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

by Nicholas Shaxson

  Still, the UK had been holding out against an LLP law and for once was doing the right thing. “The UK . . . wanted to tell the world, ‘You can trust London,’” said Sikka, who researched the Jersey LLP affair. “If it is impossible to sue the auditors, that makes it harder to look clean.” The accountants had other ideas. “I think the calculation was that if the UK fell, the rest of Europe would fall, and the former British Colonies would also fall into place. They thought: ‘If the UK gets going, everything else is won.’”

  The accountants’ strategy was simple: find an easy-to-influence legislature offshore, win LLP concessions there, then threaten to relocate there if the UK refused to create its own LLP law. First they approached the Isle of Man, then Guernsey, for an LLP law, but they were turned down. Then they came to Jersey, which is, as Jersey senator Stuart Syvret put it, “a legislature for hire.”

  A month after that initial letter, Price Waterhouse and Ernst & Young publicly announced the proposed Jersey LLP legislation. Senior Jersey politicians had assured them that the bill would be “nodded through,” as one insider notes.

  Not everybody was happy. Jersey’s senior law draftsman complained that the new law was like “getting a completed crossword and being asked to write the clues.” Syvret remembers first coming across the proposed law. “I knew bugger-all about accountancy, and suddenly it was on our desks and we had to debate it in two weeks,” he remembers. He and Gary Matthews, one of the only other dissidents in the legislature to smell a rat, set about educating themselves about LLP laws. Matthews contacted a British parliamentarian, Austin Mitchell, who in turn called Sikka. They soon began to understand what this law meant. Matthews put it bluntly. “This law is poison.”

  Sikka remembers Matthews and Syvret first contacting him as they scrambled to get up to speed. “Gary Matthews said, ‘They want to rush this through parliament and I don’t understand a word—and other people I’ve spoken to don’t understand it either.’” “I’d been there on holiday but had taken no interest in this funny little island, until that fateful call from Gary Matthews. The more we looked into it, the more rotten the place looked.”

  Matthews and Syvret were up against a well-resourced and motivated establishment on an island whose very political structure makes dissent extremely hard. Jersey has no political parties. The 53 members of the States (or government) are directly elected, but in three separate groups: 12 senators, 29 deputies, and 12 parish constables (known as connétables). Elections are staggered over time, so there has never been a general election or a change of government. There is no tradition of “government” versus “opposition” but instead a permanent regime that evolves over time.

  This dramatically weakens opponents of an establishment consensus. “When bad men combine,” the conservative thinker Edmund Burke wrote, “the good must associate; else they will fall, one by one, an unpitied sacrifice in a contemptible struggle.” Without political parties, good men and women are isolated, then picked off.

  “Democracy doesn’t work here,” said Geoff Southern, one of few dissident deputies in the Jersey assembly. “There are 53 Members, but nobody can stand up and say, ‘Vote for us and we will do this as a bloc.’ Instead, it’s ‘I am a good bloke—vote for me.’ Manifestos are just candy floss.”30 Jersey politics is about personalities, not issues; without shared platforms States Assembly members tend to look after themselves rather than embrace common agendas more likely to reflect the public interest. “For the last two hundred years the establishment has cultivated the notion that party politics is wicked, divisive, and harmful,” Southern said. “The media spreads it. If you did a survey, I expect two-thirds would say they think party politics is a bad idea. Propaganda is everywhere. The media here is like in Soviet Russia.”

  Voter turnout reflects the absence of local democracy. The 33 percent turnout in the November 2005 election would have put Jersey in 165th position of 173 countries in a world ranking: marginally better than Sudan and far below the 77 percent European average since 1945.31 Poorer voters are especially disenfranchised, facing endless little hurdles that deter them from voting. Much of the Portuguese-origin working class subgroup that makes up nearly 10 percent of the population is unaware they even can vote, Southern said; voters must reregister every three years, and he has found dead people on his voters’ rolls.

