shaxson

PROLOGUE
An Offshore Awakening

ONE NIGHT IN SEPTEMBER 1997 I RETURNED home to my flat in North London to find that a man with a French accent had left a message on my answering machine. Mr. Autogue, as he called himself, had heard from an editor at the Financial Times (whom I was writing for) that I was to visit the oil-rich country of Gabon on Africa’s western coastline, and he said he wanted to help me during my visit. He left a number in Paris. Curious as hell, I rang back the next morning.
This was supposed to be a routine journalist’s trip to a small African country: I wasn’t expecting to find too much to write about in this sparsely populated former French colony, but the fact that English-speaking journalists almost never ventured there meant I would have the place all to myself. When I arrived, I discovered to my surprise and alarm that Mr. Autogue had flown out to the capital of Libreville with an assistant on first-class Air France tickets and they had booked themselves into the city’s most expensive hotel for a week—and their sole project, he cheerfully admitted, was to help me.
I had spent years watching, living in, and writing about the curve of oil-soaked African Atlantic coastline that ranges from Nigeria, in North Africa, through Gabon and down to Angola, farther south. Today this region supplies almost a sixth of U.S. oil imports1 and about the same share of China’s; and beneath a veneer of great wealth in each place lies terrible poverty, inequality, and conflict.
Journalists are supposed to start on the trail of a great story somewhere dramatic and dangerous. I found my story here unexpectedly, in a series of polite if unsettling meetings in Libreville. Lunch with the finance minister? No problem: Monsieur Autogue arranged it with a phone call. I drank a cocktail in a hotel lobby with the powerful half-Chinese foreign minister Jean Ping, who later became president of the U.N. General Assembly; the estimable Mr. Ping gave me as much of his time as I needed for my interview and asked graciously about my family. Later, the oil minister clasped me by the shoulder and jokingly offered me an oil field—then withdrew his hand, saying, “No: these things are only for les grands—the people who matter.”
Never more than five hundred yards from foul African poverty on the streets of Libreville, I spent a week wandering about in a bubble. Mr. Autogue’s attempts to keep my diary full made me determined to find out what it was that he might be wanting to hide. My new best friend had opened for me a zone of air-conditioned splendor: I was ushered to the front of queues to meet with powerful people, who were always delighted to see me. This parallel, charmed world, underpinned by the unspoken threat of force against anyone inside or outside the bubble who would disrupt it, is easy to miss in the affluent and easy West. In Africa the jolt was enough to begin to shake me from my sleep.
I had stumbled into what later became more widely known through a scandal in Paris as the so-called Elf affair.
The scandal began in 1994 when U.S.-based Fairchild Corp. opened a commercial dispute with a French industrialist, triggering a stock exchange inquiry. Unlike in more adversarial Anglo-Saxon legal systems, where the prosecution jousts with the defense to produce a resolution, the investigating magistrate in France is more like an impartial detective inserted between the two sides. He or she is supposed to investigate the matter until the end, when the truth is uncovered. In this case Eva Joly, the Norwegian-born investigating magistrate, found that every time she investigated something new leads would emerge. Her probes just kept going deeper. She began receiving death threats: A miniature coffin was sent to her in the post, and on a raid of one business she found a Smith & Wesson revolver, fully loaded and pointed at the entrance. But she persisted: Other magistrates became involved, and as the extraordinary revelations began to accumulate, they began to discern the outlines of a gigantic system of corruption that connected the French state-owned oil company Elf Aquitaine with the French political, commercial, and intelligence establishments, via Gabon’s deeply corrupt ruler Omar Bongo.
Bongo’s story is a miniature tale of what happened when France formally relinquished its colonies. As countries in Africa and elsewhere gained independence, the old beneficiaries of the French empire set up new ways to stay in control behind the scenes. Gabon became independent in 1960, just as it was starting to emerge as a promising new African oil frontier, and France paid it particular attention. France needed to install the right president: an authentic African leader who would be charismatic, strong, cunning, and, when it mattered, utterly pro-French. In Omar Bongo they found the perfect candidate: He was from a tiny minority ethnic group and had no natural domestic support base, so he would have to rely on France to protect him. In 1967, aged just 32, Bongo became the world’s youngest president, and for good measure France placed several hundred paratroopers in a barracks in Libreville, connected to one of his palaces by underground tunnels. This intimidating deterrent against coup plots proved so effective that by the time Bongo died in 2009, he was the world’s longest-serving leader.
In exchange for France’s backing Bongo gave two things. First, he gave French companies almost exclusive access to his country’s minerals, on highly preferential terms that were deeply unfair to the people of Gabon. The country became known as French companies’ chasse gardée—their private hunting ground. But the second thing Bongo provided was more interesting. He allowed his country, through its oil industry, to become the African linchpin of the gigantic, secret Elf system—a vast, spooky web of global corruption secretly connecting the oil industries of former French African colonies with mainstream politics in metropolitan France, via Switzerland, Luxembourg, and other tax havens. Parts of Gabon’s oil industry, Joly discovered as she dug deeper and deeper in Paris, had been serving as a giant slush fund: a pot of secret money outside the reach of French judicial authorities in which hundreds of millions of dollars were made available for the use of French elites. An African oil cargo would be sold, and the proceeds would split up into a range of bewildering accounts in tax havens, where they could be used to supply bribes and baubles for whatever the unaccountable elites who controlled the system deemed fit.
