Treasure Islands, Nicholas Shaxson, 2011
While we are vaguely aware of secret bank accounts in Switzerland and the Caribbean, few actual studies and little journalism are done, maybe because facts are so hard to come by. Here is a compact work delving into the history and current state of offshore banking. It is short of figures because of the secrecy but Shaxson argues offshore banking is at the heart of recent financial crises and seemingly beyond the control of any government. The author, Shaxson, is British and perhaps only a Brit can adequately tell the story.
At the heart of this tale is the City of London which this reader thought was just a part of London where banks locate but is in fact a state within state, much like the Vatican, which traces its origins back to the Magna Carta – it predates Parliament. The City of London, covering a single square mile in the heart of London, has its own government with a Lord mayor at its head elected, not by people, but by corporations who have a vote in the City. The City of London was useful to the monarchs of England because they could borrow to pay for their domestic and international adventures. Then when England created its empire, the City of London was essential in financing that empire. The City reached its old zenith in the roaring twenties when even America had opened subsidiaries of their biggest banks in the City of London. This golden era ended with the crash of 1929, the great depression, the rise of fascism, and WWII. By the end of the war the City of London was a sleepy backwater whose bankers took three day weekends. Nonetheless, every November the City holds its Lord Mayor’s show an arcane ritual with guided coaches and elderly men in long satin robes.
John Maynard Keynes and Harry Dexter White at Bretton Woods
In 1944 John Maynard Keynes, the most brilliant Economist in history, helped negotiate the Bretton Woods agreement to control and limit international finance and create the IMF and the World Bank. This set of principals were to govern international banking until about 1970 and ushered in a period of continuous growth and prosperity for all leading economies.
The debts from WWII led to the breakup of the colonial empires, for Britain starting with the independence and partition of India in 1947 and culminating in the shocking nationalization of the Suez canal by independent Egypt in 1956.
Omar Bongo’s Paris
But something else was going on in this period. Shaxon, working for Reuters, was interested in why oil producing countries in Africa were doing so poorly. The light finally went on during a trip to Gabon in 1997. Gabon became independent of France in 1960 and in 1967 France installed Omar Bongo, then only 32, from a small minority group who combined cunning, charisma, and loyalty to France. France stationed a small contingent of troops to assure Bongo could not be overthrown in a coup. Bongo was to rule Gabon continuously til his death in 2009. Gabon was to become the cornerstone of the Elf (Elf Aquitaine) system, a global system of corruption using Switzerland and Luxembourg as tax havens and secretly connecting former french colony African oil producers to politics in France. The Elf system allowed African oil money to secretly control the politics of France for the benefit of France’s biggest corporations.
Caymans Hong Kong
Shaxon was led to look again at the moribund City of London after the breakup of the British empire. Starting in the 1950′s, the City of London was busily constructing its own labyrinth of offshore banking havens in an elaborate three tier system made from the remnants of the empire. The first tier were the crown dependencies, the islands of Jersey, Guernsey, and Man. The second tier consisted of seven of Britain’s Overseas Territories with the Queen as head of state; Antigua, Bermuda, the British Virgin Islands, the Cayman Islands, Gibraltar, Montserrat, and the Turks and Caicos Islands. The third tier consisted of Hong Kong and a scattering of other small remnants of empire in the Pacific and elsewhere. The City of London was to keep two sets of books, one for onshore banking and another for offshore banking. Secrecy and an absence of regulation or oversight was the mainstay of the offshore system. Big American banks like Citibank and Chase quickly realized that they could get around the restrictions of the Glass Steagall Act of 1933 which prevented banks from investment or casino banking, by opening subsidiaries in the offshore side of the City of London. By 1960 in France, Britain, and America the highly regulated banking systems and the Bretton Woods conventions were fast eroding. While Thatcher and Reagan continued the national erosion of regulation in the 1980′s the horses had long before left the barn for the offshore system. The Reagan – Thatcher liberalization efforts were attempts to allow domestic financial institutions to catch up with the runaway Euromarket. The Lord Mayor of the City regularly lobbies for liberalization and deregulation, making twenty trips a year to places like China and India. Insider trading has been a regular feature of activities within the offshore system where secrecy and the lack of any regulations lead to an anything goes environment. Out of the ashes of European empire and the fall of Suez rose the Euromarket, an unregulated new empire with its heart in the City of London. A 1957 commission studying the City of London concluded “Logic has its limits and the position of the City lies outside them.”
