The spider’s web has enabled people connected to the City of London to make immense profits from illegal or immoral activities, typically involving American citizens and taxpayers, while using the overseas territories like barge poles—to hold the stink at arm’s length. And whenever a bad smell has emerged, British officials have told their irate detractors, “Look, chaps, these places are largely independent from us; there’s really not much we can do.” Yet this claim of powerlessness is false. Her Majesty the Queen appoints the governors of these British overseas territories; all their laws were and still are sent to London for approval; and Britain has always had complete power to revoke these laws. Yet it almost never does.30
We should be outraged at this long-running British government strategy in support of the City of London. But not too outraged, because there’s another large player in the tax haven game that may be just as bad, in its own way. The United States itself.
In 1967 Michael Hudson, then a balance-of-payments economist at Chase Manhattan Bank, was in a company elevator when someone handed him a State Department memo asking Chase to take the lead in helping turn the United States into a giant tax haven. “Like Switzerland, flight money probably flows to the US from every country,” the memo began. The United States at that time was suffering outflows of dollars as US forces conducted bloody and expensive ground offensives in Vietnam, and it was looking to attract some money back. The memo listed its complaints: the US Treasury and FBI were too enthusiastic in their use of subpoenas and other tools to crack down on crime; taxes and regulations on foreign money were too high. Hudson was asked if he could estimate how much foreign illicit money the United States might be able to get its hands on. “The hot money wouldn’t come directly into Chase, because that wouldn’t be nice and very legal,” remembers Hudson, now a finance professor at the University of Missouri at Kansas City. “What happened was that the Latin American criminals, other criminals, drug dealers, all sorts of organized crime would put their money in the offshore Caribbean banks, and these offshore banks would then deposit the inflow in the head office.”
According to Hudson, “they were saying, ‘We want to replace Switzerland. All this money will come here if we make this the criminal center of the world. This is how we fund Vietnam. We wanted the foreign criminal money, which is patriotic, but not the American criminal money.’”31
In fact, the United States already had some discreet laws to attract foreign money and had, since 1921, exempted from tax the interest income on bank deposits owned by foreigners. After World War II, there were widespread fears that if European economies collapsed again they might fall into communism and the Soviet orbit and also fears that enormous quantities of US aid to address this, under the Marshall Plan, might be undermined by wealthy Europeans seeking to escape paying their share. US policy makers in Congress deplored the “small, bloated, selfish class of [Europeans] whose assets have been spread all over the place” and asked “whether or not [the United States] should become a sanctuary for refugee money.” Indeed, early drafts of the IMF’s Articles of Association said countries should be “required” to help each other address capital flight, especially with transparency: telling European governments about their wealthy citizens’ stashes of offshore wealth. Yet an alliance of US bankers, with some help from Treasury officials, fought back hard against such transparency, fulminating that these and other controls would do “maximum violence to our position as a world financial center”;32 in the end the IMF would no longer require countries to help each other track down offshore stashes, merely permit them to do so. Through this tiny loophole whooshed huge volumes of European treasure, much of it the proceeds of US Marshall Plan aid that had been sequestered by that small, bloated, selfish class of Europeans almost as soon as it landed, and sent back offshore to the United States: a total of at least $4–$5 billion in 1947, which in those days was a vast sum of capital lost to a Europe desperate for capital for reconstruction. Only a major new economic crisis in Europe in 1947, caused largely by these outflows, forced US policy makers to tighten up again.33
Over the ensuing decades, foreign capital continued to wash into the United States, much of it from Europe and much of it smuggled undetected alongside bona fide trade flows. Once the money was there, the US banking community was able to hold on to it by cloaking it in deep secrecy, for the United States didn’t have any meaningful arrangements in place to tell foreign governments about their wealthy citizens’ holdings. And it steadily put in place new federal-level regulations to bolster the attractions: by 1976, when a new US Tax Reform Act reaffirmed America’s commitment to use tax haven secrecy facilities to attract capital to the United States, it was estimated that a third of all bank deposits were from Latin Americans evading taxes and controls at home.
And while this shift was happening at a federal level, mostly with respect to banking deposits, another whole set of games was going on at the state level, as places like Delaware and Nevada started passing laws to allow the creation of shell companies and other mechanisms that would be all but impenetrable to outsiders—including the IRS. In 1984 Time magazine summarized the changes: “America has become the largest and possibly the most alluring tax haven in the world.” At any rate, it was giving the British postimperial spiderweb a run for its money.34
The Janus-faced offshore business model of trying to appear clean and well regulated while attracting as much criminal and dirty money as possible poses many problems for any country, like the United States or Britain, that hosts and encourages this kind of activity.
For one thing, it assumes you can sequester the dirt and the criminality safely away from the rest of the economy, from democracy, and from society. This, however, is impossible, for the two most dangerous parts of a political system are most likely to meet and become intertwined: the richest and most powerful members of society, who are of course the biggest users of tax havens, and criminals. Fish, as the saying goes, rot from the head. Crafting a national economic strategy that relies on offshore finance creates inevitable blowback, which has criminalized American and British elites in four main ways: it brings the wealthiest and most powerful into close proximity with criminals; it offers the elites permanent temptations to criminality; it makes criminals rich, enabling them to join the ranks of the elites; and, by making it easy to escape rules and laws, it creates a culture of impunity and a real sense of being above the law. Modern US politics, with sleazy revelation after sleazy revelation, exposes how dangerous this strategy has been.
All this history helps us answer a question that bothers many people about tax havens: Why don’t governments just close these financial brothels down? Lee Sheppard, a leading US tax expert, summarizes the answer to this question as well as anyone: “We fuss about them, we howl that the activity is illegal, but we don’t shut them down because the town fathers are in there, with their pants around their ankles.”35
And this, in turn, brings us to a further major characteristic of these offshore territories: they are all, especially the smaller island tax havens, “legislatures for hire,” as the British tax haven expert Prem Sikka puts it. Like the old colonies, their political and economic development is mainly dictated not by local democracy but by foreign interests, and in the case of tax havens this means rootless foreign offshore money. A memo in Britain’s national archives from 1969 illustrates this problem, fretting about
a flow of propositions involving Crown lands put daily and endlessly to the government by private developers. These propositions are inevitably propounded in an atmosphere of geniality, lavish hospitality, implied generosity and overwhelming urgency. They are usually backed by glossy lay-outs, and declaimed by a team of businessmen supported by consultants of all sorts. They are invariably staged against an impossibly tight deadline, with an implicit threat of jam today or none tomorrow. On the other side of the table—the Administrator and his civil servants. No business expertise, no consultants, no economists, no statisticians, no specialists in any of the vital