Tax havens and the men who stole the world

Stuart Weir, Associate Director of Democratic Audit, reflects on Nicholas Shaxson’s new book on the scale, depth and penetration of tax havens and tax avoidance across the globe.

Stuart Weir, Associate Director of Democratic Audit, reflects on Nicholas Shaxson’s new book on the scale, depth and penetration of tax havens and tax avoidance across the globe.

Treasure Islands: Tax Havens and the Men Who Stole the World, by Nicholas Shaxson, Bodley Head, £14.99, January 2011.

I am all for the UK Uncut campaign against tax avoiding companies like Boots, Vodafone, Barclays, etc, highlighting sums of lost revenue that could pay off the deficit over a few years. Shaxson’s Treasure Islands reveals just how justified the protests are – and also how likely they are to prove impotent.  The scale, depth and penetration of tax havens and tax avoidance is a world-wide phenomenon in which the UK, US and other nations collude, and to which national and international authorities have surrendered.

Shaxson has compiled a remarkable dossier: part analysis, historical and contemporary, part expository, part anecdote and gossip, wholly revealing, shocking and, yes - entertaining.  His publisher’s proof copy for reviewers suggests that he has written a thriller, and certainly his often over-written narrative strains for that effect. For me it is possibly the most important political book that I have read since The Spirit Level.

The scale of abuse is staggering. More than half of world trade passes, often just on paper, through tax havens. More than half of all banking assets and a third of all multinational corporations’ foreign direct investment is offshore where the assets and revenues escape not only tax, but also the rule of law and democratic regulation.  UK Uncut’s estimates of lost tax revenue come to some £100 billion over four years. Shaxson quotes a National Audit Office finding in 2007 that a third of the UK’s biggest companies paid no tax at all in this country in the previous boom year.  It is of course not only developed nations like the UK that lose out. Developing countries lose some $160 billion annually just through manipulative price fixing that drains tax revenue out of poor countries – as well as sustaining corrupt rulers in power.

According to Shaxson, the world contains about 60 tax havens, or ‘secrecy jurisdictions’. Banish from your mind pictures of tropical islands.  One significant island haven is Manhattan; on another island, the City of London.  These tax havens fall into roughly four groups – the European havens (Switzerland, Luxembourg, the Netherlands); Britain’s world-wide ‘spider’s web’; the three tiers of the US offshore system; and a handful of ‘oddities’, like Somalia and Uruguay.  Historically, the US authorities sought to defeat tax havenry, but Wall Street financiers fled to Britain’s offshore ‘Euromarket’ and spider’s web and forced the authorities there to dismantle their strong regulations, turning the US, in Shaxson’s words, ‘into the world’s most important tax haven in its own right’ – a key example of the process by which the offshore world degrades regulation and tax policy in the onshore world where most people live.

Let’s follow Shaxson through the rings of the British spider’s web: the inner ring of the Crown dependencies, Jersey, Guernsey and the Isle of Man; the overseas territories, the Cayman Islands, Bermuda, the Virgin Islands, the Turks and Caicos Islands, and Gibraltar, all of which have close but ambiguous political relationships with the UK; and the outer ring,  Hong Kong (which the Chinese now exploit as their own offshore jewel along with HSBC), Dubai, the Bahamas, etc which are politically independent of the UK but ‘deeply connected’ to the City of London. This network of offshore satellites catches international capital flowing to and from different jurisdictions across time zones and funnels the money and the business of handling it through the City – business possibly illegal in the UK, bur far enough away to be deniable. “Much (but not all) of the financial activity hosted in these places breaks laws and avoids regulation elsewhere,” says Shaxson.

The Caymans are a remarkable example of British greed and hypocrisy.  Their population of 10,000 people hosts the world’s largest financial centre, with 80,000 registered companies and more than three quarters of the world’s hedge funds. Of Citibank’s 427 subsidiaries in tax havens, 90 are in the Caymans, along with 33 of News Corporation’s 152 tax haven subsidiaries.  In 2008, the Caymans reported $2.2 trillion in equity liabilities (deposits and other obligations) – figures which should be matched by a roughly equal sum of assets. But they reported only $750 billion in portfolio assets.  This huge discrepancy goes unexplained.

You may be astonished to learn that the Queen appoints the Governor of the Caymans, on the advice of the British government.  A former Governor explains that his power is kept hidden; there is a typically British fiction that the constitution obliges him to do what elected politicians want, even though they know that it doesn’t.  A former Caymans politician told Shaxson that the UK had influence without responsibility – they wanted to have a significant degree of control without being seen to have it: “The Governor can bring an agent of the Crown to come here and do whatever they want.”

