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

by Nicholas Shaxson

  The next component of the City’s offshore status is its role in running, protecting, and being fed by Britain’s offshore spiderweb. As a reminder, this web of partly British tax havens around the world provides the City with three things. First, it captures passing foreign business and assets nearby and channels them, and the business of handling them, to London, just as a spiderweb catches insects. Second, it is a storage mechanism for assets. Third, it is a kind of money-laundering filter that lets the City get involved in foreign dirty business but at sufficient distance to minimize the stink. In the second quarter of 2009, the UK received19 net bank financing of $332.5 billion just from its tax havens of Jersey, Guernsey, and the Isle of Man; in June 2009 the British web as a whole held an estimated $3.2 trillion in offshore bank deposits, half the global total, according to data from the Bank for International Settlements.

  London’s next offshore attraction is secrecy. Britain does not practice Swiss bank secrecy, which would make its violation a criminal offense, but it uses other equally effective mechanisms. The British spiderweb is a big part of this story, as is UK trust law. When Denis MacShane, a former British foreign office minister, criticized bank secrecy at a European seminar, his opposite number from Luxembourg retorted: “Have you ever examined UK trust law? All our bankers and financial lawyers say that if you really, really want to hide money, go to London and set up a trust.”20 Britain offers all manner of other secrecy facilities. Under UK law, for example, offshore companies can be directors of UK companies, and it is usually impossible to know who the real owners are.21

  Another London attraction is the so-called “domicile” rule, whereby wealthy foreigners can come to live in England and escape tax on all their non-UK income. In pursuit of this tax break, the world’s super-rich—from Greek shipping magnates to Saudi princesses—have descended on London in hordes. Having gone out of its way to welcome wealthy Arabs since the 1980s and rich Japanese and oil-rich Africans since the 1990s, the City has more recently aggressively courted Russian oiligarchs, offering them an almost tax-free bolt-hole beyond the reach of Russian law enforcement: Alexander Zvygintsev, Russia’s deputy prosecutor-general, describes “London-grad,” as it is sometimes known, as “a giant laundrette for laundering criminally sourced funds.”22

  The contrast between London and New York, in terms of tolerance for criminal behavior, is stark. In January 2009, for instance, U.S. law enforcement fined the British bank Lloyds TSB $350 million after it admitted to secretly channeling Iranian and Sudanese money into the U.S. banking system. Robert Morgenthau, the Manhattan district attorney, explained how Lloyds would routinely strip out identifying features from payments from Iran so that wire transfers would pass undetected through filters at U.S. financial institutions.23 In the City of London, this business just went on unperturbed.

  “In America they send hundreds of people to jail: in this country bankers don’t go to jail,” explains the British author and publisher Robin Ramsay. “There are no consequences in London.” Though Americans may roll their eyes at this, as they consider the financial crimes that have gone unpunished at home in the wake of the latest financial crisis, there is no doubt that London’s tolerance for abusive or criminal financial behavior is in a class of its own. The Paris-based investigating magistrate Eva Joly, who broke open the Elf Scandal in Paris, described another view from overseas: “The City of London, that state within a state which has never transmitted even the smallest piece of usable evidence to a foreign magistrate.”

  The next part of the City of London’s offshore armory is the strangest one. It concerns an organization called the City of London Corporation. On the face of it, the Corporation of London, as it is sometimes known, is merely the municipal authority for City of London, a 1.22 square mile of prime financial real estate located at the geographical center of the physical, sprawling metropolis of greater London. But the Corporation of London is far more than a municipal authority. It is a lobbying organization for the financial sector that is so deeply embedded in the fabric of the British nation-state that it has become impossible in Britain, even after the greatest financial crisis since the Great Depression, to confront or even seriously check the power of finance. Without understanding the Corporation of London, one cannot properly understand how Wall Street has become so powerful in the United States.

