In those early post-Soviet days Angola’s leaders still looked to Russia as their big-power patron, but they had lost their bearings in a fast-changing Moscow. “I began to be an intermediary,” he explained. “Russia was changing so quickly, everything was new: you should know where to go, how to go, how to organize. I was the so-called organizer of everything.” Gaydamak became Angola’s trusted man in Moscow. He knew that the big money lies in the “elsewhere” zone between jurisdictions, and in this context he gave me what must be one of the most “offshore” quotes of all time.
“In the so-called market economies, with all the regulations, the taxation, the legislation about working conditions, there is no way to make money,” he said. “It is only in countries like Russia, during the period of redistribution of wealth—and it is not yet finished—when you can get a result. So that is Russian money. Russian money is clean money, explainable money. How can you make $50 million in France today? How? Explain to me!”
In other words, because Russian and international law is so full of holes, the money “redistributed” to a small oligarchy must be clean.
Some have compared the vast upward redistribution of wealth in Russia after the fall of the Soviet Union to the era of the robber barons in the United States in the nineteenth century. But there is a crucial difference. The U.S. robber barons didn’t have a huge offshore network in which to hide their money. In spite of their many abuses, they concentrated on domestic investment. While they fleeced unwary investors and subverted the political process, they also built the country’s industrial prosperity. In time, the state was able to rein in their worst excesses.
But in the case of countries like Angola and Russia, the money simply disappeared offshore forever. African governments have grown weaker and more dependent on aid from the very states that are also strengthening the offshore system. It was Africa’s curse for her countries to gain independence at precisely the time that the purpose-built offshore warehouse for leaders’ loot properly started to emerge. For many of these countries, “independence” really meant independence for African rulers from bothersome societies. In a sense independence was a pyrrhic victory: The colonial powers departed but quietly left the financial mechanisms for exploitation in place.
After the Cold War, Angola was in debt to Russia for about $6 billion, and in 1996 Gaydamak inserted himself into a deal to restructure the debt. The debt was shaved down to $1.5 billion and sliced into thirty-one promissory notes that Angola would pay back in oil, via a private company called Abalone, set up by Gaydamak and his business partner Pierre Falcone, with a UBS account in Geneva.18 UBS was uncomfortable about the arrangements. “Any possible mention of one of the representatives of one or other of the parties,” an internal UBS memo said, “in a newspaper article, even if a posteriori this is judged to be unfounded or indeed libellous, would not prevent, in the first instance, a Swiss or particularly Genevan judge taking an interest in the people mentioned.”19 But the deal went ahead.
Unfortunately for Gaydamak, a Swiss judge intervened in February 2001, after Angola had paid off just over half the promissory notes. The judge had found vast, mysterious flows of money out of Abalone, including over $60 million to accounts in Gaydamak’s name, tens of millions more to accounts in the names of senior Angolan officials, and almost $50 million to a former Yeltsin oligarch.20 But most of it flowed to an array of accounts in Switzerland, Luxembourg, Israel, Germany, the Netherlands, and Cyprus. Little or none of it seemed to have flowed to Russia’s treasury. Gaydamak claimed that the Russian treasury got paid indirectly, via these mysterious accounts,21 and added that this was a “classic trading operation, extremely favourable to us.”
Because of the offshore secrecy, it is impossible to tell whether what Gaydamak said is even partly true. What is certain is that Angola’s leaders, in partnership with Russian interests and private offshore intermediaries, cooked up a curious deal, routed offshore, with vast profits for some insiders, and with absolutely no chance of accountability to the people of Angola or Russia. The African insiders had used offshore to enrich themselves not from Angola’s assets but from its debts.
The Swiss judge was later promoted away from the post, and his replacement unblocked the notes in October 2003, arguing that neither Angola nor Russia had complained about the deal, and accepting the argument that the accounts held by the Angolan dignitaries amounted to “strategic funds, placed abroad in a time of war.”
