a club of wealthy City of London banks, and it was only in 1946, during Keynesianism’s brief dominance after the horrors of war and the Great Depression, that the politicians had the political strength to nationalise it. Even after nationalisation, however, the politicians could not control it. The government could not dismiss the bank’s governor, and the Bank still kept its internal operations shrouded in secrecy. To this day the bank has continued to draw top officials directly from private financial services companies in the City of London, in a constantly revolving door. A British Treasury paper in 1956 concluded that nationalisation did not represent ‘any fundamental change or break’ with the past. Keynes had called the Bank of England ‘a private institution practically independent of any form of legal control’,14 and after nationalisation, it seems, not much changed. The Bank of England has also remained a powerful lobbyist within the British state, a sort of praetorian guard protecting the City of London and its libertarian world view – and by extension the global offshore system.
By 1965, an empire that had ruled over 700 million foreigners at the end of the Second World War had shrunk to a population of just five million. This is well known; but there is a financial side to this story which almost nobody knows about, for out of the dust and fire of Suez something new emerged in London, which would eventually grow to replace the old empire, and raise the City of London to even greater financial glories.
This was the birth of what Ronen Palan, professor of international economy at Birmingham University, calls ‘a regulatory vacuum, which is called the Euromarket, or the offshore financial market’. A British bank, say, would keep two sets of books – one for its onshore operations, where at least one party to the transaction was British, and one for its offshore operations, where neither was British. In other words, as Palan put it, ‘the Euromarket might be considered as essentially no more than a bookkeeping device.’
It was at this point that the modern offshore system really began.
And, as is usual with so much that happens in the offshore system, almost nobody noticed.
Modern histories of London’s growth as a financial centre typically point to the Big Bang of 1986 – the sudden deregulation of London’s markets driven by Prime Minister Margaret Thatcher – as the moment when London really took off. The Big Bang was important to be sure, but Tim Congdon, perhaps one of the City of London’s sharpest and most experienced spokesmen, spotted the real story. ‘The Big Bang,’ he wrote in the Spectator magazine ‘is a sideshow to, indeed almost a by-product of, a much Bigger Bang which has transformed international finance over the last 25 years.
‘An extraordinary situation has arisen,’ he continued, ‘where the Euromarket, which has no physical embodiment in an exchange building or even a widely recognised set of rules and regulations, is the largest source of capital in the world.’27 Gary Burn put it in a different light. The market’s emergence, he said, was ‘the first shot in the neo-liberal counter-revolution against the social market and the Keynesian welfare state’
The London loophole, in effect a new banking technology, was the invisible financial counterpart of the Mont Pelerin Society’s ideological insurgency. While the ideology provided the enabling environment, it was this new London market and its subsequent spin-offs that ultimately forced through the liberalisation of the world economy, whether the world’s citizens liked it or not.
In fact, the formal empire did not quite disappear; fourteen small island states decided not to seek independence, becoming British Overseas Territories, with the Queen as their head of state. Exactly half of them – Anguilla, Bermuda, the British Virgin Islands, the Cayman Islands, Gibraltar, Montserrat and the Turks and Caicos islands, are secrecy jurisdictions, actively supported and managed from Britain and intimately linked with the City of London.
As the Euromarket bonfire raged ever higher, capital began its assault on the citadels of power and the democratic nation state.
It is now so all-enveloping that the Bank for International Settlements, which oversees global financial flows, has given up trying to measure its size; it simply bundles everything together into wider foreign exchange markets.
Free money for bankers and the representatives of the world’s wealthy at the expense of everyone else is a basic leitmotif of the offshore system.
It is hard to believe that money can be simply conjured out of thin air like this, but this is one of the most important things banks do. ‘Money creation is a bizarre thing to ponder,’ said the economist J. K. Galbraith. ‘The process by which money is created is so simple that the mind is repelled.’ This is the central mystery of banking: a bank can ‘expand its balance sheet’ by extending credit to others. In the banking world, money can be created merely by the act of lending it – it is money as debt.
