Offshore world: A review of Nicholas Shaxson’s ‘Treasure Islands’

Posted on June 11, 2011

0


An edited version of this review was published in the journal Renewal Vol 19 No 3/4 2011

Nicholas Shaxson’s Treasure Islands

Treasure Islands: Tax havens and the men who stole the world is Nicholas Shaxson’s sweeping account of the rise of the ‘offshore’ world. It is the story of how of corporate giants and the super rich, with their legions of bankers, lawyers and lobbyists, found a space to grow between the cracks of a globalising world, before quietly invading the ‘onshore’ mainland. That is, the space still inhabited by the rest of us, with its varied laws and regulations, tax and benefit systems, public services, and (seemingly impotent) politics.

It is an eye opening and highly readable book that shifts seamlessly between investigative journalism, grand history and sober, but nonetheless impassioned polemic against the corruption of institutions and language that made it all possible. It is also an important book, which sheds light on a system that thrives in the shadows. In the process it provides a compelling new perspective for understanding many of the key themes of post-War history, from the decolonisation of the European Empires, to the travails of ‘development’ policy in the global south, to the rise of neoliberalism since the 1970s and the endemic instability that has characterised the global economy ever since. Of equal interest (though less explicitly addressed within the book itself) it raises important questions about the ability of democratically elected national politicians to act in an increasingly interconnected world.

The rise of the offshore world

Like all good analysts Shaxson clearly defines his subject at the outset. Equally important, he defines what it isn’t. The term ‘offshore tax haven’ evokes the idea of a geographically peripheral and economically insignificant (in systemic terms) space where companies and rich individuals can reap the marginal gains of avoiding tax in their primary place of operations or residence. Your view of tax havens according to this understanding will probably be shaped by your view of taxation in general. Seeing as most people do not like to pay too much tax (though you might fairly ask ‘how much is too much?’), the general reaction would probably lie somewhere along a spectrum of “fair enough – wouldn’t we all if we could” to “I don’t agree with it, but I can see why they do it”. It is a definition that does not entirely neutralise the offshore tax haven (how could it?), but nonetheless presents it as a problem of manageable proportions and as at least politically and morally debatable, if not necessarily defensible.

Shaxson’s definition challenges these assumptions. He defines the tax haven as ‘a place that seeks to attract business by offering politically stable facilities to help people or entities get around the rules, laws and regulations of jurisdictions elsewhere’. This pulls away the double veneer of political neutrality and economic marginality that the beneficiaries of the offshore system prefer us to see. Offshore is not simply an escape from tax, but also from regulation, transparency, the law (including criminal law), and democratic politics, which is clearly far harder to justify. The proactive efforts of these ‘places’ to attract business, and their means of doing so also indicate that they are not simply peripheral eccentricities of the global economic system. Instead they are drivers of a process that has moved a particular set of norms and values to the heart of 21st century global capitalism. The rest of Treasure Islands explains how – and why – this process has unfolded, and with what consequences.

Those expecting the story to start with American corporations, Saudi oil princes or Russian oligarchs may be shocked to hear that that the lead role is played by an actor much closer to home. In fact Treasure Islands will make difficult reading for anyone who holds on to the myth of Britain’s dignified imperial decline and modestly positive influence in the modern world. Haemorrhaging political and economic influence following the Second World War, Britain, through an unholy alliance between its leading banks and the Bank of England, stumbled upon the ‘Eurodollar market’. By conducting their international lending in dollars, rather than devalued sterling, British banks found a large new market that acted as a kind of proto-tax haven. Although opposed in principle and concerned about the reaction in Washington, the Treasury turned a blind eye to the trade that was bringing much needed capital into the country.

This marked a change in British imperial strategy. As the Empire retreated over the 1950s and 60s, it left behind a ‘spider’s web’ of colonial outposts, including, among others, the Channel Islands, Gibraltar, the Cayman Islands, Bermuda and Hong Kong. These generally small, quasi-autonomous island states began to position themselves, through competitive specialisation in low taxation, lax regulation, secrecy, or a combination of the above, as channels or safe havens for the wealth of elites in their surrounding regions. Their small populations and close-knit political communities quickly exposed them to ‘regulatory capture’ by financial interests and allowed for the bloodless elimination of all domestic dissent. The web centred on the City of London, with business trafficked back and forth between London and the satellites. The City’s anomalous status (within both London and the British state) and antediluvian rituals continue to mask a very modern and powerful financial empire with global reach.

The offshore logic emanating from London’s spider web prompted the emergence of small island or border states around the world which began to compete for offshore flows. A gradual drift in the US towards this logic, although punctuated by abortive efforts at resistance, first by President Kennedy and later the Carter administration, has led to it now being considered the world’s largest tax haven. Again this happened through a ’drip, drip’ process of offshore regulatory capture, first of small states (most notably Delaware,) leading to beggar thy neighbour competition between states and, eventually, an all out race to the bottom. (Fascinatingly, Shaxson informs us that during a global tour in the late 1980s advertising the state’s services, a Delaware commission adopted the slogan ’Delaware can protect you from politics’.) This incursion of offshore dynamics into the ‘onshore’ world has been largely driven by special interest lobbies using the threat of capital flight as leverage over sometimes supportive, sometimes reluctant, but always pliable political elites. This is, in effect, regulatory capture similar to that achieved in the offshore tax havens, only on a far greater scale.

