Yet if it is obvious that the British would welcome this market, it seems rather odder that the United States would let its banks dive headfirst into this unregulated offshore market, knowing they were undermining American financial controls. Several things help explain why it was tolerated in Washington too.
Wall Street lobbying was obviously a huge part of the story. There is also the classic offshore problem: what goes on overseas, out of sight, gets ignored. Many policy-makers and regulators in the United States simply failed to understand this strange new phenomenon or dismissed it as a weird, slightly unclean, but temporary anomaly66: a funny money best left to Europeans. “Euro-dollars, indeed!” one U.S. banker told Time magazine. “It’s hot money—and I prefer to call it by that name.” And it was hot money.
U.S. banking interests worked hard to keep this offshore playground as quiet as possible too. Bankers deliberately avoided discussing it,67 and when Hendrik Houthakker, a junior member of the U.S. Council of Economic Advisors, wanted to tell the U.S. president about the Euromarket, he was slapped down by his superiors with, “No, we don’t want to draw attention to it.” A U.S. congressional committee report in 1975 expressed amazement at how it had flourished so far beneath the political radar for so long.68 Yet there is a bigger reason why the United States ultimately colluded with Britain in letting Wall Street banks roam offshore.
The U.S. dollar is the world’s main reserve currency. Less privileged nations are periodically constrained from spending by shortages of foreign exchange, but the nation with the dominant currency can borrow in its own currency—and it can print money to acquire real resources and live beyond its means for a long time. This “exorbitant privilege” helped America fight and pay for the Vietnam War; more recently it helped President George W. Bush cut taxes, invade Iraq, and rack up huge deficits while investors around the world continued to buy U.S. debt. Countries choose dollars as the main component in their reserves because dollar markets are large and liquid, and the dollar is trusted to be relatively stable. Everyone trades in dollars. When I was the Reuters correspondent in war-ravaged Angola in the mid-1990s, the raucous street money changers plumped up their ample brassieres not with Euros, Swiss francs, or Renminbi—but with dollars. Dollars make the world go round, and if you print the stuff, you’ve got it made.
To claim reserve status, a currency must have huge, deep, liquid, and sophisticated markets—and a currency subject to capital controls and stringent financial regulations is less attractive. U.S. policymakers wanted these deep markets but did not want to give up their taxes and controls. They thought, let’s have our cake and eat it, by preserving the rules and constraints at home while permitting this unregulated dollar market to flourish overseas. What they had not appreciated enough was the extent to which this offshore market would rebound back into the United States, with malign effects.
By the time Margaret Thatcher and Ronald Reagan came to power in 1979 and 1981, the political classes in Britain and the United States were losing faith in manufacturing and genuflecting toward finance. Wall Street and the City of London were at the forefront of a global trend of financialization: the reengineering of manufacturing firms as highly leveraged investment vehicles and, soon, the packaging of mortgages into risky asset backed securities for offloading into global markets. Everything was for sale: school playing fields, post offices, army services, and old fish markets. In the offshore centers, the very sovereign laws of nation-states had become available for sale or rent.
After Thatcher’s giant deregulatory “Big Bang” of 1986 deepened London’s offshore status as a freewheeling, anything-goes financial center, “light-touch London” broadcast ever stronger antiregulatory impulses around the world, deregulating other economies and their banking systems as if by remote control. The City became a crow-bar for lobbyists in Wall Street and around the globe: “If we don’t do this, the money will go to London,” they would cry; or “we can already do this in London so—why not here?” Its offshore satellites were deregulating even faster, constantly seeking to stay ahead of the others. This race has an unforgiving internal logic: you deregulate—then when someone else catches up with you, you must deregulate some more, to stop the money from running away. For the City, it was a beautiful, self-reinforcing dynamic: The more countries that opened their financial systems, the more business that would float around internationally, ready to be caught in the nearby nodes of the British offshore spiderweb and then sent up to be serviced in the City and its allies on Wall Street.