There has been huge controversy for decades about how much the Euromarket has really contributed to expanding the amount of money sloshing around in the world, boosting risk and building an unsustainable pyramid of increasingly wobbly debt. Since the one institution that could have measured this market – the Bank for International Settlements – has stopped measuring it, it is hard to come to any solid conclusions about how it has, for example, contributed to the latest financial crisis and the explosion of debt globally. Yet some things seem fairly clear. If you create an enormous arena for generating unregulated new credit, these markets will expand to displace better-controlled banking operations, and demand will rise to meet potential supply. Credit will start expanding into places where it wasn’t previously able to, and often to where it really shouldn’t be.
Euromarkets, in other words, made it possible for credit quality to deteriorate out of sight of the regulators.
Even in 1975, years after people started raising concerns, a US congressional committee report expressed amazement at how this new market had stayed so far beneath the political radar. These concerns would be echoed a generation later by the Bank for International Settlements in June 2008, as financial panic spread around the globe. ‘How could a huge shadow banking system emerge,’ it asked forlornly, ‘without provoking clear statements of official concern?’ It turns out, as we shall see, that the offshore Euromarkets are to a large degree the enabling environment for this shadow banking system: the deep and unregulated financial sea populated by all the big, dangerous sharks of the latest economic crisis – the bizarre structured investment vehicles, conduits and their like that recently caused so much grief.
It was not only American politicians who failed to see through this carefully constructed veil of secrecy and obfuscation. Bank of England letters reveal in bold colours the central role it played in keeping the rise of offshore off the political agenda.
As Gary Burn put it, the Bank of England ‘guarded its control over the British banking system from other state institutions, especially the Treasury, only then to delegate much of this authority, in turn, via “representative associations”, to the City’s banks.’
Who in Britain questioned this kind of arrangement seriously and got a proper hearing?
The Euromarkets were not the fruit of an original master plan but instead grew under their own internal logic, rapidly becoming an unstoppable force in the global economy. But from the 1960s they also grew hand in hand with a second, more deliberately constructed counterpart: a London-centred web of half-British territories scattered around the world that would catch financial business from nearby jurisdictions by offering lightly taxed, lightly regulated and secretive bolt holes for money. Criminal and other money could be handled by the City of London, yet far enough from London to minimise any stink.
Just as the Bank of England had officially tolerated but quietly encouraged the growth of the offshore Eurodollar market from 1955, so Britain adopted a policy of official tolerance and quiet encouragement towards its new secret empire.
In 1976 the Caymans’ offshore industry got a new and unexpected fillip. It started when Anthony Field, the managing director of Castle Bank & Trust (Cayman) Ltd, was served with a subpoena on arriving at Miami airport, on suspicion that his bank was facilitating tax evasion by American citizens. The US authorities wanted him to testify before a grand jury, but he refused. In response, the Cayman Islands drafted the infamous Confidential Relationships (Preservation) Law, which makes it a crime punishable by prison to reveal financial or banking arrangements in Cayman. You can go to jail not only for revealing information, but just for asking for it.25 It was a giant, fist-pumping Fuck You aimed squarely at American law enforcement – and became a cornerstone of Cayman’s success. Cayman offshore practitioners remember cash literally flying in on private aircraft. Chris Johnson, an accountant, remembered in an interview in 2009 how people would arrive with large amounts of money in suitcases and get a police escort to the bank if they requested it. Britain did nothing.
Company law statutes in the Cayman Islands come from English law as far back as 1862 – with certain democratic provisions removed – one of which means that frequently the directors of hedge funds or mutual funds are indemnified from litigation. ‘So you can’t be sued for negligence. Suppose I’m liquidating a fund and $200 million is gone. Why shouldn’t I be able to sue them? The directors are steering the ship, but when it sinks they can’t be sued.’
But these havens levy no tax on those profits. To this day, accounting standards effectively hide this kind of trickery, letting companies shovel results from different countries into a single category (often called simply ‘international’) which cannot be unpicked to work out who takes what profit where. ‘Only the immense political power of these extractive sectors,’ said Hudson, ‘could have induced their governments to remain so passive in the face of the fiscal drain.’