Shaxson traces the leading role that the UK, and particularly the Bank of England, has played in establishing the offshore regime since control of the flow of capital across borders under Keynes’s Bretton Woods system gave way to the free movement of capital. Now, as Shaxson  notes:

“(capital is) actively and artificially encouraged to  move, lured by any number of offshore attractions – secrecy, evasion of prudential banking regulations, zero taxes and so on. A pin-striped infrastructure of lawyers, accountants and bankers has emerged, all with a vested interest in accelerating the flows and deepening the perverse incentives”.

Keynes, a great believer in free trade – in goods – would have been horrified, Shaxson says, because he saw that freedom for capital meant less freedom for countries to set their own economic policies; “from this particular kind of freedom, a form of bondage emerges”.

After 1945, the Bank of England pursued the project to re-establish the hegemony of international financial capital and to restore the City of London to its former imperial glory on the ruins of the old imperial order. It did so, as one observer noted, “unhesitatingly and unstintingly, without, it seems, any prior or subsequent debate by the Prime Minister, the Treasury, by Cabinet, Government or Parliament”.  Shaxson writes of the Bank, an inveterate opponent of regulation, seeing off two Prime Ministers, Macmillan and Wilson, and other politicians who were alarmed by its libertarian policies; and describes the “vigorous and even acrimonious” exchanges between the Bank and overseas development ministry on the one side, and the Treasury, Inland Revenue and less strongly, the Foreign Office, on the other. He argues that Mrs Thatcher’s Big Bang in 1986 – the sudden deregulation of London’s markets – was eclipsed by a Bigger Bang that had already been accomplished.

Enter stage left – no, not left! – New Labour’s triumvirate, Blair, Brown and Mandelson. Their lickspittle capitulation to finance capital and big business is already a matter of record.  But Shaxson recounts an extraordinary addition to their weakness with the saga of the Corporation of London – a fiefdom of the financial community posing as a local authority, albeit a very powerful local authority of ancient privileges, which has defied monarchs and Prime Ministers from William the Conqueror onwards.  The Corporation acts as a cheerleader for the City all round the world. It acts as ‘a state within the state’, Maurice (now Lord) Glasman told Shaxson. “The Prime Minister has to meet with the City if it asks for it, within ten days; the Queen has to meet with it within a week if it requests.” And of course, the Prime Minister and Chancellor make speeches at the Mansion House, “jusifiying how they have served the interests of finance.”

Fittingly, the City was excluded from the Domesday Book, William’s national survey of assets and revenues for the purposes of taxation.  New Labour has continued the tradition, confining FOI requests for information to it “as a local authority, police authority and port health authority only” – emphasising the last word in bold.  And so the Corporation was able to rebuff all Glasman’s FOI attempts to investigate its City Cash, “a private fund built up over the last eight centuries”.

It will come as no surprise that Blair dropped Labour’s eighty-year pledge to abolish the City Corporation in 1996, replacing it with a vague promise of reform. But you may be surprised by the lengths of grovelling that Blair and his government were prepared to go to. Residents in the City had just 9,000 votes in elections to the authority’s legislative body while businesses in the City had 23,000.  Blair’s reform took the shape of a private member’s bill to ‘streamline’ voting rights – the residents’ vote remained the same, the business vote swelled to 32,000!   Thus Goldman Sachs, the Bank of China, Moscow Narodny Bank and KPMG have been voting in British elections.  In May 2002, Glasman and Father Taylor, an elected member, presented a petition against the reform bill to the House of Lords, then the de facto supreme court.  The law lords upheld the measure, with one modest addition. To their eternal credit, John McDonnell MP and Tony Benn MP fought the bill throughout its passage.

Back to UK Uncut’s demos.  As you will see, they are really up against it - not only against the British establishment  but international finance and the major powers that sustain a system that was one of the factors that made the financial crisis  not only possible, but inevitable.  The Organisation for Economic Co-oporation and Development (OECD) made vague motions of seeking reform, but they have dissipated. Further, tax avoidance is now the perverted norm in big business, among the rich in Britain and around the world as well. Shaxson advances a set of reforms that could begin to curb the excesses of the offshore world, but they seem to me to be as remote as they are admirable.

Maurice Glasman is now one of Ed Miliband’s advisers.  He was very active in the London Citizens network that called for (among other things) a living wage for ordinary workers in the City – a cause that Miliband has tentatively taken up. It would be very interesting – possibly inspiring – if he could indicate what might now be realistic politics for reform in a world in the grasp of international finance and its acolytes.

 

About the author

Stuart Weir is founder of Democratic Audit at the Human Rights Centre, University of Essex, and co-founder of Charter 88. He is a consultant to the Joseph Rowntree Reform Trust on the State of the Nation polls.