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

by Nicholas Shaxson

  Today, an “aged shelf company” will help you pretend you have been trading for years, when in fact you’ve just started up. “It’s an effective means to create a perception of business stability,” one registered agent advertises. “Most people won’t ask…. There’s nothing wrong with immediate gratification, as long as it’s affordable!” Behind the secrecy, nobody can discover the deception. All this, and more, is yours for $299.

  A limited liability corporation (LLC) might offer certified copies of the passports of that company’s directors. That looks reassuring, but even with genuine passport copies you are no closer to knowing who really owns the company or its assets: These directors are probably professional nominees who work for hundreds of such corporations. Typically the nominee director will route all queries via a company attorney who has contact with the real people, and when crime-fighters come looking, the attorney will hide behind attorney-client privilege and claim he or she cannot reveal the information. “That’s a secrecy jurisdiction right there, in his office,” one irate U.S. government investigator told me. “The lawyers are worse than the bankers. And there are the securities firms, and accountants. They are all involved.”

  These LLCs are a filter between the assets and the owner, screening out the information. U.S. states cream off a few hundred dollars in fees, and crimes around the world go unpunished.

  A Wyoming website boasts that “Wyoming Corporations and LLCs have a tax haven within the United States with no income taxation, anonymous ownership and bearer shares…. Shelf Corporations and LLCs: Anonymous entity where YOUR NAME IS ON NOTHING! These companies already exist and are complete with Articles, Federal Tax ID numbers and registered agents…. You may have these complete companies by TOMORROW MORNING!”

  Yours for $69, plus modest state filing fees.30

  These places are selling a cheap and very strong form of secrecy.31 In Switzerland, information is typically retained, but secrecy laws mean locals may not disclose it. States like Wyoming have no such prohibitions on breaking the secrecy: The trick is simply to ensure no information is available in the first place. All company records may be kept outside the state—in North Korea, for instance—so even if the authorities wanted to find out what your company was about, they couldn’t. Stock can be transferred instantly and privately without filing a public notice.

  With its corporate laws, the United States does not even comply with the transparency requirements of the IMF’s rather toothless IMF Financial Action Task Force, which requires countries to be able to identify beneficial owners. When congressional staffers and others have tried to change this, they have met ferocious lobbying from these states and from the American Bar Association.

  “When other countries ask us for company owners, we have to stand red-faced and empty-handed,” said Senator Carl Levin. “The United States has been a leading advocate for transparency and openness. We have criticized offshore tax havens for their secrecy and lack of transparency. We have pressed them to change their ways. But look what is going on in our own backyard.

  “America should never be the mattress corrupt foreign officials use to hide their money.”32

  Secrecy is just one of several lures that individual U.S. states offer to financial capital elsewhere. Tax is another lure, though a fairly minor one. Certain types of state corporations shield residents from state income tax, asset tax, sales tax, stock transfer tax, or inheritance tax, and U.S. corporations push trademarks, patents, and other nebulous things into low-tax states in a transfer pricing game to cut state taxes. World-Com, for instance, shifted nearly $20 billion tied to “management foresight” to a Delaware company before it collapsed in 2002. Tax is never the individual states’ top attraction, though: Corporations paying no state taxes owe U.S. federal taxes.

  Two further lures have turned certain U.S. states into corporate havens. One involves usury; I will explore this in chapter 10. The other involves corporate governance, which is largely governed in the United States by state, not federal, laws. In both of these, Delaware plays a starring role.

  What ties all these different strands together—the tax, the secrecy, the usury specialties, and the corporate governance—is the political establishment of this tiny state, where everyone knows everyone else and Democrats and Republicans alike seem to share a uniform opinion that local laws must be shaped to satisfy corporate desires, to attract business for the state—and the rest of the world can take care of itself. Only a definition of offshore like the one I use in chapter 1—focusing on how locals prioritize their own interests explicitly at the expense of others—enables us to tie together the four strands mentioned above and to understand what is going on.

