I recently read Nick Shaxson’s excellent book which explores the extent of off-shore banking in the world, shocking stuff. I was honoured to be able to interview Nick recently, you can either listen to our conversation below, or read the transcript. You can find out more about the book here.
Nick, thanks very much for joining us. For people who haven’t read Treasure Islands, can you describe for us its key findings?
There are a couple of main conclusions. One is that the offshore system of tax havens is much much bigger and much more central to the global economy than almost anybody had thought. It’s seen in the popular imagination as an exotic sideshow to the global economy. But really since the era of globalisation began in the 1970s the offshore system of tax havens has been growing much much faster than the supposedly onshore economy. It has been steadily pushing its way onshore so that a lot of big countries are increasingly resembling tax havens as they try and compete with each other to attract the hot money. So they increasingly offer stronger forms of secrecy and new forms of trust and corporations and so on to try and attract the hot money, and new tax loopholes.
Another big finding is that tax havens are not where most people think they are. Of course places like Switzerland, the Cayman Islands and Monaco are tax havens, big and important tax havens. But the really big ones are places like the United States and the United Kingdom which runs a huge network of satellite tax havens around it, feeding the City of London. The UK and its overseas territories, which it partly controls, include the Cayman Islands, Gibraltar, British Virgin Islands. Massive tax havens. And also the crown dependencies which are Jersey, Guernsey and the Isle of Man. And these are all like, in Treasure Island I describe it as a bit like a spider’s web with the City of London at the middle. So these places are capturing money from around the world, and the business of handling the money from around the world and funneling this money up to London.
They are deliberately lowering the standards on secrecy and various other things to entice this money. And so the City of London itself is only indirectly implicated in this stuff. It is at one step remove and there’s plausible deniability. We’re not offering these specific facilities. But this network is. It’s very much a British network and it is, in a sense, a financial empire. It grew up from the 1950s onwards with the City of London, the growth of the oil markets. That was when the formal British empire was ended but the UK has managed to retain a significant degree of influence over the flows of money around the world after the collapse Empire and it now has this new kind of financial empire. So these were my two big conclusions.
Are there any countries that don’t allow the offshoring of capital? And if so, how do they do it? And also, are there any countries that have reintroduced those mechanisms.
The trouble with this is that there are all shades of grey. Some countries deliberately set out to be tax havens. So Switzerland is a classic example. It has for decades set out to provide banking secrecy and to attract dirty money, criminal money and other sorts of money from around the world. But every country, in a sense, is a tax haven in its own right because there isn’t an international network of transparency, of sharing information between countries that makes any country in the world completely transparent.
If you take your money to Germany, or somewhere like that, it’s going to be difficult – if you’re an African government or something like that – it’s going to be quite difficult to get hold of information about that money, there’s no automatic sharing mechanisms. There are some sharing mechanisms in their fledgling state. The European Union has one called the Savings Tax Directive and the United States is starting to get more active in this area. So there are some international information sharing transparency mechanisms, but it’s still very much a patchwork, an insufficient patchwork. So when money moves across borders very often is able to find secrecy.
But I think when you’re looking at tax havens what you’re really looking at are places that are deliberately setting out on a strategy to do this. Some countries are tax havens kind of by accident but they tend not to the big players. The big players are the ones that deliberately set out to create this stuff.
What’s your view on the supposed benefits of extra liquidity that our internationalised banking and money system provides versus the loss of money in the real economy that Treasure Islands describes so well?
If you take the UK for example, on the one hand you have the UK losing tax revenue to tax havens. So British tax evaders or tax avoiders, that is, for example, corporations that are not technically breaking the law but are still cutting their tax bills substantially. These are costing the treasury billions of dollars, billions of pounds. But at the same time the money that is coming into the United Kingdom from tax havens, there’s this huge kind of feeder mechanism into the UK, is benefiting the City of London.
I’d be very careful about how to phrase this because what the City does is it says, “this is good for Britain, this is money that is coming into Britain.” But I argue very strongly that it isn’t. This is money that is good for the City but what it does is it creates this international financial centre, this offshore financial centre in the heart of the United Kingdom. Makes it almost unreformable. People are worried about the power of the City of London, the fact that it’s able to suck up the best talent and all the best capital and influence all the policy makers.
This power and this strength comes in very large measure from its international network and the offshore network. So just to say, “oh, money coming into Britain must be good for Britain”, it’s just not true. These hundreds of billions of dollars that have been flooding into the UK. Is Britain any better off than say, Germany or France or Sweden or Canada which have not been playing nearly such a financial game? I would say “no”. Britain is on many measures much more unequal, worse health outcomes, worse social outcomes than these other countries and I think there’s quite a lot of evidence to suggest that the financial centre has been a very powerful driver rather a contributor, rather than anything that benefits Britain.
