Inside Story

Private gains and social losses

From the archive | The biggest tax havens aren’t on faraway islands, writes Jason Sharman

Jason Sharman 6 November 2017 2129 words

The biggest tax haven of them all? The City of London. Simon Peyto/iStockphoto

Treasure Islands: Tax Havens and the Men Who Stole the World
By Nicholas Shaxson | Bodley Head | $35

Global finance has been interesting for all the wrong reasons over the past few years. This new book by journalist Nicholas Shaxson aims to shed light on a key, but generally overlooked, facet of the system: tax havens, also known as offshore financial centres. Rather than seeing tax havens as obscure curiosities at the margins of the global economy, Shaxson forcefully argues that “offshore” is in fact the essence of the modern, finance-dominated economic system. In his view, tax havens are responsible both for the glaring inequalities of wealth between and within countries and for the recurrent crises that roil the world economy. Treasure Islands is highly readable and fast-paced, benefitting from Shaxson’s experience writing about corruption in the African oil industry, and does an excellent job of making comprehensible even the most complicated financial wizardry.

The first of three tax-haven channels Shaxson describes, and the one he explores most thoroughly, is the new British empire said to have arisen since the mid 1950s. Having been shunted into second place as an economic power by the Americans during and immediately after the second world war, Britain saw the majority of its colonies breaking away. Faced with the prospect of unrelenting economic and political decline, the Bank of England and the financial industry hit on a system of off-the-books banking, and built up highly profitable links with the remaining outposts of empire. While American power waxed, Britain, or more specifically London, remained number one in finance, as in many ways it still is today.

In describing this new empire, Shaxson reveals the web of ties linking London financiers to the Channel Islands of Jersey and Guernsey (which are formally separate from Britain), Caribbean outposts like the Cayman and British Virgin Islands, and other centres like Hong Kong. Many are substantial players in their own right: the Cayman Islands, with not much more than 50,000 inhabitants, is commonly said to be the world’s fifth-largest banking centre. But according to Shaxson, the prime function of these centres is to feed money back into the imperial core (London) while providing “plausible deniability” in relation to the less savoury aspects of the business. The self-styled dissidents Shaxson interviews in the Caymans and Jersey paint an unflattering picture of governments in thrall to the finance industry, and heavy pressure to conform in communities not much larger than an average country town.

Some of the scandals referred to in the book have a fact-is-stranger-than-fiction quality: tins packed with secret financial documents hidden aboard a ship full of guano; the Caymanian offshore bank whose female tellers’ uniform was hotpants and leather; and Castle Bank, whose records were obtained by the US tax authorities through the expedient of hiring a prostitute to distract the chairman (though the case fell through when it turned out the CIA was one of the bank’s main customers). Though Shaxson has little to say about the South Pacific havens, they often have the same quality of unreality. Griffith University’s Anthony van Fossen has written about how Tonga’s entry to the offshore world was facilitated by the right-hand man of the American reclusive millionaire Howard Hughes, who redirected funds dedicated to cryogenically freezing his boss’s body, and how the “ambassadors” of the pseudo-states that claim various uninhabited Pacific islands peddle fraudulent government bonds.

But one of the most intriguing oddities Shaxson’s research throws up is the City of London itself: a medieval corporation governing the Square Mile that includes the headquarters of the largest and most prestigious banks and financial firms. In many instances exempted from British law thanks to thousand-year-old prerogatives, the City maintains its own corps of diplomats to lobby on the finance industry’s behalf around the world. The British monarch must request the permission of the lord mayor to enter the Square Mile, and the City has its own permanent representative in parliament.

Beyond the new British empire, predictably enough, the United States is an important player in the offshore world, though in some ways rather late to the game. Thanks to a more diversified economy, and the New Deal economic policy after the Great Depression, bankers were on a much shorter leash in the United States. This began to change from the 1970s, as the US government tired of seeing its firms take advantage of an offshore system, either in the Caribbean or London itself, run by the British. In a refrain that has been echoed hundreds of times since, the American financial sector argued that, because others allowed certain practices, the United States should do the same, or see business up and leave for greener pastures. (The Australian government has certainly not been immune to this siren song, allowing businesses to use “offshore banking units” after they threatened to decamp to Singapore.) While the United States has taken a very tough line on foreign countries sheltering American tax-evaders, the US government has resolutely protected tax evaders from Latin America who park their money in Florida, Texas and elsewhere. So while, for example, it is unacceptable for Switzerland to host American tax-avoidance money, it is apparently perfectly fine for the United States to host funds hidden from Mexican tax inspectors.

Switzerland is Shaxson’s home base, in the banking centre of Zurich where I met him late last year. Familiar to any James Bond fan, the Swiss numbered bank account is somewhat less than reputation suggests. There are no anonymous accounts, and of course all bank accounts in any country are numbered. Yet Switzerland has long had a law on its books that makes it a criminal offence for bank employees to reveal any information about account holders, even to the Swiss government itself. Bludgeoned by repeated outside campaigns, the Swiss have created more and more exceptions to this rule. Indicative of this changing attitude, Swiss banks were notably quicker than any others in suspending accounts connected with Hosni Mubarak and Muammar Gaddafi.

