Tax evasion by multinationals and wealthy individuals, as well as illicit transfers of funds resulting from corruption and organized crime, are at the heart of the global economic and financial system. Nicholas Shaxson’s work places this phenomenon in historical perspective.
If it is an indictment, Nicholas Shaxson’s work on “ Tax havens “, also places financial markets, and more particularly offshore centers, in historical perspective. The author manages to show, through multiple surveys, the place occupied by offshore finance at the heart of the global economic and financial system. Tax havens appear to be the essential instrument for tax evasion by multinationals and wealthy individuals as well as for illicit transfers of funds resulting from corruption and organized crime.
This is not the first book which demonstrates that offshore finance has infiltrated all international economic relations, but the author has brought together here an impressive mass of information and even anecdotes resulting from a long work of investigation. Through his detailed description of the development and operation of tax havens, Nicholas Shaxson manages to convey two essential messages: offshore centers are omnipresent, the most powerful being in the heart of or close to major world centers rather than on exotic islands, and On the other hand, these tax havens contribute to the persistence of corruption and poverty in developing countries.
Classification of offshore centers
Nicholas Shaxson provides a historical classification of offshore centers. The first group includes the dependencies of the British Empire such as Jersey, Guernsey, the Isle of Man, the Cayman Islands, the British Virgin Islands, Gibraltar, Hong Kong… like a spider’s web woven by the City of London. A second group of small European states: Switzerland, Luxembourg, Lichtenstein, Monaco. The third category is that which has as its center the United States itself and more particularly certain States, with a network of small satellite States such as the Marshall Islands, Panama, Liberia… The author insists on the essential role played by the City of London and the United States in the offshore world.
The academic literature on international taxation has explained that micro-states could lead tax competition by lowering rates against large countries, because the gains from attracting capital would be much greater than the tax losses. But is this strategy reserved for very small states? ? Nicholas Shaxson provides a convincing negative answer. Indeed, niches or gaps in legislation, possible consequences of financial liberalization, can create offshore territories even within large developed countries. They allow foreign banks, multinationals, and wealthy individuals to escape internal rules, including tax rules, within large global financial centers which thus offer the same services as the small islands of the Caribbean or the Pacific. The detailed explanation of these rules, illustrated by an abundance of cases, is a strong point of Nicholas Shaxson’s work. One of the finest examples is that of the State of Delaware (USA) which, a true internal tax haven for American companies, offers a multitude of tax advantages to business managers, shareholders and other taxpayers. Delaware refuses the transmission of information concerning depositors and investors in its territory. But if Delaware is the best-known internal tax haven, it is not the only one. The small state of Wyoming and Florida share a number of these characteristics. The author recalls that the United States thus finds itself in the highest places in the ranking of the Tax Justice Network organization in terms of banking secrecy weighted by the amounts involved.
The origin of offshore activities initiated by the United States and the United Kingdom lies in 1921 and the 1950s, respectively. Since 1921, the United States has allowed foreign depositors in American banks to receive their interests exempt from taxes provided they are not related to American business. And in 1981, the International Banking Facility was established (IBF), structure that allows American banks to grant loans to foreigners outside of the usual reserve requirements and taxes. States like Delaware and Florida will rush to use these permissive rules.
After the nationalization of the Suez Canal by President Nasser and the British, French and Israeli military operation, the Bank of England faced capital flight that heralded the decline of the Pound Sterling as an international currency. Faced with restrictive measures taken by the English government on loans in sterling, London banks simply replaced the pound sterling with the dollar in their international operations. From that moment on, an unregulated offshore market called “ eurodollars » has grown significantly and has grown thanks to the circumvention of American banking legislation. According to Nicholas Shaxson, this advent of the Euromarket marks the beginning of financial liberalization. It gave a considerable boost to the offshore activities of the London market and generally strengthened all offshore centers.