Sometimes, corporations can bring this offshore money back through loopholes or amnesties: in 2004 George W. Bush’s administration offered his corporate friends a chance to repatriate profits and pay just five per cent tax rate instead of the normal 35 per cent. Over $360 billion whooshed back to the US, much of which went into share buybacks, boosting executive bonuses. ‘There is no evidence,’ said the non-profit research organisation Citizens for Tax Justice, ‘that the amnesty added a single job to the US economy.’
Monetarist theories of tackling economic problems by focusing on the money supply were coming into vogue just as the Euromarkets, lacking regulation and official checks on banks’ abilities to create money out of thin air, were starting to disrupt the Fed’s efforts to control that very money supply.10 Volcker called for a new cooperative international framework through the Bank for International Settlements in Switzerland, to get other countries to clamp down on uncontrolled money creation in the offshore system. But New York bankers, in alliance with the Bank of England and the Swiss National Bank, killed the initiative.
The Carter administration decided to commission a major survey of secrecy jurisdictions, the first really serious challenge to the havens in world history. The Gordon Report, as it was called, condemned tax havenry as a situation that ‘attracts criminals and is abusive to other countries’ and called on America to lead the world in a crackdown. Published a week before Ronald Reagan was inaugurated in 1981, it was buried almost immediately.
A tax haven sets up worthy treaties that require them to exchange information with foreign jurisdictions, then they set up the structures to make sure that they never have the information to exchange in the first place. They keep their secrecy, but – by pointing to their treaties – they can claim that they are a transparent and cooperative jurisdiction.
The Clinton administration, to be fair, issued proposed regulations near the end of its second term that would have provided OECD countries with information about their citizens’ US bank deposits. American banks, especially those with major deposits in Florida and Texas, lobbied hard, and George W. Bush’s administration dropped them.
A Wyoming-based website boasts, ‘Wyoming Corporations and LLCs have a tax haven within the United States with no income taxation, anonymous ownership and bearer shares … Shelf Corporations and LLCs: Anonymous entity where YOUR NAME IS ON NOTHING! These companies already exist and are complete with Articles, Federal Tax ID numbers and registered agents … You may have these complete companies by TOMORROW MORNING!’ Yours for sixty-nine dollars, plus modest state filing fees.
As late as the early 1990s mainstream development theorists trying to work out why some countries were failing, or why poverty was so widespread, all but ignored the issue of corruption.
The OECD’s Anti-Bribery Convention came into force only in 1999, and the UN’s Convention Against Corruption only solidified in 2003. In many OECD countries bribery was even tax-deductible until just a few years ago.
After the brutal Nigerian president Sani Abacha died in 1998, poisoned while in the company of Indian prostitutes, it was revealed that he had skimmed off billions of dollars of oil money. Two countries in particular soaked up his embezzled wealth – Britain and Switzerland.
By the early 1980s the main elements of the modern offshore system were in place, and growing explosively. An older cluster of European havens, nurtured by European aristocracies and led by Switzerland, was now being outpaced by a network of more flexible, aggressive havens in the former outposts of the British empire, which were themselves linked intimately to the City of London.
The Bretton Woods system of international cooperation and tight control over financial flows had collapsed in the 1970s, and the golden age of capitalism that had followed the Second World War had ended. The world had entered a phase of much slower growth, punctuated by regular financial and economic crises, especially in developing countries.
As all this happened, and the offshore system grew and metastasised around the world, a new and increasingly powerful army of lawyers, accountants and bankers emerged to make the whole system work. Offshore, in partnership with changing ideologies, was driving the processes deregulation and financial globalisation. In particular, the London-based Euromarket, then the wider offshore world, provided the platform for US banks to escape tight domestic constraints and grow explosively again, setting the stage for the political capture of Washington by the financial services industry, and the emergence of too-big-to-fail banking giants, fed by the implicit subsidies of taxpayer guarantees and the explicit subsidies of offshore tax avoidance.
Many people supposed that by eliminating double taxation and creating nearly frictionless conduits for capital, the offshore system was promoting global economic efficiency. In reality the system was rarely adding value, but instead redistributing wealth upwards and risks downwards, and creating a new global hothouse for crime.
