Treasure Islands: Dirty Money, Tax Havens and the Men Who Stole Your Cash

by Nicholas Shaxson

  In 2010 Luxembourg’s authorities pleaded this laddering as an excuse for potentially harboring North Korean money. “The problem is that they do not have ‘North Korea’ written all over them,” a spokesman said. “They try to hide and they try to erase as many links as possible.”44 That is, after all, the point. Magistrates in France only ever saw a limited part of the Elf system because of this saucissonage. “The magistrates are like sheriffs in the spaghetti westerns who watch the bandits celebrate on the other side of the Rio Grande,” wrote the magistrate Eva Joly, furious about how tax havens stonewalled her probes into the Elf system. “They taunt us—and there is nothing we can do.”

  Even if you can see parts of the structure, the laddering stops you from seeing it all—and if you can’t see the whole, you cannot understand it. The activity doesn’t happen in any jurisdiction—it happens between jurisdictions. “Elsewhere” becomes “nowhere”: a world without rules.

  I already mentioned some ballpark numbers suggesting how big the offshore system has become: half of all banking assets, a third of foreign investment, and more. But there have been very few attempts to quantify the damage that this system causes. This is partly because it is so hard to measure, let alone detect, secret, illicit things. But it is also because nobody wants to know.

  Recently, however, a few organizations have sought to assess the problem’s scale. 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 GDP of the United States. That much money in hundred-dollar bills, placed end to end, would stretch twenty-three times to the moon and back. The estimated $250 billion in taxes lost each year on the income that money earns is two to three times the size of the entire global aid budget to tackle poverty in developing countries.

  But that sum just represents the taxes lost on money wealthy individuals hold offshore. A much bigger transfer of wealth is occurring through illicit financial flows across borders from developing countries into secrecy jurisdictions and rich countries. The most comprehensive study of this comes from Raymond Baker’s Global Financial Integrity (GFI) Program at the Center for International Policy in Washington. Developing countries, GFI estimated in January 2011, lost a staggering $1.2 trillion in illicit financial flows in 2008—losses that had been growing at 18 percent per year since 2000.45 Compare this to the $100 billion in total annual foreign aid, and it is easy to see why Baker concluded that “for every dollar that we have been generously handing out across the top of the table, we in the West have been taking back some $10 of illicit money under the table. There is no way to make this formula work for anyone, poor or rich.” Remember that the next time some bright economist wonders why aid to Africa is not working. We are clearly talking about one of the great stories of our age.

  In a separate study subsequently endorsed by the World Bank,46 Baker estimated that only about a third of total illicit cross-border flows represent criminal money—from drug smuggling, counterfeit goods, racketeering, and so on. Corrupt money—local bribes remitted abroad or bribes paid abroad—added up to just 3 percent of the total. The third component, making up two-thirds, is cross-border commercial transactions, about half from transfer pricing through corporations. His research underlines the point that illicit offshore flows of money are far less about the drug smugglers, mafiosi, celebrity tax exiles, and fraudsters of the popular imagination and mostly about corporate activity.

  And out of this emerges another profoundly important point. The drug smugglers, terrorists, and other criminals use exactly the same offshore mechanisms and subterfuges—shell banks, trusts, dummy corporations, and so on—that corporations use. “Laundered proceeds of drug trafficking, racketeering, corruption, and terrorism tag along with other forms of dirty money to which the United States and Europe lend a welcoming hand,” said Baker. “These are two rails on the same tracks through the international financial system.” We will never beat the terrorists or the heroin traffickers unless we confront the whole system—and that means tackling the tax evasion and avoidance and financial regulation and the whole paraphernalia of offshore. It is hardly surprising, in this light, that Baker estimates that the U.S. success rate in catching criminal money was 0.1 percent—meaning a 99.9 percent failure rate.

  And that is only the illegal stuff. The legal offshore tax avoidance by individuals and corporations, which further gouges honest hardworking folks, adds hundreds of billions of dollars to these figures.

