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Offshore Banking and Tax Havens Have Become Heart of Global Economy

StoryApril 15, 2011
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As millions of Americans prepare to file their income taxes ahead of Monday’s deadline, we look at how corporations and the wealthy use offshore banks and tax havens to avoid paying taxes and other governmental regulations. "Tax havens have grown so fast in the era of globalization, since the 1970s, that they are now right at the heart of the global economy and are absolutely huge," says our guest, British journalist Nicholas Shaxson. "There are anywhere between $10 and $20 trillion sitting offshore at the moment. Half of world trade is processed in one way or another through tax havens." Shaxson is the author of the new book, Treasure Islands: Uncovering the Damage of Offshore Banking and Tax Havens. [includes rush transcript]

This is a rush transcript. Copy may not be in its final form.

JUAN GONZALEZ: As millions of Americans are preparing to file their income taxes ahead of Monday’s deadline, we look today at how corporations and the wealthy are utilizing offshore banks and tax havens to avoid paying taxes and other governmental regulations.

Earlier this year, Democratic Senator Carl Levin introduced two bills to crack down on tax havens. Levin estimates that nearly $100 billion is lost each year by not closing tax loopholes.

Besides Levin’s bill, there has been little discussion in Washington on the issue, despite the intense debate over the budget. During President Obama’s budget speech on Wednesday, he uttered the words "tax" and "taxes" nearly 40 times. Never once did he mention tax havens.

AMY GOODMAN: Our first guest today is the British journalist Nicholas Shaxson, author of the new book Treasure Islands: Uncovering the Damage of Offshore Banking and Tax Havens. In the book Shaxson writes, quote, "The offshore system is the secret underpinning for the political and financial power of Wall Street today. It is the fortified refuge of Big Finance." Nicholas Shaxson joins us from Washington, D.C.

Welcome to Democracy Now! Talk about what you’re calling "Treasure Islands."

Nicholas Shaxson? We’ll go to a music break, and we’ll come back to see if we can get the audio of Nicholas Shaxson. Looks like we got it right now. Welcome to Democracy Now!, Nicholas.

NICHOLAS SHAXSON: Thanks. Thank you very much.

AMY GOODMAN: It’s good to have you with us. OK, explain what these "Treasure Islands" are.

NICHOLAS SHAXSON: Well, my book is about tax havens, and one of the big themes of my books is — one of the big things in my book is that tax havens are much, much bigger and much more important than almost anybody realizes. Most people think of tax havens as just a bunch of shady places, perhaps out in the Caribbean, Switzerland, a couple of other places, where a few celebrity tax dodgers maybe and some mafiosi and some criminals go and put their money. And they see it as a kind of exotic sideshow to the global economy.

One of the central messages of my book — and I explore the history of this in quite a lot of detail — is that tax havens have grown so fast in the era of globalization, since kind of the 1970s, that they have now become right — they are now right at the heart of the global economy and are absolutely huge. I mean, there are 10 — anywhere between 10 and 20 trillion U.S. dollars sitting offshore at the moment. Half of world trade is processed in one way or another through tax havens. It’s all around us, and it’s absolutely huge.

Part of that — part of that message is that the biggest tax havens in the world are not so much these little islands, but big, rich countries. The United Kingdom, my country, is one of the world’s most important tax havens. And right now in Washington, D.C., I’m sitting in one of the world’s biggest tax havens, as well: the United States. So, this is something we need to really reappraise, the whole geography of the system, and understand how important it is. And when we’re hearing figures of $100-plus billion lost to the U.S. taxpayers, I would argue that is just one aspect of the problem. The problem is much, much bigger. There are many, many other aspects to consider here.

JUAN GONZALEZ: Well, when you say that United Kingdom itself is a tax haven, what do you mean? And how did that develop?

NICHOLAS SHAXSON: Well, there are two aspects to this, really. One is the U.K., the city of London, which is the financial district of the United Kingdom, is itself a tax haven. And I need to explain a little bit what I mean by "tax haven." There’s no general agreement worldwide as to what a tax haven is. A lot of people focus on the tax element, but it’s much more than that. Tax havens do offer zero or low taxes to people elsewhere, but they also offer secrecy. They offer escape routes from financial regulation. They offer escape routes from criminal laws. The key theme here is escape. If you don’t want to do — if you are constrained by democratic rules and curbs at home, you take your money offshore, you take it elsewhere, to a place where they’ll let you do what you’re not allowed to do at home.

