Treasure Islands

1. The offshore world: A global network of tax havens and financial secrecy

"Offshore is not just a place, an idea, a way of doing things, or even a weapon for the finance industries. It is also a process: a race to the bottom where regulations—laws and trappings of democracy—are steadily degraded."

A vast, hidden financial system. The offshore world encompasses about 60 secrecy jurisdictions, handling over half of world trade and banking assets. This system allows wealthy individuals and corporations to escape taxes, regulations, and legal accountability.

Key components of offshore:

• Tax havens offering low or zero taxes
• Secrecy laws protecting financial transactions
• Complex legal structures like trusts and shell companies
• A global network of banks, lawyers, and accountants facilitating offshore activities

Impact on global economy:

• Erosion of tax bases in both developed and developing countries
• Undermining of financial regulations and criminal laws
• Facilitation of money laundering and other illicit activities
• Widening wealth inequality and concentration of power in financial elites

2. Historical roots: From empire to modern financial centers

"As the empire crumbled, the pound—then fixed against the U.S. dollar at $2.80 per pound—began to totter and with it the whole edifice of solid, dependable imperial finance."

From empires to tax havens. The modern offshore system has its roots in the decline of European empires, particularly the British Empire. As colonial powers lost direct control over territories, they sought new ways to maintain economic influence.

Key historical developments:

• Swiss banking secrecy laws enacted in 1934
• Emergence of Caribbean tax havens in the 1960s and 1970s
• Creation of the Euromarket in London in the 1950s

The Vestey brothers case: This early example of corporate tax avoidance illustrates how multinational companies began using offshore structures to minimize taxes. The Vesteys created a complex network of trusts and companies to shift profits and avoid British taxes, setting a precedent for modern offshore practices.

3. The City of London: Heart of 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."

A state within a state. The City of London, with its unique governance structure and historical privileges, serves as the central hub of the global offshore system. It connects a network of British Overseas Territories and Crown Dependencies that function as tax havens.

Key features of the City:

• Ancient rights and privileges dating back centuries
• Separate governance from the rest of London
• Close ties to the banking and financial services industry
• Central role in facilitating offshore transactions

The British "spiderweb":

• Crown Dependencies: Jersey, Guernsey, Isle of Man
• Overseas Territories: Cayman Islands, British Virgin Islands, Bermuda
• Former colonies: Hong Kong, Singapore, Dubai

This network captures global financial flows and channels them through London, while providing secrecy and tax advantages to wealthy clients and corporations.

4. Tax havens drain wealth from developing countries

"Raymond Baker, the director of GFI, was quite right to call the emergence of the offshore system 'the ugliest chapter in global economic affairs since slavery.'"

A modern form of exploitation. Tax havens facilitate the extraction of wealth from developing countries on a massive scale, undermining economic growth and perpetuating poverty.

Scale of the problem:

• Estimated $1.2 trillion in illicit financial flows from developing countries in 2008
• For every $1 in foreign aid, $10 leaves developing countries through illicit channels

Mechanisms of wealth extraction:

• Corporate tax avoidance through transfer pricing and other techniques
• Corruption and embezzlement by political elites
• Criminal activities such as drug trafficking and human smuggling

Impact on development:

• Loss of tax revenue for essential public services
• Weakening of democratic institutions and accountability
• Perpetuation of economic inequality and dependence on foreign aid

5. Corporate tax avoidance and its global impact

"Tax is not a cost of production but a distribution out of profits to stakeholders, ranking on the profit and loss account alongside dividends. It is a distribution to society, and it pays for the things like roads and education that help the corporations make their profits."

A race to the bottom. Multinational corporations use complex offshore structures to minimize their tax bills, shifting profits to low-tax jurisdictions and costs to high-tax countries.