Out of this pot, money flowed secretly to finance French political parties, the intelligence services, and other well-connected parts of French high society. Elf’s secret money greased the wheels of French political and commercial diplomacy around the globe: France’s biggest corporations were allowed to use this West African oil pot as a source of easy bribe money to support their bids for giant contracts ranging from Venezuela to Germany to Jersey to Taiwan—and the out-of-sight Gabon connection meant that the money trails did not lead to them. (One man told me how he once carried a suitcase of cash provided by Omar Bongo to pay off a top rebel separatist in the Angolan oil enclave of Cabinda, where Elf had a lucrative contract.)
President Bongo, for his part, was one of the smartest political operators of his generation and tapped into French Freemasonry networks and African secret societies to become one of the most important power brokers in France itself. He was the key to French leaders’ ability to bind les grands—opinion-formers and politicians from across Africa and beyond—into France’s postcolonial foreign policy. This immensely powerful, corrupt subterranean system helped France punch above its weight in global economic and political affairs and remain significantly in control after independence, behind the scenes. A local journalist summed the relationship up for me most effectively. “The French went out of the front door,” he said, “and came back in through a side window.”
The system emerged gradually, but by the 1970s it was already serving as a major secret financing mechanism for the main French right-wing party, the Rally for the Republic (RPR).2 When a Socialist, François Mitterrand, became French president in 1981, he sought to break into this right-wing Franco-African offshore cash machine and installed his man Loïk le Floch-Prigent at the head of Elf to do the job. But the latter was wise enough not to cut out his rivals in the RPR. “Le Floch knew that if he cut the financing networks to the RPR and the secret services, it would be war,” explained the French authors Valerie Lecasble and Airy Routier in an authoritative book on the affair.3 “It was explained that, instead, the leaders of the RPR—Jacques Chirac and Charles Pasqua—did not mind the Socialists taking part of the cake, if it were enlarged.” So the Elf system grew. It became more baroque, complex, and layered, and it began to branch out into international corruption so grand that Mitterrand’s man le Floch-Prigent was moved to describe France’s intelligence services, which dipped freely into the slush, as “a great brothel, where nobody knows any more who is doing what.”4
The system was a kind of open secret: A few well-connected French insiders knew all about it, and a fair number of educated outsiders in France knew something important was afoot but didn’t know the details and largely ignored it. Yet almost nobody could see the whole thing in overview. Everything was connected through tax havens. The paper trails, as the magistrates were discovering during my Libreville trip, were typically sliced among Gabon, Switzerland, Liechtenstein, Jersey, and beyond. Joly admitted that even though she probed deeply she only ever saw fragments of the whole picture. “Endless leads were lost in the shifting sands of the tax havens. The personal accounts of monarchs, elected presidents-for-life, and dictators were being protected from the curiosity of the magistrates.”5
My trip to Gabon in late 1997 came at an exquisitely sensitive time. On November 7 of that year, less than a week after I left Libreville, Christine Deviers-Joncour, a former lingerie model, was sent to jail in the southern suburbs of Paris, still protecting the secrets of her lover Roland Dumas, the French foreign minister. She was jailed for suspected fraud after magistrates found that Elf had paid her over $6 million to help “persuade” Dumas, a haughty prince of the Paris political clans, to do certain things—notably to reverse his public opposition to the sale of Thomson missile boats to Taiwan. On an Elf credit card she had bought him gifts, including a pair of hand-made ankle boots from a Paris shop so exclusive that its owner offered to wash customers’ shoes once a year in champagne. Nobody thanked her for her discretion, and five and a half months in jail gave her time to reflect on her treatment. “A flower, a single flower, even sent to me anonymously [in jail] would have been enough,” she later explained.6 “I would have known it came from Roland.” The following year she cast aside the code of silence and published a book, The Whore of the Republic, which became a best seller in France.
So when I visited Gabon at that especially tricky moment, the Elf networks must have wondered why this English journalist was nosing around in Libreville. Was I really a journalist? No wonder Mr. Autogue took such an interest in me. Recently, I tried to find him, to ask him about our week together. His old phone numbers no longer work, several Africa experts in Paris hadn’t heard of him, Internet searches turned up no trace of him or the company he claimed to represent, and the only person with that name in the French phone book has, a surprised-sounding wife in a rural Dordogne village informed me, never been to Gabon.
The Elf system, when I visited, was dying. The magistrates’ investigations were in full swing, and they finally secured 31 convictions in November 2004 after eight years’ work. Elf Aquitaine has since been privatized and is now part of the Total group, which has an utterly different character from the old Elf. Still, Elf was not the only creature in the corrupt Franco-African system—myriad smaller pots of offshore money existed too. And though Elf is long gone, it seems that the system is not really dead. When President Nicolas Sarkozy of France came to power in 2007 the first person he called was not the president of Germany or the United States or the European Commission but Omar Bongo. The French troops remain in place in Gabon today, connected by underground tunnels to the presidential palace. In January 2008 the French aid minister, Jean-Marie Bockel, complained that a “rupture” with a corrupt past that French leaders had promised “is taking its time to arrive.” He was summarily sacked.7 If the Elf system is dead, then French elites seem to have replaced it with something else.