And looking at the history of this, Wall Street, after the Second World War, they were — after the Bretton Woods agreement, 1946, there was a cooperative international order set up where capital was tightly controlled around the world. Wall Street was very firmly put in its place. And, you know, there were very high taxes on the wealthy. And for about a quarter of a century, this system more or less worked out, and capital was quite tightly constrained. It was also an era of very high, broad-based economic growth, not just in the United States, but around the world. What happened during that period, though, was that the banks, Wall Street, in particular, didn’t — obviously didn’t like these curbs, didn’t like the Glass-Steagall Act that was separating commercial from investment banking, didn’t like interest rate caps, didn’t like these controls. And essentially, they went off to London. And in London, the Bank of England and the city of London said, basically, "You bring your money here, and you can do what you like. You don’t — we’re not going to worry about Glass-Steagall. We’re not going to worry about interest rate caps." And so, what happened is Wall Street piled into London from about the ’60s onwards, and that really marked the unraveling of — part of the unraveling of the Bretton Woods arrangements.

And Wall Street was able to grow incredibly fast offshore, much, much faster than it had been before. And this ability to grow offshore, first in London and then in a wider network of tax havens around the world, this has been one of the great reasons why it has been able to grow so fast. And now we have "too big to fail" banks and this offshore system, the ability of banks in the United States to go elsewhere to do things that allow them to grow faster and take more risks, away from the democratic curbs. It’s one of the reasons why they’ve grown so powerful and why we have got such a difficult situation today with Wall Street having such power over the politicians in this country and my country and others.

JUAN GONZALEZ: You talk in your book also about Britain recreating a new empire. You mention all of the Caribbean islands, that most Americans have heard about as vacation spots but really don’t pay much attention to: Anguilla, Bermuda, the British Virgin Islands, Turks and Caicos. What role do they play in this exploding situation with tax havens?

NICHOLAS SHAXSON: It’s a very curious story. I and my researchers, my co-researchers, went into the archives in the United Kingdom and looked at what they were saying at the time. What we had was a — we have a series of partly British territories spread around the world, notably the overseas — the British Overseas Territories, which include the Cayman Islands, Bermuda, the Turks and Caicos, Gibraltar, Anguilla, and the so-called Crown Dependencies, which are closer to the U.K. That’s Jersey, Guernsey and the Isle of Man. And all of these centers were allowed — they’re partly controlled by Britain; they do have independent politics, as well. It’s a sort of half-in, half-out kind of offshore system. So Britain has this kind of network around the world.

But what this network does is that these places serve as conduits; they serve as channels for business to be passed to the city of London. So there’s this kind of network of havens around the world, capturing business. And in the Caribbean, a lot of business captured from the United States, Latin American. And this is licit and illicit business; it’s a mixture of the two. And the Crown Dependencies — Jersey, Guernsey and the Isle of Man — capturing business focusing more on Europe, perhaps in Africa and the Middle East. And all this — so they’re serving as feeders for the city of London.

And I was talking about how the offshore system has been used to — used by Wall Street to become so big and powerful. Well, the U.K. has its own special version of that, and that’s this network, which has really — as well as the U.K. itself being a tax haven, this network feeding business into the city of London is an absolutely colossal reason why the city of London is now, by some measure, the world’s biggest financial center. So, it’s something that has — you know it is at the period of decolonization, this is when the system really started getting together and started working. And one can make an argument that this is a new kind of financial empire that Britain — you know, a kind of hidden empire that nobody really has really paid much attention to now, but it is of absolutely tremendous importance. And we in the United Kingdom — I just as — we have the banks holding our politicians by the throat, I think, just as much as you do here in the United States.

