The United States anchors the third big offshore pole. Before the great global offshore explosion began in the 1960s and the 1970s, the U.S. government was generally hostile to offshore business, and its leaders fought against the British spiderweb and the European havens. But as the 1970s wore on financial interests became increasingly influential in U.S. policymaking, and the country, facing large Vietnam War–era deficits and increasingly adopting an “if you can’t beat ’em, join ’em” attitude toward tax havens, began consciously adopting its own offshore characteristics—particularly special tax incentives and secrecy structures available to foreigners—in efforts to attract financial capital into the United States to fill the deficits.
So there are two things going on here: Tax revenues and other money are being drained out of the United States into tax havens elsewhere, and a flow of foreign (often dirty) money is moving in the other direction back into the country. The United States is estimated to be losing $100 billion annually from offshore tax abuses—a gigantic transfer of wealth from ordinary taxpayers to rich people.30 And that is not to mention the role the offshore system plays as a giant hothouse for international crime and fraud or its role in undermining financial regulation, which I shall get to.
But the money flowing into tax haven USA does not make up for the money and tax revenues being drained out. The inflows have made matters worse still for ordinary U.S. taxpayers, let alone for foreigners being stiffed by their own wealthy and unaccountable elites. As the following chapters will show, the inflows delivered massive rewards to a small financial elite, while helping Wall Street to gain its too-big-to-fail stranglehold on the U.S. economy and the politicians in Washington. “Tax havens are engaged in economic warfare against the United States, and honest, hardworking Americans,” says Senator Carl Levin. He is quite right—but we should add that the United States in its role as a tax haven is conducting economic warfare against honest, hardworking people at home and around the world.
Like the British offshore system, the U.S.-based offshore system operates on three tiers.
At the federal level, on the top tier, the United States dangles a range of special tax exemptions, secrecy provisions, and laws designed to attract foreigners’ money into the United States in true offshore style. U.S. banks may, for instance, legally accept proceeds from a range of crimes, such as handling stolen property—as long as the crimes are committed overseas. Special arrangements are made with banks to make sure they do not reveal the identities of foreigners parking their money in the United States.
The second offshore tier involves individual U.S. states. A range of different things are happening, in a number of states. Florida, for example, is where Latin American elites do their banking, and the United States generally does not share banking information with those countries, so a lot of this is tax-evading and other criminal money, protected by U.S. secrecy. Florida’s banks also have a long history of harboring Mob and drug money, often in complex partnerships with the nearby British Caribbean havens. On a different tack, smaller U.S. states like Wyoming, Delaware, and Nevada have become specialists in offering low-cost and very strong forms of almost unregulated corporate secrecy, which has attracted illicit money, and even terrorist money, from around the globe.
The third U.S. offshore rung is an overseas satellite network, far smaller than the British zone. One is the U.S. Virgin Islands, a U.S. “Insular Area” and a minor haven used by Bank of America, Boeing, FedEx, and Wachovia, among others.31 A more interesting haven in the U.S. zone is the Marshall Islands, a former Japanese colony under U.S. control since 1947, now under a Compact of Free Association with the United States. It is primarily the host for a “flag of convenience” service that, The Economist magazine recently noted, is “much prized among shipowners for its light regulatory touch.” The Marshall Islands registry was set up in 1986 with USAID help by Fred M. Zeder II, a golfing buddy of George H. W. Bush who later ran the United States Overseas Private Investment Corp. (OPIC), and its flag of convenience service is run by a private U.S. corporation out of offices in Reston, Virginia, near Washington Dulles Airport. The Marshall Islands provides the anything-goes, unregulated flag for, among many others, the Deepwater Horizon, the BP-operated oil rig that caused environmental chaos off the U.S. Gulf Coast in 2010.32
A small, opaque tax haven also grew alongside the Marshall Islands shipping registry, which the GAO reckoned was being used by ConocoPhilips, Morgan Stanley, and News Corp. When Khadija Sharife, a South African journalist, posed as a shipping client pretending to be worried about disclosure, she was told that forming a Marshall Islands company could be done in a day for an initial filing fee of $650 plus annual fees of $450, and
If the authorities . . . come to our Registry and Jurisdiction and ask to disclose more information, regarding shareholders, directors of the company etc.… we are not privy to that information anyway, since all the business organization and conduct of the entity is performed by the entity’s lawyers and directors directly. Unless the name of directors and shareholders are filed in the Marshall Islands and become a public record (which is NOT mandatory), we are not in a position to disclose that information.33
In Africa, Liberia was set up in 1948 as a “flag of convenience” by Edward Stettinius Jr., a former U.S. secretary of state, and its maritime code was “read, amended, and approved by officials of Standard Oil,” according to the historian Rodney Carlisle. Its sovereign shipping registry is now run by another private U.S. corporation out of Vienna, Virginia, about five miles from the Marshall Islands registry.34 Sovereignty is, literally, available for sale or rent in such places.