  A brief look at the story of Delaware helps bring this historical section of the book up to the present day.

  Delaware, the second smallest of the U.S. states, is home to many of the world’s biggest corporations. Conventional definitions of tax havens—those that focus on tax—fail to capture Delaware as a part of the offshore system. But something important is clearly happening here: Over half of U.S. publicly traded companies and nearly two-thirds of its Fortune 500—Coca-Cola, General Motors, ExxonMobil, you name it—are incorporated here; the little state hosted over 90 percent of all IPOs in the United States in 2007. These corporations don’t have their headquarters here; they are just incorporated there. Being in Delaware gives modest tax advantages over other states, but the killer lure is, as I’ve said, laissez-faire standards of corporate governance that give tremendous power to corporate managers.

  Delaware has long been a refuge for financial capital. In 1899 the state government, influenced by the du Pont family, who wanted to incorporate their chemical industries,33 adopted a new and permissive corporation law that reflected the laissez-faire spirit of an age of growing corporate power. In Delaware, the message went, company managers gain huge leeway to do what they want at the expense of other stakeholders. Other states began to follow suit. “Even as the starter’s gun went off,” the Chancery Court’s official history puts it, “Delaware was already being accused of leading a ‘race to the bottom.’” This classically offshore theme has remained a permanent character of Delaware history. In 1974 William Cary, a former chairman of the U.S. Securities and Exchange Commission, wrote in a landmark article in the Yale Law Journal that Delaware law has “watered down the rights of shareholders vis-à-vis management to a thin gruel” and that “necessary high standards of conduct cannot be maintained by courts shackled to public policy based upon the production of revenue, pride in being ‘number one,’ and the creation of a ‘favorable climate’ for new incorporations.”

  To be fair to Delaware, there are healthier reasons for incorporating here. Its Chancery Court has become—because of Delaware’s success in attracting out-oftowners—the specialist in corporate law, with unrivaled experience and expertise.34 And its location halfway between New York and Washington gives Wilmington a fearsome geographical edge too. Who wants to fly to Alaska to litigate?

  The Delaware Chancery Court has a “business judgment rule” under which courts should not second-guess corporate managers, provided they have not blatantly violated some major rule of conduct and their decisions are approved by a “neutral” decision-making body. Whatever one thinks of this approach, Delaware has taken it to extreme lengths, granting corporate bosses extraordinary freedoms from bothersome stockholders, judicial review, and even public opinion. As Bernard Black, a professor of law at Columbia University, wrote in 1998, “Shareholders haven’t been able to stop managers, and their allies on the Delaware Supreme Court and in state legislatures, from chilling hostile takeovers through poison pills, antitakeover statutes, and judicial decisions that let managers ‘treat shareholders like morons’ who are incapable of understanding a firm’s true value.”35

  In 2003 Delaware passed new legislation expanding the Chancery Court’s jurisdiction, and the official synopsis said the aim was to “keep Delaware ahead of the curve in meeting the ev
olving needs of businesses, thus strengthening the ability of the state to convince such businesses to incorporate and locate operations.”36 J. Robert Brown, a professor of corporate law at Denver University and a leading critic of Delaware courts, said that “Delaware courts have all but eliminated meaningful limits on self-interested transactions.”

  A Reuters story in May 2010 provided a fascinating insight into one role Delaware’s incorporation business played in the latest financial crisis.37 The story examines the “dean of CDOs,” a retired University of Delaware finance professor who became the sole independent director of the Delaware-based corporations behind more than two hundred mostly subprime-backed CDOs, including ones underwritten by Goldman Sachs and Morgan Stanley. Independent directors are supposed to bring unbiased opinions to company boards and ought to be what one expert terms “the cornerstone of good corporate governance.”38 Janet Tavakoli, a Chicago-based structured finance consultant, said these independent directors “are basically there just as a rubber stamp.” We will see a lot more of Delaware’s role in the financial crisis later, but the point for now is that allowing toothless directors for securitization deals, just like Nevada’s tolerance for nominee directors who reinforce corporate secrecy, is offshore business.39