AMY GOODMAN: I wanted to go to U.S. presidential politics. One of the leading Republican presidential contenders, Mitt Romney, has a history profiting from offshore tax havens. In 2008, the Los Angeles Times exposed how Romney, as head of Bain Capital, utilized shell companies and two offshore tax havens in Bermuda and the Cayman Islands to help eligible investors avoid paying U.S. taxes. The tax-friendly jurisdictions helped attract billions of investment dollars to Bain Capital. Los Angeles Times reporter Bob Drogin spoke to us about this in 2008.

BOB DROGIN: A side light of that was Bain Capital, which today has assets of about $60 billion — that’s their — the number that they officially say — and about a third of that comes from these offshore operations that Romney set up when he was still there, in particular, companies that are set up — really, they’re just mail drops, they’re mailboxes; they don’t have any staff, they don’t have any operations. The one on Grand Cayman Island is a Post Office Box 60D, I think, on Grand Cayman Island, and the ones in Bermuda are also at a lawyer’s office. But they’ve got them in other places as well. And they bring in somewhere above $25 billion a year.

And again, it’s — these are companies — these are operations set up through various systems. They’re blocker corporations. They are investment — or rather, equity groups that are set up to attract, for the large part, foreign capital. And the reason these are set up overseas is so that foreign investors in these private companies can avoid paying U.S. taxes. Mitt Romney and his colleagues don’t get that advantage. So it’s not like they’re avoiding taxes through this. It’s simply — what happens is, they’re helping other people avoid paying U.S. taxes, and as a result they make enormous profits.

AMY GOODMAN: That’s Los Angeles Times reporter Bob Drogin speaking to us in 2008. Nicholas Shaxson, your response?

NICHOLAS SHAXSON: Yeah, this is — I mean, there are two things I would respond to this. First of all, there is — a lot of this business is legal. It is. There are two terms: tax avoidance and tax evasion. Avoidance is, by definition, not doing anything illegal, but also, by definition, getting around the spirit of the law; this is not what legislators intended when they set up the legislation. Tax evasion, on the other hand, is, by definition, criminal. It is — you’re breaking the law. But in between these two poles of evasion and avoidance is a huge gray area, and often you don’t find out which side of the law a company is until there’s been, you know, a challenge by the IRS or a court case or something like that. A British — former British Chancellor Denis Healey once said, "The difference between avoidance and evasion is the thickness of a prison wall."

But also, the example of Mitt Romney — I imagine what he was doing was on the avoidance, not on the evasion side — is this issue of intermediaries, people who help others. And we’re talking here particularly about accountancy firms, law firms and banks, and also company formation agents. These intermediaries have, for such a long time, seen a very simple calculus. They get — I saw a statistic yesterday that, for the big four accountancy firms on certain kinds of business, the average profit for a client was something like $360. The maximum fine for infringement for assisting a client to do things that have gone wrong is $10,000. So it’s a very simple calculation. You know, if you get caught, well, you pay a bit of money, but it will only be a fraction of your profits. And as a result of these kinds of incentives, you’ve had the complete corruption of the culture of these industries, saying, "We’re just going to, you know, help these people. We don’t care if they’re breaking the law or avoiding taxes or whatever. We’ll just help them do what they want to do." And it’s a terrible — this corruption of the culture is one of the biggest problems of the whole — the whole issue.

JUAN GONZALEZ: Nicholas Shaxson, I want to ask you about the portion of your book that deals with the impact of these tax havens on the poor countries of the world. You say, at one point in the book, "Nearly every effort to generate large flows of capital to developing countries since the 1980s has ended in crisis because the money has escaped offshore. Towering inequalities in Europe and the United States, not to mention in underdeveloped countries, cannot be understood properly without exploring the role of secrecy jurisdictions. The systematic looting of the former Soviet Union, and the merging of the nuclear-armed country’s intelligence apparatus with organized crime, is substantially a story that unfolds in London and its offshore satellites." You also talk about Saddam Hussein’s billions and the power of North Korea’s Kim Jong-il. Could you explain?

NICHOLAS SHAXSON: Yeah, offshore — if you look at these crises, offshore is always a part of the story. It’s never the whole story; you can always point to other factors in, you know, the corruption of a country or economic crisis. But offshore is always a huge part of the story.