Gabon is on no list of tax havens anywhere. But the Elf system that it hosted was part of, and a metaphor for, the offshore world. To understand this, it is necessary to explain some fundamental truths about what a tax haven or offshore jurisdiction is.
Tax havens provide escape routes from rules and laws elsewhere. These two words, “escape” and “elsewhere,” will crop up repeatedly in this book. The zero tax rates offered in the Cayman Islands, for example, are not designed for Caymanians but are set up to attract the business of North and South Americans, Europeans, Asians, Middle Easterners, and Africans alike.
In truth, the term tax haven is a bit of a misnomer because these places offer an escape not just from taxes but from many other rules and regulations too. If a person or entity wants to do something but is forbidden by law from doing it at home, it escapes to somewhere else to do it. (To be more precise, it isn’t usually the entity but its money that escapes.) The common feature of tax havens is that they offer secrecy. Once the escape has been effected, the escapee is very hard to find. The users of tax havens might be escaping any number of different laws or regulations: taxes, criminal laws, insider trading rules, inheritance rules, environmental laws, or financial regulation. If there is a law to stop or regulate it, there will probably be places that offer escape routes from that law. A simple example of an offshore escape is when a U.S. citizen, say, parks $10 million of drug money in a bank account in Panama. It will be exceedingly difficult for the U.S. authorities to find that money, let alone tax it.
The Elf system allowed bribes to be paid and other nefarious acts to be committed elsewhere—without the paper trails touching French soil. Offshore. The system did not exactly exist anywhere: It flourished in the gaps between jurisdictions. Elsewhere became nowhere.
The Elf affair illustrates another fundamental offshore truth. The escape routes from the rules and laws of society are provided almost exclusively for the benefit of wealthy and powerful insiders—leaving the rest of us to pick up the bill. The Elf system, a gargantuan octopus of corruption, affected ordinary people in both Africa and France in the most profound, if mostly invisible, ways. Ordinary African citizens saw their nations’ oil money being siphoned off to the rich world through unfair oil contracts and general corruption, while French protection made Gabon’s leaders invulnerable and hence unaccountable to their citizens—at the same time that the Elf system made France’s elites unaccountable to that nation’s citizens too.
These very same principles apply to the offshore system more generally. Because of tax havens, we have ended up with one set of rules for the rich and powerful and another set of rules and laws for the rest of us—and this applies to citizens of rich and poor countries alike. Just like the Elf system, offshore is a project of elites against their, and our, societies. It is not so much about crime or taxes, important though they are. This is a story about how political power is distributed in the world today.
It is essential to understand from the outset that the offshore system is ultimately not about celebrity tax exiles and mobsters—though they are regular users of the system. It is about banks and financial services industries. This book will show that the offshore system is the secret underpinning for the political and financial power of Wall Street today. It is the fortified refuge of Big Finance.
The offshore system is also about a more generalized subversion of democracy by our increasingly unaccountable elites. “Taxes are for the little people,” the New York millionaire Leona Helmsley once famously said. She was right, though in the end she wasn’t big enough to escape prison herself. The media baron Rupert Murdoch is different. His News Corporation, which owns Fox News, MySpace, and any number of other media outlets around the globe, is a master of offshore gymnastics, using all legal means available. When The Economist magazine investigated in 1999, it reckoned that News Corporation paid a tax rate of just 6 percent—compared with 31 percent for its competitor Disney.8 Neil Chenoweth, an Australian reporter, probed News Corporation’s accounts and found that its profits, declared in Australian dollars, were A$364,364,000 in 1987, A$464,464,000 in 1988, A$496,496,000 in 1989, and A$282,282,000 in 1990.9 The obvious pattern in these numbers cannot be a coincidence. As John Lanchester wrote in the London Review of Books: “That little grace note in the sums is accountant-speak for ‘Fuck you.’ Faced with this level of financial wizardry, all the ordinary taxpayer can do is cry ‘Bravo l’artiste!’”
Much of what happens offshore is technically legal. A lot of it is plainly illegal and often criminal. And there is a vast gray area in between. All of it is profoundly dangerous, corrosive to democracy, and morally indefensible. Eva Joly explains what the Elf affair taught her about the distribution of power in the world. “I realized I was no longer confronted with a marginal thing but with a system,” she said. “I do not see this as a terrible, multifaceted criminality which is besieging our [onshore] fortresses. I see a respectable, established system of power that has accepted grand corruption as a natural part of its daily business.”10
From this strange Franco-African tale emerges one more important point, which will be a recurring theme of this book. In decades and centuries past, colonial systems helped rich countries preserve and boost their elites’ wealth and privileges at home. When the European powers left their colonies after the Second World War, they replaced formal controls over their ex-colonies with different arrangements to retain a measure of control behind the scenes. The Elf system was the main way that France achieved this. Britain did it with the modern offshore system, its financial replacement for empire. Citizens of the United States are paying the price.
“It has taken me a long time to understand,” explains Joly, “that the expansion in the use of these jurisdictions [tax havens] has a link to decolonization. It is a modern form of colonialism.”11