  Richard Murphy of Tax Research UK captures the artificiality of these arrangements. “Offshore is used to repackage what happens elsewhere,” he said. “It is used to change the form, but not the substance, of a transaction.” A world-famous totem to this artificiality is Ugland House, in the Cayman Islands, which Barack Obama once criticized for housing over twelve thousand corporations: “either the biggest building,” he said, “or the biggest tax scam.”40 When Obama said that, Antony Travers, chairman of the Cayman Islands Financial Services Authority, fired right back. Obama would be better advised to focus his attention in Delaware, where, he said, “an office at 1209 North Orange Street, Wilmington, houses 217,000 companies.”

  After Travers said that, I had to see the world’s biggest building.

  This, as it happens, is the office for the Corporation Trust, a subsidiary of the Dutch firm Wolters Kluwer. It is just at the edge of Wilmington’s small financial center: a forgettable yellowish brick low-rise with a modest maroon awning: the kind you’d find outside a pizza restaurant. It sits between the scruffy little parking lot behind it and the unsightly six-story parking garage across Orange Street, and it is, legally speaking, the corporate home of Ford, General Motors, Coca-Cola, Kentucky Fried Chicken, Intel Corp., Google Inc., Hewlett Packard, Texas Instruments, and many more global corporate giants, including many of the specialized trusts and Special Purpose Entities (SPEs) that underlay the latest financial crisis. These corporations are not here for secrecy but for the corporate governance. The Corporation Trust will, as part of the service, also help your company serve and receive notices, subpoenas, summons, and the like. Delaware’s government website lists 110 registered agents—these, by the way, are not regulated.41 In 2008 Delaware hosted 882,000 active business entities: one for every man, woman, child, and baby in the state.42

  Before visiting the building, I called repeatedly to request an interview with the management of the Corporation Trust. Each time I was promised a call back, which never came, until I eventually caught a new receptionist who put me through to the office manager, Cory Bueller. Evidently flustered, she agreed to see me. I turned up ten minutes ahead of time and was buzzed into a reception room about twelve by twelve feet, with an aging, scuffed gray-patterned carpet, two potted plants, and light-colored walls dotted with odd grease smears. Behind a glass window sat the receptionist, a slightly unshaven black man in a baseball jacket, who was replaced soon after I arrived by an attractive, well-dressed young woman in a vivid red coat, who smiled brightly and promised that Bueller would be out shortly.

  Bueller came through the door in faded jeans, white sneakers, a white T-shirt, and a gray cardigan and said sheepishly that she couldn’t give me that interview after all. I asked if I could have a quick nose around. That would not be possible, she said, wringing her hands. I pressed again. “Just a quick peek?” A flush of color came to her cheeks, and she declined again. She would not give me her own card but instead passed me a piece of headed paper with a phone number for Wolters Kluwer’s New York press office. Back outside, I could see long rows of work cubicles through one window. It looked very similar to what I had been able to see of the ground floor of the Caymans’ Ugland House. This was clearly a place for secretarial work: Bueller did confess under my questioning that about 80 people worked there, and none were lawyers.

  As late as the early 1990s, mainstream development theorists trying to work out why some states were failing, or why poverty was so widespread, all but ignored the issue of corruption. Berlin-based Transparency International (TI), founded in 1993, put corruption on the map, launching its famous Corruption Perceptions Index (CPI) two years later. The Financial Times nominated 1995 as the International Year of Corruption; and the World Bank, which had previously been so polite toward developing country elites that it all but banished the c-word from its policy documents, followed TI’s lead in 1996 when its president, James Wolfensohn, accepted in a landmark speech that the bank needed to deal with “the cancer of corruption.” The OECD’s Anti-Bribery Convention came into force only in 1999, and the UN’s Convention Against Corruption was only solidified in 2003. In many OECD countries, bribery was even tax-deductible until just a few years ago.

