shaxson intro

WELCOME TO NOWHERE
An Introduction to Offshore

THE OFFSHORE WORLD IS ALL AROUND US. Over half of world trade passes, at least on paper, through tax havens.1 Over half of all bank assets, and a third of foreign direct investment by multinational corporations, are routed offshore.2 Some 85 percent of international banking and bond issuance takes place in the so-called Euromarkets, a stateless offshore zone that we shall soon explore.3 Nearly every multinational corporation uses tax havens, and their largest users—by far—are on Wall Street.4
Tax havens don’t just offer an escape from tax. They also provide wealthy and powerful elites with secrecy and all manner of ways to shrug off the laws and duties that come along with living in and obtaining benefits from society—taxes, prudent financial regulation, criminal laws, inheritance rules, and many others. Offering these escape routes is the tax havens’ core line of business. It is what they do.
Before getting into the real story of offshore, this chapter will lay some basic groundwork for understanding tax havens, offering a few essential principles, some brief history, and a short overview of where the tax havens are located.


Nobody agrees exactly what a tax haven is, but I will offer a loose description here: It is a place that seeks to attract money by offering politically stable facilities to help people or entities get around the rules, laws, and regulations of jurisdictions elsewhere.5 This definition is quite broad, compared to some others, and I have chosen it for two main reasons. First, I aim to challenge a common idea that it is perfectly OK for one jurisdiction to exercise its sovereign right to get rich by undermining the sovereign laws and rules of other places. Second, I am offering a lens through which to view the history of the modern world. This definition will help me show how the offshore system is not just a colorful appendage at the fringes of the global economy but rather lies at its very center.
I should also make a short point here about some confusion in the language. When I say “offshore,” I obviously am not referring to offshore oil drilling. I am also not talking about “offshoring,” which is what happens when a company moves a manufacturing plant or, say, a call center from the United States to India or China, perhaps to save on labor costs. When I say “offshore,” I am talking about the artificial movement or use of money across borders, and about the jurisdictions, commonly known as tax havens, that host and facilitate this activity. Once the money has escaped offshore, it is reclassified in an accountant’s ledger and it assumes a different identity—and that means, very often, that the forces of law and order will never find it.
A number of features help us spot tax havens. Here are some important ones.
First, as my colleagues have found through painstaking research, all tax havens offer secrecy, in various forms. The term secrecy jurisdiction emerged in the United States in the late 1990s, and in this book I will use it interchangeably with tax haven. I will call the whole global structure of these places, and the private infrastructure that services them, the offshore system.
Another common marker for tax havens is very low or zero taxes, of course. People and corporations use them to escape tax, legally or illegally. Secrecy jurisdictions also have very large financial services industries in comparison to the size of the local economy. These places also routinely “ring-fence” their own economies from the facilities they offer to protect themselves from their own offshore tricks. So they might, for example, offer a zero tax rate to nonresidents who park their money there but tax local residents fully. This ring-fencing is a tacit admission that what they do is harmful.
Various other telltale signs exist. Tax havens usually deny what they are and strenuously assert that they are clean. Search for “We are not a tax haven” on the Internet or “We are a transparent, well regulated, and cooperative jurisdiction,” and see what comes up. Each has its own way of addressing the critics: In the Cayman Islands, for example, accusations of lax regulation after scandals are routinely dismissed as media stereotypes that do not correspond to objective reality.6
But there is one feature of a secrecy jurisdiction that stands out above all: that local politics is captured by financial interests from elsewhere (sometimes these financial interests are criminal interests). This is why I include “politically stable” in my definition: Meaningful opposition to the offshore business model will have been neutered in a serious tax haven, so that such irritants as local politics cannot interrupt the business of making money. And here lies one of the great offshore paradoxes: These zones of ultra-freedom for financial interests are so often repressive places, viciously intolerant of criticism. The offshore world is steeped in a pervasive inverted morality: Turning a blind eye to crime and corruption has become good business practice: a way of attracting money; while alerting forces of law and order to wrong-doing has become the punishable offense. Here in the tax havens, rugged individualism has morphed into a disregard, even a contempt, for democracy and for societies at large.


One of the first things to understand about offshore business is that it is, at heart, about artificially manipulating paper trails of money across borders. To get an idea of how artificial it can be, consider the banana.
A bunch of bananas typically takes two routes into your home: a real route and an artificial offshore paper trail. On the first route a Honduran worker, say, is employed by Big Banana, a U.S. multinational I’ve just invented, to pick the bananas, which are then packaged and shipped to Britain, sold to a supermarket, and sold on to a customer.
The second route—the accountants’ paper trail—is different. When a banana is picked in Honduras and shipped to Britain and sold, where are the final profits generated? In Honduras? In the British supermarket? In the multinational’s U.S. head office? And how do you work this out? How much do the corporation’s management expertise, or the brand name, or the insurance, or the accounting business, contribute to profits and costs? Which country ought to tax each component of the final profit? Nobody can say for sure, so the accountants can, up to a point, decide for themselves.
Here, in simple form, is what they might do. They advise Big Banana to run its purchasing network from, say, the Cayman Islands, and put a financial services subsidiary in Luxembourg. The Big Banana brand might be parked in Ireland; its shipping subsidiary in the Isle of Man; it might locate certain parts of its “management expertise” in Jersey, and its insurance arm in Bermuda. All are tax havens.
Next, each part of this multinational charges the other parts for the services they provide. So Big Banana’s Luxembourg finance subsidiary might lend money to Big Banana Honduras, then charge that Latin American subsidiary $10 million per year in interest payments for that loan. The Honduran subsidiary will deduct this $10 million from its local profits, cutting or wiping out its local profits (and consequently its tax bill) there. The Luxembourg finance subsidiary, however, will record this $10 million as income—but because Luxembourg is a tax haven, it pays no taxes on this. With a wave of an accountant’s wand, a hefty tax bill has disappeared. Who is to say that the $10 million charged by Big Banana Luxembourg is the real going rate—or just an accountant’s invention? Quite often it is hard to tell, although sometimes these prices are adjusted so aggressively that they lose all sense of reality: A kilo of toilet paper from China has been sold for $4,121.81, a liter of apple juice has been sold out of Israel at $2,052, and a ballpoint pen has been recorded leaving Trinidad valued at $8,500.