So what are the consequences of all of this for the mere mortals of the onshore world? If the thought of the world’s wealthiest people being able to stash their riches away from the tax collectors, auditors, regulators and criminal justice systems of democratic nation states doesn’t offend your sense of fairness and accountability; if the thought of these faceless, unaccountable companies and individuals using their influence to recreate the ‘onshore’ world in their own image doesn’t worry you; maybe some of the real world implications of the offshore system will change your mind. Shaxson uses vivid description and mind boggling statistics to show how the rise of offshore has fuelled corruption, organised crime and terrorism, stunted development, increased inequality, stoked financial crises and undermined democracy across the globe.

The greatest victims, as tends to be the case, are in the developing world. The power of the world’s most odious political regimes, from Pinochet in Chile and Marcos in the Phillipines to Saddam Hussein’s Iraq and to Kim Jong Il’s North Korea, is financed largely through private and stolen national wealth secretly held offshore. Africa’s bloody resource wars, from Sierra Leone to the Congo, are fuelled by the looting of mineral wealth by local and foreign actors through tax havens. The emergence of a post-Soviet oligarchy, able to enrich itself offshore, largely explains Russia’s descent into authoritarianism and organised crime. The enormous arms and drug trades, which in turn fund terrorism and conflict – across the world but most devastatingly in the global south – are only possible on today’s scale because of the anonymity afforded by tax havens.

When we begin to grasp how much wealth is withdrawn from developing countries by small groups of elites with the connivance of Western banks and private interests, it becomes impossible to separate the challenges of development from the depredations of the offshore system. Shaxson tells us that over half of the money lent to third world countries by Western banks during the 1970s and 80s probably flowed back out ‘under the table’ into private offshore accounts, often within a matter of weeks. The wealth held offshore by the wealthiest citizens of developing countries is often several times their national debts, and if modestly taxed could easily be used to service those debts. Accurate data for offshore flows are hard to compile, for obvious reasons. However, the best estimate suggests that collectively developing countries may lose up to $1,000 billion a year (and growing) in illicit financial flows. By comparison the $100 billion it receives in total annual foreign aid must swim against a very powerful tide to have any impact at all.

While less spectacular, the impact of offshore on Western societies has been no less transformative. Over the past forty years or so, as offshore has drifted onshore, our societies have become more unequal, our economies more unstable and our democracies weaker. Taxation has become steadily more regressive, with the burden of paying for public spending falling more heavily on low- and middle-income groups. The need to compete with the offshore world to retain capital flows has also put a downward pressure on regulatory and transparency standards. This is most clearly seen in the failure to regulate banks in the lead up to the recent (read current) financial crisis. It is no coincidence that much of the imaginary wealth generated by securities and derivatives will have found its way offshore before Western taxpayers were left to pick up the tab. In 2005 the Tax Justice Network estimated that wealthy individuals (ie. not including companies) held $11.5 trillion offshore – equivalent to US GNP and about a quarter of all global wealth. The tax on this wealth would immediately wipe out Western deficits and avoid the need for what may be a decade or more of austerity.

The opportunistic ideology of offshore

When we consider the meaning of these numbers, the thing that stands out most strikingly in Shaxson’s account is that the offshore system arose in almost total silence. (Indeed it is our, or at least my, general ignorance of the topic that makes the facts so shocking.) The role of tax havens in eroding tax revenues from the wealthy, lowering standards of corporate transparency and responsibility or increasing inequality within and between countries to stratospheric levels, has not been the subject of many parliamentary debates, public inquiries or newspaper exposes. This veil of silence may imply that it is all some kind of grand conspiracy theory, but in reality none is needed. Offshore tax havens are the setting of many a colourful James Bond-style conspiracy, some of which, such as the French/Gabonese ‘Elf Affair’, the BCCI scandal and the theft of sovereign wealth by innumerable murderous third world despots with the help of Western banks, are described in considerable detail. The scandal of offshore itself, however, is largely the result of ’drift’. Most participants merely took the path of least resistance, while a few, like the perfidious City of London, played more active, but still essentially opportunistic roles.

It is easy to see why decision makers in the Bank of England, the Jersey, Cayman or Delaware political establishments, or the banking giants may have adopted the offshore worldview out of self-interest, even if it is harder to see how they are able to justify their actions. It is even possible to see why national politicians faced with the ominous challenge of trying to tame the beast, have consistently looked the other way. What is perhaps more strange is the way that electorates across the rich world (ignoring for a moment the largely disenfranchised populations of the global south who have suffered most) seem to have tolerated this drift.