What was actually happening was nothing less than a head-on assault on New Deal principles in the US, on the foundations of social democracy in Europe, and on democracy, accountability and development in vulnerable low-income countries across the world.
The narcotics industry alone generates some $500 billion in annual sales worldwide,2 twice the value of Saudi Arabia’s oil exports.3 The profits made by those at the top of the trade find their way into the banking system, the asset markets and the political process through offshore facilities. You can only fit about $1 million into a briefcase. Without offshore, the illegal drugs trade would be a cottage industry.
Multinational corporations could never have grown so vast and powerful without tax havens. Goldman Sachs is very, very much a creature of offshore.
Without understanding offshore, we will never properly understand the history of the modern world. The time has come to make a start on filling this gap in our knowledge – to appreciate how offshore has bent the world’s economy into its present shape, transforming societies and political systems in its image.
It was Africa’s curse that its countries gained independence at precisely the same time as purpose-built offshore warehouses for loot properly started to emerge. For many of these countries, independence really meant independence for their elites from bothersome rules. The colonial powers left, but quietly left the mechanisms for exploitation in place. *
In March 2010 Global Financial Integrity (GFI) in Washington authored a study on illicit financial flows out of Africa.21 Between 1970 and 2008, it concluded, ‘Total illicit financial outflows from Africa, conservatively estimated, were approximately $854 billion. Total illicit outflows may be as high as $1.8 trillion.’
Raymond Baker, director of GFI, was quite right to call the emergence of the offshore system ‘the ugliest chapter in global economic affairs since slavery’
Today the top 1 per cent of households in developing countries own an estimated 70–90 per cent of all private financial and real estate wealth. The Boston Consulting Group reckoned in 2003 that over half of all the wealth owned by Latin America’s wealthiest citizens lay offshore. ‘The problem is not that these countries don’t have any assets,’ a US Federal Reserve official said. ‘The problem is, they’re all in Miami.’
Economists have not ignored these issues entirely, but they almost always break them down into discrete, country-level local problems that only blame corrupt local elites. These matter, of course – but such analyses obscure what all the disasters have in common.
And in the relatively few instances when offshore erosion has been considered, it has been taken as an inconvenience, to be addressed with Band-Aids. As one IMF report put it: ‘Offshore banking has most certainly been a factor in the Asian financial crisis. A special effort is therefore needed to help emerging economies … to avert financial crises through dissemination of internationally accepted prudential and supervisory standards.’ The IMF is arguing here in an illogical circle. By helping local elites effectively place themselves above the law and creating new temptations to mischief, the offshore system neuters the chance of the prudent regulation and supervision that is needed to protect those countries against that very same offshore system. Imagine if those elites had to keep their money at home, or at least account for their wealth, pay appropriate taxes on it, and submit to appropriate laws. Very soon they would understand why good government was in their direct interests. The saddest part of all this is that it should have been obvious to anybody who gave it a moment’s thought.
On the surface Jersey feels terribly British, and the island’s rulers always say it is a well-regulated, transparent and cooperative jurisdiction. The reality is shockingly different. It is a state whose leadership has essentially been captured by global finance, and whose members will threaten intimidate anyone who dissents.
After the LLP law passed in Jersey, the accounting firms next opened a front in London.
The campaign worked. Britain passed its own LLP law in 2001 and the accountants stayed. ‘It was the work that Ernst & Young and Price Waterhouse undertook with the Jersey government,’ an Ernst & Young partner crowed, ‘that first concentrated the mind of UK ministers … I’ve no doubt whatsoever ourselves and Price Waterhouse drove it onto government’s agenda because of the Jersey idea.’31 As Sikka put it, ‘the Jersey sprat had served its purpose, now that the UK mackerel had been landed.’
I have no objection to deregulation in principle, as long as it is the process of genuine – and I mean genuine – democratic bargaining that considers the needs of all affected stakeholders, at home and overseas. But what we have in Jersey and Delaware is rampant, uncontrolled deregulation, harnessed to the interests of a few insiders and large corporate players. Just as European nobles used to consolidate their unaccountable powers in castles, to better subjugate and extract tribute from the surrounding peasantry, so financial capital has coalesced in these fortified nodes of unaccountable political and economic power, capturing local politics and turning these jurisdictions into fast and flexible private law-making machines, defended against outside interference and protected by establishment consensus and the suppression of dissent.