Common tax avoidance techniques:

• Transfer pricing manipulation
• Intellectual property holding companies in tax havens
• Debt shifting through intra-company loans
• Use of shell companies and trusts

Consequences:

• Erosion of national tax bases
• Unfair competition with smaller, domestic businesses
• Increased tax burden on individuals and small businesses
• Widening wealth inequality

The role of professional enablers: Accountants, lawyers, and bankers play a crucial role in designing and implementing offshore tax avoidance schemes, often operating in a legal gray area.

6. The United States: Both victim and perpetrator of offshore finance

"America must not be allowed to pick out the eyes of the British Empire."

A complex relationship with offshore. The United States is both a major victim of offshore tax evasion and a significant provider of financial secrecy services to foreign clients.

U.S. as offshore victim:

• Estimated $100 billion annual loss in tax revenue due to offshore evasion
• Undermining of financial regulations and criminal laws

U.S. as offshore haven:

• Delaware, Nevada, and Wyoming offer corporate secrecy
• Foreign investors can invest in U.S. assets tax-free and anonymously
• Major financial centers like Miami cater to offshore clients

The offshore lobby: Powerful financial interests in the U.S. have consistently fought against efforts to crack down on offshore abuses, using threats of capital flight to influence policy.

7. Offshore's role in the 2008 financial crisis

"Offshore did not exactly cause the financial crisis: It created the enabling environment for the conditions underlying the crisis to develop."

A catalyst for instability. The offshore system played a significant role in creating the conditions that led to the 2008 global financial crisis.

Offshore contributions to the crisis:

• Facilitation of excessive risk-taking and leverage
• Creation of opaque financial instruments and structures
• Undermining of financial regulations and oversight
• Amplification of global financial imbalances

Specific examples:

• AIG's London-based Financial Products unit
• Lehman Brothers' use of offshore accounting tricks
• Growth of the shadow banking system in secrecy jurisdictions

Lessons unlearned: Despite the crisis, many of the offshore practices that contributed to financial instability remain in place, posing ongoing risks to the global economy.

8. The human side of secrecy jurisdictions

"Those who know don't talk, and those who talk don't know."

A culture of silence and complicity. Life in secrecy jurisdictions is characterized by a pervasive atmosphere of secrecy, social pressure, and moral compromise.

Key features of offshore culture:

• Groupthink and suppression of dissent
• Strong social and professional networks based on trust
• Normalization of unethical behavior
• Fear of retaliation for speaking out

Personal accounts: Stories from individuals who have worked in offshore finance reveal the psychological toll of participating in a system that facilitates tax evasion, money laundering, and other harmful practices.

Impact on local communities: While offshore finance brings wealth to secrecy jurisdictions, it often comes at the cost of democratic accountability and social cohesion.

9. Resistance and reform: Challenging the offshore system

"We must tackle the offshore system."

Growing momentum for change. Despite the entrenched power of the offshore system, there are increasing efforts to challenge and reform it.

Key areas for reform:

• Increased transparency through country-by-country reporting and automatic information exchange
• Stronger anti-money laundering regulations
• Reform of corporate tax rules to prevent profit shifting
• Greater accountability for professional enablers of offshore abuse

Obstacles to reform:

• Political influence of the financial industry
• Competition between jurisdictions to attract capital
• Complexity of the global financial system

The role of civil society: Organizations like the Tax Justice Network and Global Financial Integrity are playing a crucial role in exposing offshore abuses and advocating for reform.

10. Reclaiming our culture from unaccountable privilege

"We can recapture our culture from the forces of unaccountable privilege that have taken it away from us."

A call to action. Challenging the offshore system requires not just policy changes, but a fundamental shift in cultural values and social norms.

Key cultural changes needed:

• Recognizing tax as a civic duty and social responsibility
• Challenging the glorification of wealth accumulation at any cost
• Promoting transparency and accountability in business and finance
• Valuing the public good over private gain

Individual actions:

• Demanding greater transparency from corporations and governments
• Supporting politicians and policies that address offshore abuses
• Raising awareness about the impact of offshore finance on society

The stakes: Failure to address the offshore system threatens to further erode democracy, exacerbate inequality, and undermine the social fabric of societies around the world.

Last updated: November 2, 2024