By 1970 Cornfeld’s IOS was tottering under ever more scandals. Some of IOS’s Swiss employees had started complaining that Cornfeld owed them money, and an insider accountant, quietly picking through IOS’s international labyrinth, realized that it was a house of cards. The company fell into the hands of a big-time criminal named Robert Vesco, whom one partner called “a sonofabitch who hurt, denigrated or corrupted everyone he had contact with.” Another associate said Vesco “could talk you right out of your socks, or blast you out of them, or you would find somebody else owned your socks.” Vesco had been a major supporter of the Bahamian leader Lynden Pindling but was forced out in 1973 under U.S. pressure after he was found to have secretly donated $200,000 to Richard Nixon’s Committee to Re-Elect the President (CREEP), partially financing the Watergate burglary.
Although the official archives paint this picture of divisions between Britain’s various departments over their sponsorship of the growth of the British offshore zone, veterans in the Cayman Islands saw things from a very different angle. Under Britain’s benign, hands-off approach to government, offshore lawyers were constructing the new offshore system.
One of the very earliest practitioners was Casey Gill, an ethnic Indian lawyer, author of a book about the Cayman Islands’ offshore attractions, and one of the first to arrive at the start of the boom times.19 “It was a slow, sleepy fishing village,” Gill remembered. “The town ended just a half mile up there,” he said, gesturing toward a window. “No buildings, just wooden shacks—apart from the Barclays building.” In those early years, he reminisced, tax and accounting experts would arrive from around the world to give seminars, helping the Caymans to shape their laws accordingly. “They would come and say, ‘These are the loopholes in our system.’ Someone would say, ‘We are competing with, say, Liechtenstein.’ Or in those days the Bahamas was still trying to come through. Panama was there, and Switzerland.” With each new piece of information from outside, the Cayman-based lawyers, bankers, and accountants got to work targeting the gaps and addressing the competitive threats from elsewhere.
“There was also the Red Threat: the Russians,” continued Gill. “Investors were seeing shadows and ghosts everywhere. We had Castro clauses: If any government tries to expropriate assets, it would turn out they were simultaneously domiciled somewhere else.” Many of these assets came out of Latin America. William Walker, a veteran father of the Cayman financial sector, described how the assets were handled in an interview to a visiting journalist in 1982. Most of the fourteen hundred registered companies whose names festooned the walls outside his office, Walker said, “don’t require too much work—just signing occasional documents and perhaps holding two meetings a year. We funnel a lot of money from Central and South America…. Most of the money coming out of Latin America, of course, is in breach of their governments’ exchange control regulations.”
Gill said he was a founder member of a body called the Private Sector Consultative Committee—an association representing every branch of the burgeoning financial sector: trust practitioners, accountants, bankers, lawyers, and so on. Any government legislation that impacted on the Caymans’ role as a tax haven would go through this committee. “The government has a legal draftsman. We would meet them—he would go and prepare a draft and circulate it back to us. We would come back with suggestions, it would be redrafted and circulated to the PCSS, it would get the OK, then the government would pass it into law. The governor would send it to the Foreign and Commonwealth Office (FCO)—and they would say ‘no problem.’ Usually business would say ‘this is what we want’ and the FCO would let you do what you want to do.”
I asked Gill if Britain ever said no or raised objections to the new legislation. “No. Not ever. Never.” He then qualified those last words a little: There had been a case, “eight or nine years” before, when the legislation had been delayed somewhat. But his basic point was clear. While the gentlemen in London buzzed around like irritable wasps, arguing with each other and writing reports on the offshore phenomenon, the wizards of global finance—not to mention half the world’s criminals—were forging their own private Caribbean domains, almost entirely free from outside interference, and under Britain’s protection. And so the offshore industry grew.
As an aside, it is worth noting what happens when, for example, the Caymans hatches up a new and ingenious offshore loophole targeting U.S. tax laws or financial regulations. The United States will learn about it sooner or later and take counter measures—and so the Caymans will create new loopholes to get around those. As this battle continues, America’s tax code and financial regulations grow ever more complex. Offshore rebounds back onshore, in a constant dance of ever-deepening complexity. The confusions that result create, in turn, yet more opportunities for the wealthy and their advisers to find pathways through the expanding legal thickets. Huge, costly industries grow up to service the avoidance industry.