The biggest tax haven in the U.S. zone of influence is Panama. It began registering foreign ships from 1919 to help Standard Oil escape U.S. taxes and regulations, and offshore finance followed: Wall Street interests helped Panama introduce lax company incorporation laws in 1927, which let anyone open tax-free, anonymous, unregulated Panama corporations with few questions asked. “The country is filled with dishonest lawyers, dishonest bankers, dishonest company formation agents and dishonest companies,” one U.S. Customs official noted. “The Free Trade Zone is the black hole through which Panama has become one of the filthiest money laundering sinks in the world.”35
This strange and little-known U.S.-centered pattern, echoing the neocolonial role of the secrecy jurisdictions in the British zone, provides a pointer to the fact that the secrecy jurisdictions have for years quietly been at the heart of neoconservative schemes to project U.S. power around the globe. And almost nobody has noticed.
It should be clear by now that 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, the United States, and some jurisdictions in Europe. Each network is deeply interconnected with, and warmly welcomes offshore business from, the others. Wealthy U.S. individuals and corporations use the British spiderweb extensively: Enron, for example, had 881 offshore subsidiaries before it went bust, of which 692 were in the Cayman Islands, 119 in the Turks and Caicos, 43 in Mauritius, and 8 in Bermuda, all in the British spiderweb. The United States returns the favor to wealthy British interests investing tax-free, in secrecy, via Wall Street.
Not only that, but the world’s most important tax havens in their own right are not exotic palm-fringed islands but some of the world’s most powerful countries themselves. Marshall Langer, a prominent supporter of secrecy jurisdictions, neatly describes the misperceptions that have grown up about tax havens. “It does not surprise anyone when I tell them that the most important tax haven in the world is an island,” he said. “They are surprised, however, when I tell them that the name of the island is Manhattan. Moreover, the second most important tax haven in the world is located on an island. It is a city called London in the United Kingdom.”36
Jason Sharman, an Australian academic, checked how easy it wa
s to set up secrecy structures, using the Internet and those seedy offshore advertisements that infest the back pages of business publications and airline magazines. In his report published in 2009 he records making forty-five bids for secret front companies. Money laundering controls seem to be in operation patchily, but of those 45 bids, 17 companies agreed to set them up without even checking his identity. Only four of these were in the “classic” havens like Cayman or Jersey, while the other 13 were in countries from the wealthy Organisation for Economic Cooperation and Development (OECD), including seven in Britain and four in the United States.
What Sharman was encountering, The Economist magazine noted, was not traditional Swiss banking secrecy, where discreet men in plush offices promised to take their clients’ names to the grave. “This is a more insidious form of secrecy, in which authorities and bankers do not bother to ask for names…. For shady clients, this is a far better proposition: what their bankers do not know, they can never be forced to reveal. And their method is disarmingly simple. Instead of opening bank accounts in their own names, fraudsters and money launderers form anonymous companies, with which they can then open bank accounts and move assets.”37 The United States, Sharman noted, was offering nonresident foreigners all the elements of a tax haven, notably no taxes and secrecy. As he put it, “The United States, Great Britain and other OECD states have chosen not to comply with the international standards which they have been largely responsible for putting in place.”
Rich OECD nations have worked hard to persuade their publics that there has been a major crackdown on the secrecy jurisdictions. “The old model of relying on secrecy is gone,” said Jeffrey Owens, head of tax at the OECD. “This is a new world, with better transparency and better cooperation.”38 Many people believed him. French president Sarkozy went further. “Tax havens and bank secrecy,” he said, “are finished.”39 Yet big OECD member states are the guardians and promoters of the offshore system. It continues to process vast tides of illicit money—yet an OECD blacklist of tax havens is effectively a whitewash, as I will explain later.40 And to the very, very limited extent that rich countries have tried to address the problem, low-income countries are being left on the sidelines as usual.
When the fox announces that it has done an excellent job of beefing up the security of the henhouse, we should be very cautious indeed.
The offshore world is an endlessly shifting ecosystem, and each jurisdiction offers one or more offshore specialties. Each attracts particular kinds of financial capital, and each develops a particular infrastructure of skilled lawyers, accountants, bankers, and corporate officers to cater to their specific needs.
Yet few people are even aware that such businesses exist. You may well have heard of the Big Four accounting firms KPMG, Deloitte, Ernst & Young, and PricewaterhouseCoopers. But have you heard of the Offshore Magic Circle? Its members are made up of highly profitable multijurisdictional law firms mostly originating in Britain or its Overseas Territories and Crown Dependencies: a smartly dressed regiment of accountants, lawyers, and bankers forming a private global infrastructure that, in league with captured legislatures in the secrecy jurisdictions, makes the whole system work.
Offshore services range from the legal to the illegal, with a huge gray area in between. In terms of tax, the illegal stuff is called tax evasion, while tax avoidance is technically legal, though, by definition, it also involves getting around the intent of elected legislatures. To distinguish between evasion and avoidance is a slippery business, and it often takes vast, lengthy court cases to find out which side of the law a multinational corporation’s tax shelter lies on. Former British chancellor Dennis Healey gave a neat definition of where the dividing line lies. “The difference between tax avoidance and tax evasion,” he said, “is the thickness of a prison wall.”41 Even when offshore is not technically illegal, it is often a problem. Secrecy jurisdictions routinely convert what is technically legal, but abusive, into what is seen as legitimate. Of course what is legal is not necessarily what is right: think slavery, or apartheid.