Offshore is not just a place, an idea, a way of doing things, or even a weapon for the finance industries. It is also a process: a race to the bottom where the regulations, laws and trappings of democracy are steadily degraded, as one arrangement ricochets from one fortified redoubt of finance to the next jurisdiction, and the offshore system pushes steadily, further, deeper, onshore. The tax havens have become the battering rams of deregulation.
The future that the offshore system promises has a distinctly medieval quality: in a world still nominally run by democratic nation states, the offshore system is more like a network of guilds in the service of unaccountable and often criminal elites.
A lot of innovation – I’m talking about useful innovations to make better and cheaper goods and services, not the City of London’s innovations that simply shift wealth upwards and shift risks downwards – happen in small and medium-sized enterprises. But the offshore system works directly against this. It subsidises multinationals by helping them cut their taxes and grow faster, making it harder for the innovative minnows to compete. And when small innovative firms do emerge they become targets for predators who seek to ‘unlock value’ from ‘synergies’ created by bringing the small firm into the bigger, more diversified one.
This harvesting removes nimble, competitive and innovative firms from the marketplace and relocates them inside large corporate bureaucracies, curbing competition and potentially raising prices. Debt rises, and ordinary people pay more tax or see their schools and hospitals fall into disrepair. And if the predators leave their earnings offshore they can defer tax on them indefinitely.
Like multinationals on steroids, banks have been particularly adept at going offshore to grow fast: by using tax havens to escape tax, to avoid reserves requirements and other financial regulation and to gear up their borrowings. Banks achieved a staggering 16 per cent annual return on equity between 1986 and 2006, according to Bank of England data,43 and this offshore-enhanced growth means the banks are now big enough to hold us all to ransom. Unless taxpayers give them what they want, financial calamity ensues. This is the too-big-to-fail problem – courtesy of offshore.
In giving freedom to finance, people in democratic nation states lost their freedom to choose and implement the laws and rules that they wanted. They handed these freedoms to the world’s financiers in exchange for a promise: that the efficiency gains from those free financial flows will be so enormous as to make that loss of freedom worthwhile. The tax havens helped bring this calculation to nought.
This is the real story: when tax havenry exploded and finance became freer, tax evasion and capital flight followed.
‘Don’t interfere with our rights as sovereign states!’ the havens cry while interfering merrily in other nations’ sovereign laws and tax systems.
Countries need, above all, sound institutions, good infrastructure and the effective rule of law, exactly what the offshore system has been undermining.
Much of the world’s wealth derives from what economists call rents, the kind of unearned income that flows effortlessly to oil-rich rulers.
‘Oil expresses perfectly the eternal human dream of wealth achieved through lucky accident, through a kiss of fortune and not by sweat, anguish, hard work.
Nearly every sane economist since Adam Smith has agreed that it is very good, and very efficient, to tax rents at very high.
One kind of rent comes from market monopolies or oligopolies, such as those enjoyed by pharmaceutical patents, by government-sanctioned licences afforded to the big four accounting firms, by taxpayer-guaranteed international banks and by the one and only Fédération Internationale de Football Association (FIFA), the super-wealthy international governing body of world football. The global headquarters of most major players in all these highly profitable industries are located offshore, most especially in Switzerland, directly against every notion of economic efficiency.
Offshore structures always serve citizens and institutions elsewhere – so the beneficiaries are always elsewhere. This is why it is called offshore. Plausible deniability is the whole game. The fraudsters may well be elsewhere, but offshore is what makes the fraud work. Secrecy jurisdictions are to fraudsters what fences are to thieves.
After a temporary setback during the recent financial crisis, the offshore system is now growing again at ferocious speed.
Rich governments cannot be trusted to do the right thing on tax havens and transparency. Many will demand more transparency and international cooperation even as they work to frustrate both. They will call for reasoned debate as they engage in character assassination, secret deals and worse. They will talk the language of democracy and freedom the better to defend unaccountable, irresponsible power and privilege.