That is not all. The U.S. tax authorities often find defenses against some of the impacts of the worst offshore schemes. Yet a developing country, blind and inexperienced to the ever-deepening offshore complexity, is all but defenseless. As it slips further behind in the battle, its elites enjoy ever more opportunities for abuse, and local politics, and people’s faith in their own rulers, rot a little bit further. As this happens, the message from George Town remains the same: “Not our problem. Fix it yourselves.”
One of the more dramatic milestones in this ongoing dance between offshore center and onshore regulator came in 1976 when Anthony Field, the managing director of Castle Bank and Trust (Cayman) Ltd., was served with a subpoena upon arriving at the Miami airport, on suspicion that his bank was facilitating tax evasion by U.S. citizens. They wanted him to testify before a grand jury, but he refused.20 Fearing that Field would spill his clients’ secrets, exposing the Caymans to a major international scandal, an oppressive new secrecy law was drafted, the now infamous Confidential Relationships (Preservation) Law, making it a crime punishable by prison21 to reveal financial or banking arrangements in the Caymans. You can go to jail not only for revealing information but just for asking for it.
It was a giant, fist-pumping “fuck you” aimed squarely at U.S. law enforcement, and it has become a cornerstone of the Caymans’ success until the present day.
When the confidentiality law was enacted, Cayman practitioners remember cash literally flying in on private aircraft. “Money was still coming in large suitcases,” explained Chris Johnson, a veteran accountant. “People arriving with large amounts of money would get a police escort from the airport to the bank if they requested it.” It was happening all across the Caribbean. By the early 1980s, the Colombian Medellin cartel kingpin Carlos Lehder was smuggling industrial quantities of cocaine into the United States from Norman’s Cay in the Bahamas, having turned it into an ultimate male libertarian fantasy. One former Medellin cartel pilot remembers being picked up by naked women at the airport. “It was a Sodom and Gomorrah,” he said. “Drugs, sex, no police . . . you made the rules.”22 Lehder’s goons played hide-and-seek with the U.S. Coast Guard across Biscayne Bay, landing planes on U.S. interstate highways and leaving bodies strewn across Florida. As the cocaine flooded into the United States, money flew out again, in shrink-wrapped bills loaded on wooden pallets; the Cayman Islands monetary authority would then return it to the Federal Reserve. How, the Fed asked, could this tiny island selling trinkets to cruise ships send them such a torrent of money?
The drugs money was, at least, saving Britain’s development ministry tens of thousands of dollars in foreign aid. The authorities in the Caymans simply denied there was a problem and wheeled out the old offshore favorite: The scandals merely represented a case of bad apples, and the system had been cleaned up thoroughly ever since. When the next scandal came, the official response would always be the same.
Johnson remembers being involved in one bank audit where his company pointed out questionable activities, which the government simply ignored. “That,
coupled with the leather-clad hot-panted secretarial staff strutting through the deep pile carpets in high heels, might also have been construed as a red flag,” he said. The bank failed two years later.
The fiascos, he added wearily in an interview in 2009 in his George Town offices, have just kept repeating themselves ever since. He continues to bump up against the confidentiality law today. “One problem we have in trying to recover the assets is that we don’t even know who the directors are…. As a liquidator, I am following the money. If I want to negotiate with a director I have no way, no clue. If I go and ask someone, ‘Are you sitting on half a million dollars of my money?’ that’s breaking the law, and the penalty is jail. It is preposterous that these directors, some of whom sit on the boards of more than a hundred companies—one sits on over 450 boards of directors—are charging fees of up to £20,000 a company.” The confidentiality law, he added mirthlessly, should be shredded.
Johnson also pointed to something else. Company law statutes in the Caymans date back to English law as far as 1862—with certain democratic provisions removed. One of these carve-outs means that directors of hedge funds or mutual funds are often indemnified from litigation. “So you can’t be sued for negligence. Suppose I’m liquidating a fund and $200 million is gone. Why shouldn’t I be able to sue them? The directors are steering the ship, but when it sinks they can’t be sued.” Other sources indicate that the companies that provide directors owe no duty of care to the company or its creditors to ensure that the directors they provide perform their functions properly.23 No wonder directors and companies—not to mention fraudsters—love the Cayman Islands. And no wonder so many Cayman vehicles have come to so much grief in the latest financial crisis, as we shall see.
