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

by Nicholas Shaxson

  The Caymans is a place “which has pledged to meet the highest and quite new international standards of tax transparency,” Travers continued, then added a more menacing note. “If it were not for a quirk in the laws of defamation,” he said (noting that jurisdictions cannot sue for libel), “comment of this sort would be actionable.”

  On September 11, 2001, two months after the OECD’s tax haven project died, with Al-Qaeda’s attack on the United States, a new tale of hypocrisy and deception began that continues up to today.

  After the attacks the George W. Bush administration suddenly wanted better cooperation and transparency from the secrecy jurisdictions on terrorist financing, though it wanted to leave offshore tax evasion alone. The problem was how to do this, given that the two practices involve exactly the same jurisdictions, structures, and techniques.

  The answer came in the form of one of the slyest offshore tricks ever devised.

  The best way for countries to share information with each other is through so-called “automatic” exchange of information—where they tell each other about their taxpayers’ financial affairs as a matter of course. This happens routinely inside Europe and between a few other countries, and although the system is leaky—it needs shoring up to cover all sorts of loopholes—it works well enough. Privacy is not invaded: Tax authorities keep the information to themselves, just as doctors keep details of their patients’ hemorrhoids and venereal diseases confidential. Doctors and tax authorities need the information and can share it with others who need it, but they don’t publicize it.

  But there is another way of sharing information, known as “on request”: A country will agree to hand over information about another country’s taxpayers—but only on a case-by-case basis, only when specifically asked, and only under very narrow conditions: You must be able to demonstrate exactly why you need the information. In other words, when you request the information you must already know, more or less, what it is. No “fishing expeditions,” or general trawls to find tax cheats, are allowed.

  You can’t prove criminality until you get the information, and you can’t get the information until you can show the criminality. Catch–22’s Captain Yossarian would have appreciated the double bind. “On request” information exchange is a fig leaf. It lets tax havens claim they are transparent while continuing business as usual.

  The “on request” model, of course, is the one that got the Bush administration’s endorsement. Instead of transparency, we got a very conditional transparency: only when there is permission to be transparent. The “on request” standard has become the OECD’s model too.

  It is hard to know how much information is exchanged “on request” globally, but Geoff Cook, chief executive of Jersey Finance, confessed in March 2009 that in the seven years since Jersey signed a tax agreement with the United States, it exchanged information with American investigators on just “five or six” cases.38 Compare that to the million-plus U.S. offshore accounts and businesses Senator Levin identified, and clearly the system is a joke. Requests for information can take months or years to process—and the assets under investigation can be shifted elsewhere in hours or even minutes.

  It gets worse. After the financial crisis struck in 2007, the OECD, by now at the mercy of the secrecy jurisdictions, set up another piece of sleight of hand to respond to public pressure. At the urging of G20 leaders the OECD set up a blacklist for tax havens, and the way to get off the blacklist was to sign 12 agreements to share information with other countries, using the OECD’s hopeless “on request” standard.

  The OECD began to claim that a major crackdown was under way. “What we are witnessing is nothing short of a revolution,” boomed the OECD secretary-general, Angel Gurría. “By addressing the challenges posed by the dark side of the tax world, the campaign for global tax transparency is in full flow.” Newspaper articles ran headlines like “Bank Secrecy Is Dead,” and British prime minister Gordon Brown declared the aim of the blacklist was to “outlaw tax havens.”

  As the new OECD push got under way, tax havens rushed to negotiate new agreements in order to sign the requisite 12 that would get them off the blacklist. At the latest count a third or so were with Nordic states, especially with such global economic giants as Greenland, San Marino, and the Faroe Islands—and another third or so were with other tax havens. The havens did sign a few with larger economies, though as usual, nobody bothered about the developing countries, which suffer most from offshore abuse. India, China, Brazil, and most of Africa were entirely absent from the list. Five days after the G20 had declared that the era of banking secrecy was over, the OECD’s blacklist was empty.39

  “The blacklist has been a sad joke,” said Professor Michael McIntyre of Wayne State University Law School, who knows this area better than almost anyone. “The OECD program has provided a patina of respectability to countries that are actively assisting taxpayers in evading taxes in their home country.”40

  The blacklist, in short, was a whitewash.

  After a temporary setback during the financial crisis, the offshore system is now growing again at ferocious speed. And the OECD insists to this day that its next-to-useless “on request” form of information exchange is “the accepted international standard.”

  As with tax, so it goes on regulation. International authorities have long recognized the problem that the global patchwork of fragmented financial regulation offers seamlessly integrated global banks vast opportunities to play the game of arbitrage between different jurisdictions, especially offshore. So world leaders are pretending that something is being done to constrain bankers’ impulses. The Bank for International Settlements, in Switzerland, is the biggest of these, along with the Financial Stability Forum that it hosts, set up in 1999 to deal with financial risks and crises. Between them, they have presided over the biggest global financial crisis since the Great Depression.

