Offshore Tax Havens, Secrecy, Financial Manipulation and the Offshore Economy:
William Brittain-Catlin is the author of Offshore: The Dark Side of the Global Economy, an examination of the pervasive phenomenon of financial offshoring. He is a producer for the BBC, a former investigator with Kroll, Inc., a major corporate risk consulting company, and a consultant for Control Risks, another business risk consulting firm. His comments here are his personal views, not those of Control Risks.
Multinational Monitor: How important is the Cayman Islands?
Brittain-Catlin: The Cayman Islands is the fifth largest financial center in the world. It is where deals are made and large amounts of capital are banked overnight. It is fully in the international financial system.
MM: What benefits do companies get from incorporating offshore subsidiaries, or locating offshore altogether?
Brittain-Catlin: Well, let’s take a rather innocuous sounding company that I discovered in Cayman. The company is called Caymans 97. It’s a holding company for BP—the world’s second largest oil producer. Now, this company holds controlling ownership in Cayman of many of BP’s worldwide operations. It serves a variety of useful purposes for BP, the most useful being the pooling together in one place of a massive portion of the income and assets of the entire BP group. The goal is to fill the holding company pool to the brim with revenue and then keep that money in play and wash it back through the company—untaxed—only landing it onshore in the U.S. or UK when tax rates have been engineered through the company’s offshore network to be the most advantageous.
Secrecy is at the heart of the process I’ve just described—it’s central to the way corporations move their money around to avoid and evade the scrutiny of regulators and governments. BP—and any multinational you care to mention—all operate in the same way. Most will be public companies and so theoretically transparent—but behind the scenes will be these networks of offshore subsidiaries that no one knows about—and if you do discover them—like Caymans 97—offshore secrecy structures prevent governments and the public from seeing what they really do, which is essentially engineering their income so as to pay as little tax as possible.
MM: How did Enron use its offshore subsidiaries? What was the attraction of offshore business for Enron?
Brittain-Catlin: Enron had 692 subsidiaries incorporated in Cayman before it went bankrupt. It had about 200 other offshore companies in other tax havens around the world. Its offshore network was set up with the prime intention of avoiding tax in any country where it operated—the company even had a special unit working out the best offshore transactions for tax purposes. It was that kind of set up which made profits for Enron of nearly $2 billion between 1996 and 2000—while the company only paid $17 million in tax. And it was that kind of aggressive offshore setup that allowed Enron to grow and expand in the 1990s and become the global multinational it so aspired to be.
But of course there was another offshore side to Enron which says a lot about how corporations use offshore setups these days. This is “corporate financialization”—and what that means is the way that multinationals now engage in very complex trading on the world’s markets using derivatives and other financial instruments to hedge loans, do deals and swaps, convert currencies, buy contracts and so on. No longer do companies just make their product and sell it—they have become banks and finance companies as well—and offshore subsidiaries and entities are absolutely critical to that, because they specifically allow companies to get around various laws in the countries where they operate to get the offshore advantage with a particular type of deal or contract they have in mind. Tax figures too in this advantage, but so do issues of secrecy, where, for example, a company might not want some loan to show up in its public accounts. And as we see at the moment—just think AIG and its reinsurance subsidiaries in Bermuda—this covering up of liabilities offshore is all too common.
With Enron, financialization and offshore cover-ups kind of converged and became a new—and completely corrupt—business line. The great intention of becoming this virtual, offshore trading company—while riding high on the onshore stock markets of New York—turned out to be a complete deception and fraud. To my mind though, that kind of duality—an offshore financial side and an onshore consumer facing side—is integral to multinationals these days. And so the processes required to commit fraud and deceive are almost by definition built in to companies, and are ready at hand for executives and managers looking to cover something up.
MM: Do you see a difference in the use of offshore subsidiaries and business between U.S., European and Japanese corporations?
Brittain-Catlin: No, I don’t. There might be differences at the margin, preferences for certain kinds of set ups offshore depending on what’s allowed onshore in a particular country—but in the main there is no difference. The offshore world of tax havens and financial centers knows no national boundaries and differences when it comes to corporations and money. To the offshore tax haven, corporations and capital are all the same, wherever they come from, and new tricks can be pulled out of the offshore box to give them that extra advantage. The main thing is the legal and financial expertise that resides in any given tax haven. At the top end you will have the best offshore lawyers and accountants in the world as well as a few dregs, and at the bottom you will have just the dregs.
Look at Cayman: side by side, you have U.S. hedge funds — it’s where Bayou Management, the most recent casualty in that industry, was incorporated; Japanese credit card companies setting up structured finance deals offshore that they couldn’t do at home; Britain’s BP with its offshore income pools; and of course it’s where all the offshore cards in Parmalat’s hand where based.
It’s offshore where the real world of international finance and business exists—and it’s all hidden away under a cloak of secrecy, transfer pricing and tax dodging. The global economy that knows no boundaries or borders—the kind of economy constantly talked up by neo-liberals and free-marketeers—does exist, jut not where they say it does. Instead, it’s offshore, where capital and corporations that know no national borders are owned and controlled by the world’s wealthy ultimately for their benefit.
