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

by Nicholas Shaxson

  33.Khadija Sharife, “Offshore Exploitation,” London Review of Books blog, June 9, 2010.

  34.About the Liberian Registry, see Liberian International Ship & Corporate Registry (LISCR, LLC), www.liscr.com, accessed September 30, 2010. For the Standard Oil link, see Andrew Leonard, “Big Oil’s Slick Trick,” Business Spectator, May 15, 2010.

  35.Jeffrey Robinson, The Sink: How Banks, Lawyers and Accountants Finance Terrorism and Crime—and Why Governments Can’t Stop Them (London: Constable & Robinson Ltd., 2003), p. 63.

  36.Widely cited. See, for example, Simon Raftopolous, “Tax Havens: The Red Herring of the Global Financial Crisis,” Appleby Global press release, May 2009, www.appleby-global.com.

  37.The Economist, however, has called tax havens “good for the financial system” and routinely carries advertisements for offshore corporations on its back pages.

  38.See “World Governments Chip Away at Bank Secrecy,” German Press Agency, April 12, 2010.

  39.Nicolas Sarkozy, “Just Ahead of the G20 Pittsburgh Summit,” from “Paradis fiscaux: bilan du G20 en 12 questions,” CCFD-Terre Solidaire, April 2010.

  40.For a list of uncooperative tax havens, see OECD Center for Tax Policy and Administration, http://www.oecd.org/document/57/0,3343,en_2649_33745_30578809_1_1_1_1,00.html, accessed 2010. At the time of writing, countries could get off the blacklist by signing 12 “tax information exchange agreements” (TIEAs) with other jurisdictions—relying on extremely weak standards of information exchange. Many havens got off the blacklist by signing TIEAs with such global heavyweights as Greenland and San Marino.

  41.E. G. Richard Salsman, “Treasury Secretary Paul O’Neil Confuses Tax Avoidance versus Tax Evasion,” Capitalism Magazine, September 13, 2002.

  42.That is a gross figure. See “The Dutch Trust Industry: Facts and Figures,” International Management Services Association (VIMS) & Dutch Fiduciary Organization (DFA), April 2008.

  43.Author’s interview with Morgenthau, New York, May 4, 2009.

  44.Oliver Arlow, “Kim Jong-il Keeps 4bn Emergency Fund in European Banks,” The Telegraph, March 14 2010.

  45.Dev Kar and Devon Cartwright Smith, Illicit Financial Flows from Developing Countries, 2002–2006 (Washington, D.C.: Global Financial Integrity, 2008). The authors define illicit money as that which is “illegally earned, transferred or utilized.” Economists from the Oxford Centre for Business Taxation have called these figures “drastically overstated.” Dev Kar, the GFI economist (formerly an IMF Senior Economist), has in turn effectively countered their arguments, noting the blind spot in traditional estimates. Traditional models will estimate the magnitude of illicit outflows from a country, then estimate the magnitude of illicit inflows, and then subtract one from the other to achieve a net result. Kar explains, however, that the estimates should not be subtracted, but added. For further details, see “Time to Bury the Oxford Report,” Tax Justice Network blog, July 16, 2009, plus associated links; and Dev Kar, “The Alpha, but Whither the Omega, of the Greek Crisis?” Task Force on Financial Integrity & Economic Development blog, May 11, 2010.

  46.Raymond Baker, Capitalism’s Achilles Heel: Dirty Money and How to Renew the Free Market System (Hoboken, N.J.: Wiley, 2005). That book’s headline $1–1.6 trillion figure was subsequently endorsed in “Stolen Asset Recovery (StAR) Initiative: Challenges, Opportunities, and Action Plan,” World Bank / UN Office on Drugs and Crime, June 2007.

  47.A picture of the book may be found at “Illicit Flows: We Finally Reveal the Official Data,” Tax Justice Network blog, July 23, 2009.

  48.Josh Rogin, “Clinton Presses Pakistan to Raise Taxes on Wealthy,” Foreign Policy, September 28, 2010.

  49.Author’s interviews with Blum, and “A Conversation with Jack Blum,” The American Interest, November/December 2009.

  50.Office of Management and Budget, “Budget of the U.S Government, Fiscal Year 2011, Historical Tables,” February 2010 (calculations by Citizens for Tax Justice [CTJ], emailed to author by Bob Mcintyre, CTJ director). Also see Ben Bagdikian, “The 50-Year Swindle,” The Progressive, April 31, 2002.