Though most examples are far less blatant than this, the cumulative total of these shenanigans is vast. About two-thirds of global cross-border world trade happens inside multinational corporations. And it is poor countries in particular, with their underpaid tax officials, that always lose out to multinationals’ aggressive, highly paid accountants.
What Big Banana has done here is transfer pricing (or mispricing), a common offshore trick that U.S. Senator Carl Levin calls “the corporate equivalent of the secret offshore accounts of individual tax dodgers.” The general idea is that by adjusting its internal prices a multinational can shift profits offshore, where they pay little or no tax, and shift the costs onshore, where they are deducted against tax. In the banana example, tax revenue has been drained out of a poor country and into a tax haven and funneled through to the wealthy owners of a multinational corporation. In October 2010 a Bloomberg reporter explained how Google Inc. cut its taxes by $3.1 billion in the previous three years through transfer pricing games known by names such as the “Double Irish” and “Dutch Sandwich,” ending up with an overseas tax rate of 2.4 percent.7 The problem is getting worse. Microsoft’s tax bill has been falling sharply, for similar reasons. Cisco is at it.8 They are all at it. Transfer pricing alone cost the United States an estimated $60 billion a year9—and that is just one form of the offshore tax game.
Worldly readers may still shrug and tell themselves that this is just part of the ugly flipside of living in a rich nation. If they do, in their reluctantly cynical way, they are suckers—for they are victims, too. The tax bill is cut not only in Honduras but in Britain and America too. The annual report of a real banana company listed in New York notes: “The company currently does not generate U.S. federal taxable income. The company’s taxable earnings are substantially from foreign operations being taxed in jurisdictions at a net effective rate lower than the U.S. statutory rate.”10 (Rough translation: We don’t currently pay U.S. taxes because we use tax havens.)
This may be quite legal—but when it happens, small businesses and ordinary folk must step in to pay the taxes that multinationals have escaped. “Small businesses are the lifeblood of local economies,” said Frank Knapp, member of a new group formed in 2010 called Business and Investors Against Tax Haven Abuse. “We pay our fair share of taxes, shop locally, support our schools, and actually generate most of the new jobs. So why do we have to subsidize multinationals that use offshore tax havens to avoid paying taxes?”
Multinationals, it has to be said, find it hard to cut their taxes to zero because governments take countermeasures. But it is a battle the governments are losing. The U.S. Government Accountability Office reported in 2008 that two-thirds of American and foreign companies doing business in the United States avoided income tax obligations to the federal government in the years 1998–2005, despite corporate sales totaling $2.5 trillion.11 Not only this, but the corporate transfer pricing abuses that I have just described are just one of several forms of tax abuse. Subsequent studies suggest the problem is getting worse.12
Transfer mispricing is one of the most important reasons that multinationals are multinationals and why they usually grow faster than smaller competitors. Anyone worried about the power of global multinationals should pay attention to tax havens.
It is not just your bananas, of course. Much of the food you eat will most likely have taken a similarly twisted route into your home. The water in your tap may have traveled on a similarly ghostly paper pathway en route to your bathtub. Your television, its component parts, and many of the programs it shows also likely took offshore routes into your living room. The offshore world envelops us.
All these offshore games make markets profoundly inefficient. Wealth has been transferred from poor taxpayers to rich shareholders—but nobody has produced a better or cheaper banana here. These are untargeted government subsidies for multinationals, courtesy of the tax havens, and they don’t make multinationals more productive. When corporate managers focus on tax dodging they take their eyes off what they do best—making better goods and delivering them more cheaply to market. Add to that the time and billions wasted paying expensive accountants and lawyers to conjure up these schemes. And then there is the secrecy. A fundamental building block of modern economic theory is transparency: Markets work best when two sides to a contract have access to equal information. Treasure Islands explores a system that works directly and aggressively against transparency. Offshore secrecy shifts control over information and the power that flows from it toward the insiders, helping them take the cream and use the system to shift the costs and risks onto the rest of society.
David Ricardo’s theory of comparative advantage elegantly describes principles that lead different jurisdictions to specialize in certain things: fine wines from France, cheap manufactures from China, and computers from the United States. But when we find that the British Virgin Islands, with fewer than twenty-five thousand inhabitants, hosts over eight hundred thousand companies, or that more than 40 percent of foreign direct investment into India comes from Mauritius, Ricardo’s theory loses its traction. Companies and capital migrate not to where they are most productive but to where they can get the best tax break. There is nothing “efficient” about any of this.


The world contains about 60 secrecy jurisdictions, or tax havens, which can be divided roughly into four groups: a set of continental European havens, a British zone of influence centered on the City of London and loosely shaped around parts of Britain’s former empire, a zone of influence focused on the United States, and a fourth category holding unclassified oddities like Somalia and Uruguay.
The European havens got going properly from the First World War, as governments raised taxes to pay for their war costs. Switzerland’s famous secrecy law, making violation of banking secrecy a criminal offense for the first time, was enacted in 1934 in response to a French tax evasion scandal, though Geneva bankers had sheltered the secret money of European elites since at least the eighteenth century.13 Picturesque, little-known Luxembourg, specializing since 1929 in certain kinds of offshore corporations,14 is among the world’s biggest tax havens today: Well over $2.5 trillion is parked offshore in Luxembourg.15 In March 2010 South Korean intelligence officials indicated that North Korea’s “Dear Leader” Kim Jong-Il had stashed some $4 billion in Europe—profit from the sale of nuclear technology and drugs, insurance fraud, counterfeiting, and projects using forced labor; Luxembourg, they said, is a favored destination for the money.16
The Netherlands is another major European tax haven. In 2006, while the Irish musician Bono browbeat Western taxpayers to boost aid to Africa, his band, U2, shifted its financial empire to the Netherlands to cut its own tax bills. Austria and Belgium are also important European havens of banking secrecy, though Belgium softened its laws in 2009. A couple of other small European micro-state havens are worth noting, including Monaco and Andorra, with occasional cameo roles from odd places like the Portuguese Islands of Madeira, which was central to a major Nigerian bribery scandal involving the U.S. oil service company Halliburton17 that resulted in the second largest fine ever paid in a prosecution under the Foreign Corrupt Practices Act.


