The ‘spider’s web’: Britain’s global money laundering network

This article was originally published in Counterpunch magazine in June 2016

Kwame Nkrumah was the leader of the Ghanaian independence movement in the 1950s, eventually leading the country to become the first black African nation to break free from British rule in 1957. But Nkrumah knew that the country he led remained tied into a colonial world economy, and would require much more than formal political independence to become truly liberated. He analysed the condition of political independence combined with economic dependence as ‘neocolonialism’ which, he argued, aimed “to keep [living] standards depressed” in the formerly colonized countries “in the interest of the developed countries” and to preserve “the colonial pattern of commerce and industry”. Specifically he noted “the financial power of the developed countries being used in such a way as to impoverish the less developed.” This short sentence describes precisely the main role of today’s global network of tax havens.
Whilst there is no single, internationally-agreed, definition of exactly what constitutes a tax haven, there is little disagreement on the broad contours of their appeal: the chance for capital to escape the regulation, scrutiny and tax laws of the society in which it was generated. Their scale and significance to the global economy is hard to overstate: according to Ronen Palan, one of the leading academic authorities on ‘offshore’ finance, tax havens hold an estimated 20% of all private wealth, process almost half the world’s stock of money, conduct 80% of international financial transactions and account for almost 100% of foreign exchange transactions (worth $2 trillion per day). It is not surprising, then, that 99 of Europe’s top 100 companies have subsidiaries in tax havens. As the investigative journalist Nicholas Shaxson has commented, “the offshore system is not just a colourful outgrowth of the global economy, but instead lies right at its centre”. But this has not always been the case. Whilst early tax havens began to take shape in the 1930s, their emergence as the world’s major financial centres coincided precisely with the end of (most) formal colonialism.
Whilst most of the British Empire had gained independence by the end of the 1960s, Britain retained control of a significant number of island outposts scattered around the globe. Some of these, such as the Chagos and Falkland islands, became outposts for the projection of military power. The Chagos islands, for example, were emptied of their indigenous populations and turned into a US base which has played a crucial role in the refueling of bomber jets on their way to the Middle East, as well as a staging post in the CIA’s notorious rendition programme. But most of the islands were destined for another, although linked, purpose: to act as financial vehicles for the continued looting of the former colonial regions, channeling their resources back to the imperial heartlands. Closest to home were the three Crown Dependencies of Jersey, Guernsey and the Isle of Man; then the fourteen Overseas Territories, mostly in the Caribbean; and finally a range of other jurisdictions such as Gibraltar and Hong Kong. Virtually all of these islands had become tax havens within years of the formal decolonization of the rest of the empire, and collectively represent around one half of all the world’s tax havens (however defined) today. With the exception of Hong Kong, all remain under the control of the British crown, with governor-generals appointed by London, and legislation subject to approval or veto by the British Foreign Office.
Once established, Britain’s network of tax havens created the competitive pressures that led other global powers to create their own offshore centres in response. As noted by Palan, Murphy and Chavagneux, “the British state and the British Empire emerged as the second [after Switzerland] and soon the dominant hub of the offshore economy…A City of London-centred economy emerged, closely linked to a satellite system of British dependencies. The British Empire economy combined tax avoidance and evasion with regulatory avoidance in a new synthesis known as OFCs [Offshore Financial Centres]. The powerful attraction of this London-centred offshore economy forced both the United States and Japan to develop their own limited version of OFCs, adopting a model originally designed in Singapore”. As Shaxson has noted, “It was Africa’s curse that its countries gained independence at precisely the same time as purpose-built offshore warehouses for loot properly started to emerge…The colonial powers left, but quietly left the mechanisms for exploitation in place”.
The main way in which tax havens drain the resources of the developing world is through their facilitation of illicit capital flight. Whilst this affects all countries, as Palan et al explain, “unlike illicit flows of money between developed countries, which tend to be multilateral (eg Swiss firms transfer illicit money to the United States, and US firms transfer money to Switzerland)…flows [from developing countries] tend to be one-directional, from the developing to the developed, from the poor to the rich”, with an estimated “80-90% of all illicit money transfers from the developing countries” thought to be “permanent outward transfers”. The result is illicit flows of $1.25 trillion per year out of developing countries, according to a 2008 report by Global Financial Integrity, ten times the total aid sent to the developing world. Palan and his colleagues note that “these sums are much larger than all other deleterious effects of development, including the transfers identified by traditional dependency theory”. 