Long before my first visit to Libreville I had noticed how money was pouring out of Africa, often into tax havens, but the secrecy surrounding this financial trade made it impossible to trace the connections. Financial institutions, and occasionally their accountants and lawyers, would surface in particular stories, then slip back into an offshore murk of commercial confidentiality and professional discretion. Every time a scandal broke, these intermediaries’ crucial roles escaped serious scrutiny. Africa’s problems, the story went, had something to do with its nations’ rulers, or its cultures and societies, or the oil companies. It was their fault.
The providers of offshore secrecy were clearly a central part of all these dramas—but the racket was very hard to penetrate, and nobody seemed very interested in trying. It was only in 2005 that the threads properly started to come together for me. I was sitting with David Spencer, a New York attorney previously with Citicorp, talking about transparency in the public finances of West African oil-producing nations. Spencer was getting agitated about matters that were not at all on my agenda: accounting rules, U.S. tax exemptions on interest income, and transfer pricing. I was wondering when he was going to start talking about West African corruption when I finally began to make a serious connection. The United States, by offering tax incentives and secrecy to lure money from overseas, had been turning itself into a tax haven.
Tides of financial capital flow around the world in response to small changes in these kinds of tax and secrecy incentives. The U.S. government needs foreign funds to flow in, and it attracts them by offering tax-free treatment and secrecy. This is offshore business, Spencer explained, and it had become central to the U.S. government’s global strategies for financing its deficits. Not only did almost nobody understand this, he continued, but almost nobody wanted to know. Once, when he gave a speech at a major United Nations event outlining some of these basic principles, a top U.S. negotiator collared him afterward and told him that his shedding light on this subject made him “a traitor to your country.” The negotiator was wrong: Spencer was being disloyal only to offshore interests on Wall Street.
In the Harvard Club with Spencer I began to see how the terrible human cost of poverty and inequality in Africa, Latin America, and other parts of the world connected with the apparently impersonal world of accounting and financial regulations and tax law. Africa’s supposedly natural or inevitable disasters all had one thing in common: the movement of money out of poor countries and into parts of Europe and the United States, assisted and encouraged by the tax havens and a pinstripe army of respectable bankers, lawyers, and accountants. Nobody wanted to look beyond poor countries at the system that made this movement possible. The U.S. government and many others have allowed tax havens to proliferate because the elites who use them are the world’s most powerful lobbyists.
Martin Woods, a Wachovia bank employee who became a whistle-blower after seeing billions of suspect dollars flowing from currency houses in Mexico in the midst of a drug war, illustrates the problem clearly. “If you don’t see the correlation between the money laundering by banks and the twenty-two thousand people killed in Mexico,” he said, “you’re missing the point.”12 The world has, it seems, been determined to miss the point.
The offshore system hadn’t been just an exotic sideshow in the stories I was covering, as I had thought. Offshore was the story. It binds together Libreville, Paris, and Jersey; Luanda, Geneva, and Moscow; Moscow, Cyprus, and London; Wall Street, Mexico City, and the Cayman Islands; Washington, the Bahamas, and Riyadh. Offshore connects the criminal underworld with financial elites and binds them together with multinational corporations and the diplomatic and intelligence establishments. Offshore drives conflict, shapes our perceptions, creates financial instability, and delivers staggering rewards to les grands, the people who matter. Offshore is how the world of power now works. This is what I want to show you. The offshore system is the greatest fault line in our globalized world.
An impression has been created in sections of the world’s media, since a series of stirring denunciations of tax havens by world leaders in 2008 and 2009, that the offshore system has been dismantled or at least suitably tamed. As we shall see, exactly the opposite has happened. The offshore system is in robust health—and growing fast. The crackdown has turned out to be a whitewash.

