Offshore Banking: The Shadow Global Financial System Running Amok

Published on July 23rd, 2012 | by

When people hear the term “offshore banking,” they might think of offshore banking and tax secrecy centers, such as Switzerland, Grand Cayman, Panama and the UK Channel Islands, where the world’s wealthiest, along with organized crime and developed and developing world despots, stash their wealth to shield it from the taxes and the prying eyes of national and international regulators, tax authorities and auditors. And they’d be right.

But the size, and the amount of money flowing through the worldwide network of offshore banking and tax secrecy havens is far larger than what’s widely realized, and the effects extend far beyond merely avoiding taxes and hiding and “laundering” illicitly earned wealth. In fact, offshore banking and tax secrecy centers have grown and developed to the point where they are essential to much of the commerce and investment that takes place in the global economy today. In fact, this network developed precisely because of the needs of multinational businesses and monied individuals–private and public, doing business and moving money legally or illegally.

Fueled by the “free market, “globalization,” “deregulation” and “privatization”, mantras incessantly put forth by bankers, financial industry lawyers, accountants, economists and supportive politicans and regulators since the eighties, offshore banking and finance has grown and developed into a network of bank and tax secrecy centers that enables any entity–individuals to the world’s largest corporations, government agencies and organized crime networks–to extract cash and capital out of national economies and inject it into a global financial network that operates outside of any national or international regulatory or tax regime.

Offshore Banking & Finance: The Tail that Wags the Dog

To a large extent, offshore banking is a pernicious, internecine shadow financial system that feeds like a vampire on the savings and investment capital of the broad, working public masses in developed, developing and the world’s poorest countries alike.

It may come as a surprise that when trying to identify which countries are the world’s biggest offshore banking and tax secrecy havens, the U.S. comes out on top. States like Delaware, Nevada and Wyoming are well-known internationally as strong bank and tax secrecy havens for corporations and individuals.

U.S. corporations and investors for some time have no longer needed to go offshore to shield their earnings, savings and investment capital from U.S. and other countries’ tax and regulatory authorities. Passage of federal laws allowing the establishment of “tax-free” Netherlands Antilles trusts, partnerships and LLCs– integral to the creation of tax-evading, so-called “Dutch Sandwiches” and more recent financial “innovations”– variations on the same theme– have been written about in business news reports intermittently in recent years.

Subsequently, International Banking Facilities (IBFs) have given free reign to major money center banks, lawyers and accounting firms to do big business creating offshore companies and accounts for multinational corporations, wealthy individuals–including government officials– and outright criminal organizations. By establishing an IBF, they don’t even have to go “offshore;” they can do so from the comfort of an office in Miami or other US-based haven for banking and tax secrecy.

The US being the leading banking and tax secrecy haven in the world stems in large part due to large and consistent contributions from banks to political campaigns and lobbying firms, accompanied by constant political lobbying, seduction and threat, as well as the prominence of the U.S. economy. That’s paid off very handsomely indeed, likely well beyond even proponents’ wildest dreams, as the banking and financial industry has come to dominate the U.S. economy to a degree not seen since the days of the great American “Robber Barons.”

Thing is, in those days, the great industrialist/monopolists couldn’t move their money offshore so easily. Their worst excesses were gradually restrained and prohibited, and their capital, held here in the US, was invested in building infrastructure and industry that fueled America’s great economic expansion and national development. That’s no longer the case. Today corporations and individuals can hire expert lawyers, bankers and accountants that will set up the secret offshore structure that will enable them to move their money offshore, and among offshore centers and vehicles, at a moment’s notice.

Facilitating unrestrained growth of offshore bank and tax secrecy havens, central bank and government leaders have allowed the world’s most prominent investment/commercial banks, hedge and private equity funds to lend and invest greater amounts of money against smaller cushions of equity capital.

When things go bad, as has happened repeatedly and so spectacularly in the past two or so decades, the public gets stuffed with the bill. This hit home hard in the US, beginning with former President G.W. Bush’s Treasury Secretary John Paulson, a former Goldman Sachs CEO, hastily and secretively forged and pushed through passage of TARP, the key piece of an initial emergency bailout of threatened US money center banks.

What’s more, this more than anything else has essentially put money creation and the money supply outside the control of central banks, who, seemingly paradoxically, are pledged to maintain vigilance of the growth of inflation, money supply, credit and debt levels.

Offshore Banking and Tax Havens: A Mutating, Multi-Headed Hydra

The U.S. is by no means alone among major, developed world countries as an offshore banking and tax haven. Home to the world’s largest centers for global banking, the US and UK long ago joined the likes of Switzerland, Grand Cayman, Hong Kong, Panama, Bermuda, Jersey, Guernsey and Gibraltar in the ranks of governments competing to attract capital to offshore centers and tax-free vehicles. They all continue to engage in a “beggar thy neighbor” game of “one-upmanship” when it comes to bringing down barriers that once held investment capital within national borders and the oversight of regulatory and tax authorities.

The Bank of England, often working for ends contradictory to that of the U.K. Treasury, has in a fashion restored the U.K.’s international influence, and its own national debt, by cultivating a far-flung network of offshore bank and tax secrecy havens. This vast, loosely organized octopus extends outwards , with money flowing inwards to the world’s international financial capital, the City of London, which when it comes to affairs of banking and finance, operates as an autonomous “state-within-state.”

With the City of London banks at its center, this offshore network of banking and tax secrecy havens rivals that of the British Empire at its height in terms of geographic scope. It includes the Isle of Man and the U.K. Channel Islands, to former British colonies in the Western Hemisphere and Caribbean, such as Bermuda, Grand Cayman and The Bahamas, to include former colonies in Africa and Asia-Pacific, still including Hong Kong, though China now owns and is now using it as its own bank secrecy and tax haven as well.