MM: You say there are 65,000 companies registered in Cayman. What does Cayman get from this beside the couple of hundred of dollars in registration fees?
Brittain-Catlin: They get more than a couple hundred dollars. They get recurring annual fees too.
The 500 odd banks that set up there have to pay much more.
It also gets a whole financial community. It gets lawyers, accountants and bankers that come to its shores. Cayman is wealthy because the professional service people there are the leaders in the field of offshore finance.
These people are generally very well paid. They live on the island, and they contribute to the growing wealth of the island.
If clients keep on turning up there, the fees accruing to these lawyers and accountants will work their way into the Cayman economy.
MM: How did Cayman become an international banking center?
Brittain-Catlin: There was a lawyer named Bill Walker who came to Cayman in 1963 from Guyana. At the time, there were cows wondering through George Town, and only one bank and only one paved road, and no telephones.
He had experience in the Bahamas, which had been the hottest offshore tax haven in the Caribbean up until Cayman came along. And Cayman was ripe for turning into a tax haven. It had the same legal foundations—English law, and specifically English company law, a very primitive and straightforward company law which held that corporations did not pay taxes. Companies just didn’t pay tax in the 1850s when this law was set up.
There were other factors as well that were very instrumental in turning Cayman into a fully fledged tax haven. They needed a technological infrastructure. It gained an international phone system in the mid-1960s. They built an airport as well.
MM: Cayman is not an independent country in any sense of the word, is it?
Brittain-Catlin: It is not. It is a dependent territory. There is a governor who is appointed essentially by the United Kingdom. He is a representative of the British Crown in the Cayman Islands. Their political system is developing all the time. They are now beginning to have political parties.
MM: Have efforts to crack down on money laundering affected Cayman’s status?
Brittain-Catlin: They have lost some business recently. Due to a specific requirement that the banks there are now required to divulge information on Europeans who have put their savings in Cayman, some business has been lost to the islands.
But in general, Cayman remains the center of offshoring.
MM: You suggest a fundamental philosophical division between onshore and offshore structures and mindsets.
Brittain-Catlin: To a certain extent, our modern world is offshore. Things are not fixed or attached to the nation-state. Increasingly, people and companies are not fixed to the ground as they would have been perhaps just 50 years ago, or even more recently.
That’s not saying that the nation-state has disappeared. But its function has probably moved on and has less of a hold over more of the day-to-day aspects of people’s lives.
In economic terms, there are two key factors at play here.
First, offshore tax havens have contributed to the global growth of corporations—corporations that have subsidiaries and holding companies across the world.
And second, offshore centers have had an enormous impact on the global financial system.
If you look back at the 1970s, tax rates in the UK were in the 90 percent range. Capital was controlled by the nation state. These offshore tax havens put an enormous amount of pressure on domestic banking systems to deregulate and liberalize. The onshore nation-state world had to become offshore. It had to loosen up, deregulate and liberalize. They had to get rid of that basic connection between people and their nations.
And that’s what has largely happened. We now live in an offshore world — an economically free market world that has paradoxically been opened up through these secretive offshore entities.
This is the dark side to that mobility, to that movement, to that fast exchange across the world. And that dark side can be one where crime, fraud and money laundering can be largely protected in secret by the very instruments that were the cause of opening up the economy in the first place.
MM: What is the dynamic by which offshore havens have forced the onshore world to become more “offshore?”
Brittain-Catlin: This is the big, historical picture of what happened: In short, the neoliberal revolution that swept through Britain and the U.S. in the 1980s was the moment that international financial capital—which had until then been kept in offshore tax havens—came onshore to remake the state in its own image. Over the course of the next two decades, offshore capital—and the corporations that depended on it to expand—asserted their dominance over sovereign national economies. Old style nation-state capitalism was replaced by a new phenomenon: I call it offshore capitalism.
Getting into more detail, my belief is that both factors that make up economic globalization today—the global financial market and the global corporation—owe their origin directly to offshore tax havens. Let’s start with the huge expansion of American corporations across the world from the 1950s. These corporations—Procter & Gamble, DuPont, IBM—would not have become the massive, integrated organizations they are today without the direct involvement of tax havens. Tax havens allowed these huge companies to retain their profits and so allowed them to expand exponentially across Europe and elsewhere. Without tax havens, and without a little help from the federal government in the form of tax credits and rebates, U.S. corporations would have found it too expensive and time-consuming to internationalize.
But the multinationals would not have been able to gain such dominance without the freeing up of capital in the world’s economies. For this to happen there needed to be a single, global financial market that integrated national economies across the world. Certainly, opening up national economies to international capital was what neoliberal politicians did—but they were only responding to the pressure that offshore tax havens were already putting on states to internationalize their economies. Onshore banks and monetary authorities tried desperately in the 1970s to control and regulate the new international capital markets that were based offshore. But it was an unequal struggle, and onshore nation-states eventually repealed their own regulations and let offshore capital come onshore. The rest is history, as they say.