  51.For instance, the share of total income going to the top 1 percent of earners rose from 8.9 percent in 1976 to 23.5 percent by 2007, while the average inflation-adjusted hourly wage declined by over 7 percent. See Robert H. Frank, “Income Inequality: Too Big to Ignore,” New York Times, October 16, 2010.

  52.Chuck Collins, Alison Goldberg, and Sam Pizzigati, “Shifting Responsibility: How 50 Years of Tax Cuts Benefited the Wealthiest Americans,” report for Wealth for the Common Good, April 12, 2010.

  53.KPMG press release, “Cyprus, Ireland and Switzerland Have Most Attractive Corporate Tax Regimes in Europe, Finds KPMG International Poll,” December 17, 2007, http://www.kpmg.co.uk/news/detail.cfm?pr=3008. Cyprus achieved a score of 90 percent.

  54.A notable exception is “Business Unprepared as Fair Tax Follows Fair Trade into the Spotlight,” SustainAbility, March 14, 2006, which examined the role of paying tax in the corporate responsibility debate.

  55.See Hogan speaking on video, embedded in “Hogan Loses High Court Battle to Keep Financial Records Secret,” Sydney Morning Herald, June 16, 2010.

  CHAPTER 2 TECHNICALLY ABROAD

  1.Philip Knightley, The Rise and Fall of the House of Vestey (London: Warner Books, 1993), p. 8.

  2.Cain and Hopkins, pp. 150 and 157; statements in June 1929 and October 1929 by ambassador Robertson. The Argentine beef industry relied almost exclusively on the British market for its exports; by 1929 Argentina generated about 12 percent of Britain’s income from overseas investments.

  3.Charles Edward Russell, The Greatest Trust in the World (1905; reprint New York: Arno Press, 1975).

  4.Rodolfo Roquel, Nosotros, los Peronistas (Buenos Aires: Dunken, 2005), p. 34.

  5.Vestey Group History, Vestey Group website, http://www.vesteyfoods.com/en/vesteygroup/vestey-group-history.html.

  6.Knightley, The Rise and Fall of the House of Vestey, p. 63.

  7.Ibid., p. 27.

  8.Leslie Bethell, ed., Cambridge History of Latin America, vol. 8 (Cambridge: Cambridge University Press, 1991).

  9.“A: The Secretary of the Treasury,” Washington, D.C., May 29, 1937, from Henry Morgenthau to FDR, from Franklin D. Roosevelt Presidential Library; given to author in 2008 by Morgenthau’s son Robert Morgenthau, then Manhattan district attorney.

  10.For instance, in 1899 the state allowed corporations to own equity in other corporations, setting the scene for the emergence of large, interlinked networks of companies, the multinational corporation, and transfer pricing activities.

  11.Some of this analysis is derived from Ronen Palan, Richard Murphy, and Christian Chavagneux, Tax Havens: How Globalization Really Works (Ithaca, NY: Cornell University Press, 2010).

  12.Most accounts say it was Bedford Gunning Jr. who made that statement at the constitutional convention.

  13.When Britain decided to tax the worldwide profits of any person resident in the UK, the judges decided that in the case of corporations they should be treated as resident where the company’s most important decisions were taken, at meetings of their boards of directors. This suited Britain, since thousands of firms with activities all over the world were financed through the City of London, and their boards were normally located there. Germany, by contrast, placed more emphasis on the “seat of management”—that is, where the company’s actual operations were managed—a subtly different definition. For more on this history, see Sol Picciotto, International Business Taxation (London: George Weidenfeld and Nicholson Ltd, 1992), pp. 4–13.

  14.Until then, tax had not been a big issue for the Vesteys because Britain did not tax British-based companies on profits they made overseas—that is, unless they repatriated these profits. This had suited the brothers, who argued that most of their profits arose overseas.

  15.Picciotto, International Business Taxation, pp. 1–37.

  16.Knightley, The Rise and Fall of the House of Vestey, p. 34.
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  17.Some tax havens claim that trustees are required by law to know the identity of all beneficiaries. Contacts indicate, however, that generally offshore jurisdictions do not adequately police these laws, and trustees often do not know the real beneficiaries.

  18.The U.S. Internal Revenue Service sums it up quite simply: “Although these schemes give the appearance of separating responsibility and control from the benefits of ownership, as would be the case with legitimate trusts, the taxpayer in fact controls them.” See Internal Revenue Service, “Abusive Trust Tax Evasion Schemes—Facts (Section I),” June 12, 2008, http://www.irs.gov/businesses/small/article/0,id=106537,00.html.

