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

by Nicholas Shaxson

  Argentinians, of course, hated having their economy carved up in informal economic empires run by foreigners. “Argentina cannot be described as an English dominion,” said Lisandro de la Torre, the fire-breathing Argentinian senator who led the investigation into the foreign meat packers, “because England never imposed such humiliating conditions on its colonies.”4

  So he was especially pleased with what the coast guard found in the ship’s holds, buried beneath a reeking load of guano fertilizer: over 20 crates labeled “corned beef” and bearing the seal of Argentina’s Ministry of Agriculture. When his men opened them, they found not corned beef but documents. De la Torre had exposed to public view for the first time the secret financial details of William and Edmund Vestey, founders of the world’s biggest meat retailers, Britain’s richest family, and among the biggest individual tax avoiders in history. Their story, and their wrangles and deals with their American competitors, provides a remarkable wind down into the emergence of multinational corporations in the early years of the last century and the emergence of a global industry of international tax avoidance alongside them.

  William and Edmund Vestey had started out in 1897 shipping meat trimmings from Chicago to their native Liverpool, where they had built cold storage facilities, giving them an edge over their competitors. They branched out into poultry farming in Russia and China in the first decade of the twentieth century, from where they began processing and shipping vast quantities of super-cheap eggs to Europe. They set up more cold stores and retail outlets in Britain, and then in France, Russia, the United States, and South Africa, then moved into shipping in 1911, before expanding out to ranches and meatpacking in Argentina from 1913. At the outbreak of the First World War, they bought up more farmland and plants in Venezuela, Australia, and Brazil,5 by which time they were involved in the entire supply change of the beef trade, from cattle to restaurant hamburger. They were pioneers of the truly integrated multinational corporation.

  The Vestey brothers dressed in dark, sober suits and hats, and perhaps the biggest visible extravagance for each of them was a watch and chain. They had no outside interests beyond business: They did not smoke, drink, or play cards, and despite their fabulous wealth they lived in modest houses and ate cheap meals. Once, while on honeymoon in Ceylon, William heard of a fire at a company packing plant in Brazil and packed his new wife off to sort out the mess there. William returned to London on the next steamer.6 Frugal and puritan, the brothers refused to trade alcohol and would even inspect their employees’ fingers for tobacco stains.

  They lived by the maxim that it is not what you can earn that makes you rich but what you can keep. They lived on the interest on the interest on their income. Peers of the Realm, Masters of the Foxhounds, personal friends of the Prince of Wales, and that sort of thing, the extended Vestey family still enjoys so much inherited money today that some have only discovered they are heirs when presented, on their eighteenth birthday, with checks for startling amounts. One distant heir, suddenly presented with a quarter of a million pounds in the 1990s, said, “I can’t handle it” and turned it down.

  The brothers lived by two business rules above all: first, never reveal what you are up to; and second, never let other people do something for you if you can do it yourself. They were, at heart, monopolists. They gave their different companies different names to disguise their ownership and bought up rivals, and if one resisted they would use their extraordinary market power—derived from their owning the whole supply chain from the grass, via the cows, to the slaughtering houses, the freezers, the ships, and then distribution and retail outlets—to drive them out of business. “If you mention his name near a meat market, people look over their shoulders,” wrote one critic. A weaker competitor said bitterly: “We’re not doing business with them. They’re in everybody’s business and they want everybody’s business.”

  As their business grew increasingly multinational, it became ever harder for anyone to even guess what they were up to. “The juggling acts El Inglés [the Vestey company] performed with the packing houses were enough to give the best aviator a dizzy spell,” an Argentinian businessman wrote. “It is not surprising that the company tax inspector had a difficult job to unravel it all when El Inglés, in the end, was left with just one packing house.”7 In partnership with the Americans, the brothers showed the same controlling behavior at the retail ends too.

  So when Senator de la Torre’s investigation stumbled across the documents on the Norman Star he had achieved quite a coup. Top members of the Argentinian government were colluding in, and even profiting from, their subterfuges, he alleged, and dirty political brawls broke out. Insults and counter-insults ricocheted around the Argentine political landscape, culminating in an assassination attempt on de la Torre in which an aide died after taking a bullet intended for the senator.8

  The Vesteys’ basic formula for gaining market power—squeeze them at the producer end, squeeze them at the consumer end, and push all the profits into the middle—was a philosophy that they also deployed, with astonishing success, in the area of tax. It is a formula that underlies the size and power of multinational corporations today.