The era of suitcases of drug money flooding into the Caymans is pretty much over today. U.S. authorities began to ratchet up the pressure during the drug war, plugging some of the worst leaks. The lawyer Jack Blum explained what happened next on the Cayman Islands: “They say, ‘We don’t do that now.’ Each time they were exposed, they would clean up the thing that was exposed. They’d say things like, ‘We’re in financial deals now; we’re in insurance.’ You go back to Cayman today, and all the guys are in pinstripe suits.”
And yet the crime continues, in different, more sophisticated guises. In March 2001, the U.S. Senate Permanent Subcommittee on Investigations took testimony from a U.S. owner of a Cayman Island offshore bank who estimated that 100 percent of his clients were engaged in tax evasion and 95 percent were U.S. citizens. Dig beneath the Cayman Islands’ sunny spin today, and the incentives to mischief are easy to find. “Client privacy,” a government website notes,24 “is protected by the fact that the Registrar of Companies can only release the name and type of company, its date of registration, the address of the registered office and the company’s status.” You cannot find a list of directors of companies in Cayman, or even a charter that describes what a company is about, without going through a court battle. Trusts do not have to be registered—and there lies another very large and murky tale. The form and the context has changed, for sure, but at root Cayman still does what it always did: finds clever new ways to undermine the rules and laws of other nation-states.
As Britain set up its Caribbean offshore networks, it was doing something else far closer to the British mainland, in the crown dependencies of Jersey, Guernsey, and the Isle of Man. While the Caribbean havens project the City of London’s global reach to cover the North and Latin American markets, the Crown Dependencies are focused on Europe. Still, U.S. businesses are highly active here. The U.S. Government Accountability Office in 2008 listed Caribbean subsidiaries of Citigroup, American Express, Bank of America, Goldman Sachs, Morgan Stanley, JP Morgan, and Wachovia, among others. Most are in Jersey and involve private wealth management services for U.S. citizens in Europe, derivatives businesses, private equity, tax avoidance, and cash management. JP Morgan alone manages well over $100 billion worth of business out of Jersey just for private equity and real estate funds. Average annual bank deposits in Jersey in 2007 were over $500,000 per person, compared with less than $30,000 in the United States.
As with the Cayman Islands and other Overseas Territories, the Crown Dependencies have an ambiguous, half-in, half-out relationship with Britain that allows them to retain a controlling hand and say, “There is nothing we can do” when somebody complains. Britain handles Jersey’s foreign relations and defense, and his Excellency the lieutenant governor represents the Queen; Jersey financial regulation goes up for approval to the venerable Privy Council in London. Jersey is outside the European Union, though it cherry-picks the European laws it likes and discards the rest.
John Christensen, Jersey’s economic adviser from 1987 to 1998 and now a fierce critic of its tax haven status, remembers that when Britain got embarrassed about something Jersey was doing, its civil servants would engage in a kind of theater, to get things to change but without being seen to force Jersey to change. “A lot happens around winks and nods,” he said. “They would say, ‘This is all a bit of a bother, but the Europeans are putting pressure on us and we don’t want to put ourselves in a position where we are required to make you do this.’ Forcing Jersey to do something would reveal that Britain has the power to make Jersey change—we all knew it. These are highly intelligent people and these things don’t need to be said.”
