Despite Chinese control, the City of London remains deeply engaged with Hong Kong, as do Wall Street firms—often through their London offices. Hong Kong remains a smallish offshore player: Its nonresident deposits, at $149 billion in 2007, were just one-eleventh the size of the Cayman Islands’ $1.7 trillion. One day many years hence, however, it may grow large enough to become a key financial tool in Chinese global imperial strategies.29
Singapore set up its financial center in 1968 and soon began to attract hot money.30 Andy Xie, Morgan Stanley’s star Asia economist, described how it had turned out, in an internal email in 2006. “Singapore’s success came mainly from being the money-laundering centre for corrupt Indonesian businessmen and government officials,” he said. “To sustain its economy, Singapore is building casinos to attract corruption money from China.”31 Xie and two colleagues reportedly had to resign after the email became public.
By the 1980s, the main elements of the City of London’s offshore networks were largely in place and being used extensively by Wall Street. But by then the United States, long a victim of offshore erosion, was in the process of turning itself into the world’s biggest secrecy jurisdiction.
6
THE FALL OF AMERICA
How the United States Learned to Stop
Worrying and Love the Offshore World
EARLY IN 1966 A YOUNG ECONOMIST WORKING at the New York headquarters of Chase Manhattan Bank was riding a company elevator when a former State Department operative handed him a memo. It isn’t clear if Chase management knew of the memo: This came from Washington, not from Chase. But the young economist, Michael Hudson, was astonished by its contents.
Hudson had gotten into banking by chance: After studying economics at New York University in 1960 he took a job in real estate banking, and later, when an opening came up at Chase to look at what are called balance-of-payments issues, he was the only applicant. Now a respected (if controversial) American economic commentator, Hudson said his time at Chase—during which, incidentally, he fired a “nasty little twit” called Alan Greenspan1—taught him most of what he ever learned about international economics.
In those days Chase was the oil companies’ preferred bank, and it had asked Hudson to study the petroleum industry’s impact on the U.S. balance of payments to provide ammunition that would help the oil companies claim they were “good for America” and help them lobby for special government perks. One of his tasks on this project was to find out where the oil companies made their profits. At the producing end? At the refineries? In the gas stations? David Rockefeller, Chase’s president, arranged for Hudson to meet Jack Bennett, Treasurer of Standard Oil of New Jersey, now part of the ExxonMobil empire.
Bennett gave him his answer. “The profits are made right here in my office,” the oilman said. “Wherever I decide.”
He was talking about transfer pricing, the practice I explained in chapter 1, where banana companies trailed their accounts around the world’s tax havens in order to shift paper profits into the low-tax countries and the costs into the high-tax countries. Bennett showed Hudson exactly how large, vertically integrated multinationals could shift profits around the globe, apparently without breaking the law. The company would sell its crude oil cheap to a shipping affiliate registered in zero-tax Panama or Liberia, which in turn sold it on at a high, nearly retail price to its refineries and marketing outlets. In the high-tax countries where the oil is produced and consumed, the subsidiaries buy at a high price and sell cheap, so they are unprofitable and pay little tax. But in the middle, in zero-tax Panama or Liberia, the subsidiaries buy cheap and sell dear, making vast profits. But these havens levy no tax on those profits.2
To this day, accounting standards effectively hide this kind of trickery, letting companies shovel results from different countries into a single category (often called simply “international”) that cannot be unpicked to work out who takes what profit where. “Only the immense political power of these extractive sectors,” said Hudson, “could have induced their governments to remain so passive in the face of the fiscal drain.”
This kind of offshore leakage was relatively restrained in the 1960s if compared to today. Capital flows were strongly regulated, taxes were high, and the offshore system, though alive, was still a fairly modest phenomenon, and the British offshore spiderweb was in its infancy. With the golden age of capitalism in full swing, American households, and particularly the poorest, were seeing tremendous improvements in wealth and welfare; Germans were basking in their Wirtschaftswunder; France was in the midst of its Trente Glorieuses; Italy was installing the springboard for its Il Sorprasso moment, to come twenty years later, when its economy would outgrow Britain’s; and Japan was unleashing its own economic miracle. In large swaths of the developing world, infant mortality was falling, economies were growing, unemployment was tumbling, and hungry children were finding food regularly on their dinner tables.
Although change was coming, the United States still harbored major and powerful opponents of the offshore system. After the Great Depression, Wall Street, diluted in a large and diversified industrial economy, had relatively little political clout to veto progressive New Deal–style legislation. By contrast, the City of London’s position at the center of the globe-spanning British empire gave it the domestic political heft to sabotage any British version of the New Deal. Not only that, but British finance hadn’t been so directly implicated in the excesses of the 1920s. London was perfectly placed to provide American banks with an escape route from regulation at home. They could rebuild their powers offshore.
The brief memo passed to Hudson in the elevator suggested, however, that some Americans were hoping to transform the U.S. approach to the offshore world.