  In those early days the tax haven world was in its infancy, and governments were groping in the dark to understand and to tax emerging multinational corporations. (They still are.) Relatively few tax havens existed then, focusing mostly on the financial affairs of extremely wealthy individuals. Rich Europeans looked primarily to Switzerland, while wealthy Britons tended to use the nearby Channel Islands and the Isle of Man. Wealthy Americans were busy too, as a letter from U.S. Treasury Secretary Henry Morgenthau to FDR in 1937 suggests.9 “Dear Mr. President,” it begins. “This preliminary report discloses conditions so serious that immediate action is called for.” American tax evaders had set up foreign personal holding corporations in places with low taxes and lax corporation laws, he wrote, singling out the Bahamas, Panama, and Newfoundland, Britain’s oldest colony. Stockholders were organizing companies through foreign lawyers, with dummy incorporators and dummy directors, to hide their identities. Though extremely rudimentary by modern standards, the basic schemes Morgenthau outlined would be familiar to followers of today’s offshore shenanigans. “The ordinary salaried man and the small merchant does not resort to these or similar devices. Legalized avoidance or evasion by the so-called leaders of the business community . . . throws an additional burden upon other members of the community who are less able to bear it, and who are already cheerfully bearing their fair share.”

  On the corporate side, offshore activity did not initially focus so much on tax. One great historical landmark in this respect emerged in the late nineteenth century when James B. Dill, a New York corporate lawyer, persuaded the governor of New Jersey that the state could get out-of-state corporate managements to incorporate there by passing permissive incorporation laws favorable to managers to the detriment of shareholders. New Jersey passed its first such law in 1889, then relaxed its rules again and again.10 Corporations, including the Standard Oil Trust, began to relocate out of New York and other large centers and flock to New Jersey. Britain and the Netherlands began to follow the U.S. lead.11

  Just before the First World War, however, New Jersey’s governor Woodrow Wilson decided to check the rampant corporate abuses that had emerged as a result of these permissive incorporation laws and put in place progressive new antitrust laws and rules to make corporate managers more accountable to shareholders, investors, and other stakeholders. So corporations flocked to neighboring Delaware, which had already set the standard to be used by tax havens thereafter, by letting corporate managers effectively write their own corporate governance rules. By 1929 two-fifths of Delaware’s income came from corporate fees and taxes, and it led the United States in incorporations, a lead it has never lost. An article in the American Law Review in 1899 noted Delaware’s efforts to win the race to relax corporate standards and called Delaware “a little community of truck-farmers and clam-d
iggers . . . determined to get her little, tiny, sweet, round, baby hand into the grab-bag of sweet things before it is too late.”

  This brief digression into corporate law helps remind us what offshore is all about. It is not just about tax: In this case it is about attracting money by offering rewards to insiders, at the expense of other stakeholders, undermining or undercutting the rules and legislation of other jurisdictions.

  And indeed, Delaware seems to have a long historical predilection toward offshore business: At the Constitutional Convention, Delaware’s delegation fought aggressively for each state to get the right to send two senators to Congress—putting tiny Delaware on a par with mighty New York. A Delaware delegate12 threatened that if they didn’t get their way, “the small ones would find some foreign ally of more honor and good faith, who will take them by the hand and do them justice.” It is easy to see, in light of examples like this, why offshore business is so often described as unpatriotic.

  Offshore corporate tax avoidance really started taking off around the time of the First World War: Before that, taxes were mostly too low to worry about.13 When war broke out, however, a lot of countries needed to raise a lot of money fast, and income taxes rose dramatically. In the United States, the top rate of tax for individuals rose from 15 percent in 1916 to 77 percent in 1918. The nation introduced the corporate income tax only after the Sixteenth Amendment was ratified in 1913, and it rose to 12 percent in 1918, by which time corporation taxes amounted to half of all federal tax revenues. In Britain the standard rate rose fivefold during the war to 30 percent in 1919, the year after the war ended. But in 1914 Britain had done something else that was especially pertinent for the Vesteys: It had begun to tax British companies on all their income worldwide, whether or not they brought this income home.14 And the Vesteys were furious.

  They tried lobbying against being taxed—which, in the new wartime environment, was doomed to look unpatriotic and to fail. As Britain’s tax authorities noted, taxes on business profits never stop you from earning the profits—they only kick in once there are profits.

  But William and Edmund Vestey were having none of it. In November 1915, as fifty thousand British soldiers died at the Battle of Loos, the brothers moved overseas to cut their tax bill. Their first stop after leaving was Chicago, where they found they weren’t the first wealthy Britons to move for tax reasons. “What’s the matter with your people?” a local tax lawyer asked. “You are the third Englishman I’ve had in here this week in the same business.” From there they moved to Argentina, where they paid no income tax at all—and even then, they fought to cut the residual company taxes they still had to pay in Britain.

  As the war progressed, however, the brothers increasingly started to wish they could return home, closer to their food empire’s real profit center. So they began to hatch up a new scheme to return and still escape the tax net.

  They put into place a two-stage plan. First they returned temporarily in February 1919, taking careful legal precautions to ensure they continued to be treated as visitors, not taxable residents, and they began lobbying. They wrote an impassioned plea to the prime minister, dressed up with appeals to patriotism and claiming their return would contribute to local employment—arguments that multinational corporations still routinely make today. They also complained bitterly about how unfair it was that their big competitor, the American Beef Trust, faced lower taxes and gained a big competitive advantage from it.

