Safe Havens

When was modern Britain born? Conservative historians have long located the emergence of the modern state in the Blitz and the Dunkirk spirit. Liberal historians point to the creation of the NHS, imagining Little England dusting itself off after World War II to build the welfare state.

Two recent books, Oliver Bullough’s Butler to the World and Kojo Koram’s Uncommon Wealth, tell a different story: of Britons modernizing their country by boarding first-class overseas flights to distant points to figure out ways to undermine the new economic order. While the US was helping rebuild the devastated economies of Western Europe and construct the World Bank and the International Monetary Fund, Britain was busy erecting what the City University London economist Ronen Palan calls its “second empire” of low- and no-tax jurisdictions.¹ Architects of a project parallel to the welfare state that would eventually help to undermine it, they proposed an exchange: if the atlas painted pink to mark imperial possessions was gone forever and Britain’s furnaces and factories would never again lead the world, then at least the empire’s financial core in the City of London could live on. Territorial control of continents would be swapped for the hub and spokes of a financial network. Today roughly half of the world’s tax havens are directly linked to the UK and responsible for a good share of the estimated $8.7 trillion held offshore.

Seeing postwar history through the tax haven helps us understand how empire ended but so little changed. For Koram, a legal scholar, an early turning point between the first and second empires was the overthrow of the Iranian prime minister Mohammed Mossadegh in 1953 with the help of British and US intelligence after his partial nationalization of the Anglo-Iranian Oil Company. The message to Iran, which had never been officially colonized, and to “all people across the world excited by the promise of decolonization” was clear: “Sovereignty is not the saviour you think it is.”

In fact, incomplete sovereignty could be its own kind of savior for the former colonizers. Empire had entailed a diversity of protectorates, crown colonies, and free ports. Postcolonial capitalism looked similar. The Anglo-Iranian Oil Company, now known as BP, shelters billions from taxation by booking profits with an insurance subsidiary on the island of Guernsey, seventy-five miles south of the British Isles. Guernsey, one of the three Crown Dependencies, never aimed for full sovereignty—just for enough independence to set its own tax rates.

For Bullough, a financial journalist, the most important event for understanding modern British history is the emergence of the offshore Eurodollar market in 1956 in the City of London. At the time the US tried to limit competition among banks by capping the amount of interest that they could pay on deposits (a prohibition that led to the proverbial toaster offered to new account holders and that was only lifted nationwide along with Reagan’s embrace of financialization in 1980). British banks started allowing depositors to denominate their accounts in dollars, offering better interest rates than those available in the US and creating a parallel banking system.

The first depositor was, astonishingly, the Soviet Union, eager to avoid the possibility of the US government confiscating or freezing deposits held in American banks but also keen to accrue interest on its precious foreign currency. By the 1970s Communist bloc countries were among the biggest borrowers from London banks. (These countries were considered among the safest clients because bankers had faith that authoritarian states could squeeze repayment out of their populations if necessary.) “The Euro-dollar market knows no politics,” the deputy director of the IMF said in 1964. In 1969 The New York Times described the Eurodollar as a genie: “He has no nationality, owes allegiance to no one and roams the world looking for the biggest financial rewards.”

Bullough focuses on the financiers who were able to act on this mercenary logic. No idealists, they

would have rejected the work of Friedrich Hayek as thoroughly as they did that of John Maynard Keynes, or—God forbid—Karl Marx. They loathed economists and the way they analyzed the world, prizing instead nothing more than “common sense.”

British bankers and their accomplices searched for gaps in global financial regulations and sought to widen them. This venture drove them across the world to some long-neglected corners of their former empire.

In the words of the historian Vanessa Ogle, whose pioneering research on the creation of the twentieth-century offshore world is cited in both books, this capital flight created “archipelago capitalism.”² The new galaxy of tax havens offered bespoke sanctuaries for individuals and corporations to shield their profits, income, and wealth from the expanding fiscal state. The outcome was a world marked by many of the same racial hierarchies of the past.

After the wave of national liberation in the 1960s, many white colonials did not remain long in their newly independent countries. They left with their skills, their connections, and their wealth to set up shop in the remaining outposts of the shrinking imperium, where they were able to recreate the comforts of their old homes. A colonial named Michael Riegels left Tanzania a decade after its 1961 independence and ended up in the British Virgin Islands. There he helped replicate the success of Curaçao, a Dutch territory that had made itself into an attractive site to register a corporation to avoid corporate income tax. In 1984 Riegels developed this model further by inventing the International Business Company (IBC). An IBC was a shell corporation, an empty and inviting hidey-hole for those who wanted to avoid corporate taxation in exchange for paying Riegels’s much lower fee. The Hong Kong billionaire Li Ka-shing transferred his shipping assets to the British Virgin Islands as an IBC in the mid-1980s. “By 1997,” Bullough writes, “the BVI was registering more than 50,000 companies a year.”