The second offshore group, accounting for about half the world’s secrecy jurisdictions, is the biggest. This is a layered hub-and-spoke array of tax havens, centered on the City of London, which mostly emerged from the ashes of the British empire.18 As I will show, it is no coincidence that the City of London, once the capital of the greatest empire the world has known, is the center of the most important part of the global offshore system.
The City’s offshore network has three main layers. Its inner ring consists of Britain’s three Crown Dependencies: the nearby islands of Jersey, Guernsey, and the Isle of Man. The authoritative U.S. publication Tax Analysts estimated conservatively in 2007 that just these three havens hosted about $1 trillion of potentially tax- evading assets.19 At a reasonable annual rate of return of 7 percent and a top income tax rate of 40 percent, the tax evaded on those could be almost $30 billion per year—and income tax evasion is just one of several forms of offshore tax and financial losses. Other losses, which I will explain below, are far bigger.
The next, intermediate ring involves Britain’s 14 overseas territories, the last surviving outposts of Britain’s formal empire. With just a quarter of a million inhabitants between them, they include some of the world’s top secrecy jurisdictions: the Cayman Islands, Bermuda, the British Virgin Islands, Turks and Caicos, and Gibraltar.20 Like the Crown Dependencies, these places are partly independent from Britain—though Britain controls events behind the scenes. In the Caymans, for instance, Her Majesty the British Queen appoints His Excellency the Governor, the most powerful person on the island. He (never a she, so far) presides over a cabinet of local Caymanians who are elected locally but who have almost no power over the stuff that matters—the money. The governor handles defense, internal security, and foreign relations; he appoints the police commissioner, the complaints commissioner, the auditor general, the attorney general, the judiciary, and other top officials. The final appeal court is the Privy Council in London. MI6, Britain’s Secret Intelligence Service, is highly active here21 (as are the CIA and several other intelligence services).
The Cayman Islands is the world’s fifth largest financial center, hosting eighty thousand registered companies, over three-quarters of the world’s hedge funds, and $1.9 trillion on deposit—four times as much as in all the banks in New York City. And it has, at the time of writing, one cinema.
To indicate how murky things are here, the Cayman Islands reported in 2008 that institutions based there had $2.2 trillion in borrowings but had only lent out a third of that amount—even though these figures should match each other, more or less. The UK and Caymans authorities have not explained this $1.5 trillion discrepancy.22
The third, outer ring is a more diverse array of havens like Hong Kong and the Bahamas, which are outside Britain’s direct control but nevertheless have strong historical links to the empire and deep current links to the City of London. One authoritative account estimates that this three-layered British grouping accounts for well over a third of all international bank assets worldwide. Adding the City of London itself brings the total up to nearly a half.23
This network of offshore satellites does several things for the City of London. First, it gives it a global reach: These havens scattered around the world attract and catch mobile international capital flowing to and from nearby jurisdictions, just as a spider’s web catches passing insects. Money attracted to these jurisdictions, and much of the business of managing that money, is funneled through to London. A lot of U.S. business is attracted to the Cayman Islands, and this gives the City of London the chance to get a slice of the action. Second, the spiderweb24 lets the City get involved in business that might be forbidden in Britain, giving the financiers in London sufficient distance from wrongdoing to allow plausible deniability. By the time the money gets to London, often via several intermediary jurisdictions, it has been washed clean. The old City of London adage “Jersey or Jail” means that if you want to do a certain type of business but don’t want to get caught, you just step out into the Jersey part of the spiderweb and do it there. Sometimes, business too dirty for the Crown Dependencies is farmed out further into the spiderweb. John Christensen, formerly a Jersey financial sector professional, remembers the Overseas Territory of Gibraltar being one particular favorite. “We in Jersey regarded Gibraltar as totally subprime,” he said. “This was where you put the real monkey business.” Later, a Caymanian character who introduced himself to me only as “The Devil” will help illustrate just how dirty this business can be.
Britain’s understated, ambiguous, but ultimately controlling role in these nodes of the spiderweb is the bedrock that reassures flighty global capital and underpins their offshore sectors. The gesture toward local representation keeps Caymanians happy and gives Britain the chance to say “it is not our business to interfere” when something unpleasant breaks the surface, or when other countries complain of abuses being perpetrated out of there. Periodically, the charade of the overseas territories is exposed: In August 2009 Britain imposed direct rule in the Turks and Caicos Islands after corruption there spun too far out of control.25 Britain plays down these episodes, as far as is possible, to distract attention away from its real control.
The outer reaches of the British spiderweb consist of a more complex and varied set of places that are independent from Britain, but with a history of involvement with the British empire or zones of close influence, and with enduring and powerful links with the City of London. The biggest are Hong Kong, Singapore, the Bahamas, Dubai, and Ireland,26 though many others exist, like Vanuatu in the South Pacific, whose small offshore center was created by the British government in 1971, nine years before independence. New ones continue to emerge: In February 2006, for example, Ghana said it would set up offshore legislation with help from Britain’s Barclays Bank. The thought of a new African secrecy jurisdiction in the midst of a swath of legendarily corrupt African oil-producing nations—and just as Ghana takes its own first steps as a big oil producer—is almost too horrible to contemplate. Botswana, right next to South Africa, is setting up its offshore center too.