According to Raymond Baker of Global Financial Integrity, fraudulent transfer pricing accounts for around two thirds of these illicit flows. This occurs when subsidiaries of multinational corporations either over-charge or under-charge another of their subsidiaries to avoid tax. An Exxon copper mine in Chile, for example, raised eyebrows in 2002 when it was sold for $1.8billion, despite being lumbered with $500 million debt and having been, at least on paper, consistently loss-making for the previous 23 years. What emerged is that the entire profits of the mine had been swallowed up in interest payments on a loan that had been taken out with Exxon’s Bermuda subsidiary. Thus the Bermuda subsidiary was making all the profit – tax free – whilst the mine itself was officially loss making, and did not pay a penny of tax to the Chilean government for the entirety of its existence. With one exception, this practice was being used by every single mining enterprise in the country. Given that 60% of all global trade is composed of such ‘intra-firm’ trade, and such deliberate mispricing appears to be the industry standard, this constitutes a massive drain of wealth: research by Christian Aid suggests that developing countries lose $160 billion per year to such practices. If these revenues were collected as tax and spent on healthcare in the same proportions as they have been since 2000, they note, this money would save the lives of 1000 under-fives per day. These practices are facilitated primarily by tax havens. 
The second largest form of illicit money flows from developing countries, constituting 30-35% of the total, is money from criminal enterprises. The secrecy provided by tax havens – which makes it nearly impossible to trace the owners of companies – along with the willful disinterest in how funds were acquired – makes tax havens a magnet for criminal funds seeking a ‘laundering’ service to clean dirty money.
Finally, an estimated 3% of the illicit money flows comes from government officials involved in theft and bribery. Whilst small as an overall proportion, however, such flows have had major consequences, as much of the money was stolen from international loans, leaving the public on the hook for ever-growing, and ultimately unpayable, debts. A major study of 30 African countries by Boyce and Ndikumana in 2003 found that for every $1 lent to Africa between 1970 and 1996, up to 80 cents flowed out of the country as capital flight within a year, often stashed away in the private bank accounts of corrupt leaders in tax havens. A further study of 33 African countries revealed that over $700 billion had fled the continent between 1970 and 2008, amounting to $944 billion including imputed interest. This dwarfs the total African foreign debt of $177bn, making Africa a net creditor to the rest of the world, by a huge margin (of $767billion). But whereas the wealth is held in private offshore bank accounts, the debt is owed by the population, with interest payments reaching $20 billion per year in 2006. Boyce and Ndikumana argue that such payments “represent the third and final act in the tragedy of debt-fuelled capital flight. In the first two acts – foreign borrowing in the name of the public, and diversion of part or all of the money into private assets abroad – there is no net loss of capital from Africa. What comes in simply goes back out again. It is when African countries start to repay these debts that the resource drain begins”. The authors have calculated that, by diverting public funds away from healthcare and towards debt repayments, “debt fuelled capital flight resulted in an extra 77,000 infant deaths per year”, not to mention deaths amongst other age groups, and losses to every other part of the public sector. Tax havens, by providing the facilities by which stolen money could be hidden and stored, have played a major role in facilitating debt-fuelled capital flight.
Not even the tax havens themselves appear to benefit. Despite the hundreds of billions passing through the Pacific tax havens each year, for example, they “remain among the poorest nations in the world” (Palan, Murphy and Chavagneux). And the Cayman islands – the world’s fifth largest financial centre, hosting 80,000 registered companies and holding $1.9 trillion in deposits, does not even provide subsistence to its population; the island’s budget for 2004-5 had as an objective that all residents should achieve at least subsistence levels of income – an astonishing admission for what is, on paper, one of the world’s richest countries per capita, with a population smaller than a typical English village. 
So, through transfer mispricing, money laundering, debt-fuelled capital flight and straightforward tax evasion, tax havens are facilitating the draining of over $1 trillion per year from developing countries. But once that money arrives in the tax havens, it doesn’t typically stay there. As Martyn Scriven, secretary of the Jersey Banker’s Association, explained to Nicholas Shaxson: “We gather deposits from wealthy folk all around the world, and the bulk of those deposits are sent to London. The banks consolidate their balances every day, and surplus funds won’t sit here – they either go to another bank or on and through to the City. If I have money to spare, I pass it to the father. Great dollops of money go into London from here”. Indeed, according to a recent UK Treasury report, “the UK has consistently been the net recipient of funds flowing through the banking system from the nine jurisdictions” covered in the report (six of the UK’s overseas territories plus its three crown dependencies, all of them tax havens). In particular, “The Crown Dependencies make a significant contribution to the liquidity of the UK market. Together, they provided net financing to UK banks of $332.5 billion in the second quarter of calendar year 2009, largely accounted for by the ’up-streaming’ to the UK head office of deposits collected by UK banks in the Crown Dependencies.” The report explains that “‘Up-streaming’ allows deposits to be gathered by subsidiaries or branches in a number of
different jurisdictions and then concentrated in one centre, in this case the UK, where the bank
has the necessary infrastructure to manage and invest these funds. This model is followed by
many large banks around the world and is not confined to ‘British’ jurisdictions”. 
