In 1969, two years after the Cayman Islands, a British territory, passed their first law allowing secret offshore trusts, an official government report struck a worrying note. A tide of brilliant proposals from private developers, he warned, was sweeping the islands. Cayman was quickly becoming a state captured by shady finance.
These were the stinging beginnings of a modern system unearthed by the Pandora Papers, a massive data breach coordinated by the International Consortium of Investigative Journalists. The newspapers exposed an assortment of secret and questionable financial transactions by more than 330 politicians and officials from more than 90 countries and territories – and more than 130 billionaires from Russia, the United States and elsewhere. A dizzying array of bickering and wealth accumulation was on display, often by the very ones who should be suppressing it.
The revelations, released on October 3, are global in scope. But if there is one country at the heart of the system, it is Great Britain. Along with its partially controlled overseas territories, Britain is instrumental in the global hiding of money and assets. It is, as a member of the ruling Conservative Party said last week, “the money laundering capital of the world.” And the City of London, its golden financial center, is at the heart of the system.
For Britain, whose bloated financial sector is exacerbating widespread economic problems, this is bad enough. For the world, at the mercy of an economic system rigged for the rich, it is even worse. The offshore ecosystem is, by design, devilishly complicated. Many complex and opaque instruments – including offshore trusts, tax loopholes and shell companies – along with banking secrecy and negligent financial regulation envelop the assets of the rich in dark legal haze. At the center of it all are tax havens, such as the Cook Islands, British Virgin Islands, and Jersey (one of the Channel Islands), which can function as coves for smugglers. The rich and the infamous take their money there to protect it, but also to escape the rules, laws and taxes that they do not like.
The wealth held in tax havens is staggering: estimates range from $ 6 trillion to $ 36 trillion. And some tax havens are closer to us than many imagine. The United States, with its shady Delaware shell companies and South Dakota trusts, has long been a big part of the secrecy system. A group of European countries, including Luxembourg, Ireland and Switzerland, offer another menu of escape routes. Asia, of course, has Hong Kong and Singapore. But the British network is surely the most important. The Financial Secrecy Index of the Tax Justice Network, a ranking of tax havens, shows that Britain and its âspider webâ of offshore satellites would rank first. More than two-thirds of the 956 companies that the Pandora Papers link to public officials were established in the British Virgin Islands.
The city of London is at the heart of the process. Through international stock quotes, currency exchanges, bond issues and more, the City runs a perfectly respectable financial business around the world. But it is also the main nerve center of the darker global offshore system that hides and protects the world’s stolen wealth.
Once the financial heart of the British Empire, the City has evolved into a crucial conduit for international capital of all kinds. The key moment came when, in the midst of decolonization, the Bank of England let the country welcome the new Eurodollar market. It was an almost unregulated and highly profitable offshore space, separate from the UK economy, where foreign banks, mostly US ones, could do things they couldn’t do at home. In the 1970s, this rapidly growing market began to merge with UK and other tax havens into a seamless global network. British havens have since served as collection vessels for various financial activities around the world, legal or not, often handing over accounting, banking and law to the City’s businesses. In tandem, the two caused untold damage. The lost tax revenues are staggering: Companies use tax havens to evade payment of around $ 245 billion to $ 600 billion a year. (A new global deal for a 15% minimum corporate tax rate will reduce these losses.) Individuals are also hiding huge sums of money.
But tax is only part of the story. The global game of deception, played for decades by the wealthy and their city officials, has eroded the rule of law – and eroded citizens’ trust in the system.
After the 2008 global financial crash, which exposed the extravagant excesses of the financial system, reform efforts were made. The âLondon gap,â as the chairman of a US regulator, Gary Gensler, called it, has been closed. But now, as memories of the crisis fade and Brexit begins to bite, the government wants to rekindle the City’s dark arts. âA New Chapter for Financial Services,â a key policy document he released in July, clearly signaled a return to more permissive times. âCompetitivenessâ and âcompetitive,â code words for low taxes, weak regulation and lax enforcement, appear more than 15 times. Britain’s deference to sneaky money is doomed to fail. Its overly âcompetitiveâ financial center is a curse with numerous consequences: regional inequalities, an unbalanced economy, declining productivity, stalled investment, inflation in asset prices and political corruption. After years of austerity and amid food and fuel shortages, Britain can hardly afford an oversized city.
But it is the world that suffers the most. For shady businessmen and longtime political leaders, the offshore ecosystem offers impunity, masks capital, and protects wealth. Inexplicable and often untraceable, the system ensures that prosperity remains the prerogative of a few. To reverse the inequalities and injustices so brutally exposed by the pandemic, we must tackle the havens – and the vested interests in London that protect them.
The writer is a NYT reporter Â© 2021