The Men Who Stole the World

by Nicholas Shaxson, Jamie Stern-Weiner

Nicholas Shaxson, author of 'Treasure Islands', discusses Britain's leading role in the global offshore economy and the prospects for challenging corporate tax avoidance.

First published: 09 February, 2011 | Category: Corporate power, Economy, International, Law, Politics

Nicholas Shaxson is a British journalist and Associate Fellow of Chatham House. His most recent book, Treasure Islands, is a highly readable and often shocking account of the murky world of offshore finance. The book provides serious intellectual ammunition to the growing campaigns in Britain and elsewhere against corporate tax avoidance. Shaxson offers a clear account of the mechanics of tax avoidance and connects it to a much broader offshore system that plays a central role in the global economy.

I met up with Nicholas last week to talk about his book.

To start off, when you use the phrase ‘tax haven’ what do you mean?

There is no common definition of what a tax haven is. Everybody has a slightly different definition. Ultimately what a tax haven provides is escape from the rules and the laws of jurisdictions. Tax havens are also about ‘elsewhere’ – the laws of the Cayman Islands are not designed for the benefit of the 50,000-odd population of the Cayman Islands. They are designed for people who live in the United States, Europe, Africa, Asia, and so on. Hence the term ‘elsewhere’, or ‘offshore’, is fundamental to what a tax haven is. Essentially, then, tax havens are about wealthy individuals and corporations taking their money elsewhere to do things that they wouldn’t be allowed to do at home.

And tax havens, presumably, are sunny Mediterranean beaches and exotic islands in the Atlantic?

The traditional view is exactly that, of a few palm-fringed tropical islands in the Caribbean, Monaco, Switzerland, Liechtenstein. Small states. But if you do the analysis of what a tax haven is and what they are selling, you will find that these small islands are generally sideshows to the big event. The biggest tax havens in the modern global economy are big OECD rich country economies – the United States, the United Kingdom, Switzerland. The Cayman Islands is still very big – it’s the biggest island tax haven in terms of financial services. Luxembourg is a great dark horse of the offshore world – it is absolutely massive. The Netherlands, Ireland… these are all OECD countries, and if you talk about offshore activity, about providing facilities for people elsewhere to escape, either legally or illegally, what they are required to do at home, then you have to realise that the offshore system is much, much bigger than the stereotype. There is no other way to analyse it, really.

The pervasiveness of this stereotype has been one of the great reasons why the offshore system has been invisible. People have always thought of tax havens as sideshows to the main event, whereas in fact they are central to the global economy.

In the book you describe the City of London as the centre of a “spider web” of tax havens across the globe. How significant is the City’s role in the international offshore economy?

This has a long historical pedigree. The City of London was the financial capital of the world’s greatest empire, and it is no coincidence that today the City of London is at the centre of a great financial network around the world. It developed in two phases. London itself became an offshore jurisdiction from the mid-1950s, exactly the time of decolonisation, with the creation of this new market known as the ‘Euromarket’ or ‘Eurodollars’, which despite the name has nothing to do with the Euro or US dollar currencies. It was a market in which financing happened in a range of different currencies in London, but the Bank of England designated these activities to be unregulated and as such created a deregulated space. This was an offshore market, and it grew incredibly rapidly from the 1950s and especially in the 1960s and ‘70s, when it became an important force in the global economy. So that was the first stage, when the City of London became the centre of these so-called Euromarkets – big offshore markets.

The second phase started in the late ‘60s and properly got going in the 70’s, when semi-independent British territories around the world, particularly in the Caribbean, began to realise that they could attract serious money by offering secrecy and zero or low tax rates. They realised that if they put these strong secrecy measures in place money would be sucked out of the United States, Africa, and so on. Money started to flood in in large quantities in the 1970s.