Add to the one of the original and still most prominent havens for banking and tax secrecy: Switzerland, as well as neighboring Luxembourg and Liechtenstein, which continue to be the havens of choice for European corporations, wealthy individuals, as well as many overseas dictators and criminals. Also built largely around former colonial era possessions, France has its own offshore bank secrecy and tax haven network, one that was partially exposed at great risk, as is usually the case, by the investigation of the “Elf Affair.”

The Center Point of Financial Scandals, Bank Collapses and Asset Bubbles

The result off public and private-sector national and international leaders in allowing, even facilitating, the largely unrestrained growth and development of the offshore banking system are profound and incredibly varied, from the collapse of BCCI to the debt and derivatives-driven collapse and public bailout of Long-Term Capital Management in the nineties to the collapse of Lehman Bros. and near-collapse of other major money center U.S. banks as the U.S. sub-prime mortgage market imploded in 2008-2009.

The real crime, and paradox, of all this is that the origin, roots and rampant expansion of the offshore banking system has been and continues to be perpetrated on a largely unsuspecting public by those very individuals charged with ensuring the well-being of national and international banking systems and economies.

At the center of this sordid tale are central banks, Treasury secretaries and ministers and elected and appointed government officials. Incessantly seduced, cajoled, threatened and prodded on by banking industry execs and their legions of lobbyists– these public officials have been central to the creation of the offshore banking system, and continue to be its most important, and staunch, defenders and proponents.

Want to know where billions of embezzled foreign development and humanitarian aid from the US, EU, Japan and other major lenders and donors goes? Offshore banks. Where the world’s most notorious dictators stash embezzled state funds, most of it borrowed or donated from developed countries? Offshore banks. Where organized crime syndicates and covert government agencies hide and transfer funds for their operations, including trade in drugs, illegal arms, humans and nuclear materials? Offshore banks

Where the many billions of untaxed profits of nearly every major US-based multinational, including Apple, GE and Exxon-Mobil, goes? Offshore banks. Where many thousands of the wealthiest Americans and the super-rich from countries stash their wealth to avoid paying taxes? Offshore banks. Where the many billions of dollars worth of Russian wealth from privatized state-owned companies went? Into the offshore bank accounts of the new wealthy and super-rich Russian “elite.”

The list goes on and on. The conduit by which multinationals “cook their books,” using transfer pricing that shifts profits and losses to avoid booking the former in what are considered to be “high-tax” countries? Through offshore banks.

Recurring Cycle of Credit/Debt Fueled Booms and Busts

To summarize, the trusts, LLCs and other legal forms of business organization commonly found in any self-respecting offshore bank are at the center of and the key enable of the financial scandals and crises we’ve experienced in the past several decades.

In addition to the collapse of Long-Term Capital Management, Lehman Brothers and Bear Stearns, a partial roster includes the junk bond/LBO crisis that took down the US stock market in the late eighties, the Iran-Contra scandal of the nineties, the fleecing of Russian state assets during “Perestroika,” the financing of wars in Angola, Congo and other African and other developing and less-developed nations. Add to the list the latest epic credit/debt-and derivatives-fueled binge: the collapse of the US sub-prime mortgage market in 2009. That one also threatened to bring the global banking system, and real economic productivity to a crashing standstill.

All this and much more is most thankfully and cogently laid out in a new book entitled, “Treasure Islands: Tax Havens and the Men Who Stole the World,” by veteran UK investigative journalist and Associate Fellow of the Royal Institute of international Affairs (Chatham House) Nicholas Shaxson.

Now available in hard cover in the US, “Treasure Islands” is set to be published in the U.S. in September. It’s a must-read that for the first time in my experience lays bare the history, development and growth of the offshore banking and financial system. In it, Shaxson traces the roots, origins, development and growth of the ultra-secretive global offshore banking system.

He then brings the story up to date, identifying the key events, players and some of the key individuals involved. Note: the Bank of England, Swiss banking authorities, US Treasury Dept. officials, including former Clinton Treasury Secretary and Goldman Sachs CEO Robert Rubin, figure prominently in the tale, as do a long list of other prominent historical and present-day figures.

Personally, reading Shaxson’s book is one of the most eye-opening and enlightening experiences I’ve had, and I’ve read a long list of books about finance and financial history over the past twenty or so years. Give it a read, a good read. And if you can think of a way to take any action that would help restrain the continuing growth and development of offshore banking and bring capital back “on-shore” and put to actually productive use, by all means do it.


About the Author

I've been reporting and writing on a wide range of topics at the nexus of economics, technology, ecology/environment and society for some five years now. Whether in Asia-Pacific, Europe, the Americas, Africa or the Middle East, issues related to these broad topical areas pose tremendous opportunities, as well as challenges, and define the quality of our lives, as well as our relationship to the natural environment.
  • Andrew, great post! Does the book give any ideas for what we can do to help pull the power away from these folks? My first thought is to pull all your assets out of larger banks and put them into a community bank. Seems less prone to shenanigans, no?

    • Longshore drifter

      Agreed…Though Keynes, and other leading economists of the time, warned against the dangers of hot money flows, and recommended ways to protect against them, they’ve not only been largely ignored, but banking industry leaders have managed to steer regulatory regimes in the opposite direction…and that’s led directly to the repeated booms and busts, scandals and crises we’ve been experiencing…not to mention the looting of developing and poor countries to an extent far greater than the foreign aid developed countries’ taxpayers have taken on the bill for….

  • Jean Maier

    Sounds like a very interesting book.
    There actually is some interest in getting money away from the big banks. One very interesting version is a state owned bank lilke the Bank of North Dakota. http://www.huffingtonpost.com/2010/02/16/bank-of-north-dakotasocia_n_463522.html