  “Whenever the cops come calling the banks have a ready response for the particular regulator in each country,” explained Jack Blum. “No one sees the whole picture and it’s really no one’s job to even try. When the big and scary stuff happens, the bankers and their friends trot out the Bank for International Settlements and the Financial Stability Forum as proof of effective coordination and regulation. But these things are glorified fig leaves. They have produced absolutely nothing of real value beyond a few minor process quick fixes.”

  Rich governments cannot be trusted to do the right thing on tax havens and transparency. Many will demand more transparency and more international cooperation, even as they work to frustrate both. They will call for reasoned debate as they engage in character assassination, secret deals, and worse. They will talk the language of democracy and freedom, the better to defend unaccountable, irresponsible power and privilege.

  Civil society is, thankfully, beginning to stir. The current thought leaders are Global Financial Integrity in the United States and the Tax Justice Network (TJN) in Europe, whose expertise has been invaluable for this book. John Christensen, TJN’s director, remembers holding an expert briefing on offshore for staff in the Senate buildings, in Washington D.C., and seeing a senior congressional staffer with tears in her eyes as she described her happiness at seeing civil society at last begin to engage, after spending so long battling to get any traction on offshore issues, in the face of the ferocious Washington right-wing counter-lobbies. “She said she had waited for years for civil society to take an interest in this.” A much greater mobilization is now required.

  How do all these shaky doctrines—the OECD’s information exchange standards, the contradictory double act of tax-cutting increasing tax revenues, and tax-cutting acting to Starve the Beast, and Mitchell’s offshore incoherences—continue to thrive? The author Jonathan Chait provides a good answer.

  “The lesson for cranks everywhere,” he wrote, “is that your theory stands a stronger chance of success if it directly benefits a rich and powerful bloc—and there’s no bloc richer and more powerful than
the rich and powerful.” But the last word here goes to Bob Mcintyre of Citizens for Tax Justice, who has spent much of his life battling with the armies of lobbyists in Washington. “There are so few of us,” he sighs wearily, “and so many of them.”

  9

  THE LIFE OFFSHORE

  The Human Side of Secrecy Jurisdictions

  IN 2009 I MET UP WITH A FORMER PRIVATE BANKER, Beth Krall, in attempt to understand a question that had been nagging me: How do private bankers who shelter the wealth of gangsters and corrupt politicians justify what they do?

  We met in the bustling café at Kramer Books, off Dupont Circle, in Washington, D.C., where she was living, one Sunday in 2009. She had left private banking and had joined the nongovernmental sector. Dressed in a striking black and white coat, she still looked very much the stylish international financier.

  Aged 47, and with nearly 24 years in the banking business, Krall (which is not her real name) was still coming to terms with her past life. She hated what she had seen and was clearly unsettled by exposing the horrors she had experienced, but she adamantly refused to reveal any of the client details she had sworn to protect. She was wary of disrupting the many friendships she had made in the industry and was careful about what she would and would not say.

  Krall’s last offshore posting was in the Bahamas, the island archipelago with over three hundred thousand residents that has been an important offshore center since the golden age of American organized crime in the early decades of the last century. A few months earlier, a practitioner in the Caymans had warned me to watch for my personal safety if I go “asking all these questions” in the Bahamas. Krall said she was unsure what might happen to her if she went back, as she was partly breaking the private bankers’ code of silence. “I don’t want to have concrete shoes put on me,” she said, without smiling. One reason for her fear was something that had angered her in the first place: that so many of the people she dealt with were powerful members of society in their countries. One case involved “very prominent people in world politics.”

  Unusually, for a foreign banker in the Bahamas, Krall became closely involved in local Junkanoo cultural celebrations, a mixture of Latin American and Caribbean carnival traditions that a dedicated website calls “the greatest cultural event of not only The Bahamas, but also the world at large.” She seemed distressed, while we talked, at the thought that fellow members of her Junkanoo group—not to mention many other friends she had left behind in Nassau—might judge her criticism of the country’s offshore industry “anti-Bahamian.” When we spoke she was still working up the courage to tell them why she could not go back. She was still redefining her relationship with the offshore values within which she had made her career: that secrecy is good, whatever brings in the money is good, and if you break the code of silence you are sloppy or treacherous.

  People want to do the right thing, and it is easy, offshore, to be seduced into the idea that what matters is doing the right thing by your peers—and the rest of the world can take care of itself. In the rush to make a career, one can only make progress by ignoring the structural implications of what one does. She is one of very few to recognize the full moral weight of what she was doing and to step away.

  Krall was born in Leicester, England, and took her banking exams straight after school, starting in Britain’s Midland International bank in 1980 before moving to a partly state-owned Swedish bank and then, in 1987, to Chase Manhattan in Luxembourg to work in its “back office”—the administrative side, where Chase was a paying agent for certain Eurobond issues. She moved to a Brazilian bank, Banco Mercantil de São Paulo, then to Cititrust in the Bahamas, where she ran evaluations and accounting for their mutual funds business. From this point onward, Krall declines to identify her employers precisely.

