Close relationships are inevitable in a small island, but it is precisely because of this that Jersey needs extra checks and more transparency, to weigh against the inbuilt tendency toward conflicts of interest. This is especially important when Jersey plays such a major role in international finance. This affects you and me.
Extreme economic inequalities are tolerated offshore—and often welcomed as incentives for the poor to work harder. It is an ethos memorably summarized by the economist J. K. Galbraith as “the ‘horse and sparrow’ theory of income distribution and tax: if you feed a horse enough oats, some will pass through to the road for the sparrows.”9
This soak-the-poor attitude is a constant theme as Jersey seeks to stay ahead of other jurisdictions in its race to attract capital. In 2004 Jersey cut the corporation tax rate from 20 percent to zero, except for finance, which pays 10 percent. This tax cut blew a hole in the budget big enough to finance Jersey’s entire benefits system, so they made hundreds of redundancies and introduced a tax on consumption, hitting the poor especially hard. Shona Pitman, a States deputy, calls this the “tax the poor to save the rich” approach.
Super-wealthy people and corporations can actually negotiate the tax rates they will pay. For most of the 1990s, wealthy people wanting to take residence sent their lawyers directly to Christensen’s office to negotiate their rates. Jersey would insist on a minimum annual tax payment, and the millionaire or billionaire would then simply remit to Jersey the amount of money that, when calculated at Jersey’s flat 20 percent tax rate, would reach this sum. Christensen’s predecessors had settled on a £25–30,000 tax payment each time; Christensen raised this to £150,000—which meant remitting income of £750,000 each year to Jersey. If you had worldwide income of £10m, say, your effective tax rate would really be 1.5 percent. A similar principle applies to corporations. For a Jersey International Business Company, the top rate starts at 2 percent and falls from there depending on how much profit they plan to book in Jersey.10
“Jersey has the social structure of a Hilton hotel,” explained Jerry Dorey, a Jersey senator. It contains “a collection of alienated individuals who are just here to make money.”
At the time of writing, six of Jersey’s ten ministers are multimillionaires. “This is a parliament of wealthy people,” said the dissident Jersey deputy Geoff Southern. “I think there is still a resentment that peasants have got into power.”
One winter night in 1996, toward the end of his time in Jersey, Christensen opened the books for a reporter from the Wall Street Journal who was investigating a fraud ring involving a Swiss bank operating out of Jersey that had been ripping off American investors and who posed some very precise questions. The story, entitled “Offshore Hazard: Isle of Jersey Proves Less Than a Haven to Currency Investors,” ran on the Journal’s front page several months later.
Jersey’s finance industry and politicians went into spasm: This was one of the first times Jersey’s supposedly clean and well-regulated finance sector had been challenged in a serious global newspaper. The end of the article quoted a senior civil servant who, everyone in Jersey knew, was Christensen. He knew that in talking to the reporter, he was effectively resigning.
“From then on, they would have done anything to get rid of me. But I had tenure: The only way they could do it was to find me guilty of professional misconduct or in bed with a choirboy. The tension was incredible.” He did not leave immediately: His second son was born the following month, and it took him some time to serve out a long notice period.
Now that he is a dissident, the barbs continue to fly across the English Channel. “Grapes come no sourer than those trodden by Mr. Christensen, who once worked in Jersey and was passed over for promotion,” the Jersey Evening Post thundered later. “Ever since, he has worked unceasingly to undermine the Island that foolishly slighted him.” A quote from Jersey, published in France’s Le Monde newspaper in April 2009, called him a “traitor to the nation.” He attacks Jersey, the whisper goes, because he was not promoted as chief adviser. Insiders in the Jersey establishment have confirmed that it is semi-official policy to attack him in exactly these terms.
Offshore thrives on narrow self-interest combined with a culture of collusion. Its defenders are neurotically quick to impute mean motives and a hidden agenda to their critics. But men angling for promotion do not usually speak freely with the Wall Street Journal as they raise their voices in dissent.
The offshore intolerance is not confined to small jurisdictions. Rudolf Elmer, a Swiss banker who worked for several banks in several offshore centers before becoming a whistle-blower on some of the corruption he had seen, felt the pressure in Switzerland, a country of 8 million people.
Not long after speaking out and returning to Switzerland, he began to notice two men following him to work. He saw them in the parking lot of his daughter’s kindergarten, then outside his kitchen window. Then his wife was followed, and the men offered his daughter chocolates in the street. In 2005 he was imprisoned for thirty days, accused of violating Swiss bank secrecy. There has been no determination as to who might have been following him.
