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

by Nicholas Shaxson

  21.Author’s interview with Rosenbloom, December 1, 2009.

  22.The Portfolio Interest Exemption.

  23.Author’s interview; also see Testimony of Michael J. McIntyre and Robert S. McIntyre on Banking Secrecy Practices and Wealthy American Taxpayers before the U.S. House Committee on Ways and Means, Subcommittee on Select Revenue Measures, March 31, 2009.

  24.Testimony of Michael J. McIntyre and Robert S. McIntyre on Banking Secrecy Practices and Wealthy American Taxpayers Before the U.S. House Committee on Ways and Means Subcommittee on Select Revenue Measures, March 31, 2009, http://www.ctj.org/pdf/mcintyresw&mtestimony20090331.pdf.

  25.The U.S. Foreign Account Tax Compliance Act (FATCA) of 2010 tightens up some aspects of the QI rules, making it harder for U.S. tax cheats, but it leaves the secrecy for foreigners in place. See “FATCA: New Automatic Info Exchange Tool,” Tax Justice Network, May 18, 2010.

  26.See Michael J. McIntyre, “How to End the Charade of Information Exchange,” Tax Notes International, October 26, 2009, p. 194.

  27.Much of the information comes from “Failure to Identify Company Owners Impedes Law Enforcement,” Hearing Senate Permanent Subcommittee, November 14, 2006. Also “U.S. Corporations Associated with Viktor Bout,” Prepared by Senate Permanent Subcommittee on Investigations, November 2009, on Senator Carl Levin’s webpage, levin.senate.gov.

  28.“Failure to Identify Company Owners Impedes Law Enforcement,” Hearing Senate Permanent Subcommittee, November 14, 2006, p. 3.

  29.L.J. Davis, “Delaware Inc.,” New York Times, June 5, 1988.

  30.Corp 95, http://www.corp95.com/, accessed June 10, 2010.

  31.The forms of secrecy are different: lack of corporate transparency in Delaware and lack of financial transparency in Switzerland.

  32.“Failure to Identify Company Owners Impedes Law Enforcement,” Hearing Senate Permanent Subcommittee, November 14, 2006. A new act was introduced in 2008, the Incorporation Transparency and Law Enforcement Assistance Act, aiming to beef up transparency in this area. At the time of writing, the bill was on the sidelines.

  33.Jeff Gerth, “New York Banks Urged Delaware To Lure Bankers,” New York Times, March 17, 1981.

  34.Chancery courts emerged out of English ecclesiastical courts and trust laws, where concepts of legal guardianship and fiduciary duty were paramount, and this makes them useful for what Delaware’s Court of Chancery does most of all: rule on the nitty-gritty of how corporations organize themselves internally, and what happens when things go awry: whether internal rules have been followed, whether management insiders are illegally abusing shareholders, and whether corporate statutes were applied fairly. The Chancery court has no close competitor in this arena.

  35.Bernard S. Black, “Shareholder Activism and Corporate Governance in the United States,” New Palgrave Dictionary of Economics and the Law 3 (1998): 459–465, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=45100.

  36.Senate Bill No. 58, An Act to Amend Title 10 of the Delaware Code Relating to the Court of Chancery, State of Delaware Division of Corporations, http://corp.delaware.gov/sb58.shtml.

  37.Matthew Goldstein, “Special Report: For Some People, CDOs Aren’t a Four-Letter Word,” Reuters, May 17, 2010.

  38.Madhav Mehra, “Are We Making a Mockery of Independent Directors?” World Council for Corporate Governance, http://www.wcfcg.net/ht130304.htm, accessed August 15, 2010. Dr. Madhav Mehra is president of the council.

  39.There are salient differences with the Cayman Islands. For example, most Cayman companies (the “exempt” companies) are by Cayman law not permitted to do business in Cayman. Such is not the case in Delaware. Also: typically, in Delaware, federal but no state taxes are paid; in Cayman, no taxes are paid.

  40.Twelve thousand was the figure cited; the true figure is closer to eighteen thousand.

  41.List of Delaware Registered Agents, Delaware Department of State division of corporations, corp.delaware.gov, http://corp.delaware.gov/agents/agts.shtml, accessed August 15, 2010.

  42.The 2008 and 2007 reports are available at the state of Delaware’s official website, http://sos.delaware.gov/2008AnnualReport.pdf.

  43.Transcript of interview with Mrs. Ngozi Okonjo-Iweala, Nigerian finance minister, interview by Paul Vallely, The Independent, May 16, 2006, http://www.independent.co.uk/news/world/africa/transcript-of-interview-with-mrs-ngozi-okonjoiweala-nigerian-finance-minister–478337.html.

  44.Transparency International has started to embrace this issue and called in November 2008 for a “second wave” of corruption campaigning to tackle these and other matters. As I write this, it is in the process of reevaluating its stance.