  They had pointed to one of the great problems in international tax. Each country taxes its citizens, residents, and corporations in different ways, and different countries’ tax systems often clash in unpredictable ways. Multinationals based in these different countries face very different tax bills on similar incomes, enabling one to out-compete another on a factor that has nothing to do with efficient management or real productivity.

  U.S. citizens and corporations formed under U.S. laws were taxed on their income from all sources worldwide, and the test of whether one was a U.S. taxpayer was based on citizenship, not on residence—a subtle but important difference. But if the corporation—even a subsidiary of a U.S.-based corporation—was formed overseas, it did not pay taxes to the United States but to the foreign country where it was incorporated. The Chicago-based Beef Trust used this to avoid paying taxes in the United States—and then used various loopholes to avoid tax in Britain, too, where it sold a lot of its meat.

  The Vesteys, who were paying significant taxes, did not like it, and the British prime minster referred their claims to an official commission. William’s testimony to that commission was to become a classic in the tax world, cited in academic tax papers ever since. He posed the question of double taxation that I referred to in chapter 1: When a business is spread across several countries, which country gets to tax which bit of it?

  “In a business of this nature you cannot say how much is made in one country and how much is made in another,” said William Vestey. “You kill an animal and the product of that animal is sold in fifty different countries. You cannot say how much is made in England and how much abroad.” He had put his finger on the central problem with taxing multinational corporations today. By their nature they are integrated global businesses, but tax is national. Taxing a corporation straddling multiple jurisdictions involves gruesome complications, and if each country scrambles to get as large a share as possible of the multinational’s taxes, then the corporation risks being taxed twice or more on the same income.

  So as taxes rose across the wealthy nations amid the First World War, a new source of economic conflict emerged. Double taxation became a hot issue, and businesses began to complain and to mobilize. An International Chamber of Commerce was set up in 1920, with tax squarely on its agenda from the outset.15

  From the beginning, the emerging multinationals stayed a few jumps ahead of tax collectors.

  Just as the Vesteys and the U.S. meat packers used their market muscle to squeeze their competitors at both the producer end and the consumer end, so they also began to squeeze the tax authorities at both ends. The trick, once again, was the same “transfer pricing” principle used by the banana companies that I described in the last chapter. If you own the ranches, the cattle, the freezers, the docks, the ships, the insurers, the wholesalers, and the retailers, then you can, by adjusting the prices one subsidiary charges another for goods, drive the profits away from the producer and the consumer countries, and instead take your profits at the most convenient place down the line. “And the most convenient stage,” notes Knightley, “is naturally where you will pay the least taxation, preferably where you will pay none at all.”

  By siphoning the profits to a holding company in a tax haven, explains tax expert Sol Picciotto, the multinationals had found a way to avoid being taxed anywhere. They could now out-compete, and grow faster than, smaller, purely national firms. A system designed to avoid double taxation had, via the use of tax havens, turned into one of double nontaxation. And through this basic formula, the offshore system has become one of the main foundations of the power of multinational corporations today.

  William Vestey’s testimony to the official commission in 1920 reveals a man accustomed to getting his way. “If I kill a beast in the Argentine and sell the product of that beast in Spain, this country can get no tax on that business,” he said. “You may do what you like, but you cannot have it.”16 He wanted to live in Britain, without paying his way, demonstrating an arrogance that pervades the offshore system, underpinned by that same old argument that bankers and other owners of footloose capital wield against our democratic representatives today: don’t tax or regulate us too much, or we will move offshore.

  Stung by the Vesteys’ lack of patriotism after a major war, the commissioners hit back. “Are you not to pay anything for the advantage of living here?” one asked. William Vestey refused to answer. “I should like to have an answer,” the commissioner continued. “It is one that has agitated me a good deal since the witness has been in t
he chair.” In the end, Britain refused to give in to the Vesteys. So they moved to the second stage of their plan, involving a more devious approach, something that helps us better understand the slippery world of offshore.

  They set up a trust.

  Many people think that the best way to achieve secrecy in your financial affairs is to shift your money to a country like Switzerland, with strong bank secrecy laws. But trusts are, in a sense, the Anglo-Saxon equivalent. They create forms of secrecy that can be harder to penetrate than the straightforward reticence of the Swiss variety. Trusts are powerful mechanisms, usually with no evidence of their existence on public record anywhere. They are secrets between lawyers and their clients.

  Trusts emerged in the Middle Ages when knights leaving on the Crusades would leave their possessions in the hands of trusted stewards, who would look after them to provide benefits to the knights’ wives and children when they were away or if they never returned. These were three-way arrangements binding together the original owners of the properties (the knights), with the beneficiaries (their families), via an intermediary (the stewards, or trustees). Over the centuries bodies of law grew up to formalize these three-way arrangements, and today you can enforce these things in the courts.