by Alec Ross
Both sentiments were confirmed by one of the exchequer’s former top officials.
“We very much saw it as a golden goose that you don’t want to kill, but you want to pluck—that basically has been the UK attitude for a long time,” the former official said. “The UK pursued a … policy of trying to promote and protect the City of London, particularly from EU regulation, while at the same time seeking to try and tax and extract rents in a way that didn’t undermine the international competitiveness of the City.”
One of the major contributors to the City’s lasting influence was its role in creating the world’s offshore system after the Second World War. At the time, the United Kingdom’s empire was coming apart at the seams. It was ravaged by war, deeply in debt, and rapidly shrinking as its colonies declared independence. It needed a way to maintain its position as a world power, and the City, which had served as the economic hub of the once-sprawling empire, offered a solution: finance.
The British banking sector began courting international clients, and appealed to them by offering a way around the rules and regulations back home. By doing business in London, American bankers could circumvent Depression-era regulations, the Soviet Union could confidently invest in Western markets, and criminal organizations could launder their money until it was squeaky clean.
But as the City revved up its financial services, it needed access to way stations where clients could deposit, store, and withdraw money. Preferably, these would be at arm’s length, to allow banks, clients, and the UK a few layers of plausible deniability if other governments came calling.
The banks did not need to look far. Despite losing the vast majority of its empire after World War II, the UK managed to cling to a few scattered islands, concentrated in the Caribbean and the English Channel. Through lobbying by the City of London, these islands found a new purpose.
Consider the Cayman Islands, one of the world’s top tax havens today. The Caymans have been controlled by the United Kingdom since the 17th century, but for most of its history the territory was nothing more than a sun-kissed, tropical backwater. Fewer than 6,500 people lived on the islands when they got their first airport, bank, and hospital in 1953. In 1966, cows still wandered through the town center of its capital, George Town. That same year, foreign bankers petitioned the British-led government to enact banking secrecy, and the City of London paved the way. By the 1970s, the Caymans were on their way to becoming a global financial hub. Note that this evolution was not driven by the Caymanian people—but by outside bankers and the City of London.
Some officials back in London objected to the Caymans’ overt appeal to offshore capital, but their concerns had less to do with ethics than maintaining control over the British currency and financial industry. “We need to be quite sure that the possible proliferation of trust companies, banks, etc., which in most cases would be no more than brass plates manipulating assets outside the Islands does not get out of hand,” Bank of England officials wrote in a 1969 letter. “There is of course no objection to their providing bolt-holes for non-residents, but we need to be sure that in so doing opportunities are not created for the transfer of UK capital to the non-Sterling Area outside UK rules.”
Eventually, the Cayman Islands adopted their own currency, alleviating the Bank of England’s concerns. Since then, the islands have continued to act as a honeypot for foreign cash. And many of Britain’s other remaining territories followed the same route. Bankers and accountants from abroad would offer a raft of new business if these jurisdictions rewrote their finance laws, exploiting loopholes in other nations’ tax laws along the way. The City would pave the way for these reforms to pass, and its banks would soak up much of the new business. So, with the tacit approval of the British government, the City refashioned the empire’s islands into some of the world’s top tax havens.
Notably, these havens were increasingly appealing to foreign banks and the skyrocketing number of multinational companies, and they were working within the lines of international law to exploit loopholes that would allow their clients to maintain legality. Over time, this would turn tax havens from peripheral to larger players in the global economy.
CITY IN ACTION TODAY
There are now thirteen jurisdictions across the globe that do not have a general corporate income tax. Eight of them—Anguilla, Bermuda, the British Virgin Islands, the Cayman Islands, Guernsey, the Isle of Man, Jersey, and Turks and Caicos—are British territories or Crown dependencies. “They’re all little outposts of the British Empire that have managed to sort of find a way to give wealthy people advantages and wealthy companies advantages in their battle to reduce their tax burden,” said Jonathan Luff, the former top aide to UK prime minister David Cameron. These jurisdictions have their own legislatures, but their chief executive is appointed by the British monarch, and their top court is the Privy Council, a group of British politicians primarily responsible for advising the Crown. In other words, though these jurisdictions present themselves as independent states, they are very much linked to the United Kingdom. And, given its weight in UK politics, according to Luff, the City of London can wield “extremely significant” influence over regulations (or the lack thereof) in the territories.
There are a number of channels the City can use to exert its influence over the British domains. The most overt is its presence in Parliament, but most of its methods are more subtle. By exploiting the peculiarities of island politics, the financial industry can make these territories impervious to reform and hostile to those who question their behavior.
Few people know this better than John Christensen, who saw firsthand how the City drove the policies of Jersey, the site of Apple’s latest tax havenry, in the 1990s and 2000s. A tall, gray-haired Brit in his midsixties, Christensen is a Jersey native and the sort of guy you would hope to run into at a pub. He is quick to laugh and brimming with stories, each one drawing you further in than the last. Some are adventurous, like the accounts of riding motorcycles along the Jersey coast and racing sailboats on the choppy English Channel. Others are more solemn, like returning to an island whose main newspaper declared him an “enemy of the people” and hearing his estranged brother call him a traitor. Christensen bears the stern features of someone who has spent decades battling forces more powerful than himself. But even after fighting the odds for so long, he remains optimistic they will soon turn in his favor.
