The Bretton Woods system of international cooperation and tight controls over financial flows had collapsed in the 1970s, bringing to an end the so-called golden age of capitalism that followed the Second World War. The world had entered a phase of much slower growth, punctuated by regular financial and economic crises, especially in the developing world.
And as all this happened, and the offshore system grew and metastasized all around the global economy, a new and increasingly powerful pinstripe army of lawyers, accountants, and bankers had emerged to make the whole system work. Offshore, in partnership with changing ideologies, was driving the processes of deregulation and financial globalization. In particular, the London-based Euromarkets, then the wider offshore world, provided the platform for U.S. banks in particular to escape tight domestic constraints and grow larger again, setting the stage for the political capture of Washington by the financial services industry, and the emergence of too-big-to-fail banking giants, fed by the implicit subsidies of taxpayer guarantees, plus the explicit subsidies of offshore tax avoidance, that continue to hold western economies in their stranglehold today. The emergence of the United States as an offshore jurisdiction in its own right attracted vast financial flows into the country, bolstering bankers’ powers even further. The old alliance between Wall Street and the City of London, which collapsed after the Great Depression and the Second World War, had been resurrected.
Many people supposed that by eliminating double taxation and creating nearly frictionless conduits for financial capital, the offshore system was promoting global economic efficiency. In reality the system was rarely adding value, but was instead redistributing wealth upward and risks downward, and creating a new global hothouse for crime.
The U.S. crime-fighting lawyer John Moscow summarized the problem. “Money is power and we are transferring this power to corporate bank accounts run by people who are in the purest sense of the word unaccountable and therefore irresponsible.”1
Secrecy jurisdictions had penetrated the public consciousness, a little, but still only as marginal, dubious oddities at the exotic fringes of civilization. Under cover of this great misunderstanding, often artfully encouraged by those who wanted to conceal the true nature of the new financial revolution, the offshore system would play out in ways that would become increasingly significant in the 30 years to follow.
What was happening was nothing less than a head-on assault on the progressive New Deal in the United States; on the foundations of social democracy in Europe; and on democracy, accountability, and development in vulnerable low-income countries across the world.
Take any significant economic event or process in the last few decades, and offshore is almost certainly behind the headline and probably central to the story.
Poverty in Africa, for example, cannot be understood without understanding the role of offshore. The world’s worst war for years has been the civil conflict in the Democratic Republic of Congo, which is tied in with the wholesale looting of its mineral resources—via tax havens. Large-scale corruption, and the wholesale subversion of governments by criminalized interests, across the developing world? Offshore is central to the story, every time. Nearly every effort to generate large flows of capital to developing countries since the 1980s has ended in crisis because the money has escaped offshore. Towering inequalities in Europe and the United States, not to mention in underdeveloped countries, cannot be understood properly without exploring the role of secrecy jurisdictions. The systematic looting of the former Soviet Union, and the merging of the nuclear-armed country’s intelligence apparatus with organized crime, is substantially a story that unfolds in London and its offshore satellites. The political strength of Saddam Hussein had important offshore underpinnings, as does the power of North Korea’s Kim Jong-Il today. Prime Minister Silvio Berlusconi’s strange hold over Italian politics is significantly an offshore story. The Elf affair, discussed earlier, which helped powerful French elites float above and out of reach of French democracy, had secrecy jurisdictions at its heart. Promoters of frauds such as “pump and dump” schemes to hype up stocks, then dump them on an unsuspecting public, always hide behind offshore entities. The death of a Russian oligarch’s lawyer in a mysterious helicopter crash? Arms smuggling to terrorist organizations? The growth of mafia empires? Offshore. The narcotics industry alone generates some $500 billion in annual sales worldwide2: To put this into perspective, that is twice the value of Saudi Arabia’s oil exports.3 The profits made by those at the top of the trade find their way into the banking system, the asset markets, and the political process through offshore facilities. You can only fit about $1 million cash into a briefcase. Without offshore, the illegal drugs trade would be more like a cottage industry.