  19.Vestey’s (Lord) Executors and another v. Inland Revenue Commissioners. Same v. Colquhoun (Inspector of Taxes.) Same v. Inland Revenue Commissioners, All England Law Reports, May 28, 1949, p. 1108.

  20.Sol Picciotto also describes this in his “Offshore: The State as Legal Fiction,” in Mark P. Hampton and Jason P. Abbott, eds., Offshore Finance Centres and Tax Havens: The Rise of Global Capital (New York: Macmillan, 1999), pp. 43–79.

  21.Obituary: Edmund Hoyle Vestey, 1932–2007, Blue Star Line, http://www.bluestarline.org/edmund_vestey2.htm, accessed Sept 12, 2010.

  22.See “Heirs and Disgraces,” The Guardian, August 11, 1999.

  CHAPTER 3 THE OPPOSITE OF OFFSHORE

  1.Robert Skidelsky, John Maynard Keynes: Fighting for Freedom, 1937–1946 (New York: Penguin, 2000), p. xiv.

  2.Ibid., p. xv.

  3.Ibid., preface and p. 98.

  4.See Thomas Friedman, “Foreign Affairs Big Mac I,” New York Times, December 8, 1996. The claim ended in March 1999 when NATO forces bombed Belgrade.

  5.John Maynard Keynes, “National Self-Sufficiency,” The Yale Review 22, no. 4 (June 1933): 755–769.

  6.Robert Skidelsky, John Maynard Keynes: Hopes Betrayed 1883–1920 (London: Macmillan, 1983), p. 220.

  7.Robert Heilbroner, The Worldly Philosophers: The Lives, Times and Ideas of the Great Economic Thinkers (Austin, TX: Touchstone, 1999), p. 251.

  8.Skidelsky, Fighting for Britain, p. 92.

  9.Ibid., p. 112.

  10.Ibid., p. 432.

  11.Robert Skidelsky, John Maynard Keynes: Fighting for Freedom, 1937–1946 (New York: Penguin, 2000), p. xxii.

  12.J. Bradford DeLong, review of Skidelsky, John Maynard Keynes: Fighting for Britain 1937–1946, July 2001, http://www.j-bradford-delong.net/Econ_Articles/Reviews/skidelsky_jel.html.

  13.Helleiner, States and the Reemergence of Global Finance, p. 4.

  14.Skidelsky, Fighting for Britain, pp. 340, 348.

  15.Barry Eichengreen, ed., Europe’s Post-War Recovery (Cambridge: Cambridge University Press, 1995), p. 99.

  16.Geoff Tily, the author of a book on Keynes, believes that the main reason Keynes supported capital controls was his belief that interest rates should be set and held low. This would place Keynes firmly on the side of the industrialist (for whom interest payments were a cost) against the financier (for whom interest payments were income). See Geoff Tily, “The Policy Implications of the General Theory,” Real-World Economics Review, no. 50 (2009): 16–33, http://www.paecon.net/PAEReview/issue50/Tily50.pdf.

  17.Capital controls had emerged during the First World War as countries had sought to stop capital fleeing their countries in order to be able to tax capital income and keep interest rates low in order to finance their war efforts. Controls evaporated after the war, following lobbying by bankers, but then returned partially during the Great Depression and finally swept the world after the Second World War and the Bretton Woods arrangements. They slowly became leaky and then were progressively dismantled around the world from around the 1970s. The United States got rid of its most important controls in 1974.

  18.Eric Helleiner, “Regulating Capital Flight,” in Gerald A. Epstein, ed., Capital Flight and Capital Controls in Developing Countries (Cheltenham: Edward Elgar, 2005), pp. 290–91.

  19.Helleiner, States and the Reemergence of Global Finance, p. 58.

  20.Ibid., p. 59.

  21.Ha-Joon Chang, Bad Samaritans: The Guilty Secrets of Rich Nations and the Threat to Global Prosperity (London: Random House, 2007), p. 27.