Christensen now leads the Tax Justice Network, a nongovernmental organization that investigates the offshore industry. But before he joined the group in 2003, Christensen worked inside the offshore system itself. He started out as a private account manager at Touche Ross (now a part of Deloitte) and became an economic adviser to the island of Jersey in the early 1990s. There, he was astounded by the level of corruption he witnessed.
Christensen describes islands like Jersey as “a perfect environment for complete political capture” by outside organizations like the City of London.
Island governments are organized in a way that makes them easy to influence, he said. Jurisdictions like Jersey, Bermuda, and the Cayman Islands lack a free press, strong political parties, bicameral parliaments, independent judiciaries, and other “foundations that you would regard as essential to democracy,” he said. Their elected officials are also easy to “bamboozle.”
“Most of the politicians in these very small islands are reasonably decent people, but they don’t have a particularly sophisticated professional background,” Christensen said. “Few of them could look at revised company law and critically examine it. Lawmakers are more likely to spend hours and hours debating relatively trivial things, like the location of a new school, and pass very high-level financial legislation through on the nod because they do not feel in a position to challenge it. They don’t see the big international picture. What they’re told is ‘this will bring business to the island in terms of newer clients or big companies booking tax in the island, and the island will benefit from that additional tax revenue.’ A
s far as they’re concerned that’s all that’s of interest.”
When Christensen served in the Jersey government, many members of Parliament who did understand the financial industry were themselves closely tied to the banks, at times in insidious ways. In 1996, Christensen helped the Wall Street Journal uncover a slew of regulatory missteps that allowed a currency trader at a Jersey-based subsidiary of UBS to commit numerous financial crimes. The multimillion-pound scandal implicated two of the island’s senior senators and its top civil servant, who also happened to be Christensen’s boss. Both the senators implicated in Christensen’s whistleblowing—Reg Jeune and Pierre Horsfall—had separately presided over the island’s financial regulatory committee while simultaneously working for the bank at the heart of scandal, Horsfall as a director and Jeune as a senior partner with the bank’s law firm. So close were the ties between the banks and the government that many elected officials “were acting almost as the lobbyists within the Parliament,” Christensen said.
Once Christensen had blown the whistle, he knew his days on the island were numbered. “Within twenty-four hours, I went from being the head of the government economic service to knowing I was going to have to leave the job, sell my house, leave the island. There was no way I could continue. Once you start challenging really powerful people, and if you are in a position where your evidence is plausible and credible and is backed up, then you become an enemy and they will bore you to the knife.” It took Christensen about eighteen months to finally leave Jersey. By the time he departed, many friends and relatives had severed ties with him, and he had dropped thirty pounds in weight. The government attempted to discredit him by circulating stories in the media that he was just a disgruntled employee operating on his own personal agenda.
Instead, he was trying to reveal how Jersey’s agenda was not its own. Combine pliable island politics with London’s direct control over executive appointments and judicial decisions, and you are left with jurisdictions that will bend to the will of the UK government and to the City of London’s outsize power over British financial matters.
“The idea these are independent places frankly doesn’t hold water,” Christensen said. “Territories will say ‘we are independent,’ and the UK will say, ‘Yeah, they’re independent, we can’t interfere with their affairs.’ That’s a lie. It’s all part of creating a theater where the UK can plausibly deny responsibility for what happens in Cayman or in Jersey. There’s no way that anything could happen in Jersey without London’s nod.”
Oftentimes, he added, that means a literal nod. During his time in the Jersey government, Christensen said British officials took care not to keep paper records of their efforts to influence matters in the territories. Instead, “Brits have this language, this coded language. They wouldn’t necessarily say, ‘you cannot do that,’ but they would over a cup of tea say something along the lines of, ‘well, we don’t think it’s in Her Majesty’s interests,’” Christensen said. “Very tongue-in-cheek language, very ironic. Our ears are tuned to that kind of language, so we know, ‘don’t do it.’ They don’t want to be seen to be putting things down in writing, because you then have a paper trail which can expose that actually this is being controlled from London.”
These ties to “elsewhere” are a defining feature of most global tax havens, Nicholas Shaxson said. They make it especially difficult for the international community to force offshore jurisdictions to reform their ways. It would be one thing to pressure a small chain of Caribbean islands to adopt transparency measures and close tax loopholes, but when those islands are controlled by a global power like the United Kingdom it becomes more challenging. It’s even more challenging when the UK itself has one of the most powerful financial lobbying organizations, the City of London, built into its Parliament.