Britain has had an ambiguous role in these different territories. It has places like the Cayman Islands, Bermuda, Gibraltar and Turks and Caicos, which are called ‘Overseas Territories’ and are the remnants of the British empire. These islands are scattered around, mostly in the Caribbean but also elsewhere, and became magnets for capital from nearby jurisdictions. Then there are the ‘Crown Dependencies’ much closer to Britain – Jersey, Guernsey, the Isle of Man – which have old histories as tax havens and have played an offshore role for decades, even centuries. They also got in on this game of attracting money by offering secrecy, zero taxes, and escape from laws.

So you have the creation of these tax havens in their own right, but what they quickly became were ‘feeders’ for the City of London. They would channel money and the business of handling money into the City, encompassing both licit and illicit business – huge capital flight out of Africa was being attracted to these places, for example. The City had this network of jurisdictions scattered around the whole world whose aim was to attract capital and then feed that money and the business of handling money into the City. So while the analogy with a ‘spider’s web’ is a bit sinister sounding it is apt – this network catches business from different parts of the world and then feeds into the centre.

One of the revelations in your book I found most striking was that the City of London itself is jurisdictionally distinct from the United Kingdom. When you walk around London and you see the looming skyscrapers and the gleaming buildings of the financial district they feel like alien presence, and what you show in your book is that in some sense they are.

When talking about the ‘City’ you have to distinguish between two things. The general view of the City is just ‘the financial services industry’, and when people say ‘the City’ that is generally what they mean. But in my book I am much more specific: I’m referring to the City of London Corporation, which is an ancient historical entity. It is on one level simply the municipal authority for the Square Mile, which is around 700 acres of prime land in the centre of London, which is essentially home to the financial services industry. But this entity, the City of London Corporation, is no ordinary municipal authority. It is an authority that has managed to carve itself out of many of the laws and regulations that apply to the rest of the United Kingdom, in a process that has lasted for centuries. It is an island of special privileges. One colourful marker of the discontinuity between the City of London Corporation and the rest of the country is that the Queen, when she crosses into the City, does this strange ceremony where she is met by the Lord Mayor and the City police raise a red rope and the Queen crosses, and there’s the Lord Mayor’s sword, etc. There is this whole colourful ceremony, and it’s treated now as just a ceremonial thing for tourists, but it is a marker of the fact that the City is politically and constitutionally a different entity that has, through the power of finance, been able to carve itself out a separate jurisdiction.

Another example is the voting rights in the City. The City is composed of 25 wards and when ward elections are held for the Common Council, which is the main decision making body, not only do the residents get a vote but the corporations within the City get to vote as well. This is not the workforces of those corporations but the corporate management. So you have Goldman Sachs voting in a British election. It is completely bizarre. There are all sorts of historical reasons behind this but the fact is that the City is a very different constitutional and political entity within the United Kingdom, and in a sense not only is it the centre of this offshore spider web but is also an offshore island in its own right. The City of London has a Lord Mayor but London has a Mayor as well, so this is really a tale of two cities.

A major theme in the book is the frequent incompatibility of economic and political freedom. You describe how one of the key features of a successful tax haven is “political stability”, which, translated into English, means freedom from democratic interference. So in Switzerland you have the ‘concordance’ system, the City of London Corporation gives votes to corporations, and so on. Why are these two principles so often at odds with each other?

I would make a distinction between ‘economic’ freedom and ‘financial’ freedom. Going back to J.M. Keynes there was a feeling that the more that there is financial globalisation the more difficult it is for democratically elected governments to set the economic policies they want. Keynes had a saying that finance should be primarily national. There was a period of about a quarter of a century after the Second World War where financial flows across borders were quite heavily constrained. And that was a period, for many reasons, of high growth and quite widespread growth. But it is very well known that when your country is completely opened up to financial capital you can have huge flows of hot money forcing the government to adopt policies that it would not otherwise adopt. Hence the famous quote by James Carville, Bill Clinton’s economic advisor, that [paraphrasing] ‘when I am reborn I want to be reincarnated as the bond market so I can intimidate everybody’. So there is a paradox: as you free up financial capital, in a sense a form of bondage for the people and their democratic representatives emerges. And tax havens are fundamental to that because they make it even harder for governments to raise as much revenue from the wealthier sector of the population as they would like according to their democratic mandate, because they are afraid that the money will flee. So governments will lower taxes on the wealthy because of this fear.