I could have chosen any number of murky African offshore episodes to explore, but I chose this one to illustrate a particular point about the scale of the draining of Africa’s wealth. Gaymadak’s deals represent only a tiny fraction of what the offshore system has drained from Africa. Two recent studies point directly to the sheer scale of the problem.
In March 2010 Global Financial Integrity (GFI) in Washington authored a study on illicit financial flows out of African countries.22 Between 1970 and 2008, it concluded, “Total illicit financial outflows from Africa, conservatively estimated, were approximately $854 billion. Total illicit outflows may be as high as $1.8 trillion.” Of that overall conservative figure, it estimates Angola lost $4.68 billion23 between 1993 (when Gaydamak’s main “Angolagate” deals started) and 2002, the year after his Abalone debt dealings ended. My personal belief, based on years of investigating Angola’s economy and its offshore-diving leadership, is that Baker’s estimate—equivalent to just over 9 percent of its $51 billion in oil and diamond exports during that time24—simply has to be a gross underestimate of the losses. Many billions have disappeared offshore through opaque oil-backed loans channeled outside normal state budgets, many of them routed through two special trusts25 operating out of London.
GFI’s shocking estimates complement the figures I mentioned in the prologue about the global scale of illicit financial flows: Developing countries lost up to a trillion dollars in illicit financial outflows just in 2006—that is, ten dollars out for every dollar of foreign aid flowing in.26
Another study emerged in April 2008 from the University of Massachusetts, Amherst, using different methodologies to examine “capital flight” from forty African countries from 1970 to 2004.27 Its conclusions are similarly striking: “Real capital flight over the 35-year period amounted to about $420 billion (in 2004 dollars) for the 40 countries as a whole. Including imputed interest earnings, the accumulated stock of capital flight was about $607 billion as of end–2004.” Yet at the same time, the total external debt of these countries was “only” $227 billion. So, the authors note, Africa is a net creditor to the rest of the world, with its net external assets vastly exceeding its debts. Yet there is a crucial difference between the assets and the liabilities. The University of Massachusetts study concludes, “The subcontinent’s private external assets belong to a narrow, relatively wealthy stratum of its population, while public external debts are borne by the people through their governments.”
Having watched people die before my eyes in Angola; having seen an otherwise pretty six-year-old Angolan girl who, without access to basic medicine, was losing a fight with an infection that had rotted a hole in her cheek the size of a golf ball, I am seared by having witnessed some of the ways Africa’s people bear their public debts, in the forms of poverty, war, a hopeless lack of real opportunities, and the regular physical and economic violence perpetrated against them by corrupt and predatory offshore-roaming elites who float free and unaccountable above their societies. Raymond Baker, the director of GFI, was quite right to call the emergence of the offshore system “the ugliest chapter in global economic affairs since slavery.”28
In February 2003 Phil Gramm, a former Republican Texan senator who became vice chairman of the Swiss investment bank UBS Warburg, wrote to U.S. treasury secretary John Snow, arguing against a plan to increase international financial transparency. “This proposal will limit economic freedom,” he wrote, “and reduce the pressure that potential capital flight imposes on high-taxing countries worldwide.”29 Illicit flow
s are good, Gramm was effectively saying, because it disciplines the victims.
Anyone who understands that there is a difference between wealthy rulers, who are the beneficiaries of illicit flows, and ordinary citizens, who are the victims, can see through Gramm’s position. Yet in whole sectors of the Western economics profession, such thinking has become almost an article of faith founded on the ageless blame-the-victim accusations that the losers are stupid, are corrupt, or just didn’t flagellate themselves hard enough.
