Welcome Nicholas Shaxson, and Host Yves Smith.

[As a courtesy to our guests, please keep comments to the book. Please take other conversations to a previous thread. – bev]

Treasure Islands: Tax Havens and the Men who Stole the World

Yves Smith, Host:

Treasure Islands tells us that tax havens are much larger and much more destructive than most might realize, yet at the same time enjoy much more unofficial and formal support from governments in advanced economies than many of us want to believe.

Nicholas Shaxson defines a tax haven (or “offshore”) as having these qualities: secrecy, low or zero taxes, very large financial service sectors compared to the domestic economy, and political stability by virtue of being captured by banking interests.

Even though Shaxon’s account includes a rogue’s gallery that would be at home in a Graham Greene novel, such as a Mr. Autogue, who has access to everyone important in Gabon, and virtually the entire government of the Isle of Jersey, the broader ramifications are far more chilling.

It’s bad enough that money launderers, arms dealers, and dictators are major beneficiaries of the presence of banks that profess to operate at first world standards without pesky first world oversight. “Offshore” also allows for governments to be denied legitimate tax revenues for activities within their borders. Thus, as implausible as it seems, Africa is a net capital exporter, losing far more in taxes than it gets back in foreign aid. And as Shaxson accounts, many of the devices used by major corporations to chop their tax bills have nothing to do with the actual flow of goods.

Treasure Islands describes how this system evolved. The UK’s Vestey Brothers, early in the 20th century, went to considerable lengths to be “technically abroad” so as to shield their income from beef imports from Argentina from taxes. Switzerland became the modern template for a tax haven during World War II. The Bank of England’s decision not to regulate the Eurodollar market, which developed in the 1960s, set the stage for the development of a much larger unfettered banking system. It expanded during the 1980s as a new cluster of tax havens in parts of what was once the British Empire, became “intimately linked to the City of London.” And the City of London, or more accurately, the Corporation of London, is a state-within-a-state, existing from “time immemorial,” with the world’s longest-standing official lobbyist, the Remembrancer. Nominally democratic, with corporate voters far outnumbering the real inhabitants, it like the various tax havens in its web, has quite deliberately been allowed to exist outside the normal rules of transparency and accountability due to the status and power of its bank residents. Even major scandals like BCCI have left this system unperturbed.

And this network also increases systemic risk. The IMF warned in 1999 that the growth of OTC markets, particularly derivative trading, likely involves offshore banks, which are typically highly leveraged. And when they get in trouble, they lack ready access to a big balance sheet central bank to bail them out. The shadow banking system is heavily anchored in offshore banking, with many hedge funds domiciled in the Caymans or Luxembourg, and special purpose like SIVs typically located in Ireland, Luxembourg, Jersey, or the UK. The point here is that their offshore status means that they finesse key aspects of regulation and oversight.  [cont’d.]

The US answer to the Channel Islands and the Caymans is Delaware. Its bank-friendly regulations have been arguably as detrimental to the US as clever transfer pricing has been to Africa. Its combination of special ring-fencing to corporations and bank-friendly statutes led to a race to the bottom by other states seeking to get banks to locate operations there. While none have beaten Delaware on being the best state for corporate headquarters, the result of Delaware’s “leadership” was the end of laws against usury and interest rate caps generally, which played a significant role in the willingness of banks to lend to crappy borrowers and helped stoke the crisis just past.

US shell companies are a less well known mechanism for conducting illicit activity, with professional nominees shielding who the real owners are. Only the company’s attorneys, who can maintain secrecy by invoking attorney-client privilege, know their identities. States like Wyoming make it easy to maintain secrecy. With no requirement to keep records in the state, shady businessmen can assure they will never be found out by keeping their books in a cooperative foreign country.

The casualties of this system are numerous. For instance, the civil conflict in Congo was sustained because tax havens made it safe and easy to loot its mineral resources. Similarly, the plutocratic land grab after the fall of the USSR was facilitated by access to offshore banks.

Shaxson calls for changes in banking regulations, greater transparency, bringing the City to heel, as well as much greater cultural emphasis on having the wealthy, both individuals and corporations, pay their freight. The growth of the UK Uncut and its little sister US Uncut movements shows that public sentiment is increasingly in line with the root and branch reform that Shaxson advocates.

It’s a great pleasure to have Mr. Shaxson join us, particularly in light of the debate his book has stirred up in the UK.

A lot of Americans would find it hard to believe your statement, that the US is the biggest tax haven country. Can you explain why?

Welcome Nicholas Shaxson, and Host Yves Smith.

[As a courtesy to our guests, please keep comments to the book.  Please take other conversations to a previous thread. – bev]

Treasure Islands: Tax Havens and the Men who Stole the World

Yves Smith, Host:

Treasure Islands tells us that tax havens are much larger and much more destructive than most might realize, yet at the same time enjoy much more unofficial and formal support from governments in advanced economies than many of us want to believe.

Nicholas Shaxson defines a tax haven (or “offshore”) as having these qualities: secrecy, low or zero taxes, very large financial service sectors compared to the domestic economy, and political stability by virtue of being captured by banking interests.

Even though Shaxon’s account includes a rogue’s gallery that would be at home in a Graham Greene novel, such as a Mr. Autogue, who has access to everyone important in Gabon, and virtually the entire government of the Isle of Jersey, the broader ramifications are far more chilling. (more…)

Yves Smith

Yves Smith

A recovering investment banker, now management consultant with nearly thirty years of experience in and around the financial services industry. Blogs at Naked Capitalism, with a book ECONNED: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism coming out in March.