The language of ‘freedom’ seems have been redefined in mainstream political discourse over the last few decades to mean economic liberalisation. Is this connected to the rise of offshore?

Absolutely. Among the people who are out there lobbying for tax havens this word ‘freedom’ crops up all the time. What it essentially amounts to, in the offshore context, is freedom for wealthy people to escape the responsibility to society that would otherwise constrain them. The cruellest example of that is tax: either illegally by finding offshore secrecy to evade taxes or legally by finding clever ways to avoid it, the net result is that ordinary people have to pay the taxes that the rich do not. So these people are conflating ‘freedom’ for themselves with ‘freedom’ for everybody.

In the book you describe a battle between US regulators and lawmakers in the Cayman Islands, with the latter coming up with increasingly sophisticated legal mechanisms to thwart the tax collecting efforts of the former. In any other context it would be strange to imagine the Cayman Islands being able to put up any kind of resistance to the US. Why have American officials been unable to crack down on it more effectively?

There has generally been quite an antagonistic relationship between the US government and secrecy jurisdictions like the Cayman Islands. Despite this the Cayman Island’s offshore activity has continued to grow. There are many reasons for this. One is the lobbying power of Wall Street. Wall Street loves the Cayman Islands because offshore banking can be an awful lot more profitable than onshore banking, because you don’t have the same constraints – you can escape reserve requirements and you can grow your business much faster. So there is a huge Wall Street lobbying element.

There is also the fact that Britain is standing staunchly behind its own tax havens, including the Cayman Islands, which makes it harder for the United States to act.

The norms of state sovereignty also make it difficult for the US to impose restraints on a nominally sovereign state, although it is questionable whether the Cayman Islands really is an independent state.

There is also a more generic problem. The Cayman Islands, say, will enact some sort of legislation aimed at attracting capital. The US government will react with some sort of defence against that new legislation. There will then be teams of lawyers in tax havens, or on Wall Street, or in the City of London, devoting themselves to hatching up plans to find new ways around it. This dynamic has two effects. First, tax systems steadily become more and more complicated through this cat-and-mouse process. Second, the countries that are able to defend themselves, up to a point, from all these newly discovered loopholes are generally the developed, wealthier countries, which have sophisticated lawyers and so on to draw upon to construct defences, albeit leaky ones. The developing countries generally lack access to this expertise and are left wide open to the proliferation of loopholes. So it has tended to be developing countries that have suffered particularly from this.

What is the relationship between tax havens and the drug trade and organised crime?

The drug trade makes heavy use of the offshore system. The money now involved is so large that you can’t transport it in suitcases anymore. A suitcase can only hold around $1-2 million, and we are now talking about tens and hundreds of millions of dollars. In terms of the overall scale of what is happening offshore there are various different estimates. One is by Raymond Baker who wrote a book called Capitalism’s Achilles Heel and who now works for Global Financial Integrity in Washington. According to his analysis criminal money – which includes money from the drug trade, as well as various other sources – accounts for roughly a third of the overall picture. Corruption money, the focus of so much attention, amounts to only three percent of the picture. The remaining two-thirds is commercial money – transfer mispricing, tax avoidance and evasion by corporations, and so on. All of these different components use the same facilities and the same corporate and secrecy structures. They are all in it together. So there is a very unhealthy proximity of the criminal and the commercial being incubated offshore.

Let’s talk about New Labour. What was that government’s record like on tax havens?

I think most people would accept that New Labour became much too beholden to the City, and I think a lot of people in the Labour Party now regret that. As Tony Blair came to power Labour had been in the wilderness for a long time and were desperate to get into power, and they thought it was a good idea to make this pact with the City – the financial interests but also the people who ran the City of London Corporation – so that that flank would be protected. The idea was that the City would make its money, Labour would tolerate its activities, make tax regulation flexible, sound all the buzzwords that sounded great until the crisis happened (‘tax efficiency’, etc.) and they would then take some tax benefit out of that. Until about 2007 that bargain seems to have worked well enough for Labour, and then things all fell apart. The Conservative Party of course since then is even more beholden to the City, but New Labour really lost its way.