“Like Switzerland, flight money probably flows to the US from every country in the world,” the memo started. But then the complaints began. The United States was not following the Swiss lead aggressively enough, it said. “US-based and US-controlled entities are badly penalized in competing for flight money with the Swiss or other foreign flight money centers.” One reason the United States lagged in the quest for dirty money, it argued, was “the demonstrated ability of the US Treasury, Justice Department, CIA, and FBI to subpoena client records, attach client accounts, and force testimony from US officers of US-controlled entities, with proper US court back-up.” There were also American taxes, plus risks associated with the Cold War and a view among “sophisticated” foreigners that U.S. money managers were “naïve and inexperienced in manipulation of foreign funds.”3 It also criticized investment and brokerage restraints “which limit the flexibility and secrecy of investment activity.”
The message was unequivocal and strong. America ought to turn itself into a tax haven.
“They were saying ‘We want to replace Switzerland. All this money will come here if we make this the criminal center of the world. This is how we fund Vietnam,’” Hudson remembers. “We wanted foreign criminal money, which was patriotic, but not the American criminal money.” The operative in the elevator suggested to Hudson that he might find out how much foreign illicit money the United States might be able to get.
Fast forward 40 years, and it is clear that the wishes of whoever wrote that memo have been realized. A table in Raymond Baker’s 2005 book Capitalism’s Achilles Heel outlines just how far the United States has fallen. By then, it showed, U.S. banks were free to receive the proceeds from a long list of crimes committed outside the country, including alien smuggling, racketeering, peonage, and slavery.4 Profiting from these crimes is legal, just so long as the crime itself happens offshore. A few of these loopholes have now been closed, and U.S. law addresses some of the others, though often only in tangential, incomplete ways. But it remains true that a U.S. bank can knowingly receive the proceeds of a wide range of foreign crimes, such as handling stolen property generated offshore. The United States is wide open for dirty money, just as that Hudson memo anticipated.
Tax havenry has alw
ays been contested in the United States. Only a month after coming to power in 1961, President Kennedy called for an end to the abuse of “foreign tax havens” and, as noted in chapter 1, asked Congress for legislation to “drive them out of existence.” Barack Obama’s cosponsorship of the Stop Tax Haven Abuse Act just before he came to power, and the subsequent evisceration of the act by offshore lobbyists, is merely a recent skirmish in an old war.
The United States, like most countries, already had some tax haven characteristics long before the day in 1966 that Michael Hudson stepped into that Chase elevator. From 1921 the United States has let foreigners deposit money with American banks and receive interest tax-free as long as it isn’t connected with a U.S. business.5 And Wall Street had ensured that the United States wasn’t going to tell foreign governments about their citizens’ holdings, despite the best efforts of John Maynard Keynes and his U.S. counterpart Harry Dexter White to combat capital flight with financial transparency.
When president John F. Kennedy launched his “Alliance for Progress” with Latin America in 1961—“a vast cooperative effort, unparalleled in magnitude and nobility of purpose,” as he put it—he said he hoped to coax Latin Americans into repatriating all the money they had stashed in U.S. banks in order to reinvest it at home. Latin American leaders quickly pointed out that this would not happen unless the United States amended its tax laws, which promoted secret banking. Substantial pockets of secretly held foreign wealth already existed, not just on Wall Street but elsewhere too: in Texas, for example, but also most especially in the Southern District of Florida.
Just as Latin Americans used the United States as a home for tax evasion, immigrant communities in the United States, and especially first-generation Americans, were major U.S. tax evaders. “For various cultural reasons they didn’t trust anyone—so they put it offshore,” said Mike Flowers, a former U.S. Senate staffer. In addition to the first-generation Latin Americans who live across the nation, Flowers described the large concentrations of first-generation Iranians and Russians in California, “New Asians” on the West Coast, Jewish communities in various locations, and so on. “They tend to come clean after they have kids and have been here a while,” he continued. “They get settled and then they think, ‘Oh my God, I have all this offshore money and what do I do now? If I get caught, I’m screwed.’”
In an article entitled “Miami, the Capital of Latin America,”6 Time magazine hinted at the city’s in-between, financialized, quasi-offshore status: Miami was “Latin America’s Wall Street . . . a hemispheric crossroads for trade, travel and communications in the 21st century—a sort of Hong Kong of the Americas.” From the 1950s and 1960s, Florida became a pivot for the French Connection heroin route, for Kuomintang drugs flowing into the United States via Hong Kong (which Lansky laundered through Florida real estate), for Latin American flight money, and for Colombian drug money, often routed via the Bahamas, Panama, and the Netherlands Antilles.7
Jack Blum, then a Senate investigator, remembers sitting on his veranda in Miami in those days and listening to the gunfire.
“This place was nuts,” he said. “The stories in the Miami Herald were so fantastic, you’d say, ‘Why hasn’t any national editor picked up on this?’” The reason, he found, was that the editors simply didn’t believe them. Blum tells of one small aircraft coming in from Colombia via the Bahamas, then getting chased by U.S. helicopters. The pilot tried to escape by flying just under a commercial jetliner, then bailing out just before landing, after first hauling overboard the cocaine with the plane on autopilot.
