Tax havens: The Financial Pirates of Treasure Island

Some scornfully call them the ‘Achilles’ heel of capitalism’, while others admire them for being ‘the lubricant of the wheels of the international economy’. For years tax havens have been under fire because of their presumed role in providing a safe haven for money laundering criminal organizations and terrorists. Less known is the fact that they also hold a key position in the underdevelopment of countries. ‘Development aid is useless as long as we don’t act upon the tax havens.’
  •  cover MO* june 2008
The South African lawyer and the magistrate from the mountainous enclave of Lesotho don’t look like tough detectives who unscrupulously burst into the offices of the mighty and powerful of this earth, confiscate files and denounce corruption. Guido Penzhorn and Leaba Thetsane both look timid and speak with a soft voice. This is the team however that revealed one of the biggest corruption scandals in Africa.
Penzhorn and Thetsane brought some big western companies to court because they had bribed functionaries in Leshotho. The companies involved were a bit too eager to get their hands on a contract of what was then considered as one of the biggest water construction works in the world, the so called Lesotho Highlands Water Project. It set off in the middle of the eighties and will not be completed until 2020. Price tag: 8 billion euro. The semi-governmental organization Lesotho Highlands Development Authority had to conduct the project.
By the end of October 2002 the Canadian company Acres International was the first to be found guilty of bribery. Acres International was condemned to pay over two million euro. In the same case twelve French, British, Swedish, Italian and South African construction companies and consultants are also being accused. And herein lays the core of the problem: the bribes had to be dispatched. And this is where tax havens come in the picture. The consortium of companies involved made the bribe cash-box “disappear” through Swiss bank accounts. Switzerland is one of the many tax havens who turned discretion into a very lucrative business concept. Payments were organized through consultants and daughter companies.
‘The Lesotho investigation was very intensive, complex, time consuming and expensive’, says Penzhorn. It took a great deal of financial resources from the dirt poor Lesotho, money that thus could not be spent on e.g. the fight against Aids. The complexity is an important aspect of tax havens, states the Tax Justice Network. Complex structures are often used with anonymous daughter companies incorporated in holdings and trusts. The disentangling of fraud records becomes very hard, especially for poor countries.
The Lesotho case is unique in the sense that it was brought to a good ending. Penzhorn admits the investigations were only successful thanks to his personal contacts with magistrates in Switzerland and detectives of the European Anti Fraud Office OLAF. The fact that successful international cooperation strongly depends on personal contacts, is a very fragile aspect. If those personal contacts disappear, the whole cooperation could run aground.

Offshore? Of Course!


Corruption like in the case of the Lesotho Highlands Water Project is facilitated and encouraged by dozens of ‘financial centers’ in the world- the neutral term for tax havens. That’s what Richard Murphy, director of Tax Research Limited, told the Commission on Globalization of the Belgian Senate in 2005. And it’s mainly companies and individuals in rich countries that benefit from this. Or as the World Bank and the UN Office on Drugs and Crime wrote in their most recent rapport Stolen Asset Recovery Initiative: ‘while the traditional focus of international development was on the elimination of corruption and poor management in the developing countries themselves, the other side of the spectrum was ignored: stolen assets are often concealed in financial centers of the developed countries, bribes for administrators of developing countries often come from multinational corporations.  The mediating service provided by lawyers, accountants and consultants that could be used for money laundering or hiding stolen capital by leaders from developing countries are often connected to financial centers of the developed countries.’
Rosalind Wright, chairwoman of the British Fraud Advisory Panel and former director of the UK Serious Fraud Office affirms: ‘It could cause a lot of damage to developing countries trying to increase their GNP if money is seeping away to tax havens at the same time. A country should be able to tax those who earn money in that country. When valuable funds are continuously diverted out of the country, it is obvious that such a thing is harmful for the economical development. But if you combine this with corrupt governments in developing countries, it becomes totally destabilizing. In particular in Africa, like the case of Sani Abacha (president of Nigeria from 1993 until 1998 hvs) who stole money from the treasury and shifted it all to tax havens. As such a flight of capital is bad enough for developed countries, for developing countries this could prove fatal. Nigeria is still trying to get over the Abacha-era. This is one of the darkest sides of tax havens.’