  Almost no official estimates of the damage exist. The Brussels-based nongovernmental organization Eurodad has issued a limited-edition book called Global Development Finance: Illicit Flows Report 2009, which seeks to lay out, over a hundred pages, all of the comprehensive official estimates of global illicit international financial flows.47 Every page is blank.

  Eurodad’s gimmick underscores a vital point: There has been an astonishing blindness on the part of the world’s most powerful institutions to this system that has effected the greatest transfer of wealth from poor to rich in the history of the planet. As the sociologist Pierre Bordieu once remarked, “The most successful ideological effects are those which have no need for words, and ask no more than complicitous silence.”

  Language itself encourages the blindness. In September 2009, the G20 group of countries pledged in a communiqué to “clamp down on illicit outflows.” Now consider the word outflows. Like the term capital flight, it points the finger at the victim countries like Congo or Nigeria or Mexico—which, this language subtly insists, must be the focus of the cleanup. But each flight of capital out of a poor country must have a corresponding inflow somewhere else. Imagine how different that pledge would be if the G20 had promised to tackle “illicit inflows.”

  Bad tax systems are pushing some nations toward becoming failed states. “Countries that will not tax their elites but expect us to come in and help them serve their people are just not going to get the kind of help from us that they have been getting,” Hillary Clinton said in September 2010, to widespread and bipartisan applause. “Pakistan cannot have a tax rate of 9 percent of GDP when land owners and all of the other elites do not pay anything or pay so little it’s laughable, and then when there’s a problem everybody expects the United States and others to come in and help.”48 Leave aside for a moment the hypocrisy involved when the United States preaches to developing countries about abusive tax systems while welcoming tides of their illicit money and wrapping it in secrecy. Clinton’s basic point is still valid. Wealthy Pakistanis are as enthusiastic about tax havens as elites in any other poor country, and their ability to escape from any responsibility to their societies while leaving everyone else to pick up the tab is one of the great factors corrupting the state and undermining its citizens’ confidence in their rulers. This is a security issue as much as anything else.

  Even this is not all. The global offshore system was one of the central factors that helped generate the latest financial and economic crisis since 2007. Offshore did not exactly cause the financial crisis: It created the enabling environment for the conditions underlying the crisis to develop. “Trying to understand the role that offshore secrecy and regulatory havens have in the crisis,” Jack Blum explains, “is like the problem a doctor has treating a metabolic disease with multiple symptoms. You can treat several symptoms and still not cure the disease. Diabetes, for instance, causes high cholesterol, high blood pressure, and all sorts of other problems. There are plenty of discrete aspects of the meltdown to talk about and many possible treatments for symptoms, but offshore is at the heart of this metabolic disorder. Its roots reach back decades, in bankers’ attempts to escape regulation and taxation and make banking a highly profitable growth business that mimics the industrial economy.”49

  I will explore this in more detail later—but here is a very short summary of some basic reasons why offshore is implicit in the latest economic crisis.

  President Roosevelt’
s New Deal in the 1930s inflicted a lasting defeat on financial capital, blaming it for the horrors of the Great Depression and tying it down with constraints that would ensure that the financial services sector would contribute to economic development, not undermine it. The New Deal was a great success, but it began to unravel properly just before the 1960s, when Wall Street found its offshore escape route from taxes and domestic regulations: first in London (the subject of chapter 4) then further afield in the British spiderweb and beyond. The offshore system provided Wall Street with a “get out of regulation free” card that enabled it to rebuild its powers overseas and then, as the United States turned itself in stages into a tax haven in its own right, at home. The end result was that the biggest banks were able to grow large enough to attain “too big to fail” status—which helped them in turn to become increasingly influential in the bastions of political power in Washington, eventually getting a grip on both main political parties, Democrat and Republican—a grip that is so strong that it amounts to political capture.