Illegal offshore services and structures include tax-evading private banking or asset management, sham trusts, corporate secrecy, illegal reinvoicing, regulatory evasion, fraud concealment, and many, many other nefarious possibilities. These are often hidden behind soothing bromides like “tax optimization” or “asset protection” or “efficient corporate structure.”
On the tax side, one important matter concerns something known as double taxation. Say a U.S. multinational invests in a manufacturing plant in Brazil and earns income there. If both countries taxed the same income, without giving credits for the other country’s taxes, the multinational would get taxed twice. Tax havens do help companies eliminate this double taxation—though you don’t need tax havens for this: It can be ironed out with appropriate treaties and tax credits between countries. But when tax havens eliminate double taxation, something else happens too: double nontaxation. In other words, not only does the corporation avoid being taxed twice on the same income. It also avoids being taxed at all. I will explore this strange and complex area in a little more detail later.
Each jurisdiction tolerates different levels of dirt. Terrorists or Colombian drug smugglers would probably use Panama, not Jersey—though Jersey’s trust company sector in particular, handling several hundreds of billions of dollars’ worth of assets, continue to make the island a sink for nefarious activity and illicit, tax-evading loot, notwithstanding Jersey’s routine claims to be a “transparent, well-regulated and cooperative jurisdiction.” Bermuda is a magnet for offshore insurance and reinsurance, frequently for the purpose of avoiding tax; the Caymans are favored locations for hedge funds, frequently for the purposes of escaping tax, legally or illegally, but more often to get around certain kinds of financial regulation. In securitization, the practice of packaging up mortgage loans and other assets to sell on to investors—a major contributor to the latest financial crisis—Wall Street has long favored locating its Special Purpose Vehicles (SPVs) in the Caymans and Delaware; in Europe the preferred locations for SPVs are Jersey, Ireland, Luxembourg, and the City of London. All are, as this book will show, major secrecy jurisdictions.
Tax havens often target specific other large economies, usually nearby. Switzerland’s wealth managers focus quite heavily on getting business from tax-evading rich Germans, French, and Italians—corresponding to Switzerland’s immediate neighbors and to Switzerland’s three main language groups—though they are open to all comers from around the world. Monaco caters especially to French elites, while some wealthy French and Spaniards use Andorra, sandwiched in the eastern Pyrenees between the two larger countries. Rich Australians often use Pacific havens like Vanuatu; a lot of illicit North African money finds itself routed through Malta, another former British outpost in the Mediterranean Sea. U.S. and Latin American corporations and wealthy individuals use Panama and the Caribbean havens for a lot of their business, while wealthy Chinese tend to use Hong Kong, Singapore, and Macau.
Some jurisdictions specialize as conduit havens: way stations offering services that transform the identity or character of assets in specific ways, en route to somewhere else. The Netherlands is a big conduit haven: About €4.5 trillion (US $6.6 trillion) flowed through Dutch Special Financial Institutions in 2008—equivalent to over nine times the Dutch GDP.42 Mauritius, off the African coast in the Indian Ocean, is a new and fast-growing conduit haven that is the source of over 40 percent of foreign investment into India. It also specializes in channeling Chinese investments into Africa’s mineral sectors. Money does not always flow through obvious geographical routes, however: Russian dirty money has favored Cyprus, Gibraltar, and Nauru, all with strong historical British links, as stepping-stones where it can be legitimized before entering the mainstream global financial system in London and elsewhere. A large amount of foreign investment into China goes via the British Virgin Islands.
Offshore financial structures typically involve a trick som
etimes known as laddering—a practice also expressed by the French word saucissonage, meaning to slice something into pieces like a sausage. When you slice a structure among several jurisdictions, each provides a new legal or accounting “wrapper” around the assets that can deepen the secrecy and the complexity protecting the assets. A Mexican drug dealer may have $20 million, say, in a Panama bank account. The account is not in his name but is instead under a trust set up in the Bahamas. The trustees may live in Guernsey, and the trust beneficiary could be a Wyoming corporation. Even if you can find the names of that company’s directors, and even get photocopies of their passports—that gets you no closer: These directors will be professional nominees who direct hundreds of similar companies. They are linked to the next rung of the ladder through a company lawyer, who is prevented by attorney-client privilege from giving out any details. Even if you break through that barrier you may find that the corporation is held by a Turks and Caicos trust with a flee clause: The moment an inquiry is detected, the structure flits to another secrecy jurisdiction. Even if a jurisdiction cooperates with inquiries, it can drag its feet for months or years. “Even when they cooperate to eliminate the fraud,” Robert Morgenthau, until recently the Manhattan district attorney, said of the Caymans, “it takes so long that when the door is finally closed, the horse has been stolen and the barn has burned down.”43 At the time of writing, Hong Kong is preparing legislation to allow incorporation and registration of new companies within minutes.
Treasure Islands: Dirty Money, Tax Havens and the Men Who Stole Your Cash Page 4