Yet in the era of WikiLeaks the Swiss model is vulnerable. In the tiny Principality of Liechtenstein next door, a bank employee, Heinrich Kieber, walked out the door with a CD containing the details of thousands of private accounts, which he sold to the German intelligence service for almost €5 million. This information was later on-sold to a variety of other national authorities, including the Australian Taxation Office. Kieber himself has been forced to assume a new identity, while various shady former customers offer a large reward for information as to his whereabouts.

As the book’s subtitle indicates, it’s fair to say that Shaxson doesn’t pull any punches in his assault on the offshore world of tax havens. Several charges stand out. The first of these is the worsening inequality in rich countries, as the wealthy use the offshore option to evade their tax obligations while everyone else foots the bill in terms of increased tax and/or decreased public services. The second is the continued poverty of much of the developing world, as corrupt leaders and tax-shy elites hide funds offshore. The third is the fact that criminals use havens to launder the flow of illicit money from drug trafficking and other illegal enterprises. Finally, tax havens are said to be responsible for producing the environment that gave rise to the global financial crisis.

Given Shaxson’s charge sheet, it might be difficult to imagine that the offshore world has its defenders (aside, of course, from those who directly profit from it). Yet tax havens do have their partisans, who have been highly effective in the past. One such outfit is the Washington-based Center for Freedom and Prosperity, led by Dan Mitchell. Mitchell is an engaging, larger-than-life figure whose right-wing politics have no equivalent in Australia. During a conversation in Sydney in 2007, he described George W. Bush to me as “a stupid, left-wing asshole.” Mitchell is ever one for the sound bite, a few of which are included in the book. For example, he tells Shaxson, “Some people fantasise about supermodels. I fantasise about having government at 5 per cent of GDP.” (Most rich countries’ governments consume 40–50 per cent of GDP.) In a presentation, Mitchell relates his concerns about where the United States is heading: “We will have a bigger government than any European welfare state — even France and Sweden... I don’t know if this means we’re going to have to stop using deodorant and train our army to surrender if there’s a war.” In Mitchell’s YouTube appearances he characterises the opponents of tax havens as tyrannical, socialistic and often, worst of all, French.

Defenders of tax havens point to two arguments in particular. The first is that havens promote tax competition between governments, which leads to positive outcomes for taxpayers, in the same way that competition between firms leads to better outcomes for consumers. The second argument is that big states are actually doing many of the same things as the Cayman Islands and other stereotypical tax havens, and that the small islands are being targeted only because they are so small and powerless. Shaxson is unimpressed by the idea of beneficial tax competition, but has mixed feelings about the second argument.

The claim that big states are being hypocritical when they attack island tax havens, because they are doing the same thing, is often hard to dispute. Treasure Islands is forthright on this score: Britain and the United States are the world’s two most important tax havens. But this blunt conclusion causes problems for the book, as it does for many people studying tax havens. It raises what seems like a simple question: what is a tax haven, and how can we tell them apart from “normal” countries?

WHETHER they’re experts or not, when people hear the term tax haven, the image that usually comes to mind is a small, faraway, exotic tropical island. As stereotypes go, this is fairly accurate. Small tropical islands in the Caribbean, Indian Ocean and South Pacific probably make up a majority of tax havens. In general, they have a population of under a million people, are former British colonies and, apart from financial services, rely on tourism and a couple of key primary industries for viability. Given this image of the typical haven, why would Shaxson lump Britain and the United States in the same category?

Shaxson defines tax havens as places that bid for outside business by helping people and companies escape regulations and laws at home. Most obviously, individuals and firms might be escaping tax obligations, but they might also be avoiding other sorts of financial regulations. The most useful feature that havens offer in achieving this goal is secrecy. In important instances Britain and the United States are actually the worst offenders in the provision of financial secrecy. In 2009 and 2010 I posed as a would-be tax evader looking to buy prohibited anonymous shell companies: companies that are a legal fiction with no assets or employees, and cannot be traced back to the real person in control. Approaching more than fifty incorporation agents in twenty-two countries, I found that such untraceable companies are much easier to obtain from Britain and especially the United States than from any of the usual suspect island states. Shaxson is right on the money in insisting that the most severe problems are caused by these two big countries rather than small havens.

Though our country is outside the scope of Shaxson’s work, there is no reason to believe that Australian public institutions are themselves squeaky clean. Two firms closely connected with the Reserve Bank of Australia are currently under investigation in Nigeria, Malaysia and Britain for secret multimillion-dollar “commissions” paid to accounts in the Bahamas, Seychelles and Switzerland in order to win tenders for printing local banknotes. Labor and Liberal senators have combined to block any investigation.

Underlying all these points, Treasure Islands argues that tax havens large and small are both the cause and the effect of the successful attempts by big finance to control and subvert political power. The ringing declarations about outlawing tax havens made by politicians like Barack Obama and Gordon Brown at the height of the crisis are shown to be so much cant. Shaxson concludes with a call to arms against a system that has so successfully privatised the gains and socialised the losses. The fact that governments here and abroad have equated the interests of the financial sector with the national interest shows how important this cause is, but also what tough odds it faces. •