By transforming its territories into flytraps for foreign cash, the United Kingdom played a critical role in creating an offshore world that lets individuals and corporations escape their domestic government’s taxes and laws. And once any jurisdiction is sufficiently captured, the history of the offshore industry shows that it is a slippery slope.
When one jurisdiction lowers its tax standards, others must compete to keep companies from testing new waters. Over time, virtually every country in the world has been drawn into the race to the bottom, trying to outmaneuver one another to lure money from companies and individuals with as few questions asked as possible. Even the most powerful countries in the world, which might have enough weight to turn the tide, have instead been roped in—either because corporate interests have lobbied to prevent action or because they are afraid of losing business. The United States serves as the perfect example.
UNITED STATES
The United States loses at least $225 billion every year due to tax avoidance and evasion. You would think that this would provide enough of an incentive for the nation to use its muscle to crack down on tax haven abuse. While there are plenty of voices in the States who would like to do just that, a haphazard policy has emerged instead. The ultimate result is that the US has taken half measures against other tax havens while quietly sprinting ahead in the race to the bottom. In many ways, it is now one of the world’s leading tax havens.
In its 2020 financial secrecy index, the Tax Justice Network named the United States the world’s second-most secretive jurisdiction, outdone only by the Cayman Islands. At the federal level, the country is unwilling to share information on foreign companies and individuals who transfer money into the US. And because states like Delaware, Nevada, and Wyoming grant corporations and their owners extensive anonymity, foreigners find the US to be an extremely attractive destination for ill-gotten funds.
After the Second World War, as the UK was laying the foundation for the offshore system, the US government remained staunchly opposed to tax havens. In 1961, President John F. Kennedy called for legislation that would “[eliminate] the ‘tax haven’ device anywhere in the world.” But as the expanding offshore markets and escalating war in Vietnam drew more US money abroad, the government chickened out. It needed a way to bring more capital into the country and keep the dollar strong, so it joined right in. The US started adopting the lax regulations that banks enjoyed in London in an effort to corner a piece of the global financial market. It made an even bigger shift in the arena of financial secrecy. In the 1960s, non-Americans could already invest in the US without fear that banks would share information with their home governments. In the decades that followed, federal and state lawmakers enacted policies to give foreign investors greater secrecy and more tax exemptions. Money began to pour into the country, much of it from corrupt officials and criminal organizations in Latin America.
“Anonymous companies … can be formed in any state in the United States. That allows wealthy individuals, corrupt officials, money launderers, etc., to set up companies to stash wealth … completely anonymously and without any accountability whatsoever,” said Clark Gascoigne of the FACT Coalition, a nonpartisan alliance of more than a hundred state, national, and international organizations working toward a fair tax system that addresses the challenges of a global economy. “That’s a very real policy choice that we have made in the United States, to allow these entities to exist.”
As it expanded secrecy for foreign investors, the US government pushed for laws and tax treaties that forced foreign jurisdictions to share more information about American investors abroad. In 2010, the US passed the Foreign Account Tax Compliance Act (FATCA), a law that required foreign financial institutions to automatically share information on American clients with the IRS. Foreign banks that did not comply with the act were slapped with a 30 percent tax on all interest and dividends paid by the United States.
Interestingly, this was a major step toward shining a light into every shady tax haven or hiding hole in the global economy. Except for one problem. The law did not require American banks to share information on their own foreign clients. In fact, since FATCA was enacted, the US has pushed back a
gainst measures that would force its banks to open their books to international tax authorities.
In effect, the United States is trying to have its cake and eat it too. It wants to fight non-American tax havens while acting as a tax haven for non-Americans.
This approach to global tax is particularly harmful. The US participates in the race to the bottom while punishing other countries for competing. And as long as it serves as a sieve, the problem of tax avoidance will inevitably continue and every country will continue to feel pressure to keep cutting taxes on corporations and foreign investment to compete. If we look at just the last half century in the United States, we can already see the cost of the race clearly.
In 1952, corporate taxes accounted for approximately 32 percent of the US government’s total tax revenue. In 2019, less than 7 percent of federal tax revenue came from corporations. During that same period, the proportion of federal revenue that came from individual income and payroll taxes rose from 52 percent to 86 percent. If you adjust for inflation, American companies paid less tax in 2018 than they did in 1989. During that time, their total profits more than doubled.
Most of those reductions were not made because policy makers wanted to give companies tax breaks and put a higher burden on individuals. But that is exactly what happened. Since these trends began after World War II, they have not stopped. In the first two decades after the war, taxes and regulations were at their stiffest in developed nations, and growth was at an all-time high. But the UK’s offshore organizing let banks and companies start to dodge those rules, setting up a competition between countries. If nations resist lowering taxes and reducing regulations, they will hemorrhage capital. As a result, between 1980 and 2019, the average corporate tax rate across the globe fell from 40.4 percent to 24.2 percent. Since 2000, only 6 of the world’s 196 countries have increased their corporate tax rate—Chile, the Dominican Republic, El Salvador, Hong Kong, Lebanon, and Papua New Guinea.