MM: What could be done about offshoring?
Brittain-Catlin: There are a whole range of possibilities. Those on the left want to close them down altogether. Those in the center want them to be under more scrutiny. And those on the right want them to be left alone.
The point about the offshore world is that it is extremely useful for corporations. And therefore it is not something that western industrial nations are in the end going to crack down on.
Corporations need these offshore financial centers to function. That is the situation today.
Of course, now and again there are huge scandals. And after the scandal erupts, politicians say we can’t have this happening anymore. But I suppose for every scandal with a corporation, there are thousands of corporations that use these offshore tax havens and nothing negative happens.
Any kind of hard regulation on an offshore jurisdiction is very unlikely to succeed. These jurisdictions are set up to evade these kinds of regulations. And there is no international body that can impose those kind of regulations on offshore jurisdictions. There can be multilateral agreements where the industrialized nations say that if offshore centers don’t reform, then they will be ostracized from the international economy.
But somehow, one can’t see that happening.
MM: If there were political will in the onshore world, could offshore havens effectively be shut down, or marginalized? If so, how?
Brittain-Catlin: Political will is necessary for any transformation—and with sufficient political will perhaps anything is possible. If we assume such will exists, the solution is quite straightforward and simple. The government can simply prohibit any company or individual that has an offshore connection from doing business in its jurisdiction. Onshore you’re in, offshore you’re out, simple as that. You could phase in such a policy over a 10-year period. During that time, corporations and individuals that had an offshore connection would pay an offshore tax. A proportion of this revenue could be directed to offshore tax havens in order to develop their economies away from the provision of offshore financial services.
As with anything in a global world, such a policy could only possibly work on a multilateral basis. There is no way the U.S. would give up the offshore “rights” of its corporations unless other nations were to do so too. And as nations’ economic fortunes are currently so tied up with the freedom of their corporations to roam the offshore world, the strength of political will needed to bring about such a reversal is almost unimaginable. But we can hope.
MM: What’s the most far-reaching idea that has been put into effect?
Brittain-Catlin: The most radical has been the EU savings tax directive. That is now law for European citizens. It has had the most far-reaching effect on offshore tax havens. Switzerland is not part of the EU, but it has agreed to pay a withholding tax on its savings. They are not going to give up tax information, but they have agreed to pay withholding tax on savings accounts.
That took about 10 years to work itself into law.
Reform of offshore only works when it applies to every single offshore jurisdiction. So, it was quite an achievement to organize that through the EU. If Switzerland had not agreed, then all the money would have flowed to Switzerland.
The idea behind the EU savings tax directive is clear enough: for one national government of the European Union to tax the savings of a citizen held in another member state.
It’s simple enough in principle but in practice it has been a nightmare to enact. To start with, not all members of the European Union have the same attitude to financial privacy, and, as the directive at heart is about member states sharing financial information about their citizens, there are countries, like Luxembourg and Austria, who resisted having to disclose their citizens’ financial information to anyone else, let alone another EU member.
The problem reaches another level of complexity when you realize that the EU savings tax directive extends to outright tax and secrecy havens like the Cayman Islands, a dependent territory of the UK, whose very being, as it were, is completely at odds with the idea of financial transparency.
Finally, the biggest issue in implementing the directive was that a great deal of the savings of European Union citizens are held in Switzerland—in the heart of Europe—but not a member of the EU.
Only after Switzerland was allowed to preserve its savers’ financial secrecy and instead pay a withholding tax in lieu of savings tax did all members of the EU—and its dependent territories—finally fall into line.
At the moment, we have a world which is trying to level up tax havens with the onshore world. The EU tax savings directive is an effort to do that. That is the political middle ground.
Another way is to pressure companies to stop going offshore. That was kind of undercut by the huge reduction in the United States corporate tax rate earlier this year. That allowed pharmaceutical companies, for example, to repatriate offshore money, and not pay taxes for profits they had parked overseas.
Corporate profits will always move to where tax rates are lowest. That’s the way the corporate economy works today.
MM: Have any major companies come out and said—this is now too risky—we are going to get out of offshore financing?
Brittain-Catlin: No. Every major company is engaged offshore at some level.
It would be very unlikely indeed for them not to have some part of their business set up in that way. Offshore is a mainstream factor of how businesses work today. An aggressive offshore setup allowed Enron to grow and expand in the 1990 and become the global multinational it so aspired to be.
To a certain extent, our modern world is offshore. Things are not fixed or attached to the nation-state.
The government can simply prohibit any company or individual thatt has an offshore connection from doing business in its jurisdiction. Onshore you're in, offshore you're out, simple as that.
Corporate profits will always move to where tax rates are lowest. That's the way the corporate economy works today.
© Multinational Monitor July/August 2005