Treasure Islands: Tax Havens and the Men who Stole the World, by Nicholas Shaxson, Bodley Head, RRP £14.99 316 pages
The offshore system is in good health. More than half of world trade passes through tax havens. Over half of all banking assets and a third of Foreign Direct Investment by multinational companies are routed offshore. Some 85 per cent of international banking and bond issuance takes place in the Euromarket. The IMF estimated that the balance sheets of small island financial centres alone added up to more than $18 trillion – a sum equivalent to about one third of world GDP. The US Government Accountability Office (GAO) reported in 2008 that 83 of U.S.A.’s biggest 100 corporations had subsidiaries in tax havens. Research showed also that 93 of Europe’s largest companies used offshore subsidiaries.
Tax havens can be defined as jurisdictions where companies can get away from normal financial regulation. They also offer secrecy and an environment where individuals refuse to cooperate on exchange of information with other jurisdictions. Secrecy jurisdictions also ring-fence their own economies from the tax havens, a tacit admission that what they do is harmful.
The most important feature of a secrecy jurisdiction is that local politics is captured by financial services interests (sometimes criminals) and meaningful opposition to the offshore model has been eliminated. There is little or no risk that democratic opposition will interrupt the process of making money. Another feature is that the financial services industry is large compared to the size of the local economy. The IMF used this tool to finger UK as an offshore jurisdiction in 2007!
Shaxson cites Murdoch’s empire as “a master of offshore gymnastics, using all legal means available”. When the Economist investigated in 1999 it reckoned that News Corp only paid an overall tax rate of about 6%.
The author uses trade in bananas to illustrate how tax havens work. The actual banana finds its way to consumer in straightforward way but the accountant’s paper trail is more roundabout. It does this through a common trick, known as transfer pricing. By artificially adjusting the price for the internal transfer, multinationals can shift profits onto a low tax haven and costs into a high-tax country where they can be deducted against tax. In the banana example, tax revenue has been drained out of a poor country and onto a bigger one. Developing countries are said to lose an estimated $160bn each year to corporate mispricing. A Guardian report in 2006 found that the three biggest banana companies in UK had sales of $760mn but only paid about $300,000 in taxes.
A study by the National Audit office in 2007 found that about a third of the UK’s largest companies had paid no tax at all in 2006.
The City of London is the most important part of the global offshore system. Shaxson summarises the transformation of the City as follows. “A state within the British state, the City had been transformed from a gentleman’s club operating the financial machinery of empire steeped in elaborate rituals and governed by unspoken rules, about ‘what isn’t done’, into a brasher, deregulated global financial centre dominated by British banks and linked intimately to the new British spiders web”. The City’s offshore network has 3 main layers – the Crown Dependencies like Jersey, Guernsey and Isle of Man. The three Crown Dependencies channelled $332bn of net financing in the 2nd quarter of 2009 to the City. Jersey promotional literature describes Jersey as ‘an extension of the City. Research shows that the 3 territories host about $1 trillion of potentially tax-evading assets.
Secondly Overseas Territories like British Virgin Islands and Cayman Islands. Cayman Islands is the world’s fifth largest financial centre, hosting 80,000 registered companies, over ¾ of the world’s and $1.9 trillion on deposit, more than New York City banks. The Cayman Islands reported $2.2 trillion in equity liabilities (deposits and other obligations) to the IMF in 2008 but only $750 billion in portfolio assets. The discrepancy is simply unexplained and is obviously deeply suspicious.
And finally an outside ring comprising countries like Hong Kong and Singapore. This network of satellites serves various purposes. Firstly, it gives City a global reach, allowing it to attract international mobile capital flows; secondly it enables City to do business which would be forbidden in UK and deny wrongdoing. Each tax haven specialises in different types of financial flows. Bermuda is a magnet for offshore insurance and reinsurance; the Caymans are favoured location for hedge funds to avoid tax and to avoid financial regulation.
The origins of the tax havens can be traced back to the mid 50s, when a new strain of offshore activity was noticed in City of London. At the time exchange rates were fixed and banks were not supposed to trade in foreign currencies unless for specific purposes. The Midland Bank was contravening exchange controls by taking US dollar deposits that were not related to commercial transactions. This was the start of the process where banks rode roughshod over exchange controls and represented the beginnings of the Euromarket.
Shaxson makes the point that the offshore tax havens did not start in scandal tainted Caribbean isles or in Zurich but in the City of London. By the end of 1959 , about $200 million was on deposit and by the end of 1961 it had reached 3 billion. The Euromarket kept booming. By 1970 it was measured at $46 bn, and by 1975 it was reckoned to have grown to exceed the size of the entire world’s foreign exchange reserves. By 1980 it had reached $2.6 trillion and by 1997 nearly 90 per cent of all international loans were made through this market. The BIS has given up calculating the extent of the market.
By the 60s US policymakers were becoming increasingly worried about the effects of the Euromarkets and the Federal Reserve sent over people to London to discuss situation with Bank of E. However a combination of Bank of E indifference and US banking interests combined to ensure that these concerns were not addressed and the Eurodollar market continued to grow.
The author makes point that the US Govt needs foreign funds to flow in, and it attracts them by offering tax-free treatment and secrecy. The very term capital flight implies that the victim – i.e. the country exporting flows – is at fault when this is not really the case. With all the Overseas territories, UK keeps enough distance to deny responsibility when things go wrong (as it did with the Turks and Caicos Islands a few years ago with corruption allegations).
Finally, independent countries like Singapore, Hong Kong and Bahamas also play a large part in the UK’s global network.
The US also has its own multi-layered network of tax havens. It appears that criminal proceeds can be deposited in US banks if crimes are committed abroad. The biggest US influenced haven is Panama. It began registering foreign ships in 1919 to enable Standard Oil to escape US taxes. Offshore finance followed in 1927, when Wall Street interests helped Panama introduce lax company laws, etc. As well as this, an important development in the US itself was the enactment of various pieces of legislation in Delaware which meant that a huge tax haven was born in the US. The deregulation can be cited as the root of the recent financial crisis in the advanced countries, particularly the US.
The book is compelling reading and shows how the interlinking of money and power has combined to entrench the tax havens in the modern global economy.