  She became a client relationship manager with the private banking arm of a well-known British bank in the Bahamas. They worked with what were euphemistically called “managed banks” or shell banks, an offshore specialty. These have no real presence where they are incorporated, so they can escape supervision by responsible regulators. A shell bank will typically be operated through an agent in the tax haven jurisdiction, perhaps a famous global bank, which provides a reassuringly solid name and address to back the shell but will otherwise carry no responsibility or even real knowledge of what the shell is actually up to. So a shell bank might be incorporated in the Bahamas, for example, but its owners and managers could be anywhere.

  Shell banks handle business that many banks will not touch. U.S. senator Carl Levin notes that they are generally not examined by regulators, and virtually no one but the shell bank owner really knows where the bank is, how it operates, or who its customers are. The bank Krall worked for provided a well-known name to reassure the Bahamas regulator. I asked Krall how much due diligence her British bank did on these entities. “Ha ha. Yeah,” was her initial reply. “These banks would send quarterly statements to the Bahamas Central Bank—but it wasn’t our job to monitor them.”

  There would literally be brass plates in her British bank’s reception area saying “Banco de X”—perhaps an Argentinian bank using the Bahamian address and phone number of the British bank on their headed notepaper. The Bahamas regulator could not find out what was going on back in Argentina, and vice versa: the classic offshore “elsewhere” technique. Predictably, some of these banks failed, despite being audited and passed by Big Five accounting firms,1 and Krall remembers taking calls from angry depositors. “People were on the phone in tears, with their life savings gone, and I was saying to them, ‘There is no point coming on a plane to look for the money because there is no money here.’” The money never was there.

  With the terrorist attacks of September 11, 2001, prompting the United States to legislate against shell banks, a bank in the Bahamas now had to employ two senior bankers and keep its books and records there to be judged real enough to do business. “That means a bank maybe with a room or suite in a building, with two people in it—that’s a bank now,” Krall said. She pointed me to the current website of a Bahamas-based trust company that will provide you with exactly that: the appearance of being a real bank, including two staff members as directors of your bank and a place to keep the books and records. Such a set-up can allow business almost as usual, yet still check off the regulators’ boxes.

  Krall moved to a big European bank, again as a client relationship manager—in effect, someone who finds wealthy clients and keeps them happy. Trawling for business, she was routinely pointed toward Latin America, where she traveled frequently.

  “On the immigration form you would write that you are going for pleasure—though your suitcase would be full of business suits and portfolio evaluations, or marketing materials and presentations explaining the advantages of a trust in the Bahamas.” The client’s name would be absent from the portfolio evaluations: In fact, the bank would not even record it as the account name. “You’d cut off the account name and number so it was just a list of securities and holdings: you could never attach it to anyone.” It was nerve-wracking, sometimes, going through airports, but she always got through unchallenged.

  Apart from the anxiety about getting caught, Krall said there was rarely, if ever, a feeling you were doing anything wrong, despite often helping clients break the law. Part of what she called “managing not to check into your conscience” was that there were always cases where you could believe you were helping someone. For example, countries like Brazil have “forced heirship” dictating who in a family gets the assets after the parents die—and an offshore trust may be a way to get around this. Krall cited a case she knew of in another country where forced heirship would have granted the assets to a playboy son instead of to the family’s preferred beneficiary, a daughter with special needs. As I explained in the last chapter, human stories like this are commonly used to justify oceans of wrongdoing in the offshore world.

  Krall would cold-call top lawyers and asset managers, hoping to get into wh
at is known in the trade as the “Beauty Parade,” the lineup of obliging banks that clients and their representatives will look for to manage their riches. The key is to build a relationship of trust, mixing the good and the bad. With the good trust you offer a solid, safe return on the assets; the bad trust is a confidence that you will keep their identities secret and will break laws on their behalf. In pursuit of these elusive relationships, Krall went to polo games, the opera, orchestral concerts in Rio de Janeiro, and umpteen working breakfasts, lunches, and dinners in the most expensive restaurants in town.

  Despite her growing qualms, Krall ended up working for a Swiss private bank in the Bahamas. This was no ordinary bank: It had only a hundred or so clients. It was also the only bank where she actually saw a suitcase full of cash. “My bank never once had a client walk through the door,” she said. “The bankers and their clients go on big game hunting trips, or to the ballet in Budapest. That is where it happens.” From her tone, she made the “it” sound like some sordid sexual act.

  Her bank was run out of Switzerland, and the Bahamas was purely a “parking space” or transit point for money: an extra layer of secrecy. A major driver was, of course, the imperative to receive and store the proceeds of crime. “I felt I was prostituting my personality, just to get money in the bank,” she said. “I came to realize that the system I was involved in contributes to the perpetuation of poverty in the world.” She thought a bit, then added, “But I did enjoy the adrenaline. When it fuels you, you don’t question what you otherwise would.”