And you’ve had — in these debt crises, you have had huge lending to developing countries. And the rulers in these countries, and the ruling elites, are able to appropriate this money, the money that comes in from borrowing, and they just — they take it offshore. And you have countries left saddled with debts. Recent studies have indicated — in Africa, at least — that the private assets, the assets held by Africans, far outsee the debts of African countries. The difference is that the assets are held in private hands. These are assets offshore in banks overseas. They could easily pay off the debts. The income on those assets could easily pay off, you know, all the debt repayments. But we have this mismatch, and the burden is that the debts are borne by the African people in the form of either higher taxes for themselves or degraded public services and an elite that benefits from complete impunity for what they’re doing. The money is offshore. There’s nothing that anybody can do about it. And this leads to the corruption of countries and a wholesale subversion of democracy. So it’s an absolute scourge on developing countries.

Global Financial Integrity, which is a Washington think tank, in January estimated that illicit financial flows out of developing countries in 2008 added up to $1.2 trillion U.S. dollars into tax havens and rich world economies. A lot of that came here into the United States. A lot of Latin American money comes here. And so, the United States itself is a tax haven. United States has a kind of two-faced problem. One is that it’s losing money to foreign tax havens, but also it is itself offering secrecy facilities, offering tax-free treatment to foreigners who bring their money here, and helping foreigners evade taxes and commit crimes. And one of the arguments, great arguments, in my book is that this money that’s coming in does not make up for the money being lost. Instead, it causes harm. It further puffs up wasteful property bubbles, further puffs up Wall Street, and has contributed even more to this, you know, "too big to fail" problem and the problem the financial capture of the political process. So we have a double — the inflow problem and the outflow problem both being harmful for the United States, but also for the developing countries.

AMY GOODMAN: So what do you think — how should this change? I mean, you have this enormous emphasis on the deficit in this country. You say that offshore tax evasion has cost the United States $100 billion a year. How can we turn this around?

NICHOLAS SHAXSON: Well, as I said, the $100 billion, I see, is just one part of the picture. I think that there are — there is some legislation that is coming in to try and crack down on this stuff. There was a bill originally co-sponsored by Barack Obama before he was president, and now it has not — it has not yet passed through, but Senator Levin, I believe, is — it’s called the Stop Tax Haven Abuse Act — Senator Levin is, I believe, trying to reintroduce this.

There is no magic bullet that is going to solve this problem, but there are a series of different measures that can be and need to be taken. And the first thing that really has to be done is for people to start to see how big and bad this system has become. While people think it’s just a few islands out in the Caribbean doing a little bit of tax evasion — I’m not saying $100 billion is just a little bit of tax evasion, but while people still see it as a problem just on that scale, there won’t be the political momentum for reform. One of my central arguments is this is so much bigger and so much badder than almost anybody knows. We need to — as a first step for reform, we need to understand that and spread the message.

AMY GOODMAN: Well, I mean, you say it was President Obama who was pushing this as senator, but it’s the same President Obama who is trying to raise a billion dollars in 2012. What would you say is the single most powerful force that is stopping any kind of crackdown on this?

NICHOLAS SHAXSON: Well, I think, of course, Wall Street banks and financial institutions, which are huge fans of the offshore system. Multinational corporations are able to use the offshore system through — particularly through tax avoidance, sending their money offshore, not getting taxed on it until they bring the money back home, so they are huge, huge proponents of this system. So, corporate lobbying power is also a huge part of the problem.

Another part of the problem is that there is this kind of self-reinforcing dynamic of the offshore system. When one country cuts its tax rates, its corporation taxes, or it creates a new loophole, others in the game which are tax havens, which have a business model of being tax havens, then feel they have to keep up, and they think, "OK, we’ve got to create an even better loophole." When one country creates a nicely — a very strong form of secrecy, the other countries will say, "Ah, we’ve got to create an even stronger form." So you have this kind of race to the bottom.