Financial deregulation and globalization? Offshore is the heart of the matter, as I will show. The rise of private equity and hedge funds? Offshore. Enron? Parmalat? Long Term Capital Management? Lehman Brothers? AIG? Offshore. Multinational corporations could never have grown so vast and powerful without the tax havens. Goldman Sachs is very, very much a creature of offshore. And every significant financial crisis in the world since the 1970s, including, as noted, the latest global economic crisis, is very much an offshore story. The decline of manufacturing industries in many advanced countries has many causes, but offshore is a big part of the story. Tax havens have been central to the growth of debt in our economies since the 1970s. The growth of complex monopolies in certain markets, or insider trading rings, or gigantic frauds, almost always involves secrecy jurisdictions as major or central elements.
This is not to say that all of these problems don’t have other explanations too. They always do. Tax havens are never the only story because offshore exists only in relation to elsewhere. That is why it is called offshore.
Without understanding offshore, we will never properly understand the history of the modern world. The time has come to make a start in filling this gigantic hole in our knowledge and to appreciate the gravity of offshore: how it has bent the world’s economy into its modern, globalized shape, transforming societies and political systems in its image.
I will now describe a rare episode where offshore’s role is widely acknowledged: the case of the Bank of Credit and Commerce International (BCCI), arguably the most offshore bank in history. The story is well known, but for one or two crucial features.
The BCCI case broke open after Jack Blum, a lawyer and investigator working for John Kerry’s Foreign Relations Committee, began picking up signs of wrongdoing in 1988.
Like most people, Blum initially saw secrecy jurisdictions mainly as centers for drug smugglers and other assorted lowlifes. But on a visit to the Cayman Islands in 1974 for the U.S. Senate Foreign Relations Committee, he remembers seeing a line of well-dressed men waiting to use the phone in his hotel lobby. He learned that they were U.S. lawyers and accountants arranging to meet Cayman bankers to set up bank accounts and trusts for tax-evading U.S. clients. The American bankers were referring U.S. customers to their Canadian colleagues, and the Canadians were returning the favor. Over time, he began to notice more sophisticated tricks and to see that this was far bigger than almost anyone imagined.
“I began to see that drugs were only a fraction of the thing,” Blum said. “Then there was the criminal money. Then the tax evasion money. And then I realized—‘Oh my God—it’s all about off the books, off the balance sheet. Offshore, there are no rules about how the books are kept,’” he continued. “I refer to offshore as a kitchen, where corporate books are cooked.”
When contacts started fingering BCCI in the late 1980s, Blum already knew it had a bad smell: He had worked previously in private practice, where he remembers his team meeting the staff of Mellon Bank in Pittsburgh and telling them about BCCI. “The entire senior international staff at Mellon just about threw up on the table,” Blum said. They would not, under any circumstances, accept letters of credit from BCCI.4
The bank was set up in 1972 by an Indian-born b
anker, Agha Hassan Abedi, who got backing for his venture from members of the Saudi royal family and from Sheikh Zayed Bin Sultan Al-Nahayan, the ruler of Abu Dhabi. BCCI grew superfast under a simple business model: create the appearance of a reputable business, make powerful friends, then agree to do anything, anywhere, on behalf of anyone, for any reason. BCCI larded politicians with bribes and served some of the twentieth century’s greatest villains: Saddam Hussein, the terrorist leader Abu Nidal, the Colombian Medellin drug cartel, and the Asian heroin warlord Khun Sa. It got involved in trafficking nuclear materials, in sales of Chinese Silkworm missiles to Saudi Arabia, and in peddling North Korean Scud-B missiles to Syria. Its branches in the Caribbean and Panama serviced the Latin American drug trade; its divisions in the United Arab Emirates, then amid an oil boom and an offshore banking bonanza, serviced the heroin trades in Pakistan, Iran, and Afghanistan; and it used Hong Kong to cater to drug traffickers in Laos, Thailand, and Burma. It also got into the U.S. banking system, getting around the concerns of U.S. regulators by using offshore secrecy structures to make its ownership invisible. It paid off Washington insiders and built up a solid partnership with the CIA. This gave it fearsome political cover and made Blum’s investigations extraordinarily difficult from the outset.