Dirty Money


Development economist John Christensen, founder of the British research NGO Tax Justice Network, illustrates this with some astonishing Nigerian figures: ‘under the reign of dictator Abacha, the central bank of Nigeria had a standing order to transfer 15 million dollar daily to his Swiss bank account’. Embezzlement on such a scale is impossible, according to Christensen, without an infrastructure of financial specialists and offshore administrators who make good money by offering an interface between criminal and common financial systems. Christensen: ‘About a hundred banks, spread out over the globe were involved in Abacha’s plundering, including important names as Citygroup, HSBC, BNP Paribas, Credit Suisse, Standard Chartered, Deutsche Morgan Grenfell, Commerzbank and the Bank of India.”
Raymond Baker, who examines money laundering at the Centre for International Policy, writes that ‘Abacha’s assets, estimated around three to five billion dollar, were the reason a state of excitement arose in the financial world to accept and manage this money.’
Christensen quotes an important figure of Baker: ‘Offshore centers make it possible that annually fifty billion dollar shifts out of the Third World, a stream of dirty money that became essential for the international elites. Approximately 300 million dollar of Abacha’s disputable loot ended up in Jersey, where people no doubt knew where this money came from. Banks were asking enormous remunerations to manage the funds of such a political and public person.’ A salary of five hundred euro per hour isn’t exceptional in the offshore business. Christensen subtly points out that, even though later a campaign was started to get Abacha’s fortune back to Nigeria, the offshore business made some good money out of it in the meantime. A small fortune that will never been seen again by the Nigerians.

Undercover In Jersey


Christensen himself comes from the tax haven of Jersey. After years of investigations and research in Asian countries, he returned to Jersey in the beginning of the nineties to study the functioning of the offshore industry on the inside- undercover. Christensen pretended to be a young man looking for a well paid job. He started out as administrator for Walbrook Trustees, a division of Deloitte –today Deloitte Touche Tohmatsu. After that, he got a job as government counselor. The work for most of the smaller accounts consisted of carrying out payments and transferring funds from one offshore account to another. The errands were faxed or mailed by lawyers in London, Luxemburg, New York or Switzerland. The real identity of the owner of the funds was top secret. Those procedures were the regular modus operandi for almost all offshore transactions.’
Christensen and his family led a princely life, but after ten years he decided to leave his beloved island. ‘I felt bad about my work. Once, when I told my chef that we were assisting to the flight of capital and looting of Africa, she told me: “I don’t give a shit about Africa anyway”. Not an unusual attitude in those surroundings. After a while I felt embarrassed about the island, which was taken over by greed and thoughtless excess of people who had been abusing and prostituting it as a tax haven.’ But Christensens undercover work proved meaningful. ‘I wanted to see how business was done in Jersey. In the past I had worked together with other researchers and journalists, but none of us really knew how the system truly worked. Books or research about tax havens didn’t exist.’
The fact that the whole business runs on secrecy makes the phenomenon so difficult to research, says Christensen. ‘For a long time it seemed it was just a marginal occurrence. Only the past couple of years people started to realize we’re talking about a billion dollar industry. The economists who did pay attention to it, did so from a strictly neo liberal point of view. They asserted that the offshore industry functions as “oil for the wheels of global economy”. A great phrase, which suggests steaming and active engines. But my research in e.g. Malaysia made me realize that the capital flight from developing countries happens on an enormous scale.’