CONCLUSION
Reclaiming Our Culture

JOHN MAYNARD KEYNES’S OBSERVATION IN THE AFTERMATH of the Wall Street Crash, which I cited in chapter 3, is as apt today as it was when first articulated: “We have involved ourselves in a colossal muddle, having blundered in the control of a delicate machine, the working of which we do not understand.” But the financial system is vastly more dangerous and pervasive now. Changes to domestic banking regulations matter but will never suffice. Reform must be based on a thorough grasp of the new, globalized reality—and anyone who wants to understand the modern financial machine must understand what tax havens are and how they work.
We must tackle the offshore system. I will point to ten major areas for change, in no particular order and as briefly as I can. All overlap with each other—and the last ties them all together.
First, we can pursue transparency. Many and varied changes are needed; here are two.
About 60 percent of world trade happens inside multinational corporations, which cut taxes by shuffling money between jurisdictions to create artificial paper trails that shift their profits into zero-tax havens and their costs into high-tax countries. The complexity and cost of this system cause great harm.
But these maneuverings are invisible in corporations’ annual reports. Under current accounting rules corporations can scoop up all their results—profits, borrowings, tax payments, and so on—from several countries and consolidate each into one figure, perhaps broken down by region. So a corporation may publish its profits from, say, Africa, but nobody can unpick those numbers to work out the profits in each country. You can’t find the information anywhere. Trillions of dollars’ worth of cross-border flows simply disappear from view. So a citizen in a country where a multinational operates cannot tell from these reports even whether that corporation operates there, let alone what it does, its level of activity, its profits, its local employment, or its tax payments. As multinationals become ever more complex, this problem just gets worse.
One might think that the main global rule-setter for international accounting standards would be a public international body accountable to democratic governments. It is not. The International Accounting Standards Board (IASB) is a private company financed by the Big Four accountancy firms and global multinationals, headquartered in the City of London, and registered in Delaware.1
Richard Murphy, an accountant arguing for reform of international accounting standards, summarizes the problem as it stands. “A company gets its license to operate in any territory from the government that represents those people. It has a corporate duty to account in return. This is the essence of stewardship and accountability. Instead we have companies pretending they float above all these countries. They don’t.”
If multinationals had to break their financial information down by country and disclose what they do in each place, global markets would immediately become more transparent. A secret trove of information vital to citizens, investors, economists, and governments would come onshore and into view. Country-by-country reporting, as it is known, is already making progress in policymaking circles, particularly for the extractive industries.2 It now needs major support and must be expanded to include all businesses—especially the banks.
Another essential step concerns how governments share information about the local incomes and assets of each others’ citizens. If a person in one country owns an income-generating asset in another country, his or her tax authorities need to know about it. So governments need to share relevant information, subject to appropriate safeguards.
But the dominant standard for exchanging information is the OECD’s “on request” standard: a cheats’ charter whereby a country already has to know what it is looking for before it requests the information from another on a bilateral basis. Developing countries are particularly vulnerable here. The OECD’s standard can be replaced by the far better alternative: automatic information exchange on a multilateral basis, where countries automatically tell each other what their respective taxpayers own and earn. Such a system exists in Europe: It works well and does not leak information (though major loopholes need plugging to defend against the Caymans trusts, Nevada corporations, Liechtenstein foundations, Austrian hidden Treuhands, and various other secrecy facilities that infest the offshore system). Momentum is just starting to build for change here3—and this can now be rolled out worldwide and vigorously supported. Sanctions and blacklists can spur the shift.


As a second major area for reform, we can prioritize the needs of developing countries.
The pattern always seems to be the same. A secrecy jurisdiction comes up with a new abusive offshore structure, and wealthy countries construct defenses against it as best they can. But poor countries, without the relevant expertise, are left wide open to the new drain. In February 2010 Misereor, a German development organization, researched the new information exchange agreements that had been signed between countries after world leaders promised to crack down on tax havens at a G20 meeting in Washington in 2008. Misereor found that just 6 percent of the tax treaties, and zero percent of the tax information exchange agreements, were signed with low- income countries. “While G20 and OECD are promoting DTTs and TIEAs as centre-pieces of a global standard on transparency and cooperation,” Misereor concluded, “statistics show that poor developing countries are simply left out.”4
Tax is the Cinderella in the debates about financing for development. Overshadowed for decades by its domineering sisters—aid and debt relief—tax is now, at last, starting to emerge from the shadows. Tax is the most sustainable, the most important, and the most beneficial form of finance for development. It makes rulers accountable to their citizens, not to donors, and the right kinds of taxes stimulate governments to create the strong institutions they need for getting their citizens and corporations to pay tax.
Three things can now happen. First, developing and middle-income countries can find a voice to articulate their concerns about this global system for transferring wealth from poor to rich and work together. A few countries like Brazil and India are beginning to construct serious offshore defenses, and the time is ripe for this to become a mass movement. Second, official development assistance in this area can rise dramatically: Less than one-thousandth of development aid is currently spent on helping countries improve their tax systems5—and much of that is spent on ideas that may make poverty worse, not better. Third, if citizens and civil society organizations were to stop focusing so exclusively on aid, in order to help revitalize the debates about tax and its role in fostering accountability, things can change. Aid can help—but with ten dollars being drained out of the developing world for every dollar going in, we need new approaches. If there were ever a movement that could unite the citizens of developing and wealthy countries in one cause, this is it.