  At its broadest, the term City of London refers to the financial services industry based in Britain, mostly located inside the so-called Square Mile that is the City. Smaller clusters of financial services activity exist elsewhere: The hedge funds in Mayfair a few underground stops farther southwest and the newer Canary Wharf, three miles east along the Thames river, are also important, hosting the spillover from the overloaded City. Neither these upstarts nor other small financial poles in places like Edinburgh or Leeds are really rivals to the Square Mile. The Corporation of London spreads a protective mantle over them all.

  London hosts more foreign banks than any other financial center. In 2008 the city accounted for half of all international trade in equities, nearly 45 percent of over-the-counter derivatives turnover, 70 percent of Eurobond turnover, 35 percent of global currency trading, and 55 percent of all international public offerings.24 New York is bigger in areas like securitization, insurance, mergers and acquisitions, and asset management, but much of its business is domestic, making London easily the world’s biggest international—and offshore—financial hub.

  The head of the Corporation of London is the Lord Mayor of London—not to be confused with the mayor of London, who runs the much larger greater London municipality that contains the City, geographically speaking, but has no jurisdiction over its nonmunicipal affairs. And this separation of powers matters.

  When the Queen visits the City, she stops at the boundary at Temple Bar and waits for the Lord Mayor of the City, accompanied by assorted City Aldermen and Sherriffs. This tourist ceremony, in which the Queen touches the Lord Mayor’s sword, strikingly highlights the political discontinuity between the City and the rest of Britain. When heads of state visit Britain the Lord Mayor throws more lavish banquets than the Queen. Each year the Chancellor, Britain’s finance minister, makes a speech at the Guildhall, the seat of City government, and at the Lord Mayor’s Mansion House, in which they justify how they have been serving the interests of finance.

  The City’s nine thousand–odd human residents have one vote each in municipal elections here. But businesses in the City vote too, as if they were human, with thirty-two thousand corporate votes.25 In effect, Goldman Sachs, the Bank of China, Moscow Narodny Bank, and KPMG can vote in a hugely important British election.

  The strangeness goes deeper and deeper. In fact the Corporation is so ancient and mystifying that barely any outsiders understand it.

  The Corporation’s website is a warren of tunneling links and unexpected, bizarre connections. A series of rituals confirm the integrity of the whole. There are 108 livery companies, including the Worshipful Companies of Broderers, and of Cord-wainers. The current Lord Mayor, Nick Anstee, is an honorary Liveryman of the Plaisterers’ Company.26 There are the Sheriffs, Aldermen, the Court of Common Council, and the “Rules for the Conduct of Life.” There is the Lord Mayor’s show, resplendent with arcane ritual, gilded coaches, and elderly men in long satin robes, that is watched by millions on the BBC every November.

  The Corporation has existed since what tour guides and historians call time immemorial, a term taken to mean that its origins extend beyond the reach of memory, record, or tradition. There is no direct evidence, Corporation officials note, of it coming into being: They say, only half in jest, that it dates its “modern period” from the year 1067. This is the world’s oldest continuous municipal democracy, predating the British parliament and rooted in what the Corporation calls “the ancient rights and privileges enjoyed by citizens before the Norman Conquest in 1066.” This, notes the City of London expert Maurice Glasman, means that the City is effectively outside the normal legislative r
emit.

  The City’s special privileges stem ultimately from the power of financial capital. Britain’s rulers have needed the City’s money and have given the City what it wants in exchange. Over the centuries the City has used this magic formula to carve out for itself privilege after privilege, exempting itself from laws it dislikes and turning itself into a state within a state: a true offshore island partly separate from Britain and protected from tides of history that have swept the British nation-state over the centuries.27 Monarchs, firebrands, and demagogues who tried to roll back the City’s special rights and privileges had occasional successes, but most came to a sticky end, and the City vigorously reasserted its rights. It was, one nineteenth-century reformer said, “like some prehistoric monster which had mysteriously survived into the modern world.”