Tip Of The Iceberg


Rudolf Mastenbroek, head of Criminal Investigations of the South African Revenue Service, assents to Christensens’ assertion about the volume of capital flight that flows to offshore accounts. ‘Investigations shows that for every dollar loaned to Africa between 1970 and 2004, at least sixty cent had left the continent by the end of that same year in the form of bribes, tied aid or theft’ says the South African researcher at a congress about fraud and corruption mid April in Cape Town. ‘Tax havens have played a very important role in this and there still doesn’t exist an effective global mechanism to prevent this.’
A brand new rapport by the Political Economy Research Institute of the University of Massachusetts describes the astonishing flight of capital from Sub-Saharan Africa between 1970 and 2004. Sometimes it was legal capital that flowed to offshore islands during political and economical instable moments, sometimes it were clandestine funds. Anyhow, the authors of the rapport, Léonce Ndikumana and James K. Boyce show that Sub-Saharan Africa, because of the massive capital flight, procured gross credits to the rest of the world for an amount of 420 billion dollar. Wíth interest that comes down to a firm 600 billion dollar in 35 years. Deducted with the total debt of broadly 200 billion dollar, this gives the authors the absurd credit of 420 billion procured by southern Africa to the rest of the world.
The point is that the ‘common’ African is still paying off these debts, while the benefits of all this money just went to a small elite and the international financial centers where the money was parked. ‘The legitimacy of many assets abroad is disputed. The famous scandals about the Abacha’s and Mobutu’s of this world are probably just the tip of the iceberg of the plundered African National resources’, say the authors.
That same conclusion was reached by journalist and oil expert Nicholas Shaxson. In his book Poisoned Wells he describes how dirty the politics around the African oil business were. Based on research of numerous substantial corruption scandals en plundering, Shaxson concludes that it is not development aid that’s going to help Africa, but the fight against a lack of transparency in tax havens. According to figures from the World Bank and the UN Office on Drugs and Crime the profits made worldwide by criminal activities, corruption and tax evasion are estimated between 1000 and 1600 billion dollars a year. The institutions write that ‘theft of public resources is causing a serious problem in the developing countries.’ But the political will to do something about it –by drawing up worldwide rules about transparency and the transfer of financial information for example- so far seems small.

Mc Maffia


A crucial element of the sophisticated financial services offered by tax havens is that they are as happily used by the upperworld as by the underworld.  It becomes impossible to distinguish the criminal kleptocrat in his striped suit from the financial director who diverts his company profits away to avoid high taxes. Rosalind Wright of the British Fraud Advisory Panel: ‘that is exactly why this whole issue is so sensitive. Criminals will always use certain methods that are used by others, just because they work.’
In his recently published book Mc Maffia, crime without frontiers the British journalist Misha Glenny investigates the world of offshore industries. Glenny: ‘as long as the United States and Europe permit the existence of offshore banks, they remain guilty of hypocrisy. Also for organized crime these financial centers are important instruments, who furthermore offer extra services like cheap covers and empty companies to masquerade illegal activities and guard against intrusive tax authorities. The only plausible reason for the growth and success of these financial institutions is the fact that a lot of major companies in the legitimate economy use them for exactly the same reason: tax evasion.’
A high ranked financial investigator, who in the past did some research around big Belgian fraud cases, sighs: ‘The existence of tax havens means there is a need for them ánd that they are tolerated. After 9/11 and the Patriot Act (the American Anti-Terrorism Bill, hvs) certain organizations were excluded from international payment traffic in no time. So it is possible to act.’
In McMaffia a top executive of the American National Security Counsil during the Clinton and Bush administration says it is indeed ‘a matter of putting a gun to the head of let’s say Liechtenstein and threaten to pull the trigger.’ Pulling the trigger here means the withdrawal of the bank license for the Unites States. Glenny: ‘Without offshore banks it would be a lot more complicated not only for criminals to shuffle their money and their companies. Also for Enron things would be a lot harder.’ In 2000 the energy company had a taxable turnover of over three billion dollar, but claimed a loss of 4,6 billion.