Not content with all this, the Corporation of London actively promotes international financial deregulation around the globe. With this in mind the Lord Mayor makes 20 or so foreign visits per year.69 An official report into one such visit to Hong Kong, China, and South Korea in 2007, along with the Lady Mayoress, the Sherriff, and a 40-strong business delegation, gives a flavor of the Corporation’s ambition and reach. The delegation’s aim, according to the report, was to
Lobby for China to maintain its course of economic and financial liberalisation, and encourage South Korea to adopt more open policies; Promote London as a global financial center …;
Explain the UK’s liberal approach to regulation and corporate governance
Lobby for liberalisation and improved market access in China’s banking, insurance and capital markets sectors; including highlighting the restrictive implications of ordinance 10 [which is designed to curb illicit financial flows and requires Chinese government approval for companies to list overseas,70] and the benefits of closer engagement with international players.
Encourage South Korea to adopt more liberal policies, notably in legal services, and to follow up on Seoul’s ambitions to become a regional financial hub
Explain the UK’s liberal approach to trade policy and regulation; and to encourage a critical mass of similarly thinking countries.71
In a meeting with senior officials from Tianjin, the Chinese city chosen as a pilot for national financial reform, the report noted that Mayor Dai Xianglong had “placed great value on deepening cooperation with the City of London, which he dubbed ‘the holy place’ of international finance and globalisation.”
The Corporation of London is a municipal authority for fewer than nine thousand souls and its job is, officially, to promote financial freedom and liberalization around the world. In partnership with the Bank of England, it is one of the most powerful players in global financial regulation today. And almost nobody has noticed it.
Political theorists have had great difficulty even seeing the Corporation of London, let alone appreciating its significance. With its politics of personal proximity, its bonds of shared identity and principle, and its elaborate ceremonials, the City manages to be at once vastly powerful and barely visible. It fits into no modern analytical framework. Mainstream modern publications about the City gloss over its free-floating status.72 Globalization has led to whole fields of research into the actions and interactions of companies in markets, but they usually only discuss political institutions on an abstract level. Students of the philosopher John Rawls have focused on the social compact—the relationship between rulers and ruled—but have paid relatively little reference to the role of institutions or history. Even Marxists, primed not to worry much about how financial capital organizes itself, have considered the City in the context of a clash between manufacturing capital and financial capital, misunderstanding its true role. The City is, as Glasman puts it, “an ancient and very small intimate relational institution, which doesn’t fit into anybody’s preconceived paradigm of modernity. Here is a medieval commune representing capital. It just does not compute.”73
And it was here in the City, just as Britain’s imperial dreams collapsed in the ignominy of the Suez retreat, that the financial establishment in London began piecing together the means by which London would restore its position as the capital of a world ruled in the interests of an elite of financial investors. At the moment of its apparent destruction, the British
empire had begun to reinvent itself, back from the dead.
5
CONSTRUCTION OF A SPIDERWEB
How Britain Built a New Overseas Empire
AS U.S. BANKS ENJOYED THE DELIGHTS OF LONDON’S unregulated markets from the late 1950s and 1960s, the City of London began to see more clearly how the partnership might be expanded more deliberately at a global level. I have already hinted at how the City began to use offshore centers around the world as nodes in a spiderweb, which would catch passing capital by getting rid of taxes and rules and regulations and providing safe, secretive new bolt holes for the world’s wealthy, and then send much of the business up to the City. Criminal money, far enough distanced from Britain itself to minimize the stink, would be turned to profit, and other money would accompany it. Meanwhile, the more that countries around the world deregulated and opened their economies to international capital, the more business would be flying around, and the more would come their way. Now I will explore the untold story of how it happened.
As I’ve noted, when Britain’s formal empire collapsed, it did not entirely disappear. Fourteen small island states decided not to become independent and became instead Britain’s Overseas Territories, with Britain’s Queen as their head of state. It is a status that has been preserved until today. Exactly half of them—Anguilla, Bermuda, the British Virgin Islands, the Cayman Islands, Gibraltar, Montserrat, and the Turks and Caicos Islands—are tax havens, actively supported and managed from Britain and intimately linked with the City of London. Accompanying these were the Crown Dependencies near the British mainland—Jersey and Guernsey, in the English Channel off the French coast; the Isle of Man, near the Irish republic; as well as a scattering of other territories—Hong Kong as a gateway to China, still under British control, and a variety of ex-colonial oddities in the Pacific and elsewhere.