“The first bag goes through the roof of a house—and nobody complains,” Blum said.8 “The second whacks the steeple off the South Miami Baptist church. The third bag falls into a community swimming pool and soaks the audience of a meeting of Crime Stoppers. The plane went down in the Everglades. The last bags probably got dragged off by alligators. He got busted.
“That happened. That happened.”
By the 1980s, two-fifths of the money on deposit in Miami banks was reckoned to have originated overseas, particularly in Latin America. After 1976, the Florida region became the only one of the Federal Reserve’s regions to show persistent (and huge) cash surpluses.9 “Half the property in Miami is owned by offshore shell companies, and the largest yachts on the Intracoastal Waterway are registered offshore,” said Blum. “Miami is the facility of choice for Latinex–heads of state, generals, and former friends of the CIA.”
Washington did not push hard on transparency: It might frighten foreign capital owners, leading to large net outflows, and worsening an already bad balance-of-payments situation. So alternative ways were sought to stop capital from leaking out of the country. A new tax was introduced in 1963, a levy of up to 15 percent on income Americans received from foreign securities, to try to stop them from exporting capital to buy foreign bonds.10 As we have already seen, banks instead flocked to the offshore Euromarkets to finance their activities: London-based borrowing tripled just between 1962 and 1963. Chase Manhattan and others began to book more and more loans through the Euromarkets, in London and Nassau in particular. The United States continued to bleed capital, and in 1965 the Johnson administration introduced limited controls on outward capital flows, broadening the controls in 1966 and making them mandatory in 1968.11 “This was the first time in U.S. history there were rules to stop capital flowing out,” explained Jack Blum. “And the corporate community went apeshit.” In the face of all the lobbying that ensued, a compromise was accepted. Corporations could continue to keep their money offshore, and it would mostly remain untaxed and outside of these controls unless they repatriated it.12
In the tax world, this is a concept known as deferral: Companies may legally defer their taxes by holding profits offshore, untaxed, indefinitely. U.S. companies are only taxed on the income they bring back to the United States, usually in order to pay dividends to shareholders. Corporations know this is a bit of a game, partly depending on who is in the White House: Every now and then they are allowed to bring this un-taxed offshore money back home through amnesties. In 2004, for example, George W. Bush’s administration offered his corporate friends a 5 percent tax rate instead of the normal 35 percent for companies repatriating cash. Over $360 billion whooshed back to the country through this Bush loophole, under a claim that this would “provide jobs” as the capital returned home. Instead, however, much of it went into share buy-backs, boosting executive bonuses. The nonprofit research organization Citizens for Tax Justice, which studied the amnesty in detail, concluded, “There is no evidence that the amnesty added a single job to the U.S. economy.”
Deferred taxes—taxes that a corporation should (in a fair world) pay this year but can choose to delay—are described by Richard Murphy, a UK-based tax expert, as “a tax-free loan from the government, with no repayment date.” This sharply reduces multinationals’ cost of capital—a very big deal indeed, especially when this is accumulated over many years—and it in turn gives them a huge competitive advantage against smaller, locally based firms.13 When corporations dodge tax, others—that is, you and me—must pay the taxes that they won’t. The writer David Cay Johnston makes an interesting environmental comparison here. “Tax shelters are to democracy what pollution is to the environment.”14 He is quite right too.
This concession to corporations—allowing them to defer their taxes offshore and indefinitely—has been an enormous political boost for the offshore system. “Suddenly,” Blum explains, “every major corporation uses an offshore account.” Companies focused especially on the London-centered Eurodollar market but also on Panama, then under a right-wing strongman who venerated Adolf Hitler, and on the Bahamas, where Meyer Lansky had the politicians in his pocket. In the United States, Lansky had close links to the Mob lawyer Sidney Korshak, a true American Mafia kingmaker who in turn helped build up the career of several Hollywood actors, including Ronald Reagan. Some large U.S. corporations even opened their own offshore banks.
&nbs
p; As this happened, the interests of big-time criminals, the intelligence services, wealthy Americans, and U.S. corporations began to converge ever more strongly offshore. The system was working two transformations simultaneously: helping criminal enterprises imitate legitimate businesses, and encouraging legitimate businesses to behave more like criminal enterprises.
“The trouble is,” Blum said, “you can’t separate the channels for paying people off from the other purposes.” Although it was tax, not criminality, that most interested the corporations (and lax financial regulation that interested the banks), the big American crime families were especially pleased with the political umbrella that the corporations, and the spies, had hoisted over their offshore playgrounds. And the secrecy, in turn, provided the managers of large corporations with fabulous new opportunities for bribery, insider trading, and fraud. A new crime-friendly environment was being created for American capitalism. The scale of this criminality can hardly be guessed at. But secrecy makes criminality possible. And in competitive markets, whatever is possible becomes necessary.
Treasure Islands: Dirty Money, Tax Havens and the Men Who Stole Your Cash Page 15