“There was an army of people working in Washington on all sides trying to say this bank was a wonderful bank,” Blum said. Friends in law enforcement warned him that his life was in danger, but he pressed on. He took the case to the Manhattan district attorney Robert Morgenthau, who shared Blum’s outrage and put a team together to take BCCI down. Fighting against what must have seemed like half the political insiders in Washington, Morgenthau helped shut it down in 1991 and charged BCCI and its founders with perpetrating “the largest bank fraud in world financial history.”
But the most interesting thing about BCCI was its offshore structure.
Abedi split his bank between jurisdictions, registering holding companies in Luxembourg and in the Caymans, so that no regulator could see the whole thing. Different auditors were used for different parts of the bank too.5 Yet he also wanted the credibility of being in a world-famous financial center, though it would need to be lax enough to ask few questions. That meant only one place: the City of London. In 1972 BCCI set up its headquarters in luxury offices in Leadenhall Street, at the heart of the City, and began making generous contributions to Britain’s Conservative Party.6
A rule of thumb was that banks should lend no more than 10 percent of their equity capital to a single borrower—but BCCI was making loans to some clients worth three times its capital or thirty times the accepted ratio. In 1977 the Bank of England tightened these rules further. To get around this, Abedi dumped shaky loans in the Cayman Islands, where, as a BCCI official noted at the time, there was “obviously more flexibility in record-keeping” and which bank officials called “The Dustbin.”7 Neither the British regulators, nor those in Luxembourg or the Caymans, assumed responsibility.
BCCI also constructed an audacious but simple offshore trick: to manufacture equity capital—the foundation and safety buffer of any bank—out of thin air. The Luxembourg bank would lend money to a BCCI stockholder—one of Abedi’s friends—who would then invest this money in the Caymans bank, building up its capital there. Likewise, the Caymans bank lent money to a stockholder who would use it to create capital in the Luxembourg bank. From just $2.5 million in equity capital at the beginning, BCCI had raised nearly $850 million by 1990, with the help of this offshore bootstrap.8 Abedi also wrote off his friends’ debts but kept expanding by operating a Ponzi scheme: milking the staff pension fund and taking in more deposits simply to pay its outgoings. Many of its eighty thousand depositors were relatively poor people from the developing world who had no idea that this apparently London-based bank, backed by wealthy Arab Sheikhs, was a fiction piled on a fiction.
“There is no way to learn banking from books: it is bullshit,” said Blum, highlighting the make-believe possibilities that emerge in the liberated offshore environment. “Nothing tells you how money-laundering generates products.”
When Morgenthau tried to probe the bank, the Caymans authorities refused to cooperate. “We subpoenaed BCCI Overseas—they told us, ‘Sorry: the laws of Cayman don’t permit us to do this,’” he said, expressing particular irritation with the attorney general, a “crotchety British guy” named Alan Scott.9 “We tried again. Finally, they said we had to go through the (U.S.-Cayman tax information exchange) treaty. We went through the treaty. Then they said, ‘The treaty doesn’t include local District Attorneys: go through the Justice Department. We can’t show this to you.’ The Justice department wasn’t overly cooperative either.”10 Morgenthau and his deputy John Moscow went to the Bank of England. “We had no cooperation from the Bank of England,” Morgenthau said. “We tried to get financial records out of London; they didn’t provide us with anything.”
With the help of Senator John Kerry, Morgenthau threatened to raise a public storm if the Bank of England did not act. Only then, finally, the Bank agreed to shut BCCI down.
In the British parliament, the scandal caused an uproar. The Bank, forced onto the defensive, claimed it had left BCCI running until 1991 because there had been no “solid evidence” of fraud until then.