The most important part of the modern British spiderweb, from the point of view of the United States, lies in the Caribbean: the City’s gateway to the vast markets of North and South America. Visit any of these territories and it becomes clear that they are, while half-British, set up to target the United States first of all. Eat out at an outdoor grill or beach restaurant, and your dinner will likely be overshadowed by a giant television screen fixed on a baseball game, and your food may be served by young American waitresses. Each either uses the U.S. dollar as its official currency or has a local currency called “dollar” that is pegged firmly to the greenback.
Offshore finance in the British Caribbean has old roots: Financial interests in Britain and their selected political representatives had learned the basics of tax havenry long before the British empire fell apart.
Organized crime in the United States began to take a serious interest in the U.S. tax code after the mobster Al Capone was convicted of tax evasion in 1931. His associate Meyer Lansky became fascinated with developing schemes to get Mob money out of the United States and bring it back, dry-cleaned. A slick Mafia operator—the inspiration for the figure of Hyman Roth in the film The Godfather—Lansky would beat every criminal charge against him until the day he died in 1983. He once boasted that the Mob activities he was associated with were “bigger than U.S. Steel.”
Lansky began with Swiss offshore banking in 1932,1 perfecting the loan-back technique. This involved first moving money out of the United States—in suitcases stuffed with cash, diamonds, airline tickets, cashier’s checks, untraceable bearer shares, or whatever. Next, he would put the money in secret Swiss accounts, perhaps via a Liechtenstein anstalt (an anonymous company with a single secret shareholder). The Swiss bank would loan the money back to a mobster in the United States, who could then deduct the loan interest repayments from his taxable business income there. Lansky opened operations in Cuba, outside the reach of the U.S. tax authorities, where he and his associates built up gambling, racetrack, and drug businesses, becoming what the author Jeffrey Robinson called an “anti-Disneyland . . . the most decadent spot on the planet.” Lansky’s close ties to Cuba’s right-wing leader General Fulgencio Batista helped stoke the violent anger that eventually brought Fidel Castro to power in 1959.
When Castro came to power Lansky moved to Miami, from where he plotted to find his next Cuba, with a pliable tyrant. “It would have to be small and close enough to the U.S. mainland to get tourists and gamblers in and out easily,” Robinson explained. “It, too, would have to come furnished with a thoroughly corrupt political regime, held together by a despot greedy enough to welcome the Mob with open arms; the tyrant would have to be so firmly in place that the political environment would remain stable no matter what. And the Mob’s money would have to be spread so thick and wide that, if some other tyrant seized power, he’d need them to maintain his own stability.”2
The Bahamas, then a British colony, was perfect. Formerly a staging post for British gun-running to the southern U.S. slave states of the Confederacy, and loosely governed for years by laissez-faire members of British high society,3 the Bahamas were effectively run by an oligarchy of corrupt white merchants.4 It would quickly become, through Lansky, the top secrecy jurisdiction for North and South American dirty money.
This much is well known. What is not widely publicized is the British authorities’ reactions to this burgeoning criminal activity on its territory. A trawl of the archives reveals a curious pattern involving periodic expressions of concern, followed by a seemingly resolute lack of action. A quaint memo from a Mr. W. G. Hulland of the Colonial Office to a Bank of England official in 1961, just as Lansky began major operations in the Bahamas, gives a flavor of such worries. “We feel that this [lack of provision of an effective regulatory system] might be a grave omission, since it is notorious that this particular territory, in common with Bermuda, attracts all sorts of financial wizards, some of whose activities we can well believe should be controlled in the public interest.”
