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Book Summary: Treasure Islands – Uncovering the Damage of Offshore Banking and Tax Havens

Victor Bout, the gunrunner portrayed in the Hollywood hit Lord of War, ran his notorious weapons trade through companies in Delaware and Florida. If you think Delaware is a strange place for a Ukrainian man smuggling guns into African civil wars to call home, you clearly underestimate the power and influence of tax havens.

Tax havens are jurisdictions that use their own legislation to help individuals and companies alike to get around taxation and regulations in their home countries. This book summary explain tax havens in depth, including their secrecy tactics, and how tax havens are rife with tax evasion, money laundering and financial instability.

In this summary of Treasure Islands by Nicholas Shaxson, you’ll know

  • how Starbucks uses tax havens to hide their wealth;
  • how a single building in Delaware can house more than 200,000 companies; and
  • which country is the world’s largest tax haven – you’ll be surprised!

Book Summary: Treasure Islands - Uncovering the Damage of Offshore Banking and Tax Havens

Tax havens are jurisdictions for secrecy.

As you probably know, tax havens have low tax rates – for some. You might’ve heard stories of corrupt dictators or mafia bosses keeping money in Switzerland or the Cayman Islands. What’s the purpose of this?

It’s quite simple: secrecy. A secrecy jurisdiction enables people or entities to escape certain laws and regulations by relocating their funds to hidden places.

Tax havens don’t cooperate with authorities from other countries. You can’t tax someone without knowing how much money they have. This is why your bank notifies the authorities when money is put into your account.

Tax havens don’t provide this information to authorities, however. They only provide information if the authorities already know the specifics of your offshore banking, and even then there’s a process to go through.

Even if a tax haven does share information with law enforcement authorities, they still provide services to protect their clients.

Many tax havens have flee causes, for example. That means that if Interpol comes looking for your money, your assets will automatically be moved to another place, like an account in a different tax haven.

Ultimately, tax havens are able to provide almost perfect secrecy. Another way they do this is through the use of trusts.

In a trust, the person who pays the money is the owner, and they have to designate a certain goal for their fund. There’s also a professional manager called the trustee.

The goal of a trust is that the money should be paid back to the owner or their relatives after some amount of time. The trustee is often a professional lawyer who manages hundreds of trusts at once.

Tax authorities can’t know who the owner is – they only know the registered trustee. Lawyers can’t tell anyone who their beneficiaries are because that would be a breach of confidentiality. The real information stays hidden.

Secrecy jurisdictions manipulate the paper trail of transactions.

What percentage of the world’s trade do you think passes through tax havens? The answer might surprise you: it’s actually more than half.

Multinational corporations can basically choose how they want their profits to be taxed. If you buy a coffee from Starbucks, for example, Starbucks profits. But who generated this profit, and who should get it? The individual café? The coffee plantation?

Starbucks argues that the profit was generated by their brand. After all, you don’t just want coffee – you want the Starbucks experience. So Starbucks can establish a separate subsidiary that owns the rights to its brand, and the main Starbucks company pays money to the subsidiary in order to buy the “right” to use its brand.

The company pays a cost while the subsidiary is the one that profits.

Corporations also use accounting tricks to shift their profits and “taxes” into tax havens.

Starbucks can even legally establish their subsidiary directly in a tax haven. That makes it hard to know how much the brand rights are really worth, because the Starbucks subsidiary can charge Starbucks any amount they want for them.

So the subsidiary is supposed to be the one paying the taxes, but the tax rate is nearly zero because it’s in a tax haven.

Rupert Murdoch’s media empire rather poignantly illustrates the wizardry of these accounting practices. Neil Chenoweth, an investigative journalist, found that News Corp – which owns Fox News, MySpace and the Sun – reported their profits in 1987, 1988 and 1989 to be A$363,000, A$464,000 and A$496,000 respectively. Those numbers are absurdly low for such a mega corporation.

The journalist John Lanchester put it well: “That little grace note in the sums is account-speak for ‘Fuck you.’”

The arguments in favor of tax havens are simply untenable.

How can anyone possibly defend tax havens? People often claim that tax havens facilitate healthy tax competition, or that secrecy helps people protect their money from greedy autocrats.

These arguments are quite shallow.

“Tax competition” is just not a logical concept. Firstly, tax havens just create a free ride situation for people who use them. People and companies still benefit from their home country’s services, but they don’t pay for them.

Secondly, high taxes are not a threat to competition in the first place. Countries compete with their education and institutions, as well as their economic and political stability. The World Economic Forum uses these indicators to rank the competitiveness of all countries in the world.

Finland, Sweden and Denmark – which have the highest taxes in the world – are ranked fourth, fifth and sixth.

Sometimes people also try to use moral arguments to support tax havens, but they don’t hold up either.

Daniel J. Mitchell of the Cato Institute argues that Switzerland provided a safe place for Jews to store their money during the Third Reich. This story is often used to support tax havens, and it’s untrue.

The Swiss law that makes it a crime for banks to release their customers’ data was a response to a scandal where someone revealed a list of French people who had Swiss accounts. The law was proposed in 1932, a year before Hitler came to power. It was passed in 1934, two years before Nazi Germany stipulated that having undeclared foreign accounts was punishable by death.

It’s really no wonder that the arguments in favor of tax havens don’t withstand scrutiny. The only real purpose of tax havens is to give wealthy and powerful elites another way to stay