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

by Nicholas Shaxson

  Once we start seeing this we will no longer limit ourselves to pointing fingers at developing country kleptocrats and rogue officials but will begin to examine a much broader array of actors and their facilitating activities. And we will have found a rubric for the citizens of rich and poor countries to find common cause in fighting a global scourge.9

  The final and most important thing is to change the culture. When pundits, journalists, and politicians fawn over people who get rich by abusing the system—getting around tax and regulation and forcing everyone else to shoulder the associated risks and taxes—then we have lost our way.

  Language can change. When someone claims that tax havens make global finance more efficient, we can ask, “Efficient for whom?” When someone says countries should compete with each other on tax or financial regulation, or that policymakers should aim for a more competitive tax or regulatory system—one may ask: “What kind of competition are you talking about? A race to the bottom on tax, secrecy, or financial regulation? Or a race to the top, such as when corporations operate in competitive markets on a level playing field?” When we hear “privacy” or “asset protection” or “tax efficient” in the context of private banking, companies can be asked exactly what they mean. When a private equity company shows record profits, we can be told how much of that comes from genuine productive improvement, and how much comes from gaming the offshore system. When hearing a pillar of society say that they are a well-regulated, cooperative, and transparent jurisdiction, the investigator can assume the opposite and probe further. When magazines carry alluring advertisements from seedy offshore promoters who may be inciting clients to criminal behavior, we can complain. When corporations talk about social responsibility, we can ask if they mean tax. When journalists need expert commentators to advise them about that tax story they are writing, they must understand that their interviewee from the big accountancy firm works for a business that makes a living out of helping wealthy corporations and individuals get around paying tax, and that their opinions will reflect that corrupted worldview. They must find alternative opinions to balance those views.

  The world’s international institutions and responsible governments could create and promote new guidelines and codes of conduct outlining responsible and irresponsible behavior in the fields of international tax and regulation, with special focus on offshore abuse. They could introduce general antiavoidance principles into their tax laws so that complex and abusive trickery, while technically not breaking the details of legislation, can be disallowed. Tax evasion can become a predicate crime for money laundering, and tax offenses, among others, could be included in international conventions such as the United Nations Convention Against Corruption. Professional associations of lawyers, accountants, and bankers could create codes of conduct stressing, among other things, that it is unacceptable for a member to help a client commit a financial crime, whether the crime occurs at home or overseas. The economics profession needs to reappraise its approach to understand the effects of things such as secrecy and regulatory arbitrage. It could start to measure illicit, secret things, difficult though that may be.

  We can recapture our culture from the forces of unaccountable privilege that have taken it away from us.

  At the time of writing, heavy government spending around the world has staved off outright economic collapse following the meltdown in global finance, but at huge costs to taxpayers. “Never in the field of financial endeavor has so much money been owed by so few to so many,” said Mervyn King, the governor of the Bank of England. “And, one might add, so far with little real reform.”

  It is time for the great global debate about tax havens to begin in earnest. Whoever you are, wherever you live, and whatever you do, offshore is at work nearby. It affects you. It is undermining the government you elect, hollowing out its tax base and corrupting your elected politicians. It is sustaining a vast criminal economy and creating a new, unaccountable aristocracy of corporate and financial power. If we do not act together to contain, control, and eradicate financial secrecy, then the world I found in West Africa more than a decade ago, a world of suave insiders, criminal complicity, and desperate poverty, will become the world we leave to our children. A tiny few will have their boots washed in champagne, while the rest of us struggle to make our lives in conditions of steepening inequality. We must avert this future.

  NOTES

  PROLOGUE

  1.US Energy Information Administration (EIA), “U.S. Imports by Country of Origin,” http://tonto.eia.doe.gov/dnav/pet/pet_move_impcus_a2_nus_ep00_im0_mbbl_m.htm.

  2.The episode is covered in detail in the author’s book Poisoned Wells: The Dirty Politics of African Oil (New York: Palgrave, 2007), chapters 4 and 5.

  3.Valerie Lecasble and Airy Routier, Forages en eau profonde (Paris: Grasset, 1998).

  4.Ibid., p. 252.

  5.Eva Joly, Est-ce dans de monde-là que nous voulons vivre? (Paris: Les Arènes, 2003).

  6.“Scandale!: How Roland Dumas Got France Gossiping,” The Independent, January 30, 2001.

  7.See Jean-Marie Bockel, “Je veux signer l’acte de décès de la Françafrique,” Le Monde, January 16, 2008. Omar Bongo is now dead; the palace is now inhabited by his son, President Ali Bongo.