In other words, the US and British banks use tax havens to gather wealth from all over the world using unregulated subsidiaries in tax havens, and then channel that money to their parent companies in London and New York. The UK report concludes that “in aggregate, the UK was a net recipient of funds from the nine jurisdictions of $257 billion at end-June 2009”, conforming to “the long-standing pattern that the UK has consistently been a net recipient of funds.” As Shaxson put it, the British-controlled tax havens “scattered across the world capture passing foreign business and channel it to London just as a spider’s web catches insects”. But this web also acts as “a money-laundering filter that lets the City get involved in dirty business whilst providing it with enough distance to maintain plausible deniability… By the time the money gets to London, often via intermediary jurisdictions, it has been washed clean”.
And once it gets to London or New York, it is pretty safe – the US success rate in catching criminal money, for example, is estimated by Global Financial Integrity to be around 0.1%. No wonder that Baker calls this system, ‘the ugliest chapter in global economic affairs since slavery’. For Shaxson, “the offshore world is not a bunch of independent states exercising their sovereign rights to set their laws and tax systems as they see fit. It is a set of networks of influence controlled by the world’s major powers, notably Britain and the United States”; and even the UK Treasury admits “the UK’s responsibility for representing their [the Overseas Territories and Crown Dependencies] interests in international fora”. 
Just as under formal colonialism, of course – and as Western media loves to point out – there are certainly also beneficiaries of tax havens in the global South. The ruling elites who have plundered their own countries and stashed the money abroad, from Mobutu in the Congo, to Marcos in the Philippines, Abacha in Nigeria and countless others, have become some of the world’s wealthiest people thanks to the ‘no-questions’ storage and laundering services provided by tax havens. Neocolonialism, as colonialism before it, has always relied on its indigenous collaborators. 
Likewise, there are also big losers from the tax haven system in the global North. Richard Murphy has estimated that £25 billion per year in tax revenues are lost to tax havens from the UK alone, and Shaxson notes that one third of Britain’s largest companies pay no tax at all. Furthermore, all countries, including the richest, have been forced to compete with tax havens by emulating some of their deregulated and low tax features in order to avoid capital flight offshore, with the result that, in Shaxson’s words, “in the large economies tax burdens are being shifted away from mobile capital and corporations and onto the shoulders of ordinary folk”. He adds that “overall, taxes have not generally declined [in the US]. What has happened instead is that the rich have been paying less, and everyone else has had to take up the slack”.
Nevertheless, what is beyond doubt is that the damage inflicted on developing countries by tax havens, in terms of world historic levels of capital flight, and measured in the deaths of literally hundreds of thousands of men, women and children is simply incomparable with the side effects suffered by the developed world. Equally incontrovertible is that it is the predominantly Western banks and multinational corporations that are the biggest winners from the explosion of offshore, as demonstrated by the net flows into US and UK-based institutions – institutions, that is, on which a massive and increasing proportion of Western citizens depend for their pensions.
This short essay has, by its nature, many omissions, barely scratching the surface of the mechanisms used by tax havens to drain the resources of the developing world. Neglected, for example, were the issue of double (non)-taxation; the role of offshore in creating financial crises in which developing countries suffer disproportionately (and following which Western corporations buy up bankrupted companies at far below their real value); and the crucial role of under-development itself in boosting Western profits, firstly by keeping third world wages low, and secondly by maintaining the West’s monopoly of hi-tech industry. Nevertheless, it has shown that whilst all countries are impacted by the tax losses, capital flight and illicit transfers facilitated by tax havens, it is the developing world which suffers the most inhuman consequences by a large margin; and at the same time, the net flows into London from its string of tax havens dwarf overall UK tax losses by a factor of around ten. Whilst I have not seen comparative figures for New York, I have no reason to disbelieve the UK Treasury’s claim that a similar pattern is at work. What is clear is that the US and UK, the world’s foremost neocolonial powers, are net (and huge) beneficiaries of the offshore system, relying on a string of ‘offshore’ territories over which they have effective control (places such as Panama in the case of the US) to provide ‘arms length’ banking services it would be politically difficult to provide at home. Nkrumah claims that “Neo-colonialism is…the worst form of imperialism. For those who practice it, it means power without responsibility and for those who suffer from it, it means exploitation without redress”. It would be hard to find a more precise example of this than in today’s empire of tax havens.

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