  In 1937, Britain’s then prime minister Clement Attlee became one of few politicians to have raised the issue. “Over and over again we have seen that there is in this country another power than that which has its seat at Westminster [the parliament]. The City of London, a convenient term for a collection of financial interests, is able to assert itself against the Government of the country. Those who control money can pursue a policy at home and abroad contrary to that which has been decided by the people.”28 In 1957 an official commission, which sparked a big shake-up of local government across Britain, opened with the memorable words: “Logic has its limits and the position of the City lies outside them.”29

  The carve-out from Britain’s rules and laws has a truly ancient pedigree. When William the Conqueror invaded England in 1066, the rest of England disarmed and gave up its rights—but the City kept its freehold property, ancient liberties,30 and its own self-organizing militias: Even the King had to disarm in the City. When William commissioned the Domesday Book, a survey of the kingdom’s assets and revenues that determined taxation, the City was excluded.31 In the momentous changes that followed—the Protestant Reformation five hundred years later when the English Church became subject to the Crown, the subsequent civil wars that broke the power of the monarchy, and the broadening of suffrage to include almost all adults—the City held on to its privileges and strengths. The Statute of William and Mary from 1690, “confirming the Privileges of the Corporation,” and following a challenge to the City’s authority by the late King Charles II, illustrates the scale of the City’s different status:

  All the charters, grants, letters patents, and commissions touching or concerning any of their liberties or franchises, or the liberties, privileges, franchises, immunities, lands, tenements and hereditaments, rights, titles, or estates of the mayor and commonalty and citizens of the City of London, made or granted to any person or persons whatsoever . . . be and are hereby declared and adjudged null and void to all intents.

  In other words, those claims that infringe the City’s ancient liberties are worthless. Earlier that century, the British crown had asked the Corporation to extend its ancient legal protections and privileges to new areas of London, outside the City, that were receiving tens of thousands of refugees from brutal land reforms known as the Enclosures. But the Corporation refused, instead shipping excess populations off to the Ulster Plantation and the Corporation of Londonderry in what is now Northern Ireland,32 helping build a large Protestant community there and contributing to bitter future conflict. Glasman calls this the “Great Refusal”: the moment where the City turned its back on London and when London’s history properly became a tale of two cities, with a mayor for the vibrant, troubled, and poverty-scarred metropolis, and a Lord Mayor for the City: the world’s most ancient political institution, at the disposal of finance.

  For much of the last century the Labour Party, the party of Britain’s working class, had a pledge into its manifesto to abolish the Corporation of London and fold it into a unified London government. The pledge would remain in place, unfulfilled, until Labour Leader Tony Blair undid it in the early 1990s. In exchange for the City’s support in his successful bid for power in 1997, he agreed to remove the pledge to abolish the Corporation and replace it with one to “reform” it instead. The reform he eventually delivered reinforced the corporate vote, further diluting the humans.33

  Today the City has an official named the Remembrancer, the world’s oldest institutional lobbyist, who is the only nonparliamentary person working in the parliamentary chamber. Currently a man named Paul Double, the Remembrancer is charged “with maintaining and enhancing the City’s status and ensuring that its established rights are safeguarded,”34 and he monitors, and lobbies on, anything in parliament that might touch on the City’s rights.35 At the time of writing in 2010 its most recent public memoranda included one arguing stridently against efforts to rein in hedge funds,36 and another largely seeking to absolve over-the-counter derivatives of helping cause the financial crisis, and arguing against restricting them.37 The City of London Corporation also has a pot of money at its disposal named City Cash, which it says is “a private fund built up over the last eight centuries,” earning income from “property, supplemented by investment earnings.”38 City Cash funds many things, including monuments and ceremonies, stakes in the property developments39 outside the City boundaries, free-market think tanks, and permanently staffed lobbying offices from Brussels to Bombay to Beijing.40 The City will not provide a detailed list of its assets and holdings: some, but not all, are available on the public record. It admits to owning some of the most valuable part of London’s West End bordering the world famous Regent and Oxford Streets.41 The City’s Cash is exempted from British Freedom of Information (FOI) requests, so we cannot find out what it owns. Jason Beattie, a reporter who sought to investigate this money pot, found it to be completely different from any other local authority fund he had ever encountered. “I FOI’d them to hell—and I got nowhere,” he remembers. Does it own property around Wall Street, as Glasman suspects? There is no obvious way to find out.42