  8.“Rupert Laid Bare,” The Economist, March 18, 1999.

  9.John Lanchester, “Bravo l’artiste,” review of Rupert Murdoch: The Untold Story of the World’s Greatest Media Wizard, by Neil Chenoweth, London Review of Books, February 5, 2004.

  10.Eva Joly, Notre affaire à tous (Paris: Les Arènes, 2000).

  11.Eva Joly, in Norway’s official aid newsletter, Development Today, March 7, 2007.

  12.See Martin Woods, “Banks Financing Mexico Gangs Admitted in Wells Fargo Deal,” Bloomberg, June 29, 2010.

  CHAPTER 1 WELCOME TO NOWHERE

  1.These figures should be taken as very rough estimates, not least because there is no agreement as to what a tax haven is, and estimates can vary widely. Once we understand that the United States and United Kingdom are major tax havens, the eye-catch figure is quite reasonable, if vague. This particular statistic is from French finance minister Dominique Strauss-Kahn in a speech to the Paris Group of Experts in March 1999; quoted in J. Christensen and M. Hampton, “All Good Things Come to an End,” The World Today (Royal Institute of International Affairs) 55, nos. 8–9 (1999). The share has grown substantially since then, because offshore financial services have been growing at substantially faster rates than the growth in trade.

  2.See Ronen Palan, Richard Murphy, and Christian Chavagneux, Tax Havens: How Globalization Really Works (Ithaca, NY: Cornell University Press, 2010), p. 51. This work uses BIS data to show offshore’s share of banking assets and liabilities rising to around 65 percent in 1990, before falling to 51 percent in 2007. Other measures of offshore, in various tables in the book, show explosive recent growth (interrupted by the financial crisis). Also see Luca Errico and Alberto Musalem, “Offshore Banking: An Analysis of Micro- and Macro-Prudential Issues,” IMF, January 1999, pp. 17–19. This study cites a figure of 54 percent in 1999, which is based on a relatively restrictive definition of offshore; subsequent measurements are affected, according to the IMF, because “the distinction between onshore and offshore banking has become progressively blurred.”

  3.Data from Palan et al., Tax Havens; from “IMF Finds ‘Trillions’ in Undeclared Wealth,” Wealth Bulletin, March 15, 2010; and from M. K. Lewis, “International Banking and Offshore Finance: London and the Major Centres,” in Mark P. Hampton and Jason P. Abbott, eds., Offshore Finance Centres and Tax Havens: The Rise of Global Capital (London: Macmillan Business, 1999).

  4.The U.S. Government Accountability Office (GAO) reported in 2008 that 83 of the nation’s hundred biggest corporations had subsidiaries in tax havens; the following year the Tax Justice Network, an advocacy organization that criticizes tax havens, used a broader definition of a tax haven and found that 99 of Europe’s 100 largest companies used offshore subsidia
ries.

  5.This loose definition is the result of collegiate discussions among members of the Tax Justice Network and other contacts primarily in the United States. It is similar to a definition offered by Richard Murphy, of the tax consultancy and advocacy company Tax Research UK, who defines secrecy jurisdictions as “places that intentionally create regulation for the primary benefit and use of those not resident in their geographical domain. That regulation is designed to undermine the legislation or regulation of another jurisdiction. To facilitate its use secrecy jurisdictions also create a deliberate, legally backed veil of secrecy that ensures that those from outside the jurisdiction making use of its regulation cannot be identified to be doing so.”

  6.See “The Cayman Islands as an Offshore Tax Haven,” http://www.cayman-information.com/cayman-islands_offshore_tax_haven.php.

  7.See Jesse Drucker, “Google 2.4 percent Rate Shows How $60 Billion Lost to Tax Loopholes,” Bloomberg, October 21, 2010.

  8.See Martin A. Sullivan, “Microsoft Moving Profits, Not Jobs, Out of the U.S.,” Tax Notes, October 18, 2010; and Martin A. Sullivan, “Cisco CEO Seeks Relief for Profits Shifted Overseas,” Tax Analysts, November 29, 2010.

  9.John W. Diamond, “International Tax Avoidance and Evasion,” National Tax Journal, December 1, 2009.

  10.Form 10-Q for Chiquita Brands International Inc., Quarterly Report, May 5, 2009, http://biz.yahoo.com/e/090505/cqb10-q.html.

  11.See Senator Carl Levin news release, “Dorgan and Levin Release Study Showing Majority of Corporations Pay No Federal Income Tax,” August 12, 2008.

