Stealing the world

I’ve just finished reading Nicholas Shaxon’s Treasure Islands: Tax Havens and the Men Who Stole the World (2011).It describes how the City of London is at the heart of a colossal corrupt system which had its origins in the activities of US gangsters seeking to launder crime proceeds to make them legitimate. To do this the British colony of Bermuda was first used but when that became too hot they moved to the Cayman Islands in the Caribbean. Despite its tiny population (30,000) these mosquito ridden islets are nominally home to 800,000 registered companies all of them paying virtually no tax. Cayman is now the world's 5th largest financial centre hosting three quarters of the world's hedge funds and $1.9 trillion on deposit, four times as much as New York banks. Even critics of conventional wisdom such as Paul Krugman have admitted that they failed to spot what was going on -

I was vaguely aware of the existence of a growing sector of financial institutions that didn’t look like conventional banks, and weren’t regulated like conventional banks, but engaged in bank-like activities. Yet I gave no thought to the systemic risks.

Wealthy people own about $11.5 trillion in offshore tax havens- one quarter of all global wealth. In 2006 700 of Britain's biggest businesses paid no tax at all in the UK. Shaxon also relates how the British Establishment have regarded the tax havens UK has long sheltered in the inner ring of Jersey, Gernsey, Isle of Man and its residual overseas territories in the Caribbean – where any pretence at democracy has long since gone. A whole chapter is devoted to how anyone who voices the slightest criticism in Jersey is hounded for their life by policy-makers who not only benefit from the financial deals but don’t even bother to hide the conflicts of interest.

He argues that tax havens – which the International Monetary Fund estimates to hold more than a third of the world’s GDP on their balance sheets – have fundamentally undermined the world’s economic system. Not only has the legitimate, on-shore financial system become progressively deregulated to compete with offshore – helping to cause the 2008 crash – but tax avoidance keeps poor nations reliant on aid. He explains:

Offshore business 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. Each bunch takes two routes into your fruit bowl. The first route involves a Honduran worker employed by a multinational who picks the bananas, which are packaged and shipped to Britain. The multinational sells the fruit to a big supermarket chain, which sells it to you. The second route – the accountants’ paper trail – is more round-about. When a Honduran banana is sold in Britain, where are the final profits generated, from a tax point of view? In Honduras? In the British supermarket? In the multinational’s US head office? How much do management expertise, the brand name, or insurance contribute to profits and costs? Nobody can say for sure. So the accountant can, more or less, make it up. They might, for example, advise the banana company to run its purchasing network from the Cayman Islands and run its financial services out of Luxembourg. The multinational might locate the company brand in Ireland; its shipping arm in the Isle of Man; ‘management expertise’ in Jersey and its insurance subsidy in Bermuda.

Say the Luxembourg financing subsidiary now lends money to the Honduras subsidiary and charges interest at $20 million per year. The Honduran subsidiary deducts this sum from its local profits, cutting or wiping them out (and its tax bill). The Luxembourg’s subsidiary’s $20 million in extra income, however, is only taxed at Luxembourg’s ultra-low tax haven rate. With a wave of an accountant’s wand, a hefty tax bill has disappeared, and capital has shifted offshore. What are the implications of this? Most importantly, our banana multinational has managed to avoid paying the Honduran government – or indeed any government – any tax. About two-thirds of global cross-border world trade happens inside multinational corporations. Developing countries lose an estimated $160 billion each year just to corporate trade mispricing of this kind. In 2006, the world’s three biggest banana companies, Del Monte, Dole, and Chiquita, paid only $235,000 tax between them – despite combined profits of nearly $750 million.

The book describes how all of this has happened in the last few decades - and the role which the establishment in 1957 of Eurodollars played. As one of the reviewers put it -

Whatever became of the UK coalition's zeal to bring bankers to heel? The same thing that wrecked Gordon Brown's supposed plan to close global tax loopholes – and brought all parallel efforts to dust. Simply, the threat to scarper offshore if too many displeasing measures are inflicted.

Simply, the impossibility of getting international action in a world where States like Delaware compete with offshore havens to register companies whose activities are guaranteed secrecy – and therefore not only pay no taxes but wriggle out of all regulatory requirements. And trigger off a "race to the bottom".

The City of London, seeing its imperial glories fade, used the leftover connections of empire to construct a web of influence and cash around the globe (with the Bank of England playing head spider). The Swiss, sitting pretty, had lessons of neutrality, secrecy and cupidity to impart to a wider audience. Enter bright sparks who might have invented spaceships or life-saving drugs, but in fact invented the eurodollar market – a continent of opportunity without actual territory or policing, because it existed somewhere over there, somewhere offshore. And, of course, enter the tax havens that helped make the whole edifice possible: enter anywhere where transparency lay covered in mists and democracy was up for sale to the highest bidder: enter the havens of opportunity.

In both the book and on video he voices his astonishment that so few academics and journalists have explored this field. And it takes a great deal of courage to expose and challenge the power which is involved. The sections of the book devoted to some of these people is very inspiring.
It's not easy to see how the genie can be put back in the bottle - but at least with books like these there is no longer any excuse for ignorance. People are getting organised. Here's a useful update on latest moves from a tax justice network. Shaxson had an excellent discussion about the various issues on Open Democracy a year ago - and Richard Murphy - one of the key reformers who previously worked with one of the Big Accountancies) - is optimistic