Where did all the money go? Not so much those billions that disappeared from computer screens when the stock market began its downward slide in the summer. Rather, I am thinking of those missing chunks of the last $4.8 billion International Monetary Fund loan to Russia, now being sought by Russian interior ministry officials.
According to those who know about these things, a large proportion of the missing IMF money left the Russian economy via the secretive and anonymous circuits of offshore finance centres. It re-entered the capital markets in private hands. For all we know, it is probably here – invested from there in the City of London.
“It’s not fanciful,” says Adam Courtenay, the editor of Money Laundering Bulletin. “It could have gone to Cyprus or another offshore centre, then sent to another trust somewhere like Jersey, set up by lawyers in the City of London, and then reinvested by them. The trail gets lost – that’s what money laundering is all about.”
Most of these offshore centres are tiny pin-pricks in an atlas, like Jersey or the Bahamas, the British Virgin Islands or Labuan in Malaysia – though Luxembourg, Switzerland and even offshore aspects of London, New York and Dublin ought to be included as well. But these tiny places now host a staggering amount of the world’s wealth.
Because of the secrecy that surrounds them we can’t know how much. The most recent estimate is around $6 trillion, approximately the annual world trade in goods and services, or about one-third of all global wealth.
Take the Cayman Islands. By 1994 they were playing host to as many as 546 banks, though there were actually only six in the George Town capital of the kind that actually cash cheques. Only 69 had a physical presence: the rest were just nameplates and legal entities. It’s the same in the offshore financial centres nearer home. Deposits in the Channel Isles and the Isle of Man probably amount to £400 billion.
Then there is the money that simply passes through the offshore centres on its way somewhere else. One American study believes that up to half of all global transactions are conducted electronically via the offshore financial centres.
Why so much? That depends on who you talk to, but there is no doubt that offshore anonymity encourages big companies and rich people to use these tiny islands as a means of avoiding or evading tax. And secrecy is important if the money happens to be a missing IMF loan.
A Home Office report on the Channel Islands and Isle of Man, commissioned from a retired Treasury official, Andrew Edwards, is expected next week. Edwards lists a series of abuses, including Jersey’s failure to help foreign authorities investigate tax evasion and other frauds, and the “Sark Lark”, whereby islanders are paid to be bogus directors of foreign companies.
One inhabitant of Sark was found to be on the board of as many as 2,400 companies, most of which he knew almost nothing about. Another was a nominee director of the Mil-Tec Corporation, registered in the Isle of Man, which was involved in supplying arms to the Rwandan Hutu militias at the time of the 1994 genocide.
Among Edwards’ recommendations are that the 100,000 offshore companies registered on the Channel Isles should be forced to file proper accounts and tell island regulators who owns them. But he stops short of requiring that they reveal the identity of directors publicly, fearing that this would turn business away to other jurisdictions.
But even in the Channel Islands not everybody is happy with the present system. Jersey’s economic adviser, John Christensen, resigned from his post four months ago, having spent 11 years telling Jersey politicians that their growing offshore finance industry would inevitably lead to a vulnerable single-sector economy.
Christensen says: “I think it imprudent to base an entire economy on a sector that would not only crowd out the island’s other industries – tourism, agriculture and light manufacturing – but would inevitably attract criticism about fiscal free-riding.”
Now he believes it is probably too late. Demand from financial services has made it impossible to diversify – homes for first-time buyers cost £170,000. “There is simply no available skilled labour, and the cost structures are prohibitive for most other industries. The banking cuckoo has taken over the nest.”
He argues: “Inward investment into the UK or any EU member state has no need to route itself via tax havens, other than where it is trying to obtain an unfair tax or regulatory advantage, or where it wants to avoid disclosure of its provenance. Too much of the capital flowing through the offshore circuits is engaged in speculative activity rather than being committed to long-term investment. The impact of such vast sums moving in and out of equity markets and currencies without effective regulation has created a global economy that is probably beyond the control of nation states.”
Multinational companies increasingly route their deals through tax havens – the goods may be made onshore but the invoices are issued offshore. Using tax havens for transfer pricing allows companies to disguise their onshore profits. Brazil’s petrol giant Petrobras, for example, is battling with local tax authorities at the moment, because it routes 75 per cent of its fuel and lubricant via the Caymans: “intelligent strategy to reduce the financial costs of its transactions,” it says.
Over half of Australia’s top 200 companies are thought to use the offshore centres of Vanuatu and the Cook Islands as part of their tax-minimisation strategies. In Jersey and Guernsey, non-resident companies have been able to adopt new types of tax status, which means they can negotiate tax rates of less than 2 per cent. Some companies use offshore invoicing to avoid the sanctions on, for example, Bosnia.
A Foreign Office report about the offshore centres of the Caribbean is due soon, and in May the G8 backed a plan by the Organisation for Economic Co-operation and Dev-elopment to clamp down on what it calls “fiscal poaching”. Add to that German concerns about $20 billion in lost tax revenues to “offshore centres” in Luxembourg, and US fears about drug money laundered through the Caribbean, and it looks as if the political will may exist to make a change. Tony Blair himself has spoken about “secretive and highly leveraged funds” operating on “an unprecedented scale”.
But can he do anything? This is one of the rare occasions when Britain could act alone effectively. Most of the world’s most prominent tax havens – from the Isle of Man to Gibraltar, the Caymans and Bermuda – are under British control or influence. “Britain is extremely well placed to lead international action against the tax havens,” says Mark Hampton, another Jerseyman and senior lecturer in economics at Portsmouth University. “Given the key role that these havens have played in the current global economic crisis and the worsening poverty of millions, British government action at this stage would be in the spirit of developing an ethical foreign policy.”
The capture of Jersey by the awesome power of world capital is reminiscent of Britain – where economic policy is tailored to suit the financial services industry, while manufacturing struggles away unsupported. In the end, it would be better for everybody if these escape routes for international capital were closed now.
The writer’s “Funny Money: in search of alternative cash” will be published by HarperCollins in January
Content from our partners
Related