  The connétables, by virtue of the parochial system through which they emerge, are intrinsically conservative and inexperienced, and make a powerful voting bloc—voting with the establishment every time. They tend to be small shopkeepers, farmers, guest house owners, and plumbers, and they get into major positions of power, and into the finance sector. When it comes to decisions on whether Jersey should adopt a global standard of banking regulation, they are unable to judge responsibly. A Wall Street Journal article in 1996 noticed, “Jersey is an island that until two decades ago lived off boat building, cod fishing, agriculture and tourism. It is run by a group who, although they form a social and political elite on Jersey, are mostly small-business owners and farmers who now find themselves overseeing an industry of global scope involving billions of dollars.”32 The article goes on to report the judgment of John Christensen, who was Jersey’s economic adviser at the time: “By and large they are totally out of their depth.”

  Christensen remembers a legislature made up largely of small-town politicians with no understanding of the complex currents of international finance and who simply pass legislation through on the nod. “When I talked to the politicians on the Finance and Economics Committee,” he said, “time and time again I talked about proposals coming forward. They said, ‘I’m being honest John: I don’t understand the detail, but I trust the lawyers and the bankers when they say it is necessary.’” The similarities with what members of the Delaware legislature were saying in 1980–81 are striking.

  It is as if a vast global financial center had been tacked onto a couple of small-town parish councils in England or a smaller U.S. county. “They can argue at enormous length about the budget for the local pony club,” said Christensen, “but a new limited liability law or a new trust law will go unchallenged. It’s the captured state.”

  Syvret also noticed that Senator Reg Jeune, one of the most powerful politicians on the island and a major supporter of the LLP legislation, was simultaneously a consultant to Mourant du Feu & Jeune, the lawyers who had brought in the legislation in the first place: He had a direct financial interest in supporting it. “I thought, ‘Whoa!’ This is extraordinarily brazen,” said Syvret. “When the States Assembly convened I stood up and said that Jeune has a conflict of interest—a financial interest. Jeune looked as though somebody had shot him. He staggered out of the chamber.”33

  Syvret came under ferocious pressure from the Jersey establishment to apologize. He declined, was pressed again, and refused again. Another top politician threatened him with “serious implications” if he did not recant, adding, “which is a pity, since you had such a lot to offer.” The politician emphasized the word had, which Syvret took as a threat.

  He stood his ground. “I just wasn’t going to take that crap,” he said. He was suspended from parliament, and in States Assembly deliberations in his absence he and Matthews were referred to as “The Enemy Within.” Sikka, for his part, was called “Enemy of the State.”

  Senator John Rothwell, responding to Matthews’s concerns, pointed to the Jersey establishment’s approach to ethics. “The Island has done extremely well in projecting an image of low-profile respectability,” he said, “but people in the finance industry, having heard speeches in the House about ethics of government, are getting rather twitchy about what members might embrace.”34 Rothwell, a public relations adviser by trade, knew exactly what he was saying. Oppose the LLP law and the financial services industries will see Jersey as unreliable—and the money will go elsewhere.

  Matthews’s and Syvret’s robust challenges slowed the fast-track passage of the legislation but did not stop it: It was fina
lly enacted in November.

  In elections that year, well-financed candidates stood against Matthews under the banner “Don’t Rock the Boat,” and Matthews was vilified in public. He lost his seat and was unable to get a job afterward. He fled to England and his marriage fell apart. As Sikka put it, “They put that man through the mincer.”

  On the surface Jersey feels terribly British, and the island’s rulers always say it is a well-regulated, transparent, and cooperative jurisdiction. The reality is shockingly different. It is a state whose leadership has essentially been captured by global finance and whose members will threaten and intimidate anyone who expresses dissenting views.

  After the LLP law passed, the accounting firms next opened a new front in London. They publicly threatened to relocate to Jersey if the UK did not create its own LLP law.