In 2008 the City accounted for half of international equity trades, 45% of over the counter derivatives, 70% of Eurobond turnover, 35% of international currency trades, and 55% of international IPOs. Yet the City remains all but invisible to historians, political analysts, and the media. The AIG subsidiary that cost US taxpayers $180 Billion operated from the City.
We think of the offshore world as the domain of organized crime, and so Shaxson treats us to a brief history of the pioneering work of mob boss Mayer Lansky who perfected the art of money laundering through Bermuda and Switzerland, converting illicit gains into south Florida real estate. Lansky built the casino and entertainment system in Cuba then “retired” to Miami Beach in 1959 when Castro overthrew the Batista government. Lansky died in 1983 in Miami Beach where he was locally portrayed as this nice grandfatherly benign old man.
Shaxson also treats us to a history of the origins of the modern multinational corporation via the Vestey brothers who built a fully integrated meat monopoly in the early 20th Century around Latin American and Australian producers. The brothers controlled every aspect of the business from production to shipping and storage to marketing. Their principals of operation were – create a monopoly, squeeze the ends (producers and markets) to push the profits to the middle, don’t tell anyone what you are doing, avoid taxes at all costs. By the first world war the brothers were the wealthiest people in Britain yet they paid no taxes at all. They ignored all suggestions that they were not patriotic and were given honorary titles. Their secret weapon of choice to disguise their activities and avoid taxes was the trust. The Vestey brother’s principals are practiced by virtually all modern multinational corporations. Oil multinationals are a classic example of the Vestey style in the modern multinational corporation. The resource owners are squeezed with low royalties as are the consumers with high prices. The profits are squeezed into the middle where they may be opaquely hidden from tax collectors and other stakeholders. It is impossible for shareholders, auditors, let alone management, to figure out how the oil companies actually operate. The Elf system is alive and well in the oil industry.
While trusts are still used offshore, modern secrecy assures that governments cannot trace activities or tie them to individuals or corporations. With the Swiss system, individuals or corporations must fully disclose their identities and the Swiss promise not to tell anyone. With modern offshore systems, accounts are created by proxy and queries will only lead to a lawyer someplace that can protect the identity of the owner by invoking attorney-client privilege. If this is not enough, accounts can be set up to trigger instant electronic closure and movement and erasure of all banking records when an inquiry is detected. Some offshore jurisdictions not only criminalize disclosure of account information, but criminalize the making of inquiries. It is little wonder that so little is known about offshore banking.
So what do we know about this offshore system? The Euromarket grew from a net $500 Billion in 1980 to $1.7 Trillion in 1988. By 1997 90% of international loans were made through this market. We know that Enron had 881 offshore subsidiaries when it went bust; that in 2008 Citigroup had 427 tax haven subsidiaries, Morgan Stanley had 290, and News Corporation (Fox News) had 152. We know that the Cayman Islands had deposits in 2007 totally $1.7 Trillion, that Hong Kong in 2007 had deposits totaling $149 but growing fast. Hong Kong is the center of most corruption activity in China. It is estimated that the United States loses $100 Billion a year in taxes to tax havens. About a third of deposits come from corrupt individuals and organized crime including terrorist networks. Drug sales alone account for $500 Billion annually, more than twice Saudi Arabian oil revenues. That leaves two thirds of deposits to multinational corporations. This makes it virtually impossible to attack or control off shore banking due to the political power of these corporations. And all multinational corporations seem to engage in offshore activities including Cisco and Google, putting a lie to their “do no harm” slogan. Bono, raiser of millions through charitable concerts, uses off shore tax havens. More than 60% of total international trades take place between subsidiaries of the same multinational corporation. The purpose of these trades is opacity from shareholders and auditors and tax avoidance. In a generally ignored detail, LTCM which collapsed in 1998 operated offshore from the Cayman Islands.
For the US, twenty five years of tax cuts “has produced not trickle down — but Niagara up. Much of this new concentration of wealth finds it way offshore.