How do all these fallacies – the OECD’s information exchange standards, the contradiction of tax cutting to increase revenues and tax cutting to starve the beast, and Mitchell’s offshore incoherencies – continue to thrive? Author Jonathan Chait provides a good answer. ‘The lesson for cranks everywhere,’ he wrote, ‘is that your theory stands a stronger chance of success if it directly benefits a rich and powerful bloc, and there’s no bloc richer and more powerful than the rich and powerful.’ The last word here goes to Bob Mcintyre of Citizens for Tax Justice, who has spent much of his life battling the armies of lobbyists in Washington. ‘There are so few of us,’ he sighs wearily, ‘and so many of them.’ *
Most people working offshore only see fragments of the big picture so do not understand what is going on. For example, if there is a trust set up in the Caymans, and the securities portfolio is in Switzerland, you will get very little information in the Caymans. You won’t know the reason why things happen. The ones who commit the crimes – those people who set up the trust or the special purpose vehicle – will often sit in New York or London.
The ruling classes realise they don’t need to worry about the Democrats coming to power in the US, or Social Democrats coming to power in Germany, or Labour coming to power in Britain. They realised they didn’t need to fight the fight at home. They already had this flotsam and jetsam of the empire strewn across the globe, with their red post boxes and British ways of life, and incredible subservience to the English ruling class.
The City gentlemen had found a way around the threat of democracy.
This of course dovetails closely with offshore’s ‘It’s not our problem – fix it yourselves’ ethical framework, which holds the rights of citizens and governments elsewhere to be inconsequential, which sees democracy as a tyranny of the masses and which holds the very idea of society in disregard, even contempt.
Konrad Hummler, a vocal senior Swiss banker, calls Germany, France and Italy ‘illegitimate states’ because their taxes are too high. Tax evasion, or what he calls ‘Swiss-style saving outside the system’, is, he says, a legitimate defence by citizens attempting to ‘partially escape the current grasp of the administrators of a disastrous social welfare state and its fiscal policies’.
Offshore attitudes are characterised by amazing similarities of argument, of approach and of method, and some striking psychological affinities in a geographically diverse but like-minded global cultural community. A peculiar mixture of characters populates this world: castle-owning members of ancient continental European aristocracies, fanatical supporters of American libertarian writer Ayn Rand, members of the world’s intelligence services, global criminals, British public schoolboys, assorted lords and ladies and bankers galore. Its bugbears are government, laws and taxes, and its slogan is freedom.
Right-wing ideologies that for years have been beyond the pale in the larger democracies have been allowed to grow without restraint offshore. As offshore finance has become increasingly influential in the global economy, re-engineering onshore economies in ever more significant ways, so such attitudes have flourished, gaining strength and confidence within the larger economies. This is evident in the intransigent arrogance of bankers, who, having nearly brought the world economy to its knees, still ask for more and threaten to relocate elsewhere if they are regulated or taxed too much. It is visible in the demands of the super-rich, who have come to expect and demand tax rates below those of their office cleaners.
America, the great democracy, is now in thrall to the world views of unaccountable, abusive and often criminalised elites, in large part thanks to offshore finance. Having colonised the economies and political systems of the large nation states where most of us live, offshore finance has gone a very long way towards capturing our attitudes too.
… Soon afterwards, Labour suffered its fourth consecutive defeat since Margaret Thatcher’s election in 1979, and Smith died of a heart attack in 1994. His replacement, Tony Blair, finally transformed the Labour Party into an institution that the City could learn to love. In this work Blair was ably assisted by Herbert Morrison’s grandson Peter Mandelson. In 1996 Blair quietly dropped Labour’s decades old pledge to abolish the Corporation of London, replacing it with a vague promise to ‘reform’ the City. Few people in Britain even noticed the capture of Britain’s last major bastion of real opposition to the financial sector.49 When Blair was elected the following year by a landslide, the Corporation could rest assured that its position was safe.