  Sikka fought to stop it. “We told the politicians, ‘You can’t concede this—these firms have held you to ransom,’” he said. He wrote in The Times of how harmful this legislation would be, and that the Jersey card was clearly a bluff. He noted that the big firms would never close up in London, sack their clients and staff, renegotiate contracts, and reopen in Jersey. “If the Government were to concede a liability cap to auditors, it would hardly be able to deny the same to producers of food, drink, medicine and cars. None of this would be welcomed by consumers.”

  The Financial Times saw the real agenda too. The accountants “want to keep the threat of moving ‘off-shore’ as a cosh with which to threaten the [UK] government if it fails to come up with a workable LLP law,” it said.

  But the accountants got most of the British financial press behind them, roundly criticized Sikka, and wielded the old favorite that Britain’s government was “anti-business.”

  The campaign worked. Britain passed its LLP law in 2001. The accountants never did relocate to Jersey: They had simply used it as a crowbar. “It was the work that Ernst & Young and Price Waterhouse undertook with the Jersey government,” an Ernst & Young partner crowed, “that first concentrated the mind of UK ministers…. I’ve no doubt whatsoever ourselves and Price Waterhouse drove it on to government’s agenda because of the Jersey idea.”35

  As Sikka put it: “The Jersey sprat had served its purpose, now that the UK mackerel had been landed.”36

  The UK law was not quite as bad as the Jersey one—it involves more disclosure, for example—and perhaps Sikka’s campaigning helped. Yet it still drastically diluted auditors’ incentives to take care over their accounting. Ernst & Young became an LLP in 2001; KPMG went in May 2002; PricewaterhouseCoopers made the move in January 2003; Deloitte & Touche followed that August. A host of lawyers, architects, and others joined in, getting the tax perks and limited disclosure available to partnerships but with limited liability. Canada took on the LLP law in 1998; it has been followed by New Zealand, Australia, South Africa, Singapore, Japan, and India—to name a few. These different countries’ LLP laws can only have contributed to the latest financial crisis. Had auditors faced getting personally into big trouble when they or their partners screwed up, they might not have been so hasty to sign off on all this off-balance-sheet financing.

  The Jersey and Delaware episodes are stunningly similar despite happening fifteen years and an ocean apart and concerning entirely different subject matter. Deep truths about global finance are at work here. Robert Kirkby, technical director for Jersey Finance, described the generic process. “Someone comes up with a new idea but onshore regulation blocks it,” he said. “You can lobby onshore but there are lots of stakeholders: you have to get past them all, and it takes a long time. In Jersey, you can bash this thing through fast. We got the leading edge years ago. We can change our company laws and our regulations so much faster than you can in, say, the UK, France or Germany.” Talking in March 2009, in the depths of the financial crisis provoked by reckless deregulation, Kirkby lauded Jersey’s new unregulated funds regime specializing in securitization—the pooling and repackaging of mortgages and other assets into securities to sell on to investors that has caused such mayhem.

  Here in these deregulated offshore zones our democratic controls on finance and business are being hollowed out, year after year, around the world, out of sight.

  I have no objection to deregulation in principle, as long as it is a process of genuine—and I mean genuine—democratic bargaining that considers the needs of all affected stakeholders, at home and overseas. What we have in Jersey and Delaware, by contrast, is rampant, uncontrolled deregulation, harnessed to the interests of a few insiders and large corporate players.

  Just as European nobles used to consolidate their unaccountable powers in fortified castles, to better subjugate and extract tribute from the surrounding peasantry, so financial capital has coalesced in offshore’s fortified nodes of unaccountable political and economic power, capturing local politics in these jurisdictions and turning them into fast and flexible private law-making machines, defended against outside interference and protected by establishment consensus and the suppression of dissent.

  Offshore is not just a place, an idea, a way of doing things, or even a weapon for the finance industries. It is also a process: a race to the bottom where regulations—laws and trappings of democracy—are steadily degraded, as one arrangement ricochets from these fortified redoubts of finance to the next jurisdiction, and the offshore system pushes steadily, further, deeper, onshore. The tax havens have become the battering rams of financial deregulation.