The third big change to make is to confront the British spiderweb, the most important and most aggressive single element in the global offshore system.
The City of London Corporation—the offshore island floating partly free from Britain’s people and its democratic system—must be abolished and submerged into a unified and fully democratic London. The City’s international offshore spider-web, the mechanism for harvesting and profiting from financial capital from around the globe, however dirty it may be, must be dismantled. It harms the people of Britain, and it harms the world at large. Britain is too thoroughly captured by the City and its offshore sector to do this alone: Pressure from outside is essential. Developing countries in particular need to appreciate how offshore is a somewhat imperial economic system, in which their own elites are deeply implicated. Alongside this new focus we need a greater understanding of the role of the United States as an offshore jurisdiction in its own right and the harm this causes, inside and outside the United States.


Onshore tax reform presents another arena where changes can be made. Endless possibilities exist, and I will focus on just two big, promising solutions that have been almost entirely overlooked.
The first is land value taxation.6 This needs a very brief detour. A street musician who sets up his stall in the middle of the main street will earn far more than if he plays on the outskirts of town. The additional earnings on the best sites, over and above what he would earn on a just-worthwhile site, owe nothing at all to his skill or efforts7—they are pure, unearned “rental value.” If a government builds a major new railway line, property owners near the new stations will see their properties rise in value through no efforts of their own. It is pure windfall: unearned rental value. The correct approach to unearned natural rents like these is to tax them at high rates (and use the proceeds to either cut taxes elsewhere or spend more). This is not a tax on property ownership, but a tax on land: whether or not that piece of prime real estate is owned by a Russian oligarch hidden behind a Liechtenstein anstalt, the bricks of the building sited there are rooted firmly into the soil, and the tax can be levied. Because land cannot move, this tax is insulated against offshore escape. It encourages and rewards the best use of land and keeps rents lower than they would otherwise be.
Not only that, but a huge share of the profits of the financial sector derive ultimately from real estate business and land value. Tax land’s rental value, and you capture a big slice of this financial business, however much it is reengineered offshore. When Pittsburgh became one of the few places in the world to adopt the tax in 1911, in the teeth of massive resistance from wealthy landowners, it had dramatic and positive effects: While the rest of America went on an orgy of land speculation ahead of the Crash of 1929, prices in Pittsburgh only rose 20 percent. Harrisburg’s adoption of the tax in 1975 led to a dramatic inner-city regeneration. The tax is simple to administer and progressive (that is, the poor pay less)—and can be especially useful for promoting growth in developing countries.
Another promising, much-overlooked scheme concerns mineral-rich countries. Tides of looted or tainted oil money sluice constantly into the offshore system, distorting the global economy in the process. A radical and controversial proposal would upend this phenomenon by distributing a large share of a country’s mineral windfalls directly, and without discrimination, to every inhabitant. This has only been implemented in a few places like Alaska, but in many other mineral-rich countries, even poor ones, it is feasible. Doing so could prevent hundreds of billions of dollars of stolen mineral-sourced loot from draining to offshore centers and deliver tremendous benefits for the populations concerned.


A corollary of onshore tax reform is leadership and unilateral action.
After the September 11, 2001, attacks, U.S. legislators tried to insert stronger anti-money-laundering provisions into the PATRIOT Act. In the halls of Congress, civility collapsed, and shouting matches erupted between bank officials and congressional staffers.8 Among other things, the bankers were defending offshore shell banks, which hide behind nominees and trustees so no one can know who their real owners and managers are. Senator Carl Levin who led the charge—after having had eleven transparency bills shot down by Senator Phil Gramm—stuck to his guns, and in the post-9/11 environment he at last got his way: remarkable provisions saying that no U.S. bank may receive a transfer from a foreign shell bank, and no foreign bank may transfer money to the United States that it has received from a foreign shell bank. The result, as Raymond Baker explains, is that “the thousands of shell banks that used to run loose have been reduced to perhaps a few dozen…. With a stroke of the legislative pen, a major threat to economic integrity has been almost completely removed from the global financial system.” International agreement is generally a good thing, in cases like this. But leadership can work wonders too.
Too often, when corporations or individuals threaten to relocate offshore if they are taxed or regulated too highly, or asked to be too transparent, or to submit to criminal laws, government officials quail and give the wealthy owners of capital what they want. Not only that, but efforts to stop people from using abusive offshore loopholes are also greeted with the same cries of “Don’t crack down on that loophole or we will go elsewhere!”
The latest crisis has made clear that much financial services activity is actually harmful. So if certain parts of the financial industry leave town—so much the better. Good projects will always find financing, whether or not your country is stuffed with foreign financiers, and local bankers are better placed to supply it because they know their customers. Tax and regulate the financial industries according to an economy’s real needs, ignore the screams that capital and bankers will flit offshore, and you will tend to drive out the harmful parts, leaving the useful bits behind. The key is leadership. Unilateral action can work.