One might ask why the United States has more or less tolerated the presence of British-run places parked off its eastern and southern coastline, eroding its tax base and undermining its laws and financial regulations. The answer isn’t straightforward. U.S. officials have periodically tried to crack down on offshore tax abuse, at least since 1961, when President Kennedy asked Congress for legislation to drive these tax havens “out of existence,”27 but have been thwarted each time by powerful interests on Wall Street. A U.S. Government Accountability Office (GAO) report from December 2008 provides a clue as to their power, showing that Citigroup had 427 tax haven subsidiaries, of which 290 were in the British spiderweb. The next biggest user was Morgan Stanley with 273 offshore subsidiaries (of which 220 were in the British zone), then News Corporation with 152, of which 140 were in the British zone.28
In these numbers lies another important point to understand from the outset. People have traditionally seen tax havens as marginal players used by mafiosi, drug smugglers, spies, petty criminals, and celebrity tax-dodgers. Plenty of these can be found offshore, it is true.29 But I need to stress again: The big users of the secrecy jurisdictions are the banks and other financial institutions.
I am struck by similarities between Britain’s postcolonial offshore network and what I encountered in oil-rich Gabon, the epicenter of France’s own very strange, quasi-offshore postcolonial system. Gabon fits no conventional definition of a tax haven, but it is, like the havens in the British spiderweb, a relic (or even a rebirth) of a colonial empire that is being used by elites to do things—often unpleasant ones—that would not be allowed at home. The Elf system, with its subterranean bargains with African rulers and French politicians, was a way for France to retain a great degree of control over its former colonies after independence. Britain’s spiderweb is different—most of its former colonies in Africa, India, and elsewhere really are independent. But what Britain has done instead is to retain a large degree of control of the vast flows of wealth in and out of these places, under the table. Illicit capital flight from Africa, for example, flows mostly into the modern British spiderweb, to be managed in London. In both the French and the British systems, powerful interest groups in the old colonial powers have built secret financial relationships with the local elites, creating global alliances with each other against the ordinary citizens of these poor countries—and against their own citizens too.


The United States anchors the third big offshore pole. Before the great global offshore explosion began in the 1960s and the 1970s, the U.S. government was generally hostile to offshore business, and its leaders fought against the British spiderweb and the European havens. But as the 1970s wore on financial interests became increasingly influential in U.S. policymaking, and the country, facing large Vietnam War–era deficits and increasingly adopting an “if you can’t beat ’em, join ’em” attitude toward tax havens, began consciously adopting its own offshore characteristics—particularly special tax incentives and secrecy structures available to foreigners—in efforts to attract financial capital into the United States to fill the deficits.
So there are two things going on here: Tax revenues and other money are being drained out of the United States into tax havens elsewhere, and a flow of foreign (often dirty) money is moving in the other direction back into the country. The United States is estimated to be losing $100 billion annually from offshore tax abuses—a gigantic transfer of wealth from ordinary taxpayers to rich people.30 And that is not to mention the role the offshore system plays as a giant hothouse for international crime and fraud or its role in undermining financial regulation, which I shall get to.
But the money flowing into tax haven USA does not make up for the money and tax revenues being drained out. The inflows have made matters worse still for ordinary U.S. taxpayers, let alone for foreigners being stiffed by their own wealthy and unaccountable elites. As the following chapters will show, the inflows delivered massive rewards to a small financial elite, while helping Wall Street to gain its too-big-to-fail stranglehold on the U.S. economy and the politicians in Washington. “Tax havens are engaged in economic warfare against the United States, and honest, hardworking Americans,” says Senator Carl Levin. He is quite right—but we should add that the United States in its role as a tax haven is conducting economic warfare against honest, hardworking people at home and around the world.
Like the British offshore system, the U.S.-based offshore system operates on three tiers.
At the federal level, on the top tier, the United States dangles a range of special tax exemptions, secrecy provisions, and laws designed to attract foreigners’ money into the United States in true offshore style. U.S. banks may, for instance, legally accept proceeds from a range of crimes, such as handling stolen property—as long as the crimes are committed overseas. Special arrangements are made with banks to make sure they do not reveal the identities of foreigners parking their money in the United States.
The second offshore tier involves individual U.S. states. A range of different things are happening, in a number of states. Florida, for example, is where Latin American elites do their banking, and the United States generally does not share banking information with those countries, so a lot of this is tax-evading and other criminal money, protected by U.S. secrecy. Florida’s banks also have a long history of harboring Mob and drug money, often in complex partnerships with the nearby British Caribbean havens. On a different tack, smaller U.S. states like Wyoming, Delaware, and Nevada have become specialists in offering low-cost and very strong forms of almost unregulated corporate secrecy, which has attracted illicit money, and even terrorist money, from around the globe.
The third U.S. offshore rung is an overseas satellite network, far smaller than the British zone. One is the U.S. Virgin Islands, a U.S. “Insular Area” and a minor haven used by Bank of America, Boeing, FedEx, and Wachovia, among others.31 A more interesting haven in the U.S. zone is the Marshall Islands, a former Japanese colony under U.S. control since 1947, now under a Compact of Free Association with the United States. It is primarily the host for a “flag of convenience” service that, The Economist magazine recently noted, is “much prized among shipowners for its light regulatory touch.” The Marshall Islands registry was set up in 1986 with USAID help by Fred M. Zeder II, a golfing buddy of George H. W. Bush who later ran the United States Overseas Private Investment Corp. (OPIC), and its flag of convenience service is run by a private U.S. corporation out of offices in Reston, Virginia, near Washington Dulles Airport. The Marshall Islands provides the anything-goes, unregulated flag for, among many others, the Deepwater Horizon, the BP-operated oil rig that caused environmental chaos off the U.S. Gulf Coast in 2010.32
A small, opaque tax haven also grew alongside the Marshall Islands shipping registry, which the GAO reckoned was being used by ConocoPhilips, Morgan Stanley, and News Corp. When Khadija Sharife, a South African journalist, posed as a shipping client pretending to be worried about disclosure, she was told that forming a Marshall Islands company could be done in a day for an initial filing fee of $650 plus annual fees of $450, and
If the authorities . . . come to our Registry and Jurisdiction and ask to disclose more information, regarding shareholders, directors of the company etc.… we are not privy to that information anyway, since all the business organization and conduct of the entity is performed by the entity’s lawyers and directors directly. Unless the name of directors and shareholders are filed in the Marshall Islands and become a public record (which is NOT mandatory), we are not in a position to disclose that information.33
In Africa, Liberia was set up in 1948 as a “flag of convenience” by Edward Stettinius Jr., a former U.S. secretary of state, and its maritime code was “read, amended, and approved by officials of Standard Oil,” according to the historian Rodney Carlisle. Its sovereign shipping registry is now run by another private U.S. corporation out of Vienna, Virginia, about five miles from the Marshall Islands registry.34 Sovereignty is, literally, available for sale or rent in such places.