It isn’t clear what other evidence the Bank needed. Indictments in the United States implicating BCCI in fraud dated back two and a half years; one stated that money laundering was part of its “corporate strategy.”11 Price Waterhouse had issued a qualified audit report on a BCCI subsidiary in 1989; and in 1990 BCCI employees had written to the Treasury, the Bank of England, and British ministers to warn of fraud inside the bank. That same year, Britain’s intelligence services had told the Bank of England that Abu Nidal controlled 42 BCCI accounts in London; the Bank for International Settlements in Basel had expressed concern; and in mid-1990 Price Waterhouse had discovered the so-called Naqvi files, revealing widespread fraud, fictitious companies, unrecorded deposits, manufactured loans, and evidence of stealing from depositors, findings that were passed along to the Bank of England. Still there was no action, even though BCCI headquarters were only a few minutes’ stroll down the road from the Bank
“It is difficult to see,” wrote Michael Gillard in Britain’s Observer newspaper, “how the required high ethical standards [for BCCI to be allowed to operate in Britain] fit with BCCI pleading guilty to conspiring with its own officials and two representatives of Colombia’s Medellin drug cartel to commit tax fraud and launder the proceeds of cocaine sales.”
Robin Leigh-Pemberton, the Bank of England governor, neatly encapsulated London’s see-no-evil offshore ethic. The present system of supervision, he added, “has served the community well…. If we closed down a bank every time we found an incidence of fraud, we would have rather fewer banks than we do at the moment.”12 That statement should have been evidence enough that the City of London was already the world’s premier offshore center.
The full Price Waterhouse report on BCCI remains confidential today, on the grounds that this will disturb Britain’s “international partners.” It is a clear defense of tax haven London.13
Ever since then, Morgenthau has struggled to wake people up to offshore crimes, personally pressing four U.S. treasury secretaries to pay more attention, with little result. “I remember giving a speech a couple of years ago to talk about offshore banks. It put everyone to sleep,”14 Morgenthau said. “Start talking about offshore money and their eyes glaze over.”
Just as the BCCI scandal quieted down, another offshore tale was emerging in the oil-rich African state of Angola, where I was the Reuters correspondent. Jonas Savimbi’s UNITA rebels had surrounded major towns in murderous sieges, pouring in mortar fire and trying to starve them into submission. In the city of Kuito desperate defenders were eating dogs, cats, and rats to survive, and bloodied patients were crawling from hospital beds to join armed raiding parties who would sneak out to search nearby fields, often mined, for cassav
a and other crops, sometimes having to fight their way back into town with provisions. The United Nations was calling it the world’s worst war, and the government was under an international arms embargo, so in 1992 it turned to secretive French Elf networks—related to the ones I would later encounter in Gabon, as described in the prologue—to help secure arms supplies. A wealthy Russian-born Jew named Arkady Gaydamak put together some $800 million in financing to help Angola procure weapons from a Slovak company, repaid in Angolan oil money, via Geneva, and get around the embargo. Later, French magistrates probing these oil-for-arms deals heard from a participant that the arrangements were “a gigantic fraud . . . a vast cash pump,” generating a 65 percent margin on the biggest arms contracts.”15 The financing trails, of course, involved many tax havens.
I tracked Gaydamak down in Moscow in September 2005, where he was under an international arrest warrant for his so-called “Angolagate” deals.16 He was eager to set the record straight and to discuss his efforts to—as he put it—bring peace to Africa and the Middle East17 (just then he was embarking on what would be an ill-fated foray into Israeli politics).
Gaydamak had left the Soviet Union as a twenty-year-old in 1972, moving first to Israel, then to France, where he built up a translation business, mostly servicing Soviet trade delegations. “‘Translator’ means go-between,” he explained. “If you are active in electronics, your position in the business world is usually with people in electronics. If you are a banker, you have relationships with bankers . . . but when you are a translator—a go-between—you know everybody.”
Treasure Islands: Dirty Money, Tax Havens and the Men Who Stole Your Cash Page 18