  Even so late, the shift was very good news. But now consider this.

  TI’s corruption ranking is invaluable to investors trying to assess “country risk.” But Nigerians already know that their country is among the world’s most corrupt. They want to know where almost $500 billion worth of their oil money has gone. The corruption index gives no clues. After the brutal Nigerian president Sani Abacha died in 1998, poisoned while in the company of Indian prostitutes, it was revealed that he had raked off billions of dollars of oil money from state coffers. Two countries in particular had soaked up his embezzled wealth: Britain and Switzerland. The Nigerian finance minister Ngozi Okonjo-Iweala revealed the problems in an interview with journalist Paul Vallely of The Independent in May 2006.43

  NGOZI: The Swiss have now returned $500 million of stolen resources. Switzerland has set the example.

  VALLELY: What about the British?

  She gives a long throaty chuckle.

  NGOZI: Now heaven help me. It’s very hard to condemn the British. On debt relief the UK has set the example.

  VALLELY: So why are the British dragging their feet on the repatriation of stolen resources?

  NGOZI: It’s been more difficult with the British. Our president has raised it many times with Prime Minister Blair. Eventually he returned $3m. We understand there are other monies but while all the discussion was going on those monies left the country and went somewhere else.

  TI’s rankings suggest that Britain and Switzerland, not to mention the United States, are among the world’s “cleanest” jurisdictions. In fact, about half the top 20 in the index are major secrecy jurisdictions, while the nations of Africa—the victims of the gargantuan illicit flows—are ranked the “dirtiest.”44

  Clearly, something is wrong here.

  In November 2009 the Tax Justice Network published a new index based on two years of work by a dedicated team. Named the Financial Secrecy Index, it ranked countries according to how important they are in providing financial secrecy in global finance. It did this by looking at a range of key secrecy indicators and structures to see how secretive a jurisdiction was, then weighting each according to the scale of cross-border financial services activity that it hosts.

  Nothing like this had ever been done before, and newspapers and television stations around the globe published the results, with some of the countries traditionally seen as the “cleanest” being ranked as among the world’s least transparent.

  In fifth place in the Financial Secrecy Index was the United Kingdom. Al
though it has by far the most important historical role in the emergence of offshore, and it is the center of the British offshore spiderweb, its own domestic secrecy structures in themselves are relatively transparent. Third and fourth most important were, respectively, Switzerland and the Cayman Islands. Luxembourg, a gigantic but hardly noticed haven of financial secrecy, came second. And which country was ranked—by a mile—the world’s most important secrecy jurisdiction?

  Step forward, the United States of America.

  7

  THE DRAIN

  How Tax Havens Harm Poor Countries

  BY THE EARLY 1980S THE MAIN ELEMENTS of the modern offshore system were in place and growing explosively. An older cluster of European havens, nurtured by old European aristocracies and led by Switzerland, was now being outpaced by a new network of more flexible, aggressive havens in the former outposts of the British empire, themselves linked intimately to the City of London. A state within the British state, the City had been transformed from an old gentleman’s club operating the financial machinery of empire, steeped in elaborate rituals and governed by unspoken rules about what “isn’t done,” into a new, brasher, deregulated global financial center dominated by American banks and linked intimately to this new British spiderweb. A less complex yet still enormously important offshore zone of influence had also grown up, centered on the United States and constructed by U.S. banks. The stateless Euromarkets linked all these zones with each other and with the onshore economies, helping free banks from reserve requirements and other democratic restraints on their behavior.

  While the old European havens were mostly about secret wealth management and tax evasion, the new British and American zones were increasingly about escaping financial regulation—though with plenty of tax evasion and criminal activity thrown in, of course. Players in each zone were warmly welcomed into the others, in true laissez-faire style, and as the offshore system became more interconnected it grew stronger too, as states competed with each other in races to the bottom on lax financial regulation, tax, and secrecy in order to lure financial capital. This competition also helped force offshore practices steadily onshore, making it harder to tell the two apart.