Similarly, the Cayman Islands—a British Overseas Territory that got its first bank branch in 1953—is now the leading site for domiciling hedge funds. Its GDP per capita is more than twice that of its mother country. In a less familiar story, Bullough reports how another British Overseas Territory, Gibraltar, reinvented itself as a site to register gambling services; once a moribund shipyard, it now has “a gross domestic product per capita of $111,505, ahead of Luxembourg but behind Monaco and top-ranked Qatar.”

While Bullough takes a muckraking approach, with accounts of hustlers and media scandals, Koram finds the roots of tax havens in the mundane ledger books and contracts of an earlier era:

So much of the empire was produced not by marauding army generals or fanatical missionaries but by those most unglamorous of people, the private lawyers, sitting in dusty basement offices across the British Empire and connecting its wealth across borders.

Many newly independent nations retained the British Privy Council as the last court of appeal, offering the prospect of a hearing in a British court to potential investors wary of local legal customs, one of many ways that the tax haven “neutralises the unpredictability of politics.” Another is undemocratic forms of rule such as the autocracy of the Emirates, a good illustration of the legal philosopher Jeremy Waldron’s argument that the so-called rule of law often has less to do with democratic governance than with the security of property rights.³

“What the market likes more than anything is legal certainty,” Koram writes. He sees finance and law as two sides of a pincer often wielded by organizations like the IMF, squeezing new nations flush with optimism about liberation into a demoralizing postcolonial reality. In one example Koram explores at length, the Jamaican prime minister Michael Manley helped promote what was called a New International Economic Order among like-minded nations of the Global South at the United Nations in the 1970s. They called for an increase in foreign aid, commodity stabilization funds, and even reparations for colonial rule. In contrast to the bankers who saw law as mere code for their clients’ capital, for Manley “international law offered the perfect avenue to organise all of the recently decolonised countries into using their growing power to call for the global economy to be rebalanced.” But as credit evaporated after the Federal Reserve raised interest rates dramatically in 1979, in Jamaica the dream of expansive social democracy funded with borrowed money and sustained by increasingly refined industrialization was replaced with the austerity of structural adjustment imposed by the IMF. The result was disenchantment with the idea of self-determination itself. Koram cites a newspaper poll from 2011 in which 60 percent of Jamaicans said their country should have never gained independence at all.

The “second empire” of tax havens persists despite the overwhelming evidence that it enables corruption, drains public budgets, and exacerbates inequality. The serial revelations of the Paradise, Pandora, and Panama Papers offered a feast of ultrarich grotesquerie. The offshore accounts and mischievous “wealth management” tactics of supposed do-gooders like Tony Blair and latter-day heroes like Volodymyr Zelensky were laid bare alongside those of the beloved villains of Western media: sub-Saharan despots, Russian oligarchs, and finance bros in pink shirts. The schemes are both highly complex and breathtakingly simple: money that would otherwise be taxed by the state is hidden abroad. But the means of this transfer are so arcane that newspapers need to create interactive graphics sure to defeat all but the most committed readers.

The most notable aspect of the scandals is how quickly they fade from headlines. Are they too complicated to understand? Are the actions of the rich too predictable to incite indignation? Is there a subconscious envy or even admiration of this class of clever elites? Recall Donald Trump’s response to Hillary Clinton’s criticism that he had not paid federal income tax: “That makes me smart!” How many people—even liberals—grant him the point? In Britain, the revelation that then chancellor of the exchequer Rishi Sunak’s wife, the Indian heiress and businesswoman Akshata Murty, had maintained her “non-domiciled” status in the UK for tax purposes hurt Sunak’s popularity in the short term, but less than a year later he was prime minister. He and Murty are wealthier than the House of Windsor.

The outflow of wealth from the tax-collecting state to the tax haven is not a natural effect of economic globalization. Tax havens exist partially because of what the political scientist Mancur Olson called a collective action problem: those who have something to gain are organized as an ultrawealthy elite class, while those who stand to lose are dispersed and lack resources. Bullough shows how oligarchs use a Scottish legal instrument called limited partnerships to stash money whose ownership is functionally impossible to trace. What looks like a loophole can’t be closed because private equity funds in the City of London enjoy using it as well, and their lobbyists have successfully blocked all reform efforts.

For British policymakers who have spent decades tying the nation’s chances for future prosperity to the finance, real estate, and insurance sectors, there is no effort at reform that would not be self-defeating. There is a fundamental belief, likely correct, that eliminating corporations’ ability to squirrel away profits would jeopardize British “competitiveness”—an elusive quality, but one deemed so important that the World Economic Forum created its own index for it. In the wake of Brexit and the loss of the City of London’s easy access to EU clients, anxiety about losing a financial edge is more acute than ever.

