What a trust does, at heart, is to manipulate the ownership of an asset. You might think ownership is a simple thing: you have, say, a million dollars in the bank; you own it, and you can save it, or spend it, or take it out in ten-dollar bills and put it in your bathtub. But ownership can, in fact, be unbundled into separate strands. This happens, for example, when you buy a house with a mortgage: Until you repay the loan, the bank has some ownership rights over your house and you have other rights.
A trust unbundles ownership into different parts very carefully. When a trust is set up the original owner of an asset in theory gives it away into a trust. The trustee becomes the legal owner of the asset—though this person is not free to spend or consume it—for they must legally obey the terms of the trust deed, the instructions that tell them exactly how to share out the benefits to the beneficiaries. The trustee must obey these instructions, and apart from fees he or she may not receive any of the benefits. So a rich old man with two children might put $5 million into a bank account owned by a trust, then appoint a reputable lawyer as the trustee, instructing him that when the son is twenty-one he should receive half the money, and when the daughter later becomes twenty-one she should get the rest. Even if the wealthy man dies before the money is paid out the trust will survive, and the trustee is bound in law to pay out the money as he is told. It is very hard indeed to break a trust.
Trusts can be legitimate. But they can be used for more nefarious purposes, like criminal tax evasion. When a trust sets up solid legal barriers separating out the different components of ownership of an asset, these barriers can become unbreakable information barriers too, shrouding the assets in secrecy.
Imagine that the assets in a trust are shares in a company. The company may register the trustee—the legal owner—but it will not register the beneficiaries—the people who will be getting and enjoying the money—anywhere. If you have a million dollars in an offshore trust in the Bahamas and the tax inspectors come after you, it will be hard for them to even start their inquiries: Trust instruments in the Bahamas are in no official register. Even if the tax inspectors or police get lucky and find out the identity of a trustee, that is likely to be simply a Bahamas lawyer who does this for a living, who may be the trustee for thousands of trusts. She may be the only other person in the world who knows you are the beneficiary, and he or she is bound by professional confidentiality to keep your secrets safe. The tax inspector has hit a stone wall.
You can make this secrecy deeper still, of course, by layering one secrecy structure on another. The assets in the Jersey trust may be a million dollars in a bank in Panama, itself protected by strong bank secrecy. Even under torture the Bahamas lawyer could never reveal the beneficiary because he or she wouldn’t know.17 Such intermediaries merely send the checks to another lawyer somewhere else, who also isn’t the beneficiary. You can keep on going: layering the Jersey trust on another trust in the Caymans, itself perched on a secret company structure in Nevada. If Interpol comes looking they must go through difficult, slow, and costly court procedures, in country after country, and face the “flee clauses” that mean the asset automatically hops elsewhere at the first sign of investigation.
The trust arrangement that the Vesteys set up in December 1921, signed in the Paris offices of the British lawyers Hall & Stirling, was fairly simple compared to the great offshore embroideries that are common today. Yet even so, it took Britain’s Inland Revenue eight years to know it even existed.
In the meantime, while the Vesteys’ secret Paris trust ticked over quietly, a new scandal erupted.
In June 1922, seven years after leaving the country to escape British wartime taxes, it emerged that William Vestey had bought himself a title, becoming Baron Vestey of Kingswood. Plenty of people who had made fortunes in the Great War had done this, craving the respectability of a peerage to mask the taint of war profiteering. Prime Minister Lloyd George had sold off official honors willy-nilly, causing outrage. “Gentlemen received titles,” a member of parliament had spluttered in 1919, “whom no decent man would allow in his home.” When challenged on his tax-avoiding activities, William Vestey did not endear himself to anyone by stating that “I am technically abroad at present . . . the present position of affairs suits me admirably. I am abroad. I pay nothing.” The scandal rumbled on, but in the end nothing was done and the Vesteys returned home to Britain as they had wished. Their secret Paris trust kept the tax authorities at bay.
But even when the British tax authorities found the Paris trust, through patient detective work, they still could not get the Vesteys to pay tax on it. For secrecy is not the only subterfuge that trusts provide.
People are sometimes puzzled by one particular thing about trusts. If you must give the asset away into a trust in order to hide the asset and dodge your tax bill, is that not an oversize price to pay?
The answer is not straightforward. In part, this is a cultural question. Wealthy classes have grown to feel comfortable separating themselves from their money and leaving it to be managed by trusted strangers. Their education prepares them to recognize those who will respect their claims and whom they can therefore count on to do the right thing by them.
But there is another part to the answer, which offers further insight into the sneaky world of offshore. If you want to evade taxes or hide money through a trust, the trick is to make it seem as if you have given your asset away, while in reality you retain control of it. You can tell the tax authorities, or the police, that you really don’t own the asset anymore—and only your trust lawyer need know that you are still really in control.18 The preamble to the Paris trust deed hints at exactly that pretence. “In consideration of the natural love and affection of the settlors [the Vesteys] for the beneficiaries,” it began, “and for divers other good causes and considerations.” The money, it was saying, had really been given away to their dear beneficiaries, their wives and children.19
But what the Vesteys actually did was this. First, they leased most of their overseas empire to Union Cold Storage Ltd., a company based in Britain. In any normal arrangement, Union would have simply paid rent to the Vestey brothers. But instead Union paid the rent to two trusted lawyers and a company director in Paris. These trustees were then given very wide powers of investment, to be carried out under the direction of certain “authorised persons.” And who were those persons? Why, the Vestey brothers! So the trustees, under the Vesteys’ direction, lent large sums to another company in Britain, which the Vesteys also controlled, and which they used as their own personal piggy bank.20 They had seemed to have given away their money while retaining real control.