  Some law made in the British parliament does apply to the Corporation, but some Acts of Parliament specifically exempt it, either fully or in part. The City is connected to the British nation-state, but it remains a constitutional elsewhere. In this the City resembles Jersey or the Cayman islands, the offshore jurisdictions that are its satellites—each of which, as I will show, has also been entirely captured by the interests of global finance.

  For skittish global capital, the City’s constitutional foundation matters absolutely. Finance knows that any serious challenge to the City would face the mystique of time immemorial and the extravagant skills and powers of the many servants of finance. This globe-encompassing financial services center, whose influence reaches silently into people’s homes from Baltimore to Birmingham to Borneo, is founded upon an ancient constitutional platform that is unique and rather impregnable.

  This detour through British constitutional history helps us understand a little more about the power of financial capital and its ability to escape offshore to fortified and deregulated spaces, protected from outside interference. It is no coincidence that the futuristic Euromarkets, this new playground for Wall Street, emerged here in this ancient City. This market and its subsequent spin-offs would, as we shall see, ultimately play a central role in forcing through the liberalization of the world economy, whether the world’s citizens liked it or not. The City had created a new banking order; a new form of money, a new market in which to trade it, and the means by which the City of London would reemerge, phoenix-like, from the ashes of empire.43 The project to restore the City to postimperial glory, the academic writer Gary Burn notes, “was pursued unhesitantly and unstintingly, without, it seems, any prior or subsequent debate by the Prime Minister, the Treasury, by Cabinet, Government or Parliament. Central to the success of this project was the Bank of England, which after 1945 set about reestablishing the hegemony of international financial capital.”

  From those early beginnings the Euromarkets spread like a forest fire, fueled by political events. The Soviet Union did not want to hold too ma
ny dollars in New York, where they risked being confiscated if the Cold War turned nastier, and they did not want to invest in Sterling either: the risky money of a collapsing empire. In this new liberated Eurodollar market they found their solution: They could hold the money in dollars in London, under the protection of an ancient, rather unaccountable institution with no qualms about the political origins of money. Starting with a deposit of a few hundred thousand dollars by the Moscow Narodny bank in 1957, the Soviets began to pile in. Karl Marx would have raised his prodigious eyebrows at the irony of avowedly Marxist nations nurturing the emergence of the biggest, most unfettered capitalist system in history.

  By late 1959 about $200 million or so was on deposit in the Euromarket in London; by the end of 1960 it had reached a billion, and a year later the total was $3 billion, by which time it was spreading to Zurich, the Caribbean, and beyond.

  In 1963 the market received two more major fillips. The first came on July 18 when President Kennedy introduced his so-called Interest Equalization Tax on income from foreign securities, which was supposed to curb U.S. dollar outflows by making it less attractive for U.S. bankers to lend overseas. Wall Street responded by doing their lending out of the offshore, tax-free Euromarkets instead. “This is a day you will remember,” said Henry Alexander of Morgan Guaranty bank when the new regulations came into force. “It will change the face of American banking and force all the business to London.”44 The second boost that year was the birth of Eurobonds: unregulated offshore bearer bonds, which are just what the name suggests: whoever bears the pieces of paper in their hands owns them. They are a bit like ultravaluable dollar bills: No records are kept of who owns them, and they are perfect for tax evasion. Bearer bonds feature in villain-infested Hollywood movies like Beverly Hills Cop and Die Hard, and they are considered so pernicious that many countries have since outlawed them. A Bank of England memo from 1963 crystallizes the cynicism. “However much we dislike hot money, we cannot be international bankers and refuse to accept money.”45