And one of the big effects from a tax point of view — and this also happens with financial regulation — but from a tax point of view, what you will get is the tax charge on mobile capital, which is very often the form of how wealthy people and corporations receive their income and how they’re taxed, the tax charge on mobile capital falls. That means somebody else has to pay for those taxes that aren’t being paid by the wealthy people and corporations, so other people have to pick up the slack. So you get a kind of compression of the tax system because of this dynamic. So you get ordinary people having to pay more in order to pay the taxes that the wealthier people are not paying. And this is a kind of impersonal dynamic that is inherent to the offshore system. And one thing that is especially required to deal with that is international cooperation, and I think the United States can take a lead, a global lead, and should take a global lead, on getting cooperation on this kind of problem that is a part of the offshore system.

JUAN GONZALEZ: And isn’t part of the problem that any talk of reform has to run up against the fact that the international banking system, to one degree or another, benefits from the entire situation of these tax havens? Because I would assume that the money is always held in banks, whether it’s in the United States or in England or in these other countries, and I would assume that the banks that help facilitate this kind of avoidance or evasion end up with bigger fees as a result of their extra assistance to the holders of these accounts, so that, in essence, the banking system doesn’t want to see this changed.

NICHOLAS SHAXSON: No, I think that’s probably fairly true to say. We should not underestimate also the lobbying power of the accounting firms. They are — that’s something that people don’t really consider. Of course the banks are huge. The accounting firms, the legal firms that are involved in this are absolutely enormous.

I think one of the things that could be done is to look at ways of having much more severe penalties on people who assist particularly criminal tax evasion and other aspects of it. But we also mustn’t lose sight of the financial regulation aspect of this. And when countries like the United Kingdom, but other tax havens like Luxembourg, Ireland, the Netherlands, which are not traditionally regarded as tax havens, but they’re huge, huge players in this business, we must increasingly recognize them as engaging in what is nothing short of economic warfare against the United States and other countries. We really need to start recognizing that this is — you know, this is conflict. This is economic conflict. When one country tries to suck tax revenue or illicit flows or whatever out of another country, that is an aggressive act. And we need to start taking much more robust action to defend all of our countries against what’s going on in the offshore system.

AMY GOODMAN: Nicholas, very quickly, as we wrap up, the two powers — corporate power and grassroots power. On the corporate side, you have people like Rupert Murdoch, who determines much of the debate in this country with his ownership of media. You call him a "master of offshore gymnastics." And then you’ve got the grassroots movements, Uncut, both in Britain and the United States, this growing movement that’s going after tax avoiders. Talk about both. Start with Rupert Murdoch.

NICHOLAS SHAXSON: OK, Rupert Murdoch. Now he — the last investigation into his tax affairs I’m aware of is one conducted by The Economist in, I think, 1998 or 1999, so we don’t have very updated data on him, but he had cut his tax rate down to six percent, when others were paying, you know, much higher rates. A recent Government Accountability Office report in 2008 estimated that News Corporation has 152 offshore subsidiaries, according to their definition of tax havens. So he is certainly a big player in the game. And when you have — you know, he’s not the only — obviously not the only media player using offshore tax havens; it’s very widespread. But when you have big players in the game defending this, then you have a big problem from the media point of view, as well.

On the grassroots side, this is incredibly heartening, what’s been happening. There has been until, I would say, a year ago almost complete radio silence on this issue. Very few people were taking an interest in it. We saw — we have seen the Uncut movement is something that emerges, spontaneous protests against corporate tax avoidance. In my country, in the U.K., where there’s big spending cuts happening, people turning around, saying, "How come we’re giving these effective subsidies to corporations, these tax subsidies to corporations, and now we’re having to cut schools and hospitals?" And people are coming out onto the streets. And this is absolutely new, and this is thrilling to see. And it’s happening in the United States. And stories such as General Electric’s ability to get away with paying no tax in the United States is, you know, a catalyst for something. So something very new is happening now, and it’s tremendously refreshing. And this is, you know, the beginning, I believe, of something much bigger that will, as austerity and deficits continue to bite, will get more people into the streets.

AMY GOODMAN: We have video of the protesters, the Uncut folks in the United States, holding up Treasure Islands, your book. Nicholas Shaxson, we want to thank you very much for being with us —

NICHOLAS SHAXSON: Thanks very much.

AMY GOODMAN: — author of Treasure Islands: Uncovering the Damage of Offshore Banking and Tax Havens.

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