  CHAPTER 7 THE DRAIN

  1.“Interview: John Moscow,” Money Laundering Bulletin, April 1997.

  2.A range of estimates for the size of the narcotics trade exists. This one comes from “The Global Narcotics Industry,” Center for Strategic and International Studies, Washington, D.C., http://csis.org/programs/transnational-threats-project/past-task-forces/-global-narcotics-industry.

  3.Based on the current price of $75 per barrel.

  4.This section on BCCI is drawn mostly from Peter Truell and Larry Gurwin, False Profits: The Inside Story of BCCI, the World’s Most Corrupt Financial Empire (New York: Houghton Mifflin, 1992); from Jeffrey Robinson, The Sink: How Banks, Lawyers and Accountants Finance Terrorism and Crime—and Why Governments Can’t Stop Them (London: Robinson Publishing, 2004); as well as various newspaper and academic reports, plus author’s interviews with Robert Morgenthau and Jack Blum in 2008 and 2009.

  5.For most of its life, Ernst & Whinney (now Ernst & Young) audited BCCI Luxembourg, while Price Waterhouse (now PWC) audited BCCI Cayman.

  6.See Peter Truell and Larry Gurwin, False Profits: The Inside Story of BCCI, the World’s Most Corrupt Financial Empire (New York: Houghton Mifflin, 1992), p. 87.

  7.Ibid., p. 189.

  8.Ibid., pp. 193–97 and pp. 290–91; and Robinson, The Sink, pp. 79–81. Some of the capital was real money, but much of it was not.

  9.Author’s interview with Morgenthau, May 4, 2009. Morgenthau didn’t name Scott, but he was the attorney general at the time.

  10.Ibid.

  11.Robinson, The Sink, pp. 318 and 357.

  12.Ibid., p. 84.

  13.In 2009, Britain’s Information Commissioners refused a Freedom of Information request by Prem Sikka finally to publish PriceWaterhouse’s 1991 “Sandstorm” report on BCCI, in an extraordinary and long-winded reply arguing that “it is very clearly in the public interest that the UK maintains strong and effective relations with its international partners”—a clear defense of tax haven London. See Freedom of Information Act 2000 (Section 50), Decision Notice, December 14, 2009, Information Commissioners (UK), http://www.ico.gov.uk/upload/documents/decisionnotices/2009/fs_50202116.pdf. In an email to the author on June 15, 2010, Sikka said he remained committed to securing publication of the report. Sikka also provides a useful in-depth examination of the BCCI affair in Austin Mitchell, Prem Sikka, Patricia Arnold, Christine Cooper, and Hugh Will-mott, “The BCCI Cover-Up,” Association for Accountancy & Business Affairs, 2001, http://visar.csustan.edu/aaba/BCCICOVERUP.pdf.

  14.Author’s interview with Morgenthau, May 4, 2009; and “More Offshore Tax Probes in Works: NY’s Morgenthau,” Reuters, April 27, 2009.

  15.See the author’s Poisoned Wells: The Dirty Politics of African Oil (New York: Palgrave, 2007).

  16.French magistrates issued an international arrest warrant for Gaydamak in January 2001, and he moved to Moscow; in October 2009 he was convicted in absentia for arms trafficking, fraud, and tax offenses. Gaydamak says the magistrates used forged documents and said he owed no French taxes because he had been resident in London at the time in question. Author’s interview with Gaydamak, and Le Monde, December 8, 2000, cited in Global Witness, All the President’s Men, 2002, p. 26.

  17.The arms he helped finance did, it is true, hasten victory over UNITA, though not everyone would agr
ee that helping supply arms constitutes “bringing peace.” Gaydamak had recently bought the Israeli football team Hapoel and a basketball team, Betar Jerusalem, with, he said, political aims.

  18.Russia agreed, with Gaydamak’s help, to cut the debt down to just $1.5 billion, sliced into 31 promissory notes with a face value of $48.3 million each. Angola would pay these off at face value in six monthly installments, after a five-year grace period, from 2001 to 2016. Gaydamak and his partner Pierre Falcone then set up a private company, Abalone Investments, with an account at UBS in Geneva. Abalone bought the 31 notes from Russia for $750 million—at a 50 percent discount—though Angola would pay Abalone the $1.5 billion in full. Angola’s state oil company Sonangol started paying money into the Abalone account via the controversial and secretive oil trader Glencore. In February 2001, after 16 of the 31 notes (or $774 million) had been paid off, the Swiss judge froze the remaining 15 notes.

  19.Global Witness, Time for Transparency, March 2004, p. 44.

  20.Over $160 million went to an account called “Treasury Ministry of Finance” in Moscow, though knowledgeable sources in Switzerland told me that despite its name, this account may have been a front, with other interests behind it.