  Most people have not yet understood these deep truths about offshore, because of two related confusions.

  The first stems from efforts to use technical criteria to define secrecy jurisdictions: tax rates, forms of secrecy, and so on. But these are just outcomes of the deeper truths. Our maps of offshore need to identify, first of all, these strongholds of financial power. A definition like my loose one—that secrecy jurisdictions are places that seek to attract money by offering politically stable facilities to help people or entities get around the rules, laws, and regulations of jurisdictions elsewhere—helps us see what we are looking for.

  A second confusion is to think that this is about physical geography, when it is really about political jurisdiction and trust-based networks. The future that the offshore system promises has a distinctly medieval quality: In a world still nominally run by democratic nation-states, the offshore system is more like a network of guilds in the service of unaccountable and often criminal elites.

  These stories of Delaware and Jersey should serve as a warning to larger economies about what happens when the offshore ethic isn’t challenged.

  The Delaware story is one part of an explanation of how offshore contributed to the latest financial crisis, and the Jersey example helps explain why nobody saw it coming. Both of these jurisdictions got rich by eroding standards in the service of financial capital. The consequences are not just insidious but devastating.

  In considering how the offshore system contributed to the financial and economic crisis, it’s useful to look at the issue of debt. Why has so much debt built up in the world’s richest economies? An article in the Financial Times in June 2009 (“Debt Is Capitalism’s Dirty Little Secret”) provides one answer. “The benefits of economic growth have gone into the pockets of plutocrats rather than the bulk of the population,” the article reads. “So why has there been no revolution? Because there was a solution: debt. If you couldn’t earn it, you could borrow it.” As we have seen, the infrastructure was put in place to make this change happen. The tax havens were a big part of it.

  As the 1990s progressed, occasional expert warnings about systemic, debt-related threats from offshore did emerge.

  The IMF pointed squarely at the problem in 1999 when discussing the interbank market, where banks lend to each other. “A large part of the growth in OTC trading of derivative instruments may have involved offshore banks,” the IMF said.37 “The interbank nature of the offshore market implies that, in the event of financial distress, contagion is likel
y…. Offshore banks are likely to be highly leveraged, that is less solvent, than onshore banks.” The report, which contains plenty more along these lines, frets especially about lax offshore regulation. It was a direct warning, long before the crisis struck.

  That report followed soon after the implosion of the hedge fund Long Term Capital Management (LTCM), a classic slice-and-dice offshore structure that nearly destroyed the U.S. banking system in 1998 after the fund took on massive risks, covered by near-paranoid secrecy. LTCM’s managers were in Greenwich, Connecticut; the hedge fund was incorporated in Delaware; and the fund it managed was in the Cayman Islands. Yet none of the agonized analyses that followed took any serious interest in the offshore angle.38 And the pattern just keeps being repeated.

  The latest financial crisis was incubated in the so-called “shadow banking system”—a vast, unregulated economic terrain containing all manner of Special Purpose Entities (SPEs, also known as shadow banks) that borrowed money to lend out again at a profit but fall outside normal bank regulation, partly by separating themselves legally from the regulated institutions that sponsor them, off their balance sheets.

  The shadow banking system is not traditionally described as either an “offshore” or “onshore” phenomenon, but an in-depth 2008 study on SPEs by the Swiss-based Bank for International Settlements is very clear about where the dangerous shadow banks were mainly located.39 “The most common jurisdictions for US securitisations are the Cayman Islands and the state of Delaware,” the BIS said. “The most common SPE jurisdictions for European securitisations are Ireland, Luxembourg, Jersey, and the UK.” Every last one is a major secrecy jurisdiction that used a simple business model: ask the financial institutions exactly what they need, then shape the laws accordingly and without democratic debate.