London did nothing. Two years later, a “Dear Rickett” memo5 from M. H. Parsons, a colonial administrator, to Sir Dennis Rickett, K.C.M.G., C.B., warned that the Bahamas’s white, racist6 finance minister Stafford Sands, who had recently taken a $1.8 million bribe from Lansky7 mobsters, wanted to make it a criminal offense to break bank secrecy, and warned that this might annoy the United States. The proposed new legislation “will surely bring protests by the U.S. Government to Her Majesty’s Government,” Parsons wrote. “We would look pretty feeble if we had to say that we could do nothing to influence the course of offensive legislation in a territory for which we still have outward responsibility. I admit the point is a ticklish one.”
Stafford Sands had estimated that there was a billion dollars or more of dirty money to be tapped by reinforcing bank secrecy, and he was prepared to anger the United States to get it. It was, as the memo put it, “a calculated risk he was prepared to take.” London gave the go-ahead, and Lansky built his new criminal empire.
Some locals in the Bahamas were unhappy about what was going on. In 1965 Lynden Pindling, a populist Bahamas politician, threw the ceremonial Speaker’s Mace out of a parliament window to a prepared crowd, in a dramatic power-to-the-people gesture. Pindling was elected prime minister in 1967, ending white minority rule, on a platform that had included railing against the gambling, the corruption, and the ruling elites’ mob connections, though several accounts say Lansky—astutely assessing the political winds—backed Pindling too.8 The casinos, the gambling, and above all the Mob-infested offshore industry continued to boom. But when Pindling led the Bahamas to full independence in 1973, skittish offshore players fled in streams. The veteran lawyer Milton Grundy put his finger on what was going on. “It wasn’t that Pindling said or did anything to damage the banks,” Grundy said.9 “It was just that he was black.”
It so happened that there was a reassuringly British place, just next door to the Bahamas, where the locals were far more friendly, the British were still in control, criminals and bankers were being warmly welcomed, and offshore finance had recently started up: the Cayman Islands. In 1966,
when the Caymans’ first trust law was written, cows were still wandering through the town center of the capital, George Town, Grand Cayman. The town had one bank, one paved road, and no telephone system. The year afterward, Grand Cayman was connected to the international phone network and the airport was expanded to take jet aircraft. Money began to pour in.
In 1969 a British government team flew to the Cayman Islands to check on progress. The report notes a “frightening absence of certain types of expertise,”10 adding that “the civil service still reflects in structure and staffing the out-moded pattern of a bygone age.”
The report continued, “The flood of private sector activities, progressively drowning basic government functions, has placed an unsupportable burden on senior staff.” Flocks of developers were arriving, “usually backed by glossy lay-outs and declaimed by a team of business-men supported by consultants of all sorts. On the other side of the table—the Administrator and his civil servants. No business expertise, no consultants, no economists, no statisticians, no specialists in any of the fields. Gentlemen vs. Players—with the Gentlemen unskilled in the game and unversed in its rules. It is hardly surprising that the professionals are winning, hands down.”
At around this time, the archives show two sets of opinions on Britain’s offshore hatchlings starting to emerge within the British Civil Service. On one side sat the British Treasury, and especially its tax collectors, who were virulently opposed to tax havenry and who found the Caymans to be especially obnoxious. The U.S. authorities were getting vexed, too, and in large part because of this the British Foreign Office was broadly opposing havenry, though its position was more nuanced. On the other side of this divide sat the Bank of England, acting as the cheerleader for the new havenry and wishing to see it grow fast—though also trying to make sure that this freewheeling Caribbean offshore expansion did not spin entirely out of control. Supporting the Bank of England, with far less influence, was the British Overseas Development Ministry, which saw offshore finance purely as a trick to get the territories to pay their own way and reduce their demands for British aid without any sign that they had any concern for the inhabitants of developing nations around the world that would suffer vast drains of wealth into the Caribbean sinkholes.11 Discreetly, within the British establishment, battle lines were drawn. The exchanges were vigorous and at times even acrimonious.
Treasure Islands: Dirty Money, Tax Havens and the Men Who Stole Your Cash Page 12