Is it possible to reform the financial institutions that we have that are responsible for so much of the world’s current crisis or is building a new financial institution based on co-operative banks, credit unions, regional currencies and so on the only way? How might we start that shift and where might the political support come from?
The lobbyist of the City of London, and the financial industry more generally, always say, they always wheel out this argument, “don’t regulate us too much, don’t tax us too much because then we’ll pull on our horns and we won’t lend anything and the economy will collapse”. But the fact is that there has been almost a fraud perpetrated by the financial sector on the UK. It’s well known now that has been that when times are good all the benefits go to to the bankers and the banks, and when times are bad all those risks and costs gets shifted onto the burden of ordinary tax payers.
This narrative that comes out of the city and is widely repeated, is demonstrably untrue. It is a much more complicated and nuanced picture than that. I would argue that if you have a system that remains unregulated and uncontrolled, you’re going to store up even bigger problems in the future. I think if you did start to regulate banks and banking properly, not just in an offshore sense but in terms of, you know, capital requirements and all sorts of other things, you would end up having a much stronger, much healthier economy. In fact, there is historical evidence to suggest that this is the case.
Back in the period after the Second World War when the Bretton Woods institutions were set up, that was an era when people had really learned the lessons of the Great Depression. There were huge policy mistakes. The Great Depression itself followed a period of extreme financial freedoms and afterwards the international policy makers in the UK and United States and elsewhere decided that the way forward was to powerfully restrain the banks and to prevent them from speculating large amounts across borders and to really curtail them.
In Treasure Islands I describe how the banks were really champing at the bit. In the 25 or so years following the Second World War the banks were really tightly constrained. That was a period of extremely high and broad-based economic growth internationally. It’s now known as the golden age of capitalism and it kind of came to the end in the 1970s. Since then we’ve seen ordinary people’s wages stagnate, lots of financial crises and all sorts of other problems. That has coincided with a period of financial liberalisation and financial freedoms which has been very substantially accelerated by the offshore system.
So financial liberalisation kind of opens up the international markets for the flow of capital but tax havens take that one step further by artificially creating things that will attract cross border money flows, will accelerate those flows, so if you offer secrecy then lots of money will flow in pursuit of that. So the tax havens have been a sort of accelerator of financial globalisation and I would argue, with very harmful effect.
The UK economy is inextricably linked to offshore banking, a relationship you brilliant outline in your book. Assuming that it were possible to regulate that and to curtail its activities, would the impacts of doing that only be beneficial or for the 99%, as it were, might there be a downside?
That’s a very good question. I think there’s a difference between now and the Great Depression. When the Great Depression happened, things were so bad that you did see a major political realignment, particularly in the United States, and you had the New Deal coming in with very progressive legislation and high tax breaks and, as I said, very tight constrains on banks and the financial sector and on capital flows. So you know this political realignment really set the stage for a period of wonderful prosperity for quite some time. Unfortunately this crisis does not seem to have produced that realignment yet.
We have seen tinkering at the edges and at the end of the day it’s all about political realignments, it’s all about citizens collectively forcing the politicians to really change. We are seeing a little bit of a swing now, there does seem to be a swing in Europe against austerity and perhaps that’s the start of something bigger. But I think until we see a much more fundamental political and social change in response to the crisis and maybe the Occupy movement times 10, I think that’s when we’re going to start seeing the possibility of change. I think until then, we do have in Britain particularly and very substantially in the United States, you have the banks calling the shots and telling the politicians what to do. Not much has changed there. I think that is the essential first step.
So the audience for this interview is the Transition movement; people out in their communities trying to build community resilience, local food systems, local energy systems and that kind of thing, which brings up a couple of questions. And the first one is do you think that something like Transition can succeed despite the enormous power and influence which will be fundamentally threatened by a real relocalisation a real programme of community resilience building?
For me, what’s important when one uses the word ‘local’, I think what I’m particularly interested in is the sort of fragmentation of the international financial architecture and the fragments are nation states. That for me is the key fault line that is the problem for me. Because within a nation state you have democratically created tax systems and sometimes inside nation states, you know in Switzerland for example they have the cantons where you have a lot of local tax raising. But essentially it needs the nation state, that is the most important local level.