  12.The problem is getting worse—it is estimated that by 2007 the United States was losing an additional $28 billion in annual revenue, over and above what it was already losing before 1999, due to the worsening offshore shenanigans by nonfinancial U.S. corporations. If you include financial corporations, the sum is far bigger. See Testimony of Martin A. Sullivan, contributing editor, Tax Analysts, Before the Committee on Ways and Means U.S. House of Representatives, July 22, 2010. As Sullivan reported, in 2007 a quarter of all foreign profits of U.S.-based multinationals outside the financial sector were realized in just five tax havens: Bermuda, Singapore, Ireland, Switzerland, and the Cayman Islands.

  13.Media reports have claimed that Switzerland’s banking secrecy laws were the product of efforts to protect German Jews from the Nazis. This story originated from a November 1966 bulletin from the Schweizerische Kreditanstalt (today’s Credit Suisse), and it is false. See Bruno Gurtner, “Swiss Secrecy Had Nothing to Do with the Nazis,” Financial Times letters, March 26, 2009; and Sebastién Guex, “The Origins of the Swiss Banking Secrecy Law and Its Repercussions for Swiss Federal Policy,” Business History Review 74 (summer 2000): 237–266, http://www.jstor.org/pss/3116693. Note also that tiny Liechtenstein next door emerged as a kind of Swiss appendage after the First World War.

  14.Luxembourg specializes in holding companies exempt from income taxes, introduced in 1929.

  15.IMF data records Luxembourg’s investment liabilities at $2.5 trillion and its assets at only $1.5 trillion, a discrepancy of a trillion dollars. And these are just portfolio investments: add cash deposits, and the sums are bigger still. See “IMF Finds ‘Trillions’ in Undeclared Wealth,” Wealth Bulletin, March 15, 2010.

  16.“Kim Jong-il Keeps $4bn ‘Emergency Fund’ in European Banks,” Daily Telegraph, March 14, 2010.

  17.See, for example, Akin Gump Strauss Hauer & Feld LLP news release, “Halliburton Co., KBR, Inc. and KBR LLC Agree to Largest Combined Settlement of FCPA Charges by U.S. Companies,” February 13, 2009. Halliburton and KBR settled with the Department of Justice for $579 million in 2009.

  18.It is no coincidence that London, the former capital of the greatest empire the world has known, is also the center of the most important part of the global offshore system. Until the early 1990s, economic historians had viewed the British empire in large part as a corollary of the industrial revolution, which had made the empire both necessary and possible; empire was, to a large degree, a story about industrial capitalism and trade. But in 1993 the economic historians P. J. Cain and A. G. Hopkins transformed this view with a two-volume book, British Imperialism: Innovation and Expansion 1688–1914 (London: Longman, 1993) and British Imperialism, Crisis and Deconstruction 1914–1990 (London: Longman, 1993), which recast the empire as something that was most fundamentally a story about financial capital, international credit, and the City of London, the governor of the imperial engine. This imperial connection, which will become clear as the book progresses, is of paramount importance to any understanding of the offshore system and of the City of London, the governor of a large part of the offshore engine.

  19.Martin A. Sullivan, “Offshore Explorations: Jersey,” Tax Notes, October 23, 2007; “Offshore Explorations: Isle of Man,” Tax Notes, November 5, 2007; “Offshore Explorations: Guernsey,” Tax Notes, October 10, 2007. These are considered conservative estimates: Offshore bank deposits in Jersey alone were worth $800 billion in mid-2009; Colin Powell, chairman of the Jersey Financial Services Commission, estimated in 2009 that trusts in Jersey alone might involve another $300 to 400 billion.

  20.Seven, including the Falkland Islands and the British Antarctic Territory, are not havens. Ascension Island, which houses highly secretive U.S. and British military bases, serves a quasi-imperial purpose as a base to help project British power overseas.

  21.For example, 2003 saw the collapse of major money-laundering trials in which a key witness was forced to admit that he had been serving as an MI6 agent.

  22.The Cayman Islands reported to the IMF $750 billion in portfolio assets (that is, loans, securities, and other profitable things) in 2008. This quantity of assets ought to be matched, more or less, by similarly sized liabilities (deposits and other obligations) on the other side of the balance sheet—yet these added up to $2.2 trillion for the Cayman Islands, three times as much as the assets. See David Bain, “IMF Finds ‘Trillions’ in Undeclared Wealth,” Wealth Bulletin, March 15, 2010. The IMF report is Philip R. Lane and Gian Maria Milesi-Ferretti, “Cross-Border Investment in Small International Financial Centers,” IMF Working Paper 10/38, February 2010.