  21.Le Monde, April 3, 2002: “Le règlement de la dette angolaise aurait donné lieu à des détournements de fonds,” quoted in Global Witness, Time for Transparency, March 2004. I asked Gaydamak if the money had simply disappeared into private pockets, offshore. No, he said: Instead of paying Russia in cash for the promissory notes, Abalone paid Russia in “Russian obligations”—Russian debts he bought on secondary markets via these mysterious offshore companies and then redeemed to Russia—and Abalone had legally profited on those debt trades too. It was a “huge stupidity,” he said, to assume that he would pay Russia back directly, rather than via intermediary accounts.

  22.Dev Kar and Devon Cartwright-Smith, “Illicit Financial Flows from Africa: Hidden Resource for Development,” Global Financial Integrity, March 26, 2010. Dev Kar is a former senior IMF economist.

  23.See “‘Angolagate’ Revisited,” Global Financial Integrity, Task Force on Financial Integrity & Economic Development, April 7, 2010, http://www.financialtaskforce.org/2010/04/07/angolagate-revisited/.

  24.IMF data, “Angola: Selected Issues and Statistical Annex,” April 1999 and Sept. 2003, and “Angola, Recent Economic Developments,” Dec. 1995, Dec. 1997, Sept. 2000; “IMF Executive Board Concludes 2004 Article IV Consultation with Angola,” July 2005.

  25.The Soyo-Palanca Trust and the Cabinda Trust were used as efficient mechanisms for routing Angola’s oil money, enabling Angola to provide trustworthy collateral for oil-backed loans, ring-fenced from the inefficiencies of Angola’s domestic financial system. The problem was, essentially, that this ring-fencing also meant it was off the Angolan state’s balance sheet, and therefore outside any normal budgetary or political procedures, playing havoc with Angola’s ability to run a coherent budget.

  26.Some economists, many with ties to the financial services industry and to tax havens, have tried to dispute these numbers—none successfully. In fact, the numbers are quite compatible with the only comparable official estimate available—a World Bank study from 1994, which estimated total capital flight from developing countries at $155–377 billion in 1992: Simply extrapolating this figure to 2006 dollars (using the IMF conversion rate of 287.2 percent) yields a figure of $443 billion to $1.1 trillion; evidence is, however, that the growth rate has significantly exceeded the inflation rate. For counterarguments and detailed discussions, see “Time to Bury the Oxford Report,” Tax Justice Network, July 16, 2009.

  27.Léonce Ndikumana and James Boyce, “New Estimates of Capital Flight from Sub-Saharan African Countries: Linkages with External Borrowing and Policy Options,” Political Economy Research Institute, April 8, 2008.

  28.Although one might argue that the problem of climate change is a bigger threat.

  29.Letter to John Snow from Phil Gramm, February 19, 2003, republished by Center for Freedom and Prosperity, http://www.freedomandprosperity.org/ltr/gramm-irs/gramm-irs.shtml.

  30.James S. Henry, The Blood Bankers: Tales from the Global Underground Economy (Thunder’s Mouth Press, 2003), p. 73.

  31.“The Future of Money,” Wired News 4, no. 10 (October 1996), http://www.wired.com/wired/archive/4.10/wriston.html?topic=&topic_set=.

  32.Eric Helleiner, States and the Reemergence of Global Finance: From Bretton Woods to the 1990s (Ithaca, NY: Cornell University Press, 1996), p. 177.

  33.Michael Hudson quotes are a mix of the author’s interview with Hudson and “An Interview with Michael Hudson: An Insider Spills the Beans on Offshore Banking Centers,” Counterpunch, March 25, 2004, http://www.counterpunch.org/schaefer03252004.html.

  34.Luca Errico and Alberto Musalem, “Offshore Banking: An Analysis of Micro- and Macro-Prudential Issues,” IMF, January 1999.

  35.Todd Moss, Gunilla Pettersson, and Nicolas van de Walle, “An Aid-Institutions Paradox? A Review Essay on Aid Dependency and State Building in Sub-Saharan Africa,” Center for Global Development, Working Paper 74, January 2006.

  36.“Address by Trevor Manuel, MP Minister for Finance of the Republic of South Africa,” 4th Meeting of the Forum on Tax Administration Cape Town, January 10, 2008.

  37.Chinese ministry of commerce. Total for Hong Kong was $27.7 billion, BVI $16.6 billion; the next largest was South Korea, with $3.7 billion.

  38.See, for example, “India Gets 43% FDI through Mauritius Route,” Press Trust of India, April 20, 2009.

  39.It was a French colony until Britain invaded during the Napoleonic Wars.

  40.Author’s interview with Elmer, 2009.