Another major task is to tackle the intermediaries and the private users of offshore.
Rudolf Strahm, a Swiss parliamentarian, studied every historical episode where Swiss bank secrecy has been loosened in response to foreign pressure and concluded that pressure only works when applied to Swiss banks. Every attempt to pressure the Swiss government was seen as an attack on national pride—and failed.
When a kleptocrat loots his country and shifts the looted wealth offshore, the banks, accountants, and law firms that assist him are just as guilty as the kleptocrat. When a client gets caught and goes to jail, so should his or her relationship manager, accountant, trustee, lawyer, and corporate nominee. A few organizations like London-based Global Witness have sought to call these intermediaries to account—but we now need a sea change in the world’s approach. Get serious with these people at last.
As regards the end users of offshore services, many strategies are needed. I will mention just one. Its awful-sounding name—Combined Reporting with Formula Apportionment and Unitary Taxation—masks a simple, powerful, and straightforward approach to tax, which California already uses successfully to confront transfer pricing abuses.
Instead of the current approach of trying to tax each separate bit of a multinational as if it were a free-floating entity, tax authorities could treat the multinational group as a single unit, then “apportion” its taxable income out to the different jurisdictions where it operates, under an agreed formula based on real things like sales, payrolls, and assets in each place. Each jurisdiction can tax its portion at whatever rate it wants. So consider a U.S. multinational with a one-man booking office in Bermuda, with no local sales. Current rules let it shift billions of dollars in profits there to skip tax. But under the alternative system based on sales and payroll, the formula would allocate only a minuscule portion of the income to Bermuda—so only a minuscule portion of its overall income would be subject to Bermuda’s zero tax rate. The rest would get taxed properly based on the substance of what it does in the real world, rather than on the gymnastic legal form its accountants have created for it. Several U.S. states already use it quite successfully. Countries can do this unilaterally—and if this happened widely a vast part of the tax havens’ business model would disappear. Again, developing countries could be particularly helped by this.


In this context, the financial sector needs special mention as a vast area to reform. Severe pundit fatigue has already set in on this topic, so I will just make two short recommendations that have not been a part of the general clamor.
First, policymakers, journalists, and many others can start to understand and accept how tax havens have become the fortified refuges of financial capital, protecting it from tax and regulation and in the process contributing to the latest crisis in many and varied ways. The veil of silence and ignorance can be lifted and the message spread.
Second, countries worried about the safety of their financial systems could compile blacklists of financial regulatory havens based on the Jersey-Delaware notion of the captured state: 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. This blacklisting will be easy enough, technically speaking, once we understand what we are looking for. With these blacklists, appropriate prohibitions and regulations—many of them very simple—can be put in place to help countries reclaim their sovereignty and respect voters’ wishes once more. Along with this another benefit would flow: Once these berserkers in the international regulatory system are out of the picture, international cooperation on financial reform will become much easier. This proposal will also help us guard not only against repeating the errors that led to the latest crisis but also against those of the next one, whose causes we may not even be able to imagine yet.


Next, we should rethink corporate responsibility.
Societies grant corporations immense privileges, such as limited liability, which lets investors cap their losses and shift outstanding debts onto the rest of society when all goes wrong. They have also been granted the right to be treated as artificial legal entities that can relocate to different jurisdictions almost at will, irrespective of where they really do business. In exchange for these remarkable privileges, corporations were originally held to a set of obligations to the societies in which they are embedded: notably to be transparent about their affairs and to pay tax.
The offshore system has undermined all this. The privileges have been preserved and enhanced, but the obligations have withered. Tax must now be brought squarely into corporate responsibility debates. Corporate managers are taught to think that they are accountable only to shareholders. From this perspective, escaping tax seems to be their duty. But we have forgotten the fundamental truth that corporations get their license to operate, and the tools and confidence to do so effectively, from society. Seen this way, tax is not a cost to shareholders, to be minimized, but a distribution to the stakeholders in the enterprise: a return on the investment societies and their governments make in infrastructure, education, law and order, and the other basic prerequisites for all corporate activity. The shareholders must get their due, but the societies they depend on must too. When we start to make corporations feel they are accountable not only to shareholders but to societies too, a whole new arena will have been created in which the offshore system can be questioned and challenged.