In the offshore context, Gordon Brown had said [paraphrasing] “we will not permit millionaires to get tax relief in tax havens” and made signals that Labour would really get serious about it. But once he became Chancellor and then Prime Minister he was much more words than substance.

New Labour is often praised, rightly or wrongly, for its record on international development. Should its support for offshore call this into question?

Yes, absolutely. This month a Washington-based organisation, Global Financial Integrity, put out some new research. They got a former IMF senior economist to crunch the numbers on illicit financial flows out of developing countries, and their latest analysis is that in 2008 $1.2 trillion – that’s trillion, not billion – leaked as illicit flows out of developing countries. If you compare that to the $100+ billion of foreign aid going to developing countries, you’re looking at one dollar going in as aid and ten dollars going out under the table. So there is a huge problem there. There has been a massive focus on foreign aid, which in general terms is not a bad thing, but one of the problems has been, and this is very much true under New Labour, the ignoring of the bigger issue of huge illicit outflows, which are associated with tax havens, crime, and so on.

Let’s look at some arguments used to defend tax havens, or at any rate to defend government leniency towards them. First, it is often argued that financial firms employ lots of people, they generate a lot of wealth, and so if, in order to attract their business, corporation tax has to be lowered and tax avoidance tolerated, those sacrifices are on balance worth making.

This is the main argument offered in offshore’s defence. Before I started working on tax havens I spent 12-13 years researching the politics of oil-producing countries in West Africa. One of the things that always startled me was that a country like Nigeria would be earning literally hundreds of billions of dollars from its oil, and this made some people extremely wealthy, yet if you look at the actual human development, all this vast volume of money has hardly done any good for most of the population compared to their peers in the region. There is a whole literature about the so-called ‘resource curse’. So money in itself isn’t necessarily a good thing.

Turning to the UK, the financial flows into the City as a result of offshore activity have dwarfed the inflows of our peers. But are we in Britain any better off than, say, the French, or the Germans? I think that’s a difficult case to make. If anything one could argue that we are worse off – we are a more unequal society, and though there is more wealth at the top there is also more deprivation at the bottom.

There is also the problem that this money is what economists call ‘economic rent’. Offshore finance is a way of attracting easy money, hot money, which will typically go into real estate and speculation on real estate and producing property bubbles. So these financial inflows are not actually making Britain a more productive place. You could already make this argument before 2007, before the financial system collapsed and we all had to start paying for it.

Then on top of that you have the problems in the developing countries that are all these financial outflows.

So there are three crucial reasons to reject this claim. I think that the arguments in defence of the City don’t stand up to scrutiny. But they are very attractive on the surface.

Another argument is that given financial globalisation there is little that one country can do on its own to crackdown on offshore finance. If, say, the British government were to clamp down on tax avoidance, financial capital would simply flee to somewhere more welcoming.

In any measures taken against offshore finance, international co-operation is always going to be crucial. Having said that there is an awful lot that individual countries can do and leadership that can be taken. Many people say, ‘oh the offshore system is just a bunch of atomised jurisdictions, all independent sovereign nations, so how can we ever get them to agree on anything?’ In fact there are a very small number of influential players. Britain, by the admission of City officials themselves, is responsible for half of the world’s tax havens, half of the offshore system. In fact the Tax Justice Network did an analysis and put together a financial secrecy index that again found that around half of the global offshore system is at least partly controlled by Britain. So Britain is absolutely crucial to changing this whole game, absolutely central. I think people in Britain don’t yet understand the importance that their own country has in it.