Not only that, but the Labour Party’s proposed ‘reform’ – that private members’ bill Taylor and Glasman had noticed – was no compromise but an astonishing capitulation to the Corporation of London. On the face of it the bill was a non-event: it merely streamlined and shook up voting rights in the Court of Common Council, the Corporation’s municipal governing body.51 Yet behind this lay an extraordinary fact. While the City’s 9,000-odd human residents had one vote each, businesses in the City could vote too, with 23,000 votes between them. The corporations could easily outvote the human beings. Blair’s reform proposed to dilute the power of the residents even further. They would still get their 9,000 votes, business vote would be expanded to 32,000, giving the companies, as the Guardian noted, ‘carte blanche to run the City’. Businesses would be assigned voting rights according to how many employees they had but without any requirement to take their workers’ wishes into account. Management – representing the money – would be voting, not ordinary employees.52 Thus Goldman Sachs, the Bank of China, Moscow Narodny Bank and KPMG have been voting in British elections.
Just as Switzerland’s system of concordance has emasculated potential political opposition there, and Jersey’s no-party politics embeds the dominant view of a political elite captured by the interests of finance, so the Corporation of London has institutionalised the death of opposition politics in the City.
In 2005 Britain’s then chancellor Gordon Brown introduced his Better Regulation plan, scorning the ‘heavy hand’ of regulation and exalting ‘a million fewer inspections every year … a risk based approach to regulation to break down barriers holding enterprise back’.
An official review in 2008 of the Crown Dependencies and Overseas Territories was led by Michael Foot, a former Bahamas central banker and chairman of a financial services company, the Promontory Financial Group, whose website boasts that its client roster includes ‘banks of all sizes, securities firms, insurance companies, investment advisers, private equity firms, hedge funds, broker-dealers and exchanges – in short, financial companies of every stripe’.
When the government launched an inquiry in 2008 into the financial crisis, every single one of the team’s twenty-one members had a background in financial services:68 four were from the City Corporation itself, including the lord mayor and two former lord mayors. The review was led by Sir Winfried Bischoff, a former Citigroup chairman.
Something profound has changed in Britain. ‘Nobody is willing to take on the City,’ said McDonnell, ‘even now, after everything that has happened.’
To discover how far the City consensus has penetrated the British body politic, I sought out an insider. Through an intermediary I arranged to meet a senior officer of HM Revenue and Customs (HMRC), Britain’s tax authorities, who was involved in taxing big corporations.
After the Labour government came to power, the whole culture in HMRC changed. Taxpayers became ‘customers’.
‘We used to have a priority to collect tax,’ my informant said, ‘now we have a priority to have a good relationship. We have got into a situation of persuading ourselves that it is a win-win to have businesses pay their taxes voluntarily, rather than have us take them to litigation.’ A UK parliamentary committee in October 2008 found that a quarter of multinationals paid no corporation tax at all in 2005-2006.
This is a disaster for the integrity of the British state.
Banks use their privileged offshore positions to avoid tax on themselves and to create, fund and sell tax-avoidance schemes to others.
The culture of tax avoidance permeated British society.
The consensus is now so widespread that Britain’s tax authorities sold off nearly 600 of their own buildings in 2001 to a company, Mapeley, registered in Bermuda to avoid tax; the National Audit Office concluded eight years later that the deal would probably cost £570 million more than originally anticipated.75 In 2009 it emerged that the government minister in charge of cracking down on corporate tax avoidance had set up a business in Bermuda to avoid tax.
Paying tax should be at the centre of debates about corporate responsibility, but it is ignored. Lord Oakeshott of the Liberal Democrat Party noted in 2009, ‘Too many boards right across Britain tick the green and diversity boxes, then reward their finance or tax director for cheating their customers, the taxpayer.’
English libel laws are among the comforts for those with dirty money who come to London. There is no constitutional protection here for free speech, like the First Amendment in the US; there is no defence in cases of high public interest; and unlike nearly everywhere else the burden of proof is deposited squarely on the shoulders of the defendant.
The libel laws, of course, suit the City’s wealthy interests very nicely indeed. They are, in the words of commentator George Monbiot, ‘a sedition law for the exclusive use of millionaires… an international menace, a national disgrace, a pre-democratic anachronism’.