Though Jersey feels exceedingly British, this facade hides an alien political system in which medieval politics combines with futuristic, high-speed offshore finance. There are no political parties, and the government is absolutely captured by global financial services. This ambiguous relationship with Britain dates back centuries. When the Prince of Wales fled via Jersey into exile in France in 1649, he was given refuge by George Carteret, a major landowner. Later the prince became King Charles II and gave Carteret a large tract of land in North America, known today as New Jersey. The original Jersey became a refuge and hothouse for European radicals, many of whom had fled first to England to escape persecution, then were shuffled off to this strange quasi-English place, partly to provide the plausible deniability that enabled Queen Victoria to avoid embarrassment in front of her various cousins in France, Belgium, Russia, Hungary, and beyond. Karl Marx and Friedrich Engels were regular visitors. In the twentieth century, officials returning from the colonies brought new colonial connections to help Jersey bankers build networks in Africa, the Middle East, and the Far East. People either moved to Jersey or kept their money there, in a trusted British environment where they could bank secretly and avoid tax. Expatriates who did not declare their income to their countries of residence, often poverty-racked African nations, knew they would never be caught.
It was not only poor countries suffering, of course. Britain’s own taxpayers were too. A letter sent in 1975 to Tony Benn, a well-known British member of parliament, describes the cynicism. “I am somewhat surprised to see a Mr. Gent from the Bank of England giving advice on how to avoid paying tax—I wonder if this is really part of the Bank of England’s duties?” Mr. Gent, Benn continues, “suggests that the Bank of England will not be prepared to pass on information required by the Inland Revenue! Does the UK Treasury have no control over the Bank of England? Surely Bank employees should not be working against Government Policy? And just what sort of arrangements and deals are made at these events ‘behind the scenes’? It really is just a bit too sordid to be true.”25
Martyn Scriven, secretary to the Jersey Bankers’ Association, illustrated how Jersey’s network grew over time.26 He ran the Barclays operation in Jersey, which he said catered to about one hundred thousand British expatriates. Smaller packets—up to £25,000, say—were saved in the clearing banks, while bigger packets went into the more secretive trust companies. “The biggest business developer is client recommendation,” said Scriven. “The client will say, ‘I’m happy, and I’d like to introduce you to my friend’—and you build it up like that. You get some seriously interesting people . . . some
one who goes abroad as a rigger twenty years ago for Shell may now be in charge of the company’s West Africa operations.” It seems reasonable, too, to imagine how client recommendation might one day deliver Nigeria’s oil minister and his friends, say, or a powerful Indian businessman, or a South African casino operator. The network grows, following old colonial links. “We gather deposits from wealthy folk all around the world, and the bulk of those deposits are sent to London,” Scriven continued. “The banks consolidate their balances every day, and surplus funds won’t sit here—they either go to another bank or on and through to the City. If I have money to spare, I pass it to the father. Great dollops of money go into London from here.” In the second quarter of 2009, the UK received net financing of $332.5 billion just from its three crown dependencies.27
Jersey Finance promotional literature makes a similar point. “Jersey,” it says, “represents an extension of the City of London.”28
As the City of London’s Caribbean havens and its crown dependencies were developing, something similar was happening in Asia. Hong Kong, which the U.S. economist Milton Friedman called the world’s greatest experiment in laissez-faire capitalism, was to be the new Asian offshore jewel, a tax haven gateway to China and the subregion. Britain remained the guiding hand, while giving financiers free rein. The colony’s financial secretary, Sir John Cowperthwaite, installed in 1961, had such stridently antigovernment views that he curtailed the publication of official statistics on the grounds that it would help the civil servants. When China introduced its “Open Door” policy of market reforms in 1978, opening up to foreign investment and export industries, Hong Kong was made: It was, as the financial crimes fighter Jack Blum remembered, “an ‘anything goes, no-regulation’ world.” When Britain handed it back in 1997 China kept it as a “special administrative zone” with the same ambiguous offshore status. Hong Kong’s Basic Law states that it shall “enjoy a high degree of autonomy” from China in all matters except foreign relations and defense. The close resemblance here with the British offshore arrangements is no coincidence. Chinese elites wanted their own offshore center, complete with political control and judicial separation. “Corporations doing business in China set up Hong Kong companies with secret shareholdings,” Blum continued. “Today Hong Kong is where most of the corruption in China is accomplished.” When the G20 countries sought to approve a tax haven blacklist at a summit meeting in April 2009, Chinese premier Hu Jintao fought intransigently with Barack Obama to get Hong Kong and Macau, another notorious Asian offshore hub, excluded. He got them relegated to a footnote.
Treasure Islands: Dirty Money, Tax Havens and the Men Who Stole Your Cash Page 14