While wealthy countries lose taxes and regulatory control to the offshore system, the biggest impact is felt in the developing world. Shaxson says that the principal foundation of modern democracy is taxation with representation. It is the interaction between elected officials and the citizens to determine the level of taxes and the use to be made of those taxes by government that underpins the entire system of proper governance. This system is undermined or never allowed to develop in countries that are dependent on minerals for financial resources or become dependent on international aid and finance. And when wealthy individuals lack confidence in the local institutions of government there is an irresistible urge to move their wealth to safe (i.e. hidden) offshore locations, denying the governments both tax revenues and pressure to develop and build stable institutions. A US Federal Reserve official noted “The problem is not that these (latin American) countries don’t have any assets. The problem is, they’re all in Miami.” South Florida banks do not share their deposit information with Latin American countries. As a measure of the damage of capital flight, it is estimated that for every $1 given in foreign assistance $10 flows out to offshore locations at the same time. Much of the $1 itself finds its way soon enough in flight. A study estimated capital flight from 40 African countries from 1970 to 2004 at $607 Billion. Total external debt for these countries in 2004 was $227 Billion. Taken as a whole Africa is a net creditor to the rest of the world. But — “The subcontinent’s private external assets belong to a narrow relatively wealthy stratum of its population, while the public external debts are borne by the people through their governments.” Another study showed that most of Argentina’s external public debt was owed to wealthy Argentines operating offshore.
First bankers lent these countries far more than they could productively absorb; then they taught the local elites the basics of how to plunder their countries’ wealth, then conceal it, launder it, and sneak it offshore. Then the IMF helped bankers pressure these countries to service their debts under threat of financial strangulation.”
He also talks about the race to the bottom in offshore, this time including individual US states which practice a type of offshore activity by promoting lenient regulation and secrecy. All the corporations or entities need do is find some legal jurisdiction somewhere in the world to do their bidding and the rest of the world immediately jumps on board. He uses the example of the dismantling of US usury laws which were repealed first in South Dakota and then in Delaware. Most credit card issuers moved immediately to these states around 1980 and credit card issuance and debt took off. His next example involves the big four accounting firms who audit most multinational corporations books and were organized as limited partnerships. As off book subsidiaries and other accounting tricks came into common use, the big four started to worry about their personal liabilities. The collapse of Enron also destroyed their accounting firm Arthur Anderson LLP, showing the the big four had reason for concern. The big four chose Jersey to create a legal framework for organizing as limited liability partnerships. After a fight in Jersey, the law was changed and in 2001, the City of London approved the same legislation. The big four immediately converted from partnerships to LLPs.
How damaging is offshore? Between 1940 and 1971 there were no banking crisis and only 16 currency crises. Since 1971 there have been 17 banking crises and 52 currency crises. Looking back at 800 years of banking, liberalization of banking always leads to banking crises.
Who populates this offshore world. A bizarre mixture of old continental European aristocrats, Ann Rand libertarians, members of the worlds intelligence communities, global crime networks, assorted lords and ladies and bankers everywhere. Their common enemies are governments, laws, and taxes. Their code of silence rivals the Sicilians and even those who leave the world in disgust are reluctant to talk about it and refuse to reveal identities.
Carl Levin Graham at UBS
In conclusion, Shaxson believes that the richest nations can bring the off shore banking system under control even acting unilaterally, one by one. He gives the example of Carl Levin, long seeking transparency in offshore banking, who, after the departure from the Senate of Phil Graham of Texas for Swiss investment bank UBS, was able to pass a simple measure banning transfers between US banks and foreign shell banks, those operating anonymously. Overnight, thousands of shell banks were reduced to a few dozen. Levin appears repeatedly in this account for his statements and attempts to limit offshore banking.
Shaxson urges all nations to return to the original bargain made between their governments and corporations, a guarantee of limited liability for individual stakeholders and the granting to the corporation of many of the rights of the individual in return for operating transparently for the benefit of all stakeholders whether management, stockholders, customers, or suppliers, and the payment of taxes in full and without delay. Any corporation refusing to abide by the bargain should have their charters revoked and should be banned from doing business within the country. The problem with carrying this out is the degree to which the rich nations have become client states of the multinational corporation. Shaxson believes this would pose a particular difficulty in Britain where the ancient traditions of the City of London have almost always thwarted any attempts at reform. As to the threat that the multinationals will move their business elsewhere, Shaxson believes their offshore activities are so toxic to the host country that their loss may not be such a bad thing. And if the wealthy nations can deny multinational corporations and offshore banks access to their citizens and markets, the huge system would soon wither.