  Part of this process has involved a constant race to the bottom between jurisdictions. When a tax haven degrades its taxes or financial regulations or deepens its secrecy facilities to attract hot money from elsewhere, other havens degrade theirs too, to stay in the race. Meanwhile, financiers threaten politicians in the United States and other large economies with the offshore club—“don’t tax or regulate us too heavily or we’ll leave,” they cry—and the onshore politicians quail and relax their own laws and regulations. As this has happened, onshore has increasingly taken on the characteristics of offshore. In the large economies, tax burdens are being shifted away from mobile capital and corporations onto the shoulders of ordinary folks. U.S. corporations paid about two-fifths of all U.S. income taxes in the 1950s; that share has fallen to a fifth.50 The top 0.1 percent of U.S. taxpayers saw their effective tax rate fall from 60 percent in 1960 to 33 percent in 2007, while their share of the income pie soared.51 Had the top thousandth paid the 1960 rate, the federal government would have received over $281 billion more in 2007.52 When the billionaire Warren Buffett surveyed members of his office he found that he was paying the lowest tax rate among his office staff, including his receptionist. Overall, taxes have not generally declined. What has happened is that the rich have been paying less, and everyone else has been forced to take up the slack. The secrecy jurisdictions, in partnership with changing ideologies, are the biggest culprits.

  The next factor behind the latest economic crisis is the huge illicit cross-border flows of money that have on a net basis flowed very significantly into deficit countries like the United States and Britain, adding very substantially to the more visible macroeconomic imbalances that fostered the crisis. Meanwhile, zero-tax offshore incentives helped encourage companies to borrow far too much, injecting more risk and leverage into the financial system. In addition, financial and other firms have been festooning their financial affairs around the world’s tax havens for reasons of tax, regulation, or secrecy—and the resulting complexity, mixed with offshore secrecy, made their financial affairs impenetrable to regulators and investors alike, eventually feeding the mutual mistrust between market players that helped trigger the crisis.

  And now, to cap it all, the system is providing our richest citizens and corporations with escape routes from tax and regulation, meaning that it is ordinary people who will have to pay the costs to clean up this giant mess. The harm that stems from all this is incalculable.

  Yet this is not a book about the financial crisis. It is about something older and deeper.

  Deregulation, freer flows of capital, and lower taxes since the 1970s—most people think that these globalizing changes have resulted primarily from grand ideological shifts and deliberate policy choices ushered in by such leaders as Margaret Thatcher and Ronald Reagan. Ideology and leaders matter, but few have noticed this other thing: the role of the secrecy jurisdictions in all of this—the silent warriors of globalization that have been acting as berserkers in the global economy, forcing other nations to engage in the competitive race to the bottom, and in the process cutting swaths through the tax systems and regulations of nation states, rich and poor, whether they like it or not. The secrecy jurisdictions have been the heart of the globalization project from the beginning.

  Finally, a word about culture and attitudes. In January 2008 the accountancy giant KPMG ranked Cyprus at the very top of a league table of European jurisdictions, according to the “attractiveness” of their corporate tax regimes.53 Yet Cyprus, a “way station for international scoundrels,” as one offshore promoter admits, is among the world’s murkiest tax havens: possibly the biggest conduit for criminal money out of the former Soviet Union and the Middle East into the international financial system. If Cyprus is ranked as the “best” in an international league table on tax, something is clearly wrong with the world. When transparency rankings list Switzerland and Singapore, two great sinks for illicit loot, as among the world’s “cleanest” jurisdictions, then we seem to have lost our way.

  Tax is the missing element in the corporate social responsibility debate. Modern company directors face a dilemma. To whom are they answerable—to shareholders only or to a wider set of stakeholders? There are no useful guidelines.54 Irresponsible players treat tax as a cost to be minimized, to boost short-term shareholder value alone. Ethical directors recognize that tax is not a cost of production but a distribution out of profits to stakeholders, ranking on the profit and loss account alongside dividends. It is a distribution to society, and it pays for the things like roads and education that help the corporations make their profits.