  41.Telephone interview with Rosenbloom, December 1, 2009.

  CHAPTER 8 RESISTANCE

  1.“Harmful Tax Competition: An Emerging Global Issue,” Organization for Economic and Cooperative Development, 1998, http://www.oecd.org/dataoecd/25/26/44430243.pdf.

  2.The last major attempt at attacking the havens had been the so-called Gordon report published by the U.S. Internal Revenue Service in January 1981: “Tax Havens and Their Use by United States Taxpayers—An Overview,” report to the Commissioner of Internal Revenue, the Assistant Attorney General (Tax Division) and the Assistant Secretary of the Treasury (Tax Policy), submitted by Richard A. Gordon, Special Counsel for International Taxation, January 12, 1981. This was almost entirely ignored.

  3.Though the 1998 report did not list the havens, the content was clearly aimed at smaller island centers.

  4.Author interview with Dan Mitchell, Washington, D.C., Jan. 16, 2009.

  5.David Cay Johnston, “Behind the IRS Hearings, a GOP Plan to End Tax Code,” New York Times, May 4, 1998, http://www.nytimes.com/1998/05/04/us/behind-irs-hearings-a-gop-plan-to-end-tax-code.html?pagewanted=1.

  6.David Cay Johnston, Perfectly Legal: The Covert Campaign to Rig Our Tax System to Benefit the Super Rich—and Cheat Everybody Else (New York: Penguin, 2003), p. 148.

  7.See “The Liberalizing Impact of Tax Havens in a Globalized Economy,” presentation by Dan Mitchell, Capitol Hill, March 23, 2009, http://www.youtube.com/watch?v=ISfsY1nqoaM&feature=related.

  8.Ibid.

  9.Paul de Grauwe and Magdalena Polan, “Globalisation and Social Spending,” Cesifo Working Paper No. 885, March 2003, https://lirias.kuleuven.be/bitstream/123456789/119 409/1/cesifo_wp885.pdf.

  10.“Table A. Total Tax Revenue as Percentage of GDP,” OECD, http://www.oecd.org/dataoecd/48/27/41498733.pdf.

  11.“A Fair Share: Has the Tide Turned for Corporate Profits?” The Economist, August 27, 2009, http://www.economist.com/research/articlesBySubject/displaystory.cfm?subjectid=2512631&story_id=E1_TQPNSGGV. In 2006, for example, just ahead of the economic crisis, U.S. corporate profits were higher as a share of national income, and wages and salaries were lower, than at any time since the Second World War.

  12.See David Cay Johnston, “Tax Rates for Top 400 Earners Fall as Income Soars, IRS Data,” Tax Anal
ysts, undated, 2010, http://www.tax.com/taxcom/features.nsf/Articles/0DEC0EAA7E4D7A2B852576CD00714692?OpenDocument.

  13.Mitchell’s own book quotes a seminal 2006 European study that baldly explains the problem: “The effect [of falling tax rates] on incorporation is significant and large. It implies that the revenue effects of lower corporate tax rates—possibly induced by tax competition—partly show up in lower personal tax revenues rather than lower corporate tax revenues…. There is reason (after all) to worry about tax competition.” “Corporate Tax Policy, Entrepreneurship and Incorporation in the EU,” CESifo Working Paper No. 1883, December 2006. Also see Lucas Bretschger and Frank Hettich, “Globalisation, Capital Mobility and Tax Competition: Theory and Evidence for OECD Countries,” European Journal of Political Economy 18, no. 4 (November 2002); and S. Ganghof, The Politics of Income Taxation: A Comparative Analysis (European Consortium for Political Research Press, 2006).

  14.Michael Keen and Alejandro Simone, “Is Tax Competition Harming Developing Countries More Than Developed?” Tax Notes International 1317, June 28, 2004.

  15.Alexander Klemm and Stefan van Parys, “Empirical Evidence on the Effects of Tax Incentives,” IMF Working Paper No. 09/136, July 1, 2009, http://www.imf.org/external/pubs/cat/longres.cfm?sk=23053.0.

  16.One such incentive was the tax holiday, which the IMF economists said was “widely regarded as the most pernicious form of incentive.” Britain had briefly tried this gimmick under Prime Minister Margaret Thatcher until it became clear they did not work: set up a ten-year tax holiday, and companies will pack up and leave after nine years and 11 months, or will transfer the business to another subsidiary and get another ten-year holiday. After these failures, however, Africa was still encouraged to embrace them: In 1990 only one sub-Saharan African country offered tax holidays, but a decade later they all did. Often these holidays are available in special export processing zones, which are a bit like small offshore jurisdictions lodged inside the state. When these zones pop up, wealthy locals who want to invest at home inevitably send their money overseas, dress it up in an offshore secrecy structure, then return it, slashing their tax bill in the process.