The biggest tax haven in the U.S. zone of influence is Panama. It began registering foreign ships from 1919 to help Standard Oil escape U.S. taxes and regulations, and offshore finance followed: Wall Street interests helped Panama introduce lax company incorporation laws in 1927, which let anyone open tax-free, anonymous, unregulated Panama corporations with few questions asked. “The country is filled with dishonest lawyers, dishonest bankers, dishonest company formation agents and dishonest companies,” one U.S. Customs official noted. “The Free Trade Zone is the black hole through which Panama has become one of the filthiest money laundering sinks in the world.”35
This strange and little-known U.S.-centered pattern, echoing the neocolonial role of the secrecy jurisdictions in the British zone, provides a pointer to the fact that the secrecy jurisdictions have for years quietly been at the heart of neoconservative schemes to project U.S. power around the globe. And almost nobody has noticed.


It should be clear by now that the offshore world is not a bunch of independent states exercising their sovereign rights to set their laws and tax systems as they see fit. It is a set of networks of influence controlled by the world’s major powers, notably Britain, the United States, and some jurisdictions in Europe. Each network is deeply interconnected with, and warmly welcomes offshore business from, the others. Wealthy U.S. individuals and corporations use the British spiderweb extensively: Enron, for example, had 881 offshore subsidiaries before it went bust, of which 692 were in the Cayman Islands, 119 in the Turks and Caicos, 43 in Mauritius, and 8 in Bermuda, all in the British spiderweb. The United States returns the favor to wealthy British interests investing tax-free, in secrecy, via Wall Street.
Not only that, but the world’s most important tax havens in their own right are not exotic palm-fringed islands but some of the world’s most powerful countries themselves. Marshall Langer, a prominent supporter of secrecy jurisdictions, neatly describes the misperceptions that have grown up about tax havens. “It does not surprise anyone when I tell them that the most important tax haven in the world is an island,” he said. “They are surprised, however, when I tell them that the name of the island is Manhattan. Moreover, the second most important tax haven in the world is located on an island. It is a city called London in the United Kingdom.”36
Jason Sharman, an Australian academic, checked how easy it was to set up secrecy structures, using the Internet and those seedy offshore advertisements that infest the back pages of business publications and airline magazines. In his report published in 2009 he records making forty-five bids for secret front companies. Money laundering controls seem to be in operation patchily, but of those 45 bids, 17 companies agreed to set them up without even checking his identity. Only four of these were in the “classic” havens like Cayman or Jersey, while the other 13 were in countries from the wealthy Organisation for Economic Cooperation and Development (OECD), including seven in Britain and four in the United States.
What Sharman was encountering, The Economist magazine noted, was not traditional Swiss banking secrecy, where discreet men in plush offices promised to take their clients’ names to the grave. “This is a more insidious form of secrecy, in which authorities and bankers do not bother to ask for names…. For shady clients, this is a far better proposition: what their bankers do not know, they can never be forced to reveal. And their method is disarmingly simple. Instead of opening bank accounts in their own names, fraudsters and money launderers form anonymous companies, with which they can then open bank accounts and move assets.”37 The United States, Sharman noted, was offering nonresident foreigners all the elements of a tax haven, notably no taxes and secrecy. As he put it, “The United States, Great Britain and other OECD states have chosen not to comply with the international standards which they have been largely responsible for putting in place.”
Rich OECD nations have worked hard to persuade their publics that there has been a major crackdown on the secrecy jurisdictions. “The old model of relying on secrecy is gone,” said Jeffrey Owens, head of tax at the OECD. “This is a new world, with better transparency and better cooperation.”38 Many people believed him. French president Sarkozy went further. “Tax havens and bank secrecy,” he said, “are finished.”39 Yet big OECD member states are the guardians and promoters of the offshore system. It continues to process vast tides of illicit money—yet an OECD blacklist of tax havens is effectively a whitewash, as I will explain later.40 And to the very, very limited extent that rich countries have tried to address the problem, low-income countries are being left on the sidelines as usual.
When the fox announces that it has done an excellent job of beefing up the security of the henhouse, we should be very cautious indeed.


The offshore world is an endlessly shifting ecosystem, and each jurisdiction offers one or more offshore specialties. Each attracts particular kinds of financial capital, and each develops a particular infrastructure of skilled lawyers, accountants, bankers, and corporate officers to cater to their specific needs.
Yet few people are even aware that such businesses exist. You may well have heard of the Big Four accounting firms KPMG, Deloitte, Ernst & Young, and PricewaterhouseCoopers. But have you heard of the Offshore Magic Circle? Its members are made up of highly profitable multijurisdictional law firms mostly originating in Britain or its Overseas Territories and Crown Dependencies: a smartly dressed regiment of accountants, lawyers, and bankers forming a private global infrastructure that, in league with captured legislatures in the secrecy jurisdictions, makes the whole system work.
Offshore services range from the legal to the illegal, with a huge gray area in between. In terms of tax, the illegal stuff is called tax evasion, while tax avoidance is technically legal, though, by definition, it also involves getting around the intent of elected legislatures. To distinguish between evasion and avoidance is a slippery business, and it often takes vast, lengthy court cases to find out which side of the law a multinational corporation’s tax shelter lies on. Former British chancellor Dennis Healey gave a neat definition of where the dividing line lies. “The difference between tax avoidance and tax evasion,” he said, “is the thickness of a prison wall.”41 Even when offshore is not technically illegal, it is often a problem. Secrecy jurisdictions routinely convert what is technically legal, but abusive, into what is seen as legitimate. Of course what is legal is not necessarily what is right: think slavery, or apartheid.