Jim Henry, a former chief economist for McKinsey’s who is almost alone in having investigated this globally since the 1980s, sees the conventional roots of the global development crisis as “an economist’s fairy tale…. It leaves out all the blood and guts of what really happened.” Henry’s 2003 book Blood Bankers explores a number of shocking episodes where offshore banking led to crisis after crisis in low-income countries. First, bankers lent these countries far more than they could productively absorb; then they taught local elites the basics of how to plunder their countries’ wealth, then conceal it, launder it, and sneak it offshore. Then the IMF helped bankers pressure these countries to service their debts under threat of financial strangulation. Capital markets were deliberately opened up to foreign capital, according to Henry, “whether or not there were adequate security laws, bank regulations or tax enforcers in place.”
He tracked down an American banker from MHT Bank who took part in a friendly private audit of the Philippines central bank in 1983. “I sat in a hot, little room at the Central Bank, added up what the Central Bank showed it had received from us on its books, and compared it with our disbursements,” the banker told Henry.30 “And nearly $5bn was just not there! I mean, it had just not come into the country. It had been disbursed by us, but it was completely missing from the Central Bank’s books. It turned out that most of these loans had been disbursed to account numbers assigned to Philippine offshore banking units or other private companies. Apparently, the Central Bank gave MHT the account numbers, and we never questioned whether they were Central Bank accounts—we just wired the loans to them. And then they disappeared offshore.”
Philippine officials realized what he was up to, and the following morning the banker got a big breakfast in his hotel room, courtesy of the management. Fortunately for him, he only had time to grab a bite of toast before heading to the airport. By the time he reached Tokyo he was sick, and on the flight home he went into convulsions and spent three days in a Vancouver hospital recovering from what the doctors said was “an unknown toxin.”
Later, he told the New York Federal Reserve, and a friend at the National Security Council. “But apparently they just kept it to themselves,” he said. “So the Philippines is still servicing all those Central Bank loans.” Henry was able to confirm the banker’s story on a later trip to the Philippines. He also dug up details on at least $3.6 billion of identifiable government-swallowed foreign loans that ended up with then-president Ferdinand Marcos and his closest associates.
Walter Wriston, the chief executive of Citibank from 1967 to 1984, described the thinking of many of the parties involved as private offshore banking emerged as a global force. Sitting before a picture of himself with President Marcos and his wife, Imelda (the picture, he said, “caused so much uncontrollable laughter among my colleagues that I’ve kept that picture on my wall all these years”), he described the pervasive lack of understanding of, or perhaps the deliberate blindness of many toward, what was really going on. “In hindsight, the corruption and the amount of money bled off from those companies was a lot more than anybody knew about, including the United States government, Citibank, and the CIA,” he said. “We based our loans on economic analyses—will the power plant supply enough kilowatts to pay back its loan?—without realizing that we also had to account for the fact that the head of the power plant was the dictator’s brother.”31
As all this happened across the developing world, a pinstripe army of bankers, lawyers, and accountants lobbied inside the United States to make it increasingly attractive to these rising tides of dirty money, successfully turning it into a secrecy jurisdiction in its own right, just as the memo Michael Hudson received in 1966 had suggested. Meanwhile, they continued to capture the legislatures in small tax havens to perfect the global dirty-money system. Playing all three corners of the dirty-money triangle—the source countries being drained of illicit wealth, the increasingly offshore-like economies receiving the wealth, and the offshore conduits handling its passage—turned global private banking into one of the most profitable businesses in history. “The rise of Third World lending in the 1970s and 1980s,” in Henry’s description, “laid the foundations for a global haven network that now shelters the world’s most venal citizens.”
Henry’s calculations suggested that at least half of the money borrowed by the largest debtor countries flowed right out again under the table, usually in less than a year, and typically in just weeks. The public debts were matched almost exactly by the stock of private wealth their elites had accumulated in the United States and other havens, and by the early 1990s there was enough flight wealth in Europe and the United States to service the entire debt of the developing world—if only its income were taxed modestly. For some countries, like Mexico, Argentina, and Venezuela, the value of the elites’ offshore illicit wealth was worth several times their external debts. Today the top 1 percent of households in developing countries owns an estimated 70 to 90 percent of all private financial and real estate wealth. The Boston Consulting Group reckoned in 2003 that over half of all the wealth owned by Latin America’s wealthiest citizens lay offshore. In June 2010 Henry reckoned that the total stock of flight capital financial wealth from developing countries in 2007 had reached $7–8 trillion—more than half under the custody or management of the world’s top 50 banks.