We can also reevaluate corruption. I have already indicated how predominant corruption rankings of countries rate many of the world’s top tax havens—the repositories of trillions of dollars of corrupt, stolen loot—as the world’s “cleanest” jurisdictions, and how a new Financial Secrecy Index, which I mentioned in chapter 6, has started the process of setting the record straight.
But we can move beyond rearranging the geography of corruption and reassess what corruption is. At heart, corruption involves insiders abusing the common good, in secrecy and with impunity, undermining the rules and systems that promote the public interest, and undermining our faith in those rules and systems. In the process it worsens poverty and inequality and entrenches vested interests and unaccountable power.
Bribery does all these things. But many of the services tax havens provide also do these things. This close analogy between bribe-paying and the business of secret offshore escape is no coincidence: We are talking about similar underlying processes. Some people have praised bribery as a way of getting around bureaucratic obstacles: Without that bribe, that company won’t get its container through the port. They are wrong, of course: Bribery may benefit the bribe-payer, but it damages the system as a whole. Similarly, the defenders of secrecy jurisdictions argue that their services help private actors get around “inefficiencies” in mainstream economies, smoothing the way for business to proceed. And they do. But what are those “inefficiencies”? They are, most importantly, tax, financial regulations, criminal laws, and transparency—all of which are there for good reason. To help someone get around the obstacle is to corrode the system and trust in the system. Bribery rots and corrupts governments, and tax havens rot and corrupt the global financial system.
Once we start seeing this we will no longer limit ourselves to pointing fingers at developing country kleptocrats and rogue officials but will begin to examine a much broader array of actors and their facilitating activities. And we will have found a rubric for the citizens of rich and poor countries to find common cause in fighting a global scourge.9


The final and most important thing is to change the culture. When pundits, journalists, and politicians fawn over people who get rich by abusing the system—getting around tax and regulation and forcing everyone else to shoulder the associated risks and taxes—then we have lost our way.
Language can change. When someone claims that tax havens make global finance more efficient, we can ask, “Efficient for whom?” When someone says countries should compete with each other on tax or financial regulation, or that policymakers should aim for a more competitive tax or regulatory system—one may ask: “What kind of competition are you talking about? A race to the bottom on tax, secrecy, or financial regulation? Or a race to the top, such as when corporations operate in competitive markets on a level playing field?” When we hear “privacy” or “asset protection” or “tax efficient” in the context of private banking, companies can be asked exactly what they mean. When a private equity company shows record profits, we can be told how much of that comes from genuine productive improvement, and how much comes from gaming the offshore system. When hearing a pillar of society say that they are a well-regulated, cooperative, and transparent jurisdiction, the investigator can assume the opposite and probe further. When magazines carry alluring advertisements from seedy offshore promoters who may be inciting clients to criminal behavior, we can complain. When corporations talk about social responsibility, we can ask if they mean tax. When journalists need expert commentators to advise them about that tax story they are writing, they must understand that their interviewee from the big accountancy firm works for a business that makes a living out of helping wealthy corporations and individuals get around paying tax, and that their opinions will reflect that corrupted worldview. They must find alternative opinions to balance those views.
The world’s international institutions and responsible governments could create and promote new guidelines and codes of conduct outlining responsible and irresponsible behavior in the fields of international tax and regulation, with special focus on offshore abuse. They could introduce general antiavoidance principles into their tax laws so that complex and abusive trickery, while technically not breaking the details of legislation, can be disallowed. Tax evasion can become a predicate crime for money laundering, and tax offenses, among others, could be included in international conventions such as the United Nations Convention Against Corruption. Professional associations of lawyers, accountants, and bankers could create codes of conduct stressing, among other things, that it is unacceptable for a member to help a client commit a financial crime, whether the crime occurs at home or overseas. The economics profession needs to reappraise its approach to understand the effects of things such as secrecy and regulatory arbitrage. It could start to measure illicit, secret things, difficult though that may be.
We can recapture our culture from the forces of unaccountable privilege that have taken it away from us.


At the time of writing, heavy government spending around the world has staved off outright economic collapse following the meltdown in global finance, but at huge costs to taxpayers. “Never in the field of financial endeavor has so much money been owed by so few to so many,” said Mervyn King, the governor of the Bank of England. “And, one might add, so far with little real reform.”
It is time for the great global debate about tax havens to begin in earnest. Whoever you are, wherever you live, and whatever you do, offshore is at work nearby. It affects you. It is undermining the government you elect, hollowing out its tax base and corrupting your elected politicians. It is sustaining a vast criminal economy and creating a new, unaccountable aristocracy of corporate and financial power. If we do not act together to contain, control, and eradicate financial secrecy, then the world I found in West Africa more than a decade ago, a world of suave insiders, criminal complicity, and desperate poverty, will become the world we leave to our children. A tiny few will have their boots washed in champagne, while the rest of us struggle to make our lives in conditions of steepening inequality. We must avert this future.