Illegal offshore services and structures include tax-evading private banking or asset management, sham trusts, corporate secrecy, illegal reinvoicing, regulatory evasion, fraud concealment, and many, many other nefarious possibilities. These are often hidden behind soothing bromides like “tax optimization” or “asset protection” or “efficient corporate structure.”
On the tax side, one important matter concerns something known as double taxation. Say a U.S. multinational invests in a manufacturing plant in Brazil and earns income there. If both countries taxed the same income, without giving credits for the other country’s taxes, the multinational would get taxed twice. Tax havens do help companies eliminate this double taxation—though you don’t need tax havens for this: It can be ironed out with appropriate treaties and tax credits between countries. But when tax havens eliminate double taxation, something else happens too: double nontaxation. In other words, not only does the corporation avoid being taxed twice on the same income. It also avoids being taxed at all. I will explore this strange and complex area in a little more detail later.
Each jurisdiction tolerates different levels of dirt. Terrorists or Colombian drug smugglers would probably use Panama, not Jersey—though Jersey’s trust company sector in particular, handling several hundreds of billions of dollars’ worth of assets, continue to make the island a sink for nefarious activity and illicit, tax-evading loot, notwithstanding Jersey’s routine claims to be a “transparent, well-regulated and cooperative jurisdiction.” Bermuda is a magnet for offshore insurance and reinsurance, frequently for the purpose of avoiding tax; the Caymans are favored locations for hedge funds, frequently for the purposes of escaping tax, legally or illegally, but more often to get around certain kinds of financial regulation. In securitization, the practice of packaging up mortgage loans and other assets to sell on to investors—a major contributor to the latest financial crisis—Wall Street has long favored locating its Special Purpose Vehicles (SPVs) in the Caymans and Delaware; in Europe the preferred locations for SPVs are Jersey, Ireland, Luxembourg, and the City of London. All are, as this book will show, major secrecy jurisdictions.
Tax havens often target specific other large economies, usually nearby. Switzerland’s wealth managers focus quite heavily on getting business from tax-evading rich Germans, French, and Italians—corresponding to Switzerland’s immediate neighbors and to Switzerland’s three main language groups—though they are open to all comers from around the world. Monaco caters especially to French elites, while some wealthy French and Spaniards use Andorra, sandwiched in the eastern Pyrenees between the two larger countries. Rich Australians often use Pacific havens like Vanuatu; a lot of illicit North African money finds itself routed through Malta, another former British outpost in the Mediterranean Sea. U.S. and Latin American corporations and wealthy individuals use Panama and the Caribbean havens for a lot of their business, while wealthy Chinese tend to use Hong Kong, Singapore, and Macau.
Some jurisdictions specialize as conduit havens: way stations offering services that transform the identity or character of assets in specific ways, en route to somewhere else. The Netherlands is a big conduit haven: About €4.5 trillion (US $6.6 trillion) flowed through Dutch Special Financial Institutions in 2008—equivalent to over nine times the Dutch GDP.42 Mauritius, off the African coast in the Indian Ocean, is a new and fast-growing conduit haven that is the source of over 40 percent of foreign investment into India. It also specializes in channeling Chinese investments into Africa’s mineral sectors. Money does not always flow through obvious geographical routes, however: Russian dirty money has favored Cyprus, Gibraltar, and Nauru, all with strong historical British links, as stepping-stones where it can be legitimized before entering the mainstream global financial system in London and elsewhere. A large amount of foreign investment into China goes via the British Virgin Islands.
Offshore financial structures typically involve a trick sometimes known as laddering—a practice also expressed by the French word saucissonage, meaning to slice something into pieces like a sausage. When you slice a structure among several jurisdictions, each provides a new legal or accounting “wrapper” around the assets that can deepen the secrecy and the complexity protecting the assets. A Mexican drug dealer may have $20 million, say, in a Panama bank account. The account is not in his name but is instead under a trust set up in the Bahamas. The trustees may live in Guernsey, and the trust beneficiary could be a Wyoming corporation. Even if you can find the names of that company’s directors, and even get photocopies of their passports—that gets you no closer: These directors will be professional nominees who direct hundreds of similar companies. They are linked to the next rung of the ladder through a company lawyer, who is prevented by attorney-client privilege from giving out any details. Even if you break through that barrier you may find that the corporation is held by a Turks and Caicos trust with a flee clause: The moment an inquiry is detected, the structure flits to another secrecy jurisdiction. Even if a jurisdiction cooperates with inquiries, it can drag its feet for months or years. “Even when they cooperate to eliminate the fraud,” Robert Morgenthau, until recently the Manhattan district attorney, said of the Caymans, “it takes so long that when the door is finally closed, the horse has been stolen and the barn has burned down.”43 At the time of writing, Hong Kong is preparing legislation to allow incorporation and registration of new companies within minutes.
In 2010 Luxembourg’s authorities pleaded this laddering as an excuse for potentially harboring North Korean money. “The problem is that they do not have ‘North Korea’ written all over them,” a spokesman said. “They try to hide and they try to erase as many links as possible.”44 That is, after all, the point. Magistrates in France only ever saw a limited part of the Elf system because of this saucissonage. “The magistrates are like sheriffs in the spaghetti westerns who watch the bandits celebrate on the other side of the Rio Grande,” wrote the magistrate Eva Joly, furious about how tax havens stonewalled her probes into the Elf system. “They taunt us—and there is nothing we can do.”
Even if you can see parts of the structure, the laddering stops you from seeing it all—and if you can’t see the whole, you cannot understand it. The activity doesn’t happen in any jurisdiction—it happens between jurisdictions. “Elsewhere” becomes “nowhere”: a world without rules.


I already mentioned some ballpark numbers suggesting how big the offshore system has become: half of all banking assets, a third of foreign investment, and more. But there have been very few attempts to quantify the damage that this system causes. This is partly because it is so hard to measure, let alone detect, secret, illicit things. But it is also because nobody wants to know.