One U.S. Federal Reserve official noted: “The problem is not that these countries don’t have any assets. The problem is, they’re all in Miami.”
In 1982 Mexico’s President José Lopez Portillo gave a speech to parliament, outlining the offshore challenge facing his continent. “The financing plague is wreaking greater and greater havoc throughout the world,” he said. “It is transmitted by rats and its consequences are unemployment and poverty, industrial bankruptcy and speculative enrichment.” He blamed “a group of Mexicans . . . led and advised and supported by the private banks that have taken more money out of the country than the empires that exploited us since the beginning of time.”32
Lopez Portillo vowed to ignore the IMF, nationalize the banks, and introduce exchange controls, and within ten days an alliance of bankers, businesspeople, and conservative Mexicans had made him back down. The IMF and the Bank for International Settlements, in Switzerland, ignoring Mexico’s offshore flight wealth, ordered Mexico and other debtor nations to “put your house in order.”
The economist Michael Hudson describes how he was hired in 1989 by a Boston money management firm to organize a sovereign debt fund investing in the government bonds of developing nations.33 Huge risk premiums then meant that Argentine and Brazilian dollar bonds were yielding almost 45 percent, while Mexican bonds were yielding 25 percent. In its first year the fund, incorporated in the Netherlands Antilles, became the world’s second best performing fund of its kind.
Hudson found out what was happening. “The biggest investors were political insiders who had bought into the fund knowing that their central banks would pay their dollar debts despite the high risk premiums,” he said. Some of the biggest investors were people in top positions in central banks and presidencies. “We realized who has all the Yankee dollar claims on Latin America,” he said. “It was local oligarchies with offshore accounts. The dollar debt of Argentina in the early 1990s was owed mainly to Argentineans operating out of offshore banking centers. The major beneficiaries of foreign debt service were their own flight-capitalists, not bondholders in North America and Europe.”
This kind of simple trick is ro
utinely practiced by so-called “vulture funds.” Wealthy foreign investors buy up distressed sovereign debt at pennies on the dollar—typically at a 90 percent discount—then reap vast profits when those debts are repaid in full. The trick is to make sure that influential local government officials are secretly part of the investor group buying the discounted debt—ensuring that these local investors will do battle inside the developing country governments to make sure the debts get paid. Their involvement, of course, is hidden behind a shield of offshore secrecy, so an impoverished nation’s citizens need never find out about the wealth that has been stolen from them or how the investors did it.
Economists have not ignored these issues entirely, but they almost always break them down into discrete, country-level local problems that only blame corrupt local elites. These matter, of course, but such analyses obscure what all the disasters have in common: offshore.
And when offshore erosion has been considered, it has been taken as an inconvenience, to be addressed with Band-Aids. As one IMF report put it: “Offshore banking has most certainly been a factor in the Asian financial crisis. A special effort is therefore needed to help emerging economies . . . to avert financial crises through dissemination of internationally accepted prudential and supervisory standards.”34
The IMF is arguing here in an illogical circle. By helping local elites effectively place themselves above the law and creating new temptations to mischief, the offshore system entirely neuters the chance of prudent regulation and supervision that is needed to protect those countries against that very same offshore system. Imagine if those elites had to keep their money bottled up at home, or at least account for their wealth, pay appropriate taxes on it, and submit to appropriate laws. Very soon they would understand why good government is directly in their interest.
Treasure Islands: Dirty Money, Tax Havens and the Men Who Stole Your Cash Page 19