Over the last many months the United States has been putting a great deal of pressure on offshore financial centers—what the politicians prefer to call tax havens. Supposedly, the point of all this pressure is primarily to stop the flow of money to terrorists and secondarily to find Americans who are not paying their taxes.
But stopping money laundering and tax avoidance isn’t as easy as that. The problem with money laundering is not that certain jurisdictions allow it, but rather that every jurisdiction has loopholes which can be used if the terrorist is smart enough to figure out how to do it. The more complicated a jurisdiction’s tax code, the easier it becomes to launder money.
This means that, in spite of the politicians’ rhetoric, shutting down a supposed tax haven has little effect on money laundering or tax avoidance and almost everything to do with publicity in an election cycle. In fact, the draconian pressures brought against some of the famous “tax havens” in the Caribbean have had the effect of putting islanders out of work and sometimes into situations of dire poverty without having any meaningful effect on either money laundering or tax avoidance. When one cuts through the rhetoric and double speak and shines the light of day on what’s really going on, what we find is that American politicians are playing a shell game with ordinary people’s lives while the real problem lies elsewhere.
To illustrate, Nancy Pelosi brought a list of around a hundred corporations with American owners whose headquarters were located in Bermuda. “None of these corporations had paid any U.S. income tax in 2007!” she stormed from the microphone. What she conveniently failed to say is that 85 of those companies lost money in 2007 and that’s why they paid no taxes. (Even American corporations like General Motors lost money in 2007 and didn’t pay any taxes.) Another percentage had invested in tax reduction programs such as natural gas exploration, which receives a huge tax credit that Pelosi strongly supports because so much natural gas drilling occurs in California. In other words, all those corporations didn’t file taxes because of the American tax code. It had nothing to do with their location in Bermuda.
And this brings me back to Derek Sambrook, who I mentioned in yesterday’s post. His firm, Trust Services, S.A., has an investment newsletter called The Offshore Pilot Quarterly. As Bob Bauman brought to my attention (a link to his blog can be found on the right side panel), in the current issue he writes the following about the jurisdiction that is the king of the world when it comes to money laundering and tax avoidance practices:
I had read about one financial services jurisdiction whose companies had been involved in the laundering of some $36 billion from the former Soviet Union; that is an amount that could finance the present Panama canal expansion project at least six times over. In this same jurisdiction, Russian officials had used companies to unlawfully divert $15 million in international aid meant to fund a safety upgrade of former Soviet nuclear power plants and in another case an individual had set up more than 2000 companies, established bank accounts for them without disclosing identities, and then passed some $1.4 billion through the accounts. It turned out, in fact, that one of those companies had received over 3,700 suspicious wire transfers which, during a two-year period, added up to just over $81 million. But the authorities could not pursue this case because they were unable to discover who owned the company due to the lax laws of the jurisdiction.
Don’t we wish Congress would go after this jurisdiction and stop their illegal activities instead of trying to shut down the tiny players in the financial services game such as Caribbean nations like Bahamas, Turks and Caicos, etc?
The problem is, the financial services jurisdiction Mr. Sambrook is talking about is the United States.
And this gets to the heart of the lie that is being foisted on the American people during this election cycle. Money laundering and tax avoidance is not rooted in the jurisdictions that promote this sort of thing. Every country tied into the international financial system is very careful to not knowingly allow illegal practices. (Well, there may be a couple of exceptions, such as Cyprus and the Marshall Islands, but even those historically loose jurisdictions have been busy kicking out the bad guys in the last several years.) But it’s a cat-and-mouse game. The crooks come up with a new scheme and the various countries come up with a new way to block the scheme, so the crooks come up with another scheme, etc.
And the dirty little secret is that the more complex the tax code, the easier it becomes to find a loophole and use that jurisdiction to do illegal things. Guess who has the most complex tax code in the world, and thus, the easiest to scam? (It’s a rhetorical question, but in case you don’t know, it’s not Turks and Caicos, it’s the U.S.) So it is that on a comparative scale, very little illegal financial activity goes on in places like Turks and Caicos, or Switzerland, Bermuda, or even Panama. It is simply too difficult to get away with it in the modern world. No, the crooks and terrorists go to the places where they can hide in the many cracks, folds, and dark places the tax code allows, such as the U.S. and Britain.
But the legacy of the post 9/11 world is that the United States is only making its own tax code more complex while it goes about trying to destroy every tiny financial services jurisdiction it can bully in the name of fighting terrorism.
If those who were killed so tragically seven years ago knew this was the legacy of their tragic story, I suspect they would be ashamed and upset at how those events have been used to take away American freedoms and frighten hard working people around the world. I know I would be.