I think it’s very interesting and useful to have local community organisation. I think that’s a very powerful thing and very important. It’s not something I have particularly paid attention to just because I’m much more focussed on the international level. But I do think, from the point of view of tax havens, it’s the jurisdictional unit of the nation state that is the fundamental building block of the whole process with regard to tax havens. I do think community organising can be fantastic at creating networks and creating awareness. In terms of the actual mechanics of off shoring it doesn’t mesh immediately with that problem, if you see what I mean.
And how do you think people who are involved in Transition and similar things should split their time and energy between trying to stop the corporate looting that you write of and building resilience at the local level?
There is no magic bullet. If there is a magic bullet it is political and local and social organisation. And awareness, the building of awareness. That is the stage we’re at now. I think it is significant. We’ve had groups such as UK Uncut which have protested against corporate tax avoidance and Occupy which has been very important, which many have derided as not having achieving many particular aims, but in fact, what we have seen. We have seen the remarkable spectacle of conservative chancellor, George Osborne, calling aggressive tax avoidance “morally repugnant”.
Also a lot of statements from business leaders such Andrew Whitty of GlaxoSmithKline making some very powerful statements about corporate responsibility and the responsibility of corporations not to just to their shareholders but to wider sets of stakeholders and particularly with tax in mind. I think tax, for me, is a real touchstone of corporate responsibility. If a corporation is prepared to engage in a tax debate, then, it’s so easy for corporations to do window dressing and things that don’t matter to them, but I think when you touch on tax, that’s when you really start to see whether they’re just window dressing or if they’re really interested in engaging.
I think touching on tax from a corporate responsibility perspective is very important. The fact that there have been these protest movements is much more significant and have had much more significant impacts than I think many people think because really now the politicians do know that they can’t get away with saying, “ah let’s just get on with this stuff”. They have to at least be seen to be doing the right thing. Whether they do the right thing is another matter, but I think all of this is just an important first step. But I think much more awareness raising is needed.
I also would suggest that the economics profession in particular has had this massive blind spot when it comes to tax havens and offshore and secrecy and tax evasion and things like that. They have just chosen, because it’s so difficult to measure and so difficult to understand, they have basically treated it like a somebody else’s problem, and let somebody else deal with that. As a result it’s been left to fester and grow rapidly without anyone challenging it. I think if we can get economists to start taking this stuff seriously, because economists are so influential, I think that will also be an important step. But at the bottom of it all is awareness raising of political consciousness and that’s what needs to happen now.
Do you think there is a way out of our current financial crisis and the steady worsening of it that we’ve seen in countries such as Greece and Portugal, without tackling tax havens?
I think it would be very difficult without tackling offshore banking. A lot of these problems have a whole array of causes. Offshore is one of these underlying causes that is very diffuse and very hard to put your finger on, that’s one of the great problems with it and many of these other causes that the size and the power of the financial sector, are very strongly influenced by the fact that financial actors are able to use the offshore escape route to escape financial regulations. Offshore is a kind of thing that’s in the background of so much that’s been going on.
Because it’s hard to point to as a specific, you know, here’s a trigger from offshore, that’s making it much harder for people to see this. I think if you did tackle offshore, and you did also find mechanisms to curb the huge tides of hot money that flow through the global economy, I think you would have a serious chance of getting the financial system on a much better long term footing. But I think that’s a long way in the future.
Lastly Nick, I’m really interested to know, having written the book, how it’s changed your own relationship to how you bank and how you live your life.
One thing I’ve realised is that if you want to avoid tax havens, the best way to do it is to go and live in a cave somewhere, because they’re everywhere.
A cave with broadband by the sound of it!
No you couldn’t have broadband! You basically can’t avoid it. All the multinationals on the high street that you see will be using tax havens in one way or another for various different reasons. The banks, of course, all of them are massively steeped in tax havens. If you’re an overseas resident, as I am, they will try and encourage you to use offshore accounts. You will get a lower interest rate if you use an onshore account. They’re always trying to get you to use offshore accounts.
That’s something actually I didn’t really touch on in Treasure Islands and I do want to research it when I get some time as to just why this is. I have banked with a bank in the UK for many years because I set it up when I was in the UK and that is still my bank, but I actually recently tried to change my account to the Co-operative Bank and I wasn’t allowed to because I was overseas. I would have been allowed to set up an offshore account but not an onshore account, so that wasn’t possible. It’s very difficult. I think if you’re looking to confront this monster and to tackle it, voting with your wallet is important, but I think it’s very hard to do. I think political action is really the way to go and raising awareness is what matters here.