And here comes a point about tax havens. Reputable jurisdictions have put in place laws to make it very hard for you to play this trust subterfuge. But secrecy jurisdictions have done the opposite, specializing in providing laws to help you perfect the deceit. Many jurisdictions, for example, allows things called revocable trusts—trusts that can be revoked so that the money is returned to the original owner. If you can do that, then you have not really separated yourself from the asset. Until it is revoked, though, it looks as though you have passed the asset on, and the tax authorities cannot have it. A Jersey sham trust provides a different subterfuge, letting you replace trustees with more pliable ones later, and changing their instructions at will. Or a trust might have a “trust protector” who has influence over the trustees, who acts discreetly on behalf of the person who pretended to give the money away. A Cayman Islands “Star Trust” lets you, the original owner, make the trust’s investment decisions—and the trustee is not obliged to ensure the investments are in the interests of other beneficiaries. And so it goes on. There are offshore lawyers who sit in their offices all day, doing little more than dreaming up deviant new flavors of trusts.
Trusts are not only about tax, either. As we shall see, many of the structured investment vehicles that helped trigger the latest economic crisis involved offshore trusts. Most people would be surprised, even shocked,
to find out how central they are to global finance.
In choosing the trust mechanism to protect their vast wealth, the Vesteys had chosen a powerful weapon indeed. And when the Argentinian senator Lisandro de la Torre found those crates of Vestey documents buried under the guano on the Norman Star in 1934, he was probably unaware just how crafty his adversaries were in this kind of offshore subterfuge. Soon after the raid, new and incriminating Vestey documents turned up in Uruguay, and the senator achieved another coup when he got the British Foreign Office, whose diplomats were deeply uneasy with the Vesteys’ business practices, to agree to turn Argentina’s quest into a multicountry joint committee of investigation.
There was no telling what such a probe might uncover, so the Vesteys went on the offensive. When their local manager died of a heart attack, William Vestey wrote to the committee and brazenly accused Senator de la Torre of murdering him. Argentina’s government responded furiously, calling Vestey’s letter “an unprecedented piece of insolence.”
Things went downhill from there. The committee worked for two more years while the Vesteys pulled strings in London to emasculate it, and despite sixty meetings and a report filled with detail about the Argentine meat trade, they never got to see the Vestey books in London. Senator de la Torre shot himself on January 5, 1939, leaving a suicide note that, as his biographer Philip Knightley notes, “expressed his disappointment at the general behaviour of mankind.”
Each time Britain’s authorities tried to tax overseas trusts in the ensuing decades, William and Edward, and their descendents, kept refining their tax planning and slipping through the net. “Trying to come to grips with the Vesteys over tax,” one tax officer said, “is like trying to squeeze a rice pudding.”
In 1980, shortly after one such assault by the Inland Revenue, an investigation by the Sunday Times, then one of the world’s most respected newspapers, revealed that in 1978, the Vesteys’ Dewhurst chain of butchers in Britain had paid just £10 tax on a profit of more than £2.3m—a tax rate of 0.0004 percent. “Here is an immensely wealthy dynasty which for more than sixty years has paid trivial sums in tax,” the newspaper wrote. “All that time its members have enjoyed the considerable pleasures of being rich in England without contributing anything near their fair share to the defences which kept those pleasures in being—against foreign enemies in wartime, against disorder and disease in times of peace.” Edmund Vestey, the grandson of the original Edmund, put the icing on this particular cake. “Let’s face it, nobody pays more tax than they have to. We’re all tax dodgers, aren’t we?”21
The Paris trust loophole was finally closed in 1991,22 but opportunities for legal tax avoidance for Britain’s wealthy remain abundant. When the British Queen finally started paying income tax in 1993 after a public outcry, the latest Lord Vestey smiled and said: “Well, that makes me the last one.”
As we shall soon see, he was very far from alone.
3
THE OPPOSITE OF OFFSHORE
John Maynard Keynes and
the Struggle against Financial Capital
IT IS WITH A STRANGELY DEFENSIVE TONE that Robert Skidelsky, the best-known biographer of John Maynard Keynes, prefaces the U.S. edition of volume 3 of his biography of the great British economist. He takes issue with U.S. economist Bradford DeLong’s accusation that he has fallen under the influence of “a strange and sinister sect of British imperial conservatives.”1
Skidelsky’s work argues that for Britain the Second World War was in fact two wars, one pitting Britain under Winston Churchill against Nazi Germany, the other lying behind the facade of the Western alliance and pitting the British empire, led by Keynes, against the United States. America’s main war aim after the defeat of the Axis powers, he argued, was to destroy the British empire. “Churchill fought to preserve Britain and its empire against Nazi Germany; Keynes fought to preserve Britain as a Great Power against the United States. The war against Germany was won; but in its effort to win it, Britain spent its resources so heavily that it was destined to lose both its Empire and its Great Power status.”2 Keynes himself outlined one of his central aims as he negotiated in Washington: “America must not be allowed to pick out the eyes of the British Empire.”3
The arguments are complex, not least because Keynes’s main negotiating partner in Washington, Harry Dexter White, was almost certainly passing information to the Soviet Union. But Skidelsky’s account leaves no doubt that the two countries were quietly locked in a titanic struggle for financial dominance, as the thrusting new American superpower began to displace the old empire.