Another obstacle to reform comes from the Davids rather than the Goliaths. After independence, the brand-new governments of small island nations lacking mineral wealth or arable land became tax havens as a development strategy. In the early 2000s the Organization for Economic Cooperation and Development, the main coordinating intergovernmental body of the richer nations, tried to crack down on tax havens. Delegates from Caribbean countries allied with lobbyists from the pro–tax haven group the Center for Freedom and Prosperity—as well as with free-market boosters from the Cato Institute and the Heritage Foundation—to undermine American support for these efforts. They won the backing of Milton Friedman and James Buchanan—and, more importantly, the Congressional Black Caucus, which mobilized against the prospect of economic measures leveled against small developing nations.⁴

Nowadays it is hard to suggest any international regulation without being accused of infringing on the sovereignty of the havens. Bullough quotes the current premier of the BVI condemning the “undemocratic” attempts to prevent low- and no-tax registration of companies in his country: “We have just as much right to control our destiny as the people in the UK do.” Koram quotes a Bermuda parliamentarian denouncing attempts to regulate tax havens as “modern-day colonialism,” a surprising statement from the leader of a territory that has no seat in the UN and is represented by Britain in foreign affairs.

Although, as these books show, tax-dodging shenanigans have been around for as long as the tax-collecting state, tax havens only became a serious political issue in the late 1990s. With the end of the cold war came new attention to the smaller-scale transnational threats of terrorism, narcotics trafficking, and money laundering. The OECD created blacklists of so-called secrecy jurisdictions and named and shamed countries like Liechtenstein for their role in hiding money for dictators and criminals, leading them to weaken their secrecy laws. The Obama administration implemented the Foreign Account Tax Compliance Act, which fined foreign banks that failed to provide information about US citizens’ offshore accounts (a move that, combined with American nonparticipation in global reporting standards, has given a boost to tax havens inside of the US like Nevada and South Dakota). Public opinion also seems to be shifting, however slowly, amid the recent scandals. In a 2020 poll 82 percent of British people said that companies registered in offshore tax havens should not be allowed to access pandemic bailouts. While this opposition was ineffective (as it was in leading tax havens such as Ireland, the Netherlands, and Luxembourg), in France, Poland, and Denmark, companies registered offshore were blocked from receiving bailouts.

Both Koram and Bullough are pessimistic about the possibility of remedying the injustices perpetuated by tax havens. They tend to talk about attempts at regulation as rare or doomed. And yet since the 1990s organizations like the OECD have made efforts to pressure tax havens into changing their ways, regardless of how one judges the sincerity of these measures. (The OECD, strangely, goes unmentioned in both books.) Despite the effort of both authors to think beyond the UK’s internal problems and consider the wider world, they might still be faulted for some national myopia.

Attempts to contain the economic effects of the global pandemic in 2020 reinvigorated projects to use state power to regulate market forces. One of the outcomes was a global tax deal proposed in 2021 that the Financial Times called “the first fundamental change to the system of cross-border corporate taxation in a century.” One hundred and forty countries signed on to a proposal to tax corporations based not on where they are domiciled but on where they do business. The deal will also implement a global minimum corporate tax. While the White House spearheaded the proposal during Joe Biden’s first year in office, the project ran into the buzz saw of Senator Joe Manchin’s veto in 2022 and now faces resistance from the Republican-controlled House. The EU has pressed on anyway, securing a directive in late 2022 that will cover approximately one quarter of the world’s eight thousand large multinational corporations.

Meanwhile, left out of the “rich countries’ club” of the OECD, African nations have led a parallel international effort to regulate taxation and prevent companies and individuals from gaming the system. African leaders view this as crucial to their countries’ prospects for economic growth: unfair advantages threaten to perpetuate their subservience to powerful Western and Asian interests. Last year a Nigerian-led resolution to create a UN tax convention passed the UN General Assembly. Supporters hope that the resolution will also create a global body for negotiating and setting tax rates—a missing element of international governance so far.

The emergence of an empire of tax havens was the result of political choices to privilege a distinct class over the majority. These histories of the offshore world revise standard conceptions of the British past by showing how events in distant territories can transform domestic politics. Beginning as a game of arbitrage in far-flung jurisdictions, tax havenry ended up eroding British control of its own destiny at home. These books suggest that the tedious matter of taxation might be at the core of the quest for what Gabriel Zucman and Emmanuel Saez call “fiscal democracy.” Understanding the imperial past is not just virtuous in its own right. It is a precondition for social justice in the present.