Also the OECD club of rich countries has a dominant position in setting economic rules, on international tax in particular. The OECD’s policy on this issue reflects the interests of its members many of which are tax havens in their own right. In April 2009 there was a G-20 statement that the ‘era of bank secrecy is over’ and mandating the OECD to start cracking down on it, accompanied by an awful lot of fanfare in the media. If you actually look at the specifics of what the OECD has done since then it looks like a whitewash. There is no other word for it. There has not been the change that is required. So the OECD is a good target for those who want to put pressure on the big players in the offshore system. And of course the United States is another big part of the picture.

Fortuitously your book was published just as UK Uncut, which protests against corporate tax avoidance, made this a live political issue. Do you see potential in that campaign?

I and others who have been working on this have been dreaming that something like UK Uncut would come along. We’re all absolutely delighted. The issue of tax avoidance is incredibly complex on a technical level, but at the heart of it it’s a very simple matter: these are corporations who are using legal or illegal means to cut their tax bills, with the outcome that ordinary people have to pay their tax bills for them. That is profoundly unfair. I think that everybody in UK Uncut and many others realise that this is a major issue. We are talking billions and tens of billions of pounds potentially lost. If you compare those sums to the amounts being cut from public expenditure there is an obvious campaign to be had here, and it is absolutely fantastic to see people out on the streets. It would be nice to see hundreds of thousands of people protesting this, and I am hoping that this is something that UK Uncut, the Tax Justice Network and others can build towards. There is no economic or political rationale for what is going on, and I see UK Uncut as a signal of something new emerging. I’m very hopeful that it will grow.

What’s interesting is that UK Uncut has not simply attracted the support of liberals and leftists. The Daily Mail has been supportive, for instance.

That’s right. Since I’ve started researching this I have never seen it as a particularly left-right issue. It will clearly be a more attractive campaigning issue for people on the left, but as you say the Daily Mail has also been very interested in the argument. It is a bit like the fight against corruption – it’s not obviously a left-wing or right-wing issue. What offshore finance is, after all, is a corruption of markets. It is not how capitalism or trade should work. There are no economic textbooks that say that this is a beneficial way to proceed. So you can oppose offshore finance whether you are a fan of free markets or a critic.

In terms of steps we can take against offshore finance, is it fundamentally a matter of restricting the free movement of financial capital?

Before we start talking about things like that, we are still in a very early phase of educating people. This is something that is not yet nearly enough on the radar, so the first phase has to be education, making people realise the scale and importance of the offshore system. One of the statistics I include in the book is that approximately half of all world trade passes through tax havens. There are many different ways of measuring it and the precise figure can be argued about but we are talking about that order of magnitude, and I think people generally haven’t woken up to that fact. So that’s the early phase we’re in.

Until now the lobbyists and defenders of offshore have had a field day and they have had their views predominate. There is a whole corrupted culture of tolerance for this abusive behaviour. The accountancy firms are particularly to blame for promoting aggressive financial schemes, and you will get journalists who have a story on tax to write calling up an accountancy firm because the technicalities are complicated. In doing so they will receive and propagate a particular worldview. So you have a corruption of the culture and a lack of understanding, and that is what needs to change at this stage.

After that, there is no magic bullet. There are various different ways of reigning in the offshore system, lots of steps that can be taken, but public engagement is absolutely fundamental to it.

It seems like the offshore system is very deeply embedded in the dominant capitalist institutions. It will be very difficult to get rid of.

Certainly there is a very powerful and self-reinforcing dynamic at play here. You have a race to the bottom in which jurisdictions compete with each other to offer ever deeper secrecy and ever lower tax schemes to attract money. Then you have competition between accountancy and law firms to out-do each other on devising aggressive schemes to enable tax avoidance. And then you have the multinationals competing with each other to drive their tax bills down. This is a powerful dynamic, which is why we need significant public engagement to challenge it.

I think we are now at the point where, because this has been so unopposed, there is a huge potential for an awakening. The entire economics profession has been largely blind to this stuff, has never really factored it in to its calculations, so it really needs to take it on board. Political discourse is beginning to change now. It is a big battle, but I think huge amounts of progress can be made.