Few newspaper editors now seriously cover the thorny issue of tax avoidance by multinationals – ‘as intelligible to the average person as particle physics’, as the Guardian’s editor Alan Rusbridger put it. Yet this tax avoidance is at the core of the relationship between money, governments and our democratic societies. Just when we need transparency, libel law in London is killing it.
Having helped transform the world economy, the City has wreaked havoc at home too.
Here, in the birthplace of the Industrial Revolution, vast financial sector salaries empty manufacturing industries of their best-educated people, and politicians, hooked on the City’s money-making machine, sneer at the dirty and difficult smokestack industries. ‘Manufacturing, mining, fishing – all fucked, screwed, irrelevant,’ said Robin Ramsay. ‘The interests of a minority have come to dominate society.’
Between 1979 and 2011, as employment in UK manufacturing fell from 6 million to just under 2.5 million, its output stagnated while financial services output trebled.82 Meanwhile, British banks aren’t even lending to British industry: in the decade before the crash just 3 per cent of banks’ net cumulative lending in the UK went to manufacturing, while three- quarters went to home mortgages and commercial real estate.
Britain and the US, the two leaders of modern global finance, are now among the most unequal societies in the developed world. In Britain 0.3 per cent of the population owns two-thirds of the land; in famously unequal Brazil 1 per cent of the population owns only half of the land.
Britain’s pensioners have Europe’s fourth highest level of poverty and are worse off than their counterparts in Romania and Poland.
Meanwhile, City bonuses were £14 billion in 2010-11, nearly 40 percent higher than the average for 2000-2007, the boom years leading up to the financial crisis85. “In the new phase after 2008,” the report continued, ‘London finance had the disruptive power to resist any reform intended to help make finance safe, as well as to vigorously support a politics of austerity.’
Martin Wolf of the Financial Times calls it a ‘financial doomsday machine … a machine to transfer income and wealth from outsiders to insiders, while increasing the fragility of the economy as a whole’
Father William Taylor summed up the challenge that the values of the modern City of London, the values of offshore finance, present to us all. ‘We need to repent of it,’ he said. ‘We are in the grip of a programme for our collective happiness that is illusory. It is a phantom, and it will enslave us.’
The latest financial crisis shows that state failure isn’t something that only happens to developing countries: it can affect the very richest. And every time, offshore has lain close to the heart of the malaise. To fix the problems, we must first understand the sickness. If there are just two ideas I’d want people to take from this book, it is these. One is that the offshore system is perhaps the strongest determinant of how political and economic power works in this world. It helps rich people, companies and countries stay on top, for no good economic or political reason. It’s battleground of the rich versus the poor, you versus the corporations, the havens against the democracies – and in each battle, unless you’re very rich, you are losing. Next, I hope I’ve helped people grasp what offshore really is. The secrecy, tax breaks or other escape routes that Luxembourg or the British Virgin Islands provide are designed to attract money not from locals, but from foreigners, elsewhere. So the people who are actually affected by the laws of secrecy jurisdictions – those foreigners, elsewhere – are always separated from the people who make those laws. There is never proper democratic consultation when those laws are written. This is the whole point. These are laws by insiders, for insiders, shielded from democratic accountability: private, hidden law-making machines. Offshore is, almost by definition, the smoke-filled room. Understand these two things, and understand much of what you need to know about the economy of the modern world.
Bribery rots and corrupts governments, and tax havens rot and corrupt the global financial system.
When pundits, journalists and politicians fawn over people who get rich by abusing the system – getting around tax and regulation and forcing everyone else to shoulder the associated risks and taxes – then we have lost our way.
‘Never in the field of financial endeavour has so much money been owed by so few to so many,’ said Mervyn King, governor of the Bank of England. ‘And, one might add, so far with little real reform.’
Offshore is at work nearby. It is undermining your elected government, hollowing out its tax base and corrupting its politicians. It is sustaining a vast criminal economy and creating a new, unaccountable aristocracy of corporate and financial power. If we do not act together to contain and control financial secrecy then the world I found in West Africa more than a decade ago, a world of suave insiders, impunity, international criminal complicity and desperate poverty, will become the world we leave to our children. A tiny few will have their boots washed in champagne while the rest of us struggle for our lives in conditions of steepening inequality.