  The corporate world has lost its way, and nowhere is this more true than with the Big Four accountancy firms. Paul Hogan, the star of the film Crocodile Dundee, put his finger on something important in 2010 when talking about an investigation by Australian tax authorities into his offshore tax affairs. “I haven’t done my own tax for thirty years,” he said. “They talk about me going to jail. Erm, excuse me: There’s about four law firms and about five accounting firms—some of the biggest ones in the world—that’d have to go to jail before you get to me.”55 On this point, Hogan is right—or at least he should be. These firms, responding to their clients’ wishes to escape taxes and other duties that come with living in democratic nations, have grown to become steeped in an inverted morality that holds tax, democracy, and society to be bad and tax havens, tax dodging, and secrecy to be good. Serial tax avoiders are made knights of the realm in Britain and promoted to the top of high society in the United States; journalists seeking guidance in this complex terrain routinely turn to these very same offshore cheerleaders, the accountancy firms, for their opinions. Bit by bit, offshore’s inverted morality becomes accepted into our societies.

  The fight against the offshore system will differ from other campaigns to fix the global economy. Like the fight against corruption, this struggle does not fit neatly into the old political categories of left and right. It does not involve rejecting cross-border trade or seeking solace in purely local solutions. This fight needs an international perspective, where countries try not to engage in economic warfare against each other. And it will provide a rubric for taxpaying citizens in both rich countries and poor to fight for a common cause. Wherever you live, whoever you are, or what you think, this affects you.

  Millions of people around the world have for years had a queasy feeling that something is rotten in the global economy, though many have struggled to work out what the problem is. This book will point to the original source of where it all went wrong.

  2

  TECHNICALLY ABROAD

  The Vestey Brothers, the American Beef Trust, and the Rise of Multinational Corporations

  ONE WINTER IN 1934 THE ARGENTINE COAST GUARD detained a British-owned ship, the Norman Star, as it was about to sail for London. The raid had been triggered by an anonymous tip-off during an investigation into a cartel of foreign meat packers who were suspected of manipul
ating prices and shipping profits illegally overseas.

  Ordinary Argentinians, amid the Great Depression, were furious about just about everything at that time. Their economy was still mostly in the hands of a few hundred landowning families, and British and American meatpacking houses, which engaged their employees under humiliating conditions, had organized a cartel so effective that while the prices they paid locals for their beef had plummeted, the investors’ profits actually rose. The beef export industry was a major plank in the growth of the political power of the Argentine elites; in his book The Rise and Fall of the House of Vestey, the biographer Philip Knightley argues that the meat packers’ cartel had such a crippling effect on the Argentine labor movement and early economic development that “it led almost directly to the formation of militant labour organisations that pushed Peron into power, the subsequent dictatorship of the generals, the terrorism, the Falklands War and the country’s economic disasters.”1

  How much profit were these foreigners really making? Nobody could be sure, but London’s influence on the Argentine economy was immense. “Without saying so in as many words, which would be tactless, Argentina must be regarded as an essential part of the British Empire,” the British ambassador had noted in 1929. But he was not complacent, for he was aware how fast large U.S. companies were penetrating these areas of British influence. “The United States under Hoover means to dominate this continent by hook or by crook,” the ambassador had recently noted. “It is British interests that chiefly stand in the way. These are to be bought out or kicked out.”2 The big historical competitors of the British meat packers, though now inside the Argentine cartel, were the Swift and Armour groups from Chicago that until recently had formed the core of the American Beef Trust, an organization founded by the robber baron Philip D. Armour. The trust had sewn up food distribution inside the United States so effectively that a book about it published in New York in 1905, entitled The Greatest Trust in the World, described it as “a greater power than in the history of men has been exercised by king, emperor or irresponsible oligarchy . . . here is something compared with which the Standard Oil Company is puerile.”3 Although by the time of the coast guard raid their cartel tactics had been tamed in the United States, the trust was still happily playing the cartel game in Argentina, in partnership with the British.