  22.Dani Rodrik and Arvind Subramanian, “Why Did Financial Globalization Disappoint?” IMF Staff Papers (2009), pp. 56, 112–138. They seek other explanations, especially exchange-rate factors, for the disappointing performance of liberalized economies, but they do note the close correlation. Also see Monique Morrissey and Dean Baker, “When Rivers Flow Upstream: International Capital Movements in the Era of Globalization,” Center for Economic Policy Research Briefing Paper, March 2003. “A striking feature of the distribution of current account surpluses and deficits among developing countries is that most of the countries that are experiencing high GDP growth have surpluses, and often large surpluses…. The fact that most of these nations continue to experience rapid GDP growth, in spite of this large outflow of capital, suggests that the availability of capital has not been a major impediment to economic growth.”

  23.Martin Wolf, “This Time Will Never Be Different,” Financial Times, September 28, 2009.

  24.“Capital Inflows: The Role of Controls,” IMF Staff Position Note, February 19, 2010.

  CHAPTER 4 THE GREAT ESCAPE

  1.Catherine R. Schenk, “The Origins of the Eurodollar Market in London: 1955–1963,” Explorations in Economic History 35, no. 2 (1998): 221–238.

  2.Ibid., p. 225.

  3.Ibid., p. 227.

  4.Anthony Sampson, Who Runs This Place?: The Anatomy of Britain in the 21st Century (London: John Murray, 2005), p. 246.

  5.David Kynaston, The City of London Volume IV: A Club No More 1945–2000 (London: Pimlico, 2002), p. 54.

  6.Ibid.

  7.U.S. banks had started expanding overseas after the First World War but mostly in Latin America and Asia, and in the 1950s their presence was still hardly discernible in London.

  8.E. A. McCreary, The Americanization of Europe: The Impact of Americans and American Business on the Uncommon Market (1964), quoted in Stefano Battilosi and Youssef Cassis, European Banks and the American Challenge: Competition and Cooperation in International Banking under Bretton Woods (Oxford: OUP, 2002).

  9.Until then, London’s role as a financial center had been based primarily on the British Imperial currency zone, whose member countries banked in London and whose nations used the pound sterling as their currency or pegged their currencies to the pound. Inside the zone trade and capital could flow quite freely, but flows in and out of the area were closely controlled. The pound sterling still financed about 40 percent of world trade, and the Bank of England wanted it to stay that way. See Gary Burn, The Reemergence of Global Finance (New York: Palgrave, 2006), p. 26.

  10.These terms are a bit of a misnomer today: They are neither named after today’s euro currency nor are they a creature only of American dollars. All the world’s main currencies are traded in this stateless unregulated space today.

  11.“With the creation of the Euromarket,” wrote Helleiner, “bankers in both countries stumbled on a solution to the problem of how to reconstruct the London-New York financial axis that had been prominent in the 1920s.” Helleiner, States and the Reemergence of Global Finance, p. 89.

  12.P. J. Cain and A. G. Hopkins, British Imperialism: Crisis and Deconstruction 1914–1990 (London: Longman, 1993), p. 293.

  13.Quoted in Kynaston, The City of London Volume IV, pp. 696–97.

  14.Ibid., p. 697.

  15.See “Linklaters Sees Fallout from Repo 105,” Financial Times, March 13, 2010; and “Report of Anton R. Valukas, Examiner,” Southern District Court, Jenner & Block LLP, vol. 3 of 9, March 11, 2010. The loophole was neither purely a UK matter nor a U.S. matter but derived from arbitrage between the two jurisdictions. See “FSA on Defensive over Lehman Failings,” Financial Times, March 18, 2010.

  16.In this process an investment bank, say, lends money to a hedge fund, and the hedge fund posts collateral against
that loan, but then the investment bank is allowed to reuse this collateral for its own business, as if it were its own collateral.

  17.See Manmohan Singh and James Aitken, “The (Sizable) Role of Rehypothecation in the Shadow Banking System,” IMF Working Paper WP/10/172, IMF, July 2010. See also Gillian Tett, “Web of Shadow Banking Must Be Unravelled,” Financial Times, August 12, 2010. If you take this practice into account, the IMF reckoned, then the shadow banking system in the United States—the giant, unregulated financial marketplace that lay at the heart of the global financial catastrophes that erupted from 2007—was in fact a full 50 percent bigger than had previously been thought. The IMF concluded that “the United Kingdom provides a platform for higher leveraging not available in the United States.”

  18.“Energy Market Manipulation and Federal Enforcement Regimes,” Michael Greenberger Testimony to U.S. Senate Committee, June 3, 2008, http://commerce.senate.gov/public/_files/IMGJune3Testimony0.pdf.

  19.Michael Foot, “Final Report of the Independent Review of British Offshore Financial Centres,” HM Treasury (UK), October 2009.