Eleven thousand billion dollar


Today tax havens are still a booming business. Some recent figures of the accountant firm Deloitte confirm this. Three quarters of all the major financial corporations in 2008 have departments in offshore centers where all services are provided. In 2001 that was only one out of ten. And the past five years employment in offshore centers has risen with 1800 percent.
Dirk Van Der Maelen, vice-president of Flemish social-democratic party sp.a, points out that ‘as good as all banks active in Belgium are also active in different tax havens to offer their -Belgian- clients an extensive display of tax evading possibilities.’ Since November 2005 VLM airlines has a daily flight from Brussels and Antwerp to the Isle of Man. Their flight schedule is aimed to attract business activities and potential investments, says VLM. Van Der Maelen: ‘this well known tax haven of 76.000 inhabitants has 30.000 corporations and a total of 46 billion euro of savings on bank accounts.’
During a hearing in the federal parliament Bruno Gurtner –economist at the Swiss Coalition, an umbrella group of aid organizations in Switzerland- gave an insight in the scale of the offshore industry: ‘less than twenty years ago they were about twelve offshore centers, today they are almost eighty. In each of them three million companies are established and every year there are about 150.000 more. This number increases constantly and the companies are located all over the world. We are talking about an extremely globalised sector of activities. Half of all financial transactions find place in those centers and that explains why they are so important for the world economy. This doesn’t necessarily mean that those figures would appear in, for example, the WTO statistics. Largely 60 percent of world trade goes intern between the diverse components of transnational companies and there is not a trace of these in the official statistics. The capital managed by offshore centers is worth about eleven thousand dollar.’

Weak Link


Jean- Claude Delepière, president of the Office for Financial Information Processing pointed out in the Commission on Globalization of the federal parliament that several international authorities became aware of offshore activities. The first one was the International Finance Action Group (IFAG) that fights criminal money laundering. The IFAG worked out forty recommendations. Delepière: ‘The IFAG has closely studied the phenomenon of offshore activities.
This action group realized that money laundering -and the fight against it- are international phenomena. Any weak link or the smallest flaw in the control network undermines the fight against laundering. It is clear that if funds are laundered in Belgium by using offshore countries or a tax paradise, it is going to be difficult to trace this occurrence. And even if we can, it remains impossible to prosecute it. The IFAG made it clear that in those offshore regions there simply aren’t enough rules regarding financial matters and the fight against capital laundering. And even if those rules would exist, they still would have to be applied.’
Rosalind Wright of the British Fraud Advisory Panel: ‘There are still tax havens where it remains difficult in practice: several Caribbean islands, the Cayman Islands, the British Virgin Islands… Jersey and Guernsey are doing slightly better, they no longer want to be seen as places that offer financial services to criminals and cooperate better than before. Also the high ranked financial investigator says: ‘through legal aid treaties and administrative agreements, by asking the right questions and by knowing the rules of law, you can get a lot of information as a researcher.’
But the policeman must admits that long waiting lines to obtain information from tax havens can provide some serious problems for judicial investigations. Christensen believes that for the investigation bureaus in developing countries –if they exist- it’s often just theory: ‘to start with only very few countries have made bilateral agreements with tax havens. And would they have such an agreement with, for example Jersey, even then the public accuser and his research team need to know clearly which information they seek. And that is exactly the problem. Furthermore, my experience is, if there are any ruling authorities, they systematically refuse to cooperate with any investigation whatsoever. Even today that attitude remains in place.’
Wright agrees. ‘It’s true that as an investigator you need to know what you want. The so-called fishing expeditions are taboo, and not just in offshore centers by the way. Even if as an investigation service you would like information about a British bank account, you have to be able to prove it concerns a punishable fact before they grant you access to that information.’ The financial investigator: ‘we need to ask ourselves if this doesn’t create a police state. We need a subtle balance between personal freedom and detection. By the way, blaming it all on tax havens is an easy way for western countries to excuse the failure of half a century of development aid and mask the by their tied aid and budget support stimulated corruption and cleptocracy. I can only see one solution and that would be the improvement of the capacity of the detection branch in African countries and of the cooperation between investigation teams. These things are crucial. This is what caused the success in the Lesotho case. Unfortunately the European Anti Fraud Office OLAF is the only institution for the moment that is capable of doing this. Other institutions like Europol don’t see the importance of it all.
Additional articles on tax havens (in Dutch) at Tax Havens

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