It was only long after the war that the two economic competitors would eventually work out a suitable arrangement for coexistence. It happened, as I shall explain later, through the construction of the modern offshore system. This chapter, however, explores what came before it: an international arrangement that Keynes helped design, where nation-states cooperated with each other and tightly controlled flows of financial capital between them. This system was, in a sense, the very opposite of today’s fragmented, laissez-faire system, where wild, unregulated, and untaxed tides of capital flow across borders with almost no restraint, much of it through offshore centers.
For all its problems, the years of the anti-offshore system that followed the Second World War were a period of tremendous, broad-based growth and prosperity—not just for the American middle classes but for the world as a whole. The collapse of the system in the 1970s and the explosion of global offshore finance after that ushered in a period of lower growth, recurring economic crisis, and stagnation for most Americans, while wealth at the top of the income pile soared.
Keynes was as complex a character as any who have taken the world stage. He crammed the intelligence, and seemingly the lives, of twenty people into one. The aging Alfred Marshall, arguably the leading economist of his generation, once declared after reading a pamphlet from the young economist that “verily, we old men will have to hang ourselves, if young people can cut their way so straight and with such apparent ease through such great difficulties.”
Keynes first properly made his reputation in 1919 with his pamphlet The Economic Consequences of the Peace, arguing that the vast reparations being heaped on Germany after the First World War would ruin it, with terrible results for the wider world. He was quite right: The stringent demands for reparation helped trigger the rise of Adolf Hitler and the Second World War. Years later, while writing his General Theory of Employment, Interest and Money, arguably the most famous economics textbook of the last century, Keynes was building a theater in Cambridge with his own money, drawing graphs of receipts from the theater restaurant, collecting tickets when the clerk failed to materialize, and, improbably, turning it into a huge artistic and commercial success. He became a respected art critic, a towering civil servant and diplomat, a hyperactive editor of economic publications, and a journalist whose articles could make whole currencies swoon. He wrote a book on mathematical probability that the polymath and philosopher Bertrand Russell said was “impossible to praise too highly,” adding that Keynes’s intellect was “the sharpest and clearest that I have ever known.” Russell felt that when he argued with Keynes, he “took his life into his hands.”
Opponents of Barack Obama have claimed that his Keynesian attempts to resuscitate the U.S. economy through deficit-financed public works constitute a Soviet-styled takeover of the free enterprise system. Yet Keynes was never the socialist bogeyman of the conservative imagination. He loathed Marx and Engels, he saw government intervention as a temporary fix, and he believed passionately in markets and trade as the best routes to prosperity. He wanted to save capitalism, not bury it.
For much of the nineteenth century, free traders had dominated policy in the United States and much of Europe: It was self-evident, many people thought, that free trade delivered prosperity and brought peace by creating economic interdependencies that made it harder to wage war. It was a bit like an argument memorably made in the 1990s by journalist
Thomas Friedman, who said that no two countries with a McDonald’s—that symbol of free trade and the “Washington Consensus”—had ever fought a war with each other.4 Keynes believed this, for a while. “I was brought up, like most Englishmen, to respect free trade,” he wrote in the Yale Review in 1933, “almost as a part of the moral law. I regarded ordinary departures from it as being at the same time an imbecility and an outrage.”5
He had begun to see then that finance is different. He learned of the irrationality of markets first hand, spending half an hour each day in bed speculating with his own money in the famously treacherous terrain of international currencies and commodities, diving into company balance sheets and statistics (and declaring of the latter discipline that “nothing except copulation is so enthralling”).6 It made him a fortune, though he nearly bankrupted himself when a gamble against the Deutschmark in 1920 went disastrously wrong. “When the capital development of a country becomes a by-product of the activities of a casino,” he famously said, “the job is likely to be ill-done.”
Keynes understood instinctively the important differences between trade and finance. When two parties trade goods with each other, it is more or less a meeting of equals. But with finance the borrower is usually subservient to the lender. It is a relationship described years later by James Carville, Bill Clinton’s adviser, who famously articulated the borrower’s sense of helplessness when he said that if reincarnated he wanted to come back as the bond market because then “you can intimidate everybody.” The interests of industrial capitalists and financial capitalists often conflict too. Financiers, for instance, tend to like high interest rates, from which they can derive considerable income, while industrialists want low interest rates, to curb their costs.
Treasure Islands: Dirty Money, Tax Havens and the Men Who Stole Your Cash Page 7