The Finance Curse. Nicholas Shaxson
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It is hardly surprising that the professionals are winning, hands-down.36
In small island tax havens, administrations staffed by former fisherfolk or owners or employees of bed-and-breakfast hotels are asked to scrutinize complex laws on special purpose vehicles or offshore trusts. Even in those rare cases where administrators do possess the technical knowledge to understand such laws, there is a wall of money pressuring them not to oppose any proposal. With Cayman-registered banks now holding $1 trillion in assets, equivalent to 100,000 percent of that microstate’s gross national product, it is clear where the power lies. As a result, local administrators can usually do little more than rubber-stamp laws devised for the owners of the world’s hot money. The Panama Papers leaks in 2015 revealed how Mossack Fonseca, the Panamanian firm at the center of the scandal, effectively wrote the tax haven laws of Niue, a tiny Pacific island of 1,500 people. Mossack Fonseca got an exclusive agreement to register offshore companies there, and this operation was soon generating 80 percent of that territory’s government revenue. The logic, as described by the firm’s cofounder Ramón Fonseca, was that “if we had a jurisdiction that was small, and we had it from the beginning, we could offer people a stable environment, a stable price.” They certainly had Niue.37
It is also essential to understand how the business model of these places is purposely antidemocratic. A tax haven’s deliberately constructed loopholes are not designed to help locals escape laws and rules but to help others, elsewhere, do so. Officials carefully write their laws to ensure that any resulting damage in unpaid taxes or evaded financial regulations is inflicted elsewhere, protecting the tax haven against self-harm. This “offshore” element means that the people who make the tax haven laws are always separated from those who are affected by those laws. So there is never democratic consultation between lawmakers in tax havens and the people elsewhere affected by their laws. That is the whole point of offshore. And it means that offshore is, almost by definition, the equivalent of the smoke-filled room, where business gets done by cigar-chomping gentlemen outside of, and indeed in opposition to, the democratic process. And they operate according to the golden rule: whoever has the gold makes the rules.
Rudolf Elmer, a Swiss bank whistleblower who was accused of passing information to WikiLeaks about shady arms brokers, Mexican officials linked to drug dealers, Saudi companies linked to the bin Laden family, and around forty American and other politicians accused of corruption, found out the cost of offshore dissent. Two men followed him to work, began watching his wife at home, and hung around his young daughter’s day care and offered her chocolates in the street. The Swiss police declined to help; instead, they searched his house, and he ended up in prison. “I was an outlaw,” he said. “I was godfather to a child whose father is in finance. He said I had to stop—’you are a threat to the family.’” After Elmer’s release, the courts kept pursuing him, and in June 2015 he sent me a trove of documents that showed how Switzerland, under instructions from its banking establishment, had corrupted its judicial system to nail Elmer, despite the case having no legal merit because he had been working in the Caymans when he blew the whistle. The court declined to allow him to call witnesses, refused to accept documents to support his case, and used false evidence. A former Swiss judge told Elmer that his treatment reminded him of the Mafia. “Swiss bankers … simply do not go to court for their crimes,” Elmer wearily told me. “They are a protected species.”38
In tax havens like Switzerland, deference to offshore financial interests becomes reinforced by a ferocious social consensus to make sure everyone does the right thing, which is to keep bringing in the money. The wealthy high-society folk who run these places rarely do anything as crude as to throw opponents of offshore finance in jail. The threat usually lies in more discreet mechanisms, such as the knowledge that if you rock the boat, your employment opportunities will dry up or you will be ostracized. In the goldfish bowl of small-island life, where opportunities are often scant, that is usually enough to silence even the reddest of radicals. John Christensen remembers this pressure from his days as official economic adviser to the tax haven of Jersey. He recalls choking with anger during meetings, yet feeling immense pressure to conform to what offshore finance wanted from the island. “It took real strength to stand up and say, ‘I’m sorry, I don’t agree with this.’ I felt like the little boy farting in church.” Many years after leaving Jersey and setting up the Tax Justice Network to combat tax havens, he says he is still a hated figure in Jersey financial circles, pilloried as a traitor. In such places the capture of the tax haven by offshore financial interests—or financial capture—often extends into family life itself. A few years ago in the Alpine tax haven of Liechtenstein I spoke to a woman who had once spoken out publicly against her country’s financial laws. After that, she said, her own sister crossed to the other side of the street to avoid meeting her.
These cultural changes have been a direct consequence of the race-to-the-bottom contagion, as countries like Britain and the United States have operated under the assumption that they need to “compete” to attract the world’s hot money and have cleared away the political and cultural obstacles to make this happen. There has been no larger arena for this game than the Euromarkets, which, as one analysis put it, created a giant “transatlantic regulatory feedback loop that stimulated deregulation on both sides of the Atlantic … eroding the regulatory architecture of the postwar Keynesian state in Britain and destabilizing American New Deal regulations.” This feedback loop helped generate a rising global wall of money and debt, which has steadily burrowed into the nooks and crannies of our economies and our political systems, driving a gravitational shift inside the United States toward the needs of finance and delivering a payload of financial techniques and methods that have transformed the way we think about businesses, our homes, our public services, and even the people we love.39
The hot capital flowing into the countries that played this game the hardest made some local bankers, lawyers, and accountants wealthy. But this hot money inflicted a wave of more invisible damage on the wider US economy and society, through all the different mechanisms of the finance curse: greater financialization and wealth extraction, the brain drain out of productive sectors and into banks and shadow banks in Miami, Chicago, or New York, and greater deregulation and risk-taking at taxpayers’ expense, as American banks flocked to the London playground, then returned home with threats to move out wholesale if they didn’t get what they wanted.
Worse was to come. As the tax havens and the Euromarkets began to flourish, another set of changes got under way in the United States that would turn out to be just as powerful a crowbar to undo the progressive reforms that had generated such widespread prosperity during the Golden Age of Capitalism. These would deliver a knockout blow not so much to the Bretton Woods system as to an older, yet no less powerful, democratic tradition: antitrust. These changes would help create the wealthiest robber barons in world history.
In April 2018 Mark Zuckerberg, of Facebook, facing a grilling from a Senate panel, took about as much care with his own information as Facebook does with your data: he allowed a photographer from the Associated Press to snap a photo of his crib notes. One of his arguments was aimed against anyone suggesting that Facebook should be broken up: “US tech companies key asset for America; break up strengthens Chinese companies.”
There were other fascinating things in Zuckerberg’s notes, and few people probed this particular tidbit very far. But his argument was odd, if you think about. He was calling for Congress to accept his monopoly, which profitably harvests and sells valuable and sensitive data about American users, in the interest of American competitiveness (and national security). Or, to put it more simply, to improve American competitiveness by restricting competition in America.
Lawmakers and commentators mostly fell over themselves to flatter Zuckerberg, and with a couple of honorable exceptions, they avoided the elephant in the room: Facebook’s gargantuan monopoly, trapping us in a devil’s bargain where we have no choice but to accept being subjected to secret surveillance if we want to connect with friends and neighbors