Tax havens for despots, criminals and the Fortune 500

The HSBC corporate logo outside a branch of the bank in central London, Feb. 9, 2015. British media reports that the Hongkong Shanghai Banking Corporation’s Swiss-based private bank helped wealthy clients evade millions of dollars in taxes, according to an investigation of thousands of leaked documents. (EPA/Facundo Arrizabalaga)
The following is a guest post by political scientists Neil A. Abrams and M. Steven Fish of the University of California, Berkeley.
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What do Google and Amazon have in common with arms traffickers, terrorists, and North Korean rulers? The answer: All use the same offshore system to circumvent rules that would otherwise constrain them.
Google and Amazon radically reduce their tax burdens. Traffickers and terrorists, as well as corrupt elites in the developing world, stash their lucre behind anonymous, untouchable trusts and LLCs. And the top global banks provide offshore services and build playgrounds where they can engage in financial speculation with no rules—in the process becoming “too big to fail” by the time the day of reckoning arrives.
An explosive report on HSBC’s Swiss banking arm reveals the extent to which the offshore system makes bedfellows of legitimate businesspeople and nefarious criminals.  On Feb. 9, the International Consortium of Investigative Journalists (ICIJ) released Swiss Leaks, its investigation into HSBC Private Bank (Suisse).  The report alleges that the bank serviced a mix of tax-dodging plutocrats, dictators’ bagmen, blood-diamond dealers, cocaine traffickers, and Al Qaeda financiers.
Swiss Leaks is the latest in a series of ICIJ reports based on millions of leaked offshore files.  Previous ICIJ exposés sparked European Commission investigations into allegedly illegal tax deals between E.U. states like Luxembourg and Ireland and huge multinational companies including Amazon, Apple, Fiat, and Starbucks.
The world’s biggest offshore haven is Britain. Nicholas Shaxson writes of a “British spider web” by which British Overseas Territories and Crown Dependencies funnel cash to the City of London, London’s financial district, from all corners of the globe. Contrary to widespread perception, the Cayman Islands and Bermuda, both favorite jurisdictions for American tax dodgers, are not untouchable microstates governed by wily potentates beyond the reach of Western governments’ control. They are British Overseas Territories, integral parts of Britain and threads in the spider web that collect money and channel it to the City of London.
The European Commission investigations are a welcome development. But they exclude a number of E.U. offshore havens (notably Britain) and focus only on breaches of the law.  Consequently, these inquiries barely scratch the surface of the problem. The issue is not just illegal practices. It is the lax, loophole-riddled laws of offshore havens that enable big banks, criminal syndicates, tax-dodgers, and rapacious rulers legally to skirt the rules of other countries. If the Commission is to make a dent in the problem, it must generate an E.U.-wide campaign to enact smarter rules that make offshore secrecy and tax avoidance more difficult.
Nor is Europe the only source of offshore mischief. Besides Britain, the other leading offshore haven is the United States. U.S. federal law is filled with wooly provisions and loopholes that allow businesses and individuals to avoid taxes by shifting assets, finance, trade, and profits offshore. U.S. law even permits American banks knowingly to accept proceeds from a wide range of criminal activities so long as the offenses were committed outside the United States.
President Obama’s recent proposal to tax the offshore cash piles and future earnings of U.S. corporations is a notable departure from the norm, however unlikely it is to become law. Even if it were to pass, the policy would do nothing to address America’s role as an offshore haven for foreigners.
A number of U.S. states have opened their arms to tax avoiders and criminals. Delaware is the most notorious but is hardly alone. Anyone — Kim Jong Un, Vladimir Putin and his oligarchs, the Islamic State — can safely stash their wealth behind a web of trusts and LLCs in Wyoming. That wealth might come from ransom, drug trafficking, or pilfering developing countries’ assets, but no matter: Wyoming does not require any records containing the names of corporate officers and members, let alone the ultimate beneficiaries of these entities, to be kept within the state’s boundaries.
The consequences of offshore banking are enormous. According to Citizens for Tax Justice, as of 2013 over 70 percent of Fortune 500 companies disclosed subsidiaries in offshore tax havens. By transferring their profits overseas, these and other companies cost the U.S. federal government an estimated $90 billion annually in lost revenue. If these companies actually paid the taxes they owe, the average American household could pay $800 less per year in federal taxes without increasing the government’s budget deficit by a dime.
The tax savings accruing to the world’s largest corporations amount to massive subsidies that undercut free and fair market competition. And some of the biggest users of the offshore system are the very firms that received taxpayer bailouts in 2008 — Bank of America, Citigroup, JPMorgan-Chase, AIG, Goldman Sachs, Wells Fargo, and Morgan Stanley. Many of these firms are also leading providers of offshore services.
But Americans’ losses from offshoring pale by comparison with the costs paid by poor countries. Many developing countries have become known for severe indebtedness and recurring financial crises. But by 2010, these countries had built up unrecorded offshore holdings of $7.3 to $9.3 trillion, according to James Henry of the Tax Justice Network. Far from being mired in debt, developing countries are in fact creditors to the rest of the world. The problem is that their assets are privately held by predatory rulers and business elites as well as their families and favorites — and stashed offshore — while the debts are shoved off onto their beleaguered citizens.
With their wealth offshore, elites in developing countries have little incentive to push for better governance at home. And even when well-intentioned reformist governments take power, they might find that the money needed to improve public administration remains in the hands of the rulers they replaced, hidden behind anonymous trusts in secret bank accounts.
Offshore has begun to draw attention from a few journalists and NGOs, but scholars for the most part have neglected it. Given its scale and consequences, offshore merits much more attention than it has received to date. It is among the most important problems of our time. Economic inequality in rich countries, developing-country poverty and indebtedness, trafficking in drugs and people, terrorism, the illegal international arms trade, insider trading scandals, and every major financial crisis since the 1970s—none of these can be discussed without examining the role of offshore, as Shaxson points out.  Enron, Parmalat, Long-Term Capital Management, Lehman Brothers, AIG, Bernie Madoff, Saddam Hussein, the Kim dynasty in North Korea — all were enabled by it.
The argument for reining in the use of offshore havens cuts across conventional political divides. It should unite all who believe that the rich and powerful should be obliged to play by the same rules as everyone else, as well as everyone who seeks to clip the wings of terrorists and international criminals. Needed reforms in policy include country-by-country reporting for multinational corporations and banks; taxing multinational firms on the basis of real economic measures like sales and payrolls in a given country; and establishing public registries that reveal the flesh-and-blood beneficiaries of all trusts and corporate entities.
International organizations, NGOs, journalists, and scholars can pitch in by educating the public about the colossal costs of offshore, publishing blacklists to shame the providers and users of offshore services, and training fire on political leaders who oppose reform.
Given the lobbying power of the offshore industry, under normal circumstances rich-country governments are unlikely to take up the cause of reform. Fortunately — at least for the purpose of weakening offshore — the big private banks and accounting firms at the core of efforts to preserve the system have demonstrated a reliable tendency to implicate themselves in major financial crises and scandals. The next time this occurs, they will be left politically weakened and vulnerable to real and lasting reform. In this regard, the 2007-2009 financial crisis was an enormous lost opportunity. But another one will eventually present itself. When it does, it will be up to our leaders to seize the moment — and to all of us to make sure that they do.
But even before the next meltdown hits, we can support efforts to rein in practices that distort competition, contravene the interests of the vast majority of the world’s people, and violate elementary common sense.