Recently, however, a few organizations have sought to assess the problem’s scale. In 2005 the Tax Justice Network estimated that wealthy individuals hold perhaps $11.5 trillion worth of wealth offshore. That is about a quarter of all global wealth and equivalent to the entire GDP of the United States. That much money in hundred-dollar bills, placed end to end, would stretch twenty-three times to the moon and back. The estimated $250 billion in taxes lost each year on the income that money earns is two to three times the size of the entire global aid budget to tackle poverty in developing countries.
But that sum just represents the taxes lost on money wealthy individuals hold offshore. A much bigger transfer of wealth is occurring through illicit financial flows across borders from developing countries into secrecy jurisdictions and rich countries. The most comprehensive study of this comes from Raymond Baker’s Global Financial Integrity (GFI) Program at the Center for International Policy in Washington. Developing countries, GFI estimated in January 2011, lost a staggering $1.2 trillion in illicit financial flows in 2008—losses that had been growing at 18 percent per year since 2000.45 Compare this to the $100 billion in total annual foreign aid, and it is easy to see why Baker concluded that “for every dollar that we have been generously handing out across the top of the table, we in the West have been taking back some $10 of illicit money under the table. There is no way to make this formula work for anyone, poor or rich.” Remember that the next time some bright economist wonders why aid to Africa is not working. We are clearly talking about one of the great stories of our age.
In a separate study subsequently endorsed by the World Bank,46 Baker estimated that only about a third of total illicit cross-border flows represent criminal money—from drug smuggling, counterfeit goods, racketeering, and so on. Corrupt money—local bribes remitted abroad or bribes paid abroad—added up to just 3 percent of the total. The third component, making up two-thirds, is cross-border commercial transactions, about half from transfer pricing through corporations. His research underlines the point that illicit offshore flows of money are far less about the drug smugglers, mafiosi, celebrity tax exiles, and fraudsters of the popular imagination and mostly about corporate activity.
And out of this emerges another profoundly important point. The drug smugglers, terrorists, and other criminals use exactly the same offshore mechanisms and subterfuges—shell banks, trusts, dummy corporations, and so on—that corporations use. “Laundered proceeds of drug trafficking, racketeering, corruption, and terrorism tag along with other forms of dirty money to which the United States and Europe lend a welcoming hand,” said Baker. “These are two rails on the same tracks through the international financial system.” We will never beat the terrorists or the heroin traffickers unless we confront the whole system—and that means tackling the tax evasion and avoidance and financial regulation and the whole paraphernalia of offshore. It is hardly surprising, in this light, that Baker estimates that the U.S. success rate in catching criminal money was 0.1 percent—meaning a 99.9 percent failure rate.
And that is only the illegal stuff. The legal offshore tax avoidance by individuals and corporations, which further gouges honest hardworking folks, adds hundreds of billions of dollars to these figures.
Almost no official estimates of the damage exist. The Brussels-based nongovernmental organization Eurodad has issued a limited-edition book called Global Development Finance: Illicit Flows Report 2009, which seeks to lay out, over a hundred pages, all of the comprehensive official estimates of global illicit international financial flows.47 Every page is blank.
Eurodad’s gimmick underscores a vital point: There has been an astonishing blindness on the part of the world’s most powerful institutions to this system that has effected the greatest transfer of wealth from poor to rich in the history of the planet. As the sociologist Pierre Bordieu once remarked, “The most successful ideological effects are those which have no need for words, and ask no more than complicitous silence.”
Language itself encourages the blindness. In September 2009, the G20 group of countries pledged in a communiqué to “clamp down on illicit outflows.” Now consider the word outflows. Like the term capital flight, it points the finger at the victim countries like Congo or Nigeria or Mexico—which, this language subtly insists, must be the focus of the cleanup. But each flight of capital out of a poor country must have a corresponding inflow somewhere else. Imagine how different that pledge would be if the G20 had promised to tackle “illicit inflows.”
Bad tax systems are pushing some nations toward becoming failed states. “Countries that will not tax their elites but expect us to come in and help them serve their people are just not going to get the kind of help from us that they have been getting,” Hillary Clinton said in September 2010, to widespread and bipartisan applause. “Pakistan cannot have a tax rate of 9 percent of GDP when land owners and all of the other elites do not pay anything or pay so little it’s laughable, and then when there’s a problem everybody expects the United States and others to come in and help.”48 Leave aside for a moment the hypocrisy involved when the United States preaches to developing countries about abusive tax systems while welcoming tides of their illicit money and wrapping it in secrecy. Clinton’s basic point is still valid. Wealthy Pakistanis are as enthusiastic about tax havens as elites in any other poor country, and their ability to escape from any responsibility to their societies while leaving everyone else to pick up the tab is one of the great factors corrupting the state and undermining its citizens’ confidence in their rulers. This is a security issue as much as anything else.
Even this is not all. The global offshore system was one of the central factors that helped generate the latest financial and economic crisis since 2007. Offshore did not exactly cause the financial crisis: It created the enabling environment for the conditions underlying the crisis to develop. “Trying to understand the role that offshore secrecy and regulatory havens have in the crisis,” Jack Blum explains, “is like the problem a doctor has treating a metabolic disease with multiple symptoms. You can treat several symptoms and still not cure the disease. Diabetes, for instance, causes high cholesterol, high blood pressure, and all sorts of other problems. There are plenty of discrete aspects of the meltdown to talk about and many possible treatments for symptoms, but offshore is at the heart of this metabolic disorder. Its roots reach back decades, in bankers’ attempts to escape regulation and taxation and make banking a highly profitable growth business that mimics the industrial economy.”49
I will explore this in more detail later—but here is a very short summary of some basic reasons why offshore is implicit in the latest economic crisis.