  23.See Palan et al., Tax Havens, p. 11. The authors estimate that the Crown Dependencies and Overseas Territories, plus the former empire, account for 37 percent of all banking liabilities and 35 percent of all banking assets; the City of London accounts for 11 percent. Even back in 1996, the U.S. lawyer John Moscow estimated that apart from Switzerland and Liechtenstein, nearly every offshore dirty-money center was British run or controlled. See Chris Blackhurst and Clare Garner, “A Trillion Dollars in Dirty Money Keeps Island Tax Havens Afloat,” The Independent, September 11, 1996.

  24.The term “British Spiderweb” was coined, I believe, by Jim Henry, author of Blood Bankers.

  25.See, for example, “Britain Imposes Direct Rule on Turks and Caicos,” Associated Press, August 14, 2009. Plans are now afoot to prepare new elections for 2011.

  26.Although Ireland lies in the Eurozone, its emergence as a secrecy jurisdiction in the late 1980s was substantially linked to interests in the City of London, and its Wild West spirit of laissez-faire financial market regulation—the turning of a blind eye to nefarious activities and potential risks—was inspired by British, not continental European, models. It is also part of a British sphere of influence.

  27.“Users of ‘Tax Havens’ Abroad Batten Down for Political Gale,” New York Times, February 26, 1961.

  28.Next came Bank of America, Lehman Brothers, and Wachovia Corp., with 115, 59, and 57 tax haven subsidiaries, respectively. See “Large U.S. Corporations and Federal Contractors with Subsidiaries in Jurisdictions Listed as Tax Havens or Financial Privacy Jurisdictions,” U.S. Government Accountability Office, December 2008.

  29.A conference in the City of London in 1995 was told that the industry objective was to shift offshore the majority of financial assets owned by the world’s high-net-worth individuals by the end of th
e decade. See Steven Hiatt, ed., A Game as Old as Empire: The Secret World of Economic Hit Men and the Web of Global Corruption (San Francisco: Berrett Koehler, 2007), p. 55.

  30.See Senator Levin, news release, “Senate, House Members Introduce Stop Tax Haven Abuse Act: Bill Targets $100 Billion in Lost Tax Each Year from Offshore Tax Dodges,” March 2, 2009. This $100 billion has several components and is in the middle of a range of estimates: The U.S. Treasury in 2007 cited estimates ranging between $40 and $123 billion annually. See Treasury Inspector General for Tax Administration, Office of Inspections and Evaluations, “A Combination of Legislative Actions and Increased IRS Capability and Capacity Are Required to Reduce the Multi-Billion Dollar U.S. International Tax Gap,” January 27, 2009.

  Levin also states that “abusive domestic tax shelters cost tens of billions of dollars more.” The United States has unusually sophisticated systems in place to stem offshore leakage; developing countries suffer far more in relation to the size of their economies. Education budget details from Office of Management and Budget, www.whitehouse.gov.

  31.From the 2008 GAO report. A number of companies, including Delphi, Dow Chemical, MetLife, Pfizer, and Washington Mutual, referred to the “Virgin Islands” but did not differentiate between the British Virgin Islands and the U.S. Virgin Islands.

  32.The Deepwater Horizon switched from Panama to the Marshall Islands in 2004. Transocean, the owner of the Deepwater Horizon, has 35 vessels registered in the Marshall Islands. Transocean moved from the Cayman Islands to the Swiss canton of Zug in 2008. For Zeder and the Marshall Islands, see U.S. Office of Insular Affairs, “Fred Monroe Zeder: In Memoriam,” http://www.doi.gov/oia/press/2004/fred_zeder.htm. While Bush’s ambassador to the region, Zeder’s private company, Island Development, became incorporated on October 14, 1986, four days before Zeder signed a treaty providing for $6 million in aid for the Marshall Islands, of which $1.2m was used to help set up the ship registry. Zeder died in 2008. See “Bush Friend, Former Ambassador: Company Wasn’t Disclosed,” Associated Press, reproduced in The Victoria Advocate, April 30, 1990. The United States is responsible for foreign affairs and defense, just as the UK is responsible for the foreign affairs and defense of its Overseas Territories. Khadija Sharife in the London Review of Books blog (“Offshore Exploitation,” June 9, 2010) established that “During a joint hearing to investigate the explosion and sinking of the Deepwater Horizon, Hung Nguyen, a captain in the Coast Guard, was surprised to learn from the US Interior Department’s Mineral Management Service—the unit responsible for overseeing offshore exploitation—that ‘there is no enforcement.’ Each operator ‘self-certifies and establishes what they think is adequate,’ . . . This system of self-regulation was formulated by Dick Cheney’s Energy Task Force.”