One possible explanation, as discussed above, is our almost complete ignorance of the issue – not helped by its complexity and, barring the occasional corporate scandal, generally faceless character. Another is that we in the West (or at least the middle classes) have not faired all that badly – although given that much of our apparent wealth depended on cheap credit and a property bubble this may no longer be the case. A third explanation is that the seeming inevitability of globalisation has made us apathetic and, perhaps more worryingly, opportunistic – willing to take what we can from an unpredictable world, regardless of who suffers or unfairly benefits elsewhere. A full explanation would probably include a mixture of these and possibly other factors, but these are not things we would ever tell ourselves, or allow our politicians to tell us. While the rise of offshore arguably reflects a failure of Western populations to rein in their economic and political elites (a charge we often level at citizens of developing countries,) the ideology and language of our politics has retained plenty of idealism, even if it sounds increasingly hollow.

In a fascinating chapter on life in an offshore tax haven, Shaxson speaks to those unfortunate souls who find themselves outcast in ‘goldfish bowl’ environments like Jersey. He finds those working in Jersey’s all-consuming financial sector to be extreme libertarians, detesting of government, the poor and even seatbelts. These attitudes, presumably (though it is never said) originating with the wealthy customers of these services, form something of an offshore ideology. It is a concept of freedom that conflates political liberty (actually in rather short supply in Jersey) with the right not to have one’s economic affairs taxed, regulated or even known about. The voices we hear have the ring of stroppy adolescents, who want to be left alone but seem to know that they’ll be ok should anything go wrong. It somehow makes sense that it is in these rarified island communities where ‘everyone knows everyone’ and government has been fully captured by finance that Ayn Rand’s worldview has found its fullest expression. On the mainland similar voices may also reverberate within the glass palaces of corporate and financial power, and perhaps behind the closed doors of Whitehall and the Capitol Building, but in public the ideology of offshore dare not speak its name.

It is worth asking why this is. In Britain an alliance between corporate power, large parts of the small business and property owning middle classes and the ‘aspirational’ working class swung, to varying degrees, behind the neoliberal project, first under Thatcher and then, in its softer form, under New Labour. But this unstable alliance diverges on the question of offshore and the monopoly advantages it bestows to big business. The small stakeholders in the ‘property owning democracy’ may not be particularly interested in equality, but they are highly sensitive to what they perceive as others are not playing by the rules. This can make them unsympathetic to the unemployed and the incarcerated, but their fury can also be stoked by bankers’ bonuses and the compound advantage enjoyed by those with the werewithal to avoid tax. This diverse constituency, ‘Middle Britain’ in the imagination of pollsters and political strategists, may barely exist as a meaningful group, but some of the prevalent views across it anchor the national debate. And on the whole their collective voice is no more interested in extreme libertarianism than it is in lenient prison sentences.

The positive arguments for the offshore system, like its capacity for wealth generation and promoting the efficient allocation of resources, quickly break down under scrutiny (Shaxson comprehensively debunks these and other related arguments here.) This leaves justifications that are essentially technical – the right of individuals and businesses to seek the lowest levels of tax/regulation/disclosure available to them, and the difficulty of stopping them. This is hardly the stuff of great oratory (which the initial success of Obama, and the failure of so many European politicians, has shown still wins over electorates.) In fact it is no different in tone to the kind of pragmatic and technocratic language that we are told is alienating voters from the European project. So why has it worked?

Historians may one day look back on the era of offshore hegemony and wonder why it took so long for politicians to act. To draw an (otherwise unrelated) historical parallel it may prove comparable to the appeasement of Fascism, where self-perpetuating inaction forms something of a consensus at the time, but then looks insane with the benefit of hindsight.

The strange appeasement of a system that benefits so few to the detriment of so many can probably best be explained as a loss of political agency. We seem to be in a period where politicians, perhaps with reason, lack faith in their own ability to enact change. The key distinction here is not between right and left. (Although this remains important and tends to determine how sympathetic politicians are to the offshore ideology, in practice there has been little to discern between the the approaches of left- and right-wing governments to offshore.) Rather it is between constructivists, who believe they can change the conditions in which they operate, and (small ‘c’) conservatives, who feel bound by them. Both of these philosophies, which span the political spectrum, have their strengths and weaknesses. Both are best used in moderation and probably need a dose of the other as a counter balance. However, globalisation and apparent popular disengagement from politics seem to have prompted an unhealthy drift towards conservatism, which has handed over unimaginable privilege to the small number of constructivist libertarians in the offshore world without a fight.

The obstacles to clamping down on tax havens and returning embezzled wealth and lost tax revenues to their rightful owners are political and psychological, rather than technical. But that does not make them any less difficult to overcome. For it to happen our politicians need to feel they can work together across borders to challenge big finance, and first they need to believe that we want them to do so. Although the mood may slowly be shifting under the strains of austerity – the popularity of the brilliant UK Uncut is one positive sign – there are still no clear indications that Western voters are shaking off the malaise, perhaps still perceiving that it could be worse. If there is any truth to my appeasement analogy, the ‘invasion of Poland’ may may be played out with a second, bigger financial crash in which the banks prove not only too big to fail, but too big to save. This would finally present voters and governments with the existential threat they may need to challenge the perverse logic and inverted morality of the offshore world. If that is to be, there is still no sign of the Churchills, Roosevelts and De Gaulles we will need to lead the charge.

The Treasure Islands website can be found here

See also David Runciman’s excellent review of Treasure Islands in the London Review of Books here

Advertisements