You write in the book that the interests of industrial capital and financial capital often conflict, for instance on the desired level of interest rates. Is there much division on the issue of tax havens? If so does this offer a potential wedge for campaigners to exploit?

Potentially, but we have seen the financialisation of industrial capital. That is part of the problem: multinationals now, even if they are effectively manufacturing corporations, have embedded offshore tax avoidance in their business model.

The real competition is between them and smaller and medium-size businesses that are onshore. Those businesses are really suffering from this because they are being out-competed on economic practices that have nothing to do with real productivity or efficiency. There is an organisation in the US that has just been established called Business and Investors Against Tax Haven Abuse, which represents smaller and more nationally-based businesses that are being out-competed by multinationals on the exploitation of tax havens. So there is definitely potential pressure in that area that campaigners could harness.

What role did the offshore system play in the recent financial crisis?

There have been a lot of statements that tax havens had nothing to do with the financial crisis, and I think the main reason for this is that people are still working with the image of tax havens as exotic palm-fringed islands in the Atlantic. If you look at the locations where all the business was done, it was in places like Luxembourg, Delaware, Ireland, the Cayman Islands, Jersey, Guernsey. Traditionally just the Cayman Islands, Jersey and Guernsey would have been thought of as offshore jurisdictions and Luxembourg, Ireland and Delaware would have been seen as onshore. But if you realise that these are the places that were selling offshore finance and where the special purpose entities were being incorporated then you start to realise that clearly offshore was central to that aspect of the crisis. More generally competitive deregulation by offshore secrecy jurisdictions was one driver – one that in my view was at least as significant as neoliberal ideology – of the process of financial liberalisation, the race to the bottom.

There is also, with the huge illicit flows out of developing countries to developed countries, the element of deficit finance and this was a hidden contributor to the macroeconomic imbalances that underlie the crisis.

There are all sorts of other, slightly arcane reasons. There are complicated stories to be told, for instance, about how accountancy firms were able to use Jersey as a crowbar to force the deregulation of limited liability laws so that it was easier for auditors to get off the hook when things went wrong.

Has the financial sector learnt the correct lessons from the crisis, in your view?

I think most people would agree that lessons haven’t really been learnt. Bankers are still getting their bonuses. There has been a lot of talk about coordinating financial regulation but no real action. We have seen a bit of progress but, again, the offshore aspect to all of this has been almost completely ignored because the role of tax havens has not been understood.

Finally, what resources can you recommend to people who would like to learn more about this issue?

For analysis I would recommend the website and blog of the Tax Justice Network, which I work for. These offer a trove of information. Their material is sometimes a bit technical, but it’s mostly written in a very accessible form. In the next month or two we will start building a program to provide a new range of materials more accessible to a lay audience.

The Guardian ran a very good series on the ‘tax gap’ that’s worth checking out.

Richard Murphy’s blog is very interesting.

Private Eye is a great source for information – the guy who writes most of their material on these issues is a top tax expert who used to work as a senior official in the corporate division of HM Revenue & Customs, so he really knows his stuff. With the Vodafone story [an article in Private Eye accused Vodafone of avoiding £6 billion in tax] there have been a lot of claims circulating that the figure of six billion an “urban myth”. It’s not. These companies that are being reported on tend to respond in that way, but it’s an incredibly slippery field and it is very easy to construct an argument that you have paid all your taxes when in fact you have been avoiding them. So Private Eye is a very reputable source for this and when it runs stories about tax evasion and avoidance they should be taken very seriously.

In the US Global Financial Integrity do a lot of interesting work. Various NGOs are also now getting involved. Action Aid, for example, did a very good report on the brewer SABMiller and its tax avoidance in Africa.

There has not been enough focus on the financial regulation side of the offshore system – there hasn’t been any in-depth study on how offshore financial regulation works. There is some material in my book but it is a ripe field for further research.

Jamie Stern-Weiner is a co-editor of New Left Project. He is a politics student at King’s College, Cambridge, and also writes for Le Monde Diplomatique. He can be followed on twitter as @jamiesw.

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