President Roosevelt’s New Deal in the 1930s inflicted a lasting defeat on financial capital, blaming it for the horrors of the Great Depression and tying it down with constraints that would ensure that the financial services sector would contribute to economic development, not undermine it. The New Deal was a great success, but it began to unravel properly just before the 1960s, when Wall Street found its offshore escape route from taxes and domestic regulations: first in London (the subject of chapter 4) then further afield in the British spiderweb and beyond. The offshore system provided Wall Street with a “get out of regulation free” card that enabled it to rebuild its powers overseas and then, as the United States turned itself in stages into a tax haven in its own right, at home. The end result was that the biggest banks were able to grow large enough to attain “too big to fail” status—which helped them in turn to become increasingly influential in the bastions of political power in Washington, eventually getting a grip on both main political parties, Democrat and Republican—a grip that is so strong that it amounts to political capture.
Part of this process has involved a constant race to the bottom between jurisdictions. When a tax haven degrades its taxes or financial regulations or deepens its secrecy facilities to attract hot money from elsewhere, other havens degrade theirs too, to stay in the race. Meanwhile, financiers threaten politicians in the United States and other large economies with the offshore club—“don’t tax or regulate us too heavily or we’ll leave,” they cry—and the onshore politicians quail and relax their own laws and regulations. As this has happened, onshore has increasingly taken on the characteristics of offshore. In the large economies, tax burdens are being shifted away from mobile capital and corporations onto the shoulders of ordinary folks. U.S. corporations paid about two-fifths of all U.S. income taxes in the 1950s; that share has fallen to a fifth.50 The top 0.1 percent of U.S. taxpayers saw their effective tax rate fall from 60 percent in 1960 to 33 percent in 2007, while their share of the income pie soared.51 Had the top thousandth paid the 1960 rate, the federal government would have received over $281 billion more in 2007.52 When the billionaire Warren Buffett surveyed members of his office he found that he was paying the lowest tax rate among his office staff, including his receptionist. Overall, taxes have not generally declined. What has happened is that the rich have been paying less, and everyone else has been forced to take up the slack. The secrecy jurisdictions, in partnership with changing ideologies, are the biggest culprits.
The next factor behind the latest economic crisis is the huge illicit cross-border flows of money that have on a net basis flowed very significantly into deficit countries like the United States and Britain, adding very substantially to the more visible macroeconomic imbalances that fostered the crisis. Meanwhile, zero-tax offshore incentives helped encourage companies to borrow far too much, injecting more risk and leverage into the financial system. In addition, financial and other firms have been festooning their financial affairs around the world’s tax havens for reasons of tax, regulation, or secrecy—and the resulting complexity, mixed with offshore secrecy, made their financial affairs impenetrable to regulators and investors alike, eventually feeding the mutual mistrust between market players that helped trigger the crisis.
And now, to cap it all, the system is providing our richest citizens and corporations with escape routes from tax and regulation, meaning that it is ordinary people who will have to pay the costs to clean up this giant mess. The harm that stems from all this is incalculable.
Yet this is not a book about the financial crisis. It is about something older and deeper.
Deregulation, freer flows of capital, and lower taxes since the 1970s—most people think that these globalizing changes have resulted primarily from grand ideological shifts and deliberate policy choices ushered in by such leaders as Margaret Thatcher and Ronald Reagan. Ideology and leaders matter, but few have noticed this other thing: the role of the secrecy jurisdictions in all of this—the silent warriors of globalization that have been acting as berserkers in the global economy, forcing other nations to engage in the competitive race to the bottom, and in the process cutting swaths through the tax systems and regulations of nation states, rich and poor, whether they like it or not. The secrecy jurisdictions have been the heart of the globalization project from the beginning.


Finally, a word about culture and attitudes. In January 2008 the accountancy giant KPMG ranked Cyprus at the very top of a league table of European jurisdictions, according to the “attractiveness” of their corporate tax regimes.53 Yet Cyprus, a “way station for international scoundrels,” as one offshore promoter admits, is among the world’s murkiest tax havens: possibly the biggest conduit for criminal money out of the former Soviet Union and the Middle East into the international financial system. If Cyprus is ranked as the “best” in an international league table on tax, something is clearly wrong with the world. When transparency rankings list Switzerland and Singapore, two great sinks for illicit loot, as among the world’s “cleanest” jurisdictions, then we seem to have lost our way.
Tax is the missing element in the corporate social responsibility debate. Modern company directors face a dilemma. To whom are they answerable—to shareholders only or to a wider set of stakeholders? There are no useful guidelines.54 Irresponsible players treat tax as a cost to be minimized, to boost short-term shareholder value alone. Ethical directors recognize that tax is not a cost of production but a distribution out of profits to stakeholders, ranking on the profit and loss account alongside dividends. It is a distribution to society, and it pays for the things like roads and education that help the corporations make their profits.
The corporate world has lost its way, and nowhere is this more true than with the Big Four accountancy firms. Paul Hogan, the star of the film Crocodile Dundee, put his finger on something important in 2010 when talking about an investigation by Australian tax authorities into his offshore tax affairs. “I haven’t done my own tax for thirty years,” he said. “They talk about me going to jail. Erm, excuse me: There’s about four law firms and about five accounting firms—some of the biggest ones in the world—that’d have to go to jail before you get to me.”55 On this point, Hogan is right—or at least he should be. These firms, responding to their clients’ wishes to escape taxes and other duties that come with living in democratic nations, have grown to become steeped in an inverted morality that holds tax, democracy, and society to be bad and tax havens, tax dodging, and secrecy to be good. Serial tax avoiders are made knights of the realm in Britain and promoted to the top of high society in the United States; journalists seeking guidance in this complex terrain routinely turn to these very same offshore cheerleaders, the accountancy firms, for their opinions. Bit by bit, offshore’s inverted morality becomes accepted into our societies.
The fight against the offshore system will differ from other campaigns to fix the global economy. Like the fight against corruption, this struggle does not fit neatly into the old political categories of left and right. It does not involve rejecting cross-border trade or seeking solace in purely local solutions. This fight needs an international perspective, where countries try not to engage in economic warfare against each other. And it will provide a rubric for taxpaying citizens in both rich countries and poor to fight for a common cause. Wherever you live, whoever you are, or what you think, this affects you.
Millions of people around the world have for years had a queasy feeling that something is rotten in the global economy, though many have struggled to work out what the problem is. This book will point to the original source of where it all went wrong.