The case of the City
As part of the denunciation of the hypocrisy of limiting oneself to exotic islands and Swiss and Luxembourg paradises in the fight against tax evasion, the chapter devoted to the activities of the City of London is particularly well documented. The author describes the London market as the central element of a network stemming from its empire where the old dependencies, tax havens attract capital and route it to London banks. He even considers that this web is a filter for laundering money allowing the City to participate in dubious operations, but sufficiently remote to hide its involvement. British legislation does not follow the Swiss banking secrecy approach but allows excessive use of trusts and other offshore companies which can be directors of companies and conceal their owners. The author details in particular the legislation on “ tax domicile » which allows residents to be “ non-domiciled », and thus very popular with Greek shipowners, Russian oligarchs, Indian steel magnates… To complete the London picture, the private body which manages the financial center, the City of London Corporation appears as a State within a State , having privileges maintained since the XIe century.
Nicholas Shaxson’s investigations also brought him into contact with people who had worked for a long time in the Cayman Islands and Jersey, and from whom he collected testimonies and impressions. It depicts a very unequal, clannish political and economic society, in which a conception reigns where each advantage gained from the outside is seen as an act of resistance. The experience of renowned expert John Christensen shows that being entirely focused on attracting capital, Jersey’s leaders appear unscrupulous towards those who criticize this system.
Offshore centers and development
The part devoted to the presentation of offshore centers as obstacles to the development of countries where great poverty reigns undoubtedly constitutes one of the pillars of Nicholas Shaxson’s work. It thus shows that large-scale corruption and the control of mafia interests over the governments of developing countries, particularly if they have natural resources, cannot be explained without tax havens offering the guarantee of secrecy. The author reminds us of the unfolding of the scandal of BCCIthis bank which served as a channel for money laundering and corruption linked to major contracts. The assemblies were organized from offshore structures.
Nicholas Shaxson, helped by his experience as a journalist stationed in Luanda, details some arms-for-oil contracts in Angola whose movements of funds transited in particular through Switzerland, Luxembourg and Cyprus. It also relies on reports from Tax Justice Network to denounce the real plunder of which African countries are victims through opaque loans guaranteed on oil, accounted for outside the State budget and transited through companies hosted in offshore centers. In terms of debt, the author also presents the complicity of opaque offshore structures with the misappropriation of international loans by a local elite from developing or emerging countries. More precisely, certain funds called “ vultures » are formed from offshore centers to purchase public bonds at a very high risk premium. Some investors are included in this type of fund for their position in local administration, which will allow them to use their influence to ensure that debts are repaid at all costs. The role of offshore centers is to hide this participation from the population. Thus, corrupt elites generally play the leading role, but offshore secrecy is essential to them. It is repeatedly pointed out that estimates of capital flight by these means generate losses of fiscal resources for developing countries that are much greater than official development assistance.
To be complete, the author continues his indictment by calling into question double taxation conventions. These agreements are certainly legitimate in international business so that profits are not taxed twice, but thanks to specialized jurisdictions, they also form the vectors of modern and legal tax optimization. For example, Mauritius’ agreements with a large number of developing countries, including India, are known to serve, under the cover of foreign direct investment, for tax evasion or the creation of monopolies in the ‘anonymity.
For better information
After such an incriminating investigation against offshore centers, the pillar of modern financial capitalism, the reader will certainly feel concerned, but perhaps distraught. If the offshore economy is the vehicle for tax evasion, illicit capital transfers, artificial prices for tax optimization by multinational firms, and corruption in developing countries, how can we tackle it effectively, and not by solutions as radical as they are utopian, to this impressive drift of capitalism ? Nicholas Shaxson’s work is not a report on the means of combating the offshore system, but by encouraging us to concentrate first on information, it encourages the action of non-governmental organizations such as Tax Justice Network. He takes up some proposals such as: the publication by multinationals of their financial statements country by country, or the automatic exchange of information for tax purposes on a multilateral basis…
Information being a crucial weapon against the opacity generated by offshore finance, Nicholas Shaxson’s investigation is a major work by an experienced financial journalist. By truly recounting the life of businesses dominated by offshore, Nicholas Shaxson allows a wide readership to become aware, without falling into conspiracy, of the real and frightening place of offshore centers in contemporary capitalism.