“I was bloody naive to think that Swiss justice was different,” Elmer said. “I can see how they might control a population of eighty thousand people in the Isle of Man,” he said. “But 8 million people? How can a minority in the banking world manipulate the opinion of an entire country? What is this? The Mafia? This is how it works. Jersey, the Cayman Islands, Switzerland: this whole bloody system is corrupt.”11
Ruling class ideologies that for years were beyond the pale in the larger democracies have been allowed to grow offshore, without restraint. As offshore finance has grown increasingly influential in the global economy, rebounding back and reengineering the onshore economies in ever more significant ways, so its attitudes have flourished, gaining the strength and confidence to capture the perceptions and attitudes of public life. This offshore consensus is evident in the intransigent arrogance of bankers who, having nearly brought the world economy to its knees, ask for still more and continue to threaten to relocate elsewhere if they are regulated or taxed too much. It is visible in the demands of the super-rich, who have come to expect and demand tax rates below those of their office cleaners. It is visible in the actions of the Irish musician Bono, perhaps the world’s most prominent poverty campaigner, who legally shifts his financial affairs offshore to the Netherlands to avoid tax and is still warmly welcomed in high society. The United States, the greatest democracy the world has known, is now in thrall to the worldviews of unaccountable, abusive, and often criminalized elites.
To a very substantial degree, indeed, we have offshore finance to thank for that.
10
RATCHET
How Secrecy Jurisdictions Helped
Cause the Latest Financial Crisis
THE PRACTICE OF USURY, OR THE LENDING OF MONEY at excessive interest rates, has a nasty historical taint. The prophet Ezekiel included it with rape, murder, and robbery in a list of “abominable things.” Plato and Aristotle called it immoral and unjust, and the books of Exodus, Deuteronomy, and Leviticus forbid it. In Dante’s Inferno, “lewd usurers” sit in the seventh circle of hell, and the Koran states that “whoever goes back to usury will be an inhabitant of the Fire.” When the ancient Greeks deregulated interest rates, indebted Athenians ended up being sold into slavery.
One can argue about the merits and evils of usury, but in a deregulated market the poor and vulnerable inevitably pay the most. Annualized rates of 400 percent or more are not uncommon.
Historically, the United States regulated lending rates carefully. In 1978, however, a new era began when the First National Bank of Omaha started enrolling Minnesota residents in its BankAmericard Plan. At the time, Nebraska let banks charge interest up to 18 percent a year, while Minnesota’s usury limits were 12 percent. Minnesota’s solicitor general wanted to stop the bank from charging higher interest rates. Could the Nebraska bank “export” the 18 percent
rate to charge Minnesota residents?
The Supreme Court ruled that it could—and Wall Street noticed. If one state removed interest rate caps entirely, Wall Street could export this deregulation across the United States. Then in March 1980, South Dakota passed a statute eliminating its anti-usury interest rate caps entirely. The statute was, according to Nathan Hayward, a central player in this drama, “basically written by Citibank.” A new opportunity for U.S. banks had opened up: By incorporating in South Dakota, they could roll out credit card operations across the country and charge interest rates as high as they liked.
Then came Delaware. The tale of its Financial Center Development Act of 1981 is a story about 10–15 powerful people who came together to pass an enormously significant piece of legislation, from which many of them, along with friends and colleagues, reaped huge wealth.1
David Swayze, a grizzled and affable lawyer who was chief of staff to Delaware’s then governor, Pierre S. “Pete” du Pont, picks up the story.
“What Citibank did [in South Dakota] was not lost on the other money center banks,” Swayze said. “They wanted some—but they didn’t want to be in South Dakota. It’s cold out there.”
Hayward, who is du Pont’s second cousin and was a du Pont cabinet member at the time, picks up the story. “Pete [du Pont] inherited a state that was in bad financial shape,” he said. “There had been a continuous stream of red ink and the deficits were hidden with tricks and budget games.” After being elected governor in 1976, du Pont had overseen an improvement in state finances, and he was a shoo-in for reelection. “We weren’t on a cocaine high,” said Hayward, “but we were beginning to feel pretty good.”
In early June 1980, a group from Chase National Bank came to the venerable University & Whist Club in the state’s commercial capital, Wilmington, to meet Delaware officials.2 The link man was Henry Beckler, an ex-Chase banker at the Bank of Delaware, and he had already persuaded Chase to manage some of its foreign operations out of Delaware. “Henry Beckler’s son and my son went together to school,” said du Pont. “When you put a statute like this together you have to talk to the banks. He was very important, he asked them what things we should be putting in there.”
Du Pont, who is reminiscent of an aging, if less handsome, Mitt Romney, comes from a family that has dominated Delaware politics for over a century, and he seems to have been a surprisingly passive player given his position. His memory of the episode was not so fresh, and he is clearly not a detail guy: Three or four times when asked to explain the episode he replied vaguely, ending by saying something like, “It was good. It was very good.” When challenged about certain Delaware corporate forms offering ironclad secrecy, he offered no detailed rebuttal, just: “I don’t think that’s right. It all works nicely.” But he did put his finger on one important element of the process: the small-town groupthink that let it happen. “One of the nice things about Delaware is that it’s a small state,” du Pont said. “We all have the same ideas.”
Hayward says the aim of the June meeting was “to listen to New York bankers who were friends of the Delaware bankers who had helped us. They said, ‘We’d love it if Delaware allowed market rate banking.’”
The Chase team wanted this rushed through in a few weeks, well ahead of the November 1980 gubernatorial elections. That was too tight. But what happened next was remarkable. Confirmed by several interviewees, by a 1981 New York Times investigation,3 and by du Pont’s official biography, it is a testament to the ability of elites in small offshore jurisdictions to create and sustain a consensus in their favor.
Frank Biondi, a powerful Democrat lawyer,4 and Chuck Welch, du Pont’s general counsel, went to see Hayward. “[They] said that the locker room on this was very small,” Hayward remembers. “If the idea got out in public, the Democratic candidate for governor, a downstate farmer named Bill Gordy, is going to grab onto this and the Democrats in the House and Senate will make this a big campaign issue. We’ll lose the battle before we even get suited up in our armor.”
Du Pont was popular, and Republicans weren’t that worried about the state election, but they did fret that if this story got out, it might affect the campaigns of other Republican candidates, including U.S. presidential nominee Ronald Reagan.
“Gordy was one of the unsung heroes of the whole story,” Hayward continued, “a good old pig farmer. Frank [Biondi] and Chuck Welch got into a helicopter in Wilmington and went to see him and said, ‘Bill, we want you to know what we’re working on. We’re here to ask you to keep your mouth shut and not make it an issue in the campaign.’ Bill Gordy, God bless him, said yes.”
The entire Democrat establishment in Delaware seems to have bought into the silence. And not just them. “If you go back and read the News Journal,” said Hayward, “you will not find one mention of it in the press in the campaign season.”5 This proposal was circulating among Delaware’s entire top business and political elite, including a couple of “populist” legislators who saw this—usury—as a threat to the basic consumer. “We had all these major bankers in Delaware through the whole summer,” said Glenn Kenton, another key player, reeling off names like Citicorp’s CEO Walter Wriston and Chase’s president Tom LaBreque. “Nobody found out about it. It’s just an amazing thing.”
Still, inside this rarefied secret circle, a pushback did materialize. “The most significant counterforce, though not overt, was the local banks,” said Swayze. “In the cold citadels of privilege there was a fear the big banks would run rings around them.”
Wall Street began to apply pressure. Chase stiffened Delaware spines at a meeting at the Wilmington Club in June, threatening to pull up stakes for South Dakota.6 “The banks would come down and say, ‘Now if we come [and build these institutions], are you guys, meaning the government, you’re not going to cut us off at the knees here?’” du Pont explained. He agreed to form an informal task force to look into Chase’s plan and promised to reply by September.
In the end, Wall Street and Delaware’s bankers settled on a compromise. To protect the local banks, they promised clauses to prohibit the outsiders from touting for local retail business. By mid-August the local banks were on board, and the task force turned to the legislative process. A special session of the legislative assembly was called outside of normal procedures to insulate this from the democratic process. As the Delaware Lawyer explained it, the special session’s purpose “was to prevent the proposal from becoming encumbered in the ‘horse trading’ that typically occurs in the regular session.”
While bigger states saw laws regulating economic activity as complex moral, political, and economic issues, Delaware was seeing them instead through an offshore lens: as pieces of sovereignty that could be sold to make locals rich.
Chase had opted for Delaware, not South Dakota, partly because it did not want to be following in Citicorp’s slipstream. “Chase said, ‘We’re not going to the same place Citicorp is going,’” Kenton remembered. Citicorp, he added, had said we’re “only out in South Dakota because we had to go someplace. But if you are going to open up, count us in too.”
As Wall Street interest grew, Delaware kept brainstorming for still more business. Biondi suggested talking to JP Morgan, where he had some connections: It did not issue credit cards, but Delaware hoped to find other business. “We went up to see Morgan and we said, ‘What do you want?’” Kenton explained. “And they said, ‘We’re just getting the heck taxed out of us up here and we need to have a low-tax environment.’” So Delaware served up the offshore classic of a regressive state tax structure: the richer you are, the lower your tax rate. They set the bank franchise tax at about 8 percent on income under $20 million, then 6 percent on $20–25 million, and so on, until the really big incomes got away with just 1.7 percent. The goal, as Swayze put it, was “sheltering the indigenous banking community against competitive threats on the one hand, and attracting and growing the business of newly created Delaware bank subsidiaries of non-Delaware bank holding companies
on the other.”7 As for the lost tax dollars from the banking behemoths—well, American taxpayers elsewhere could pick up the tab for that.
Biondi’s firm Morris, Nicholas, Arsht & Tunnell represented both Chase and JP Morgan, and both he and his firm are frank about their role in the local bonanza. “The Chase Manhattan and J. P. Morgan banks hired Morris, Nicholas’s Frank Biondi to draft the law,” the firm’s official history notes, “and help convince the state legislature to adopt it.”8
Biondi himself adds, “Did I lobby the state legislature? You’re damn right I did.”
So Chase and JP Morgan, in effect, wrote the law through their local representatives. The New York Times noted later that it was drafted without any written analysis by a Delaware official, and that Biondi’s drafts got their primary reviews from other bank attorneys.9 Biondi denies any conflict of interest, saying he disclosed his connections to all parties.
Treasure Islands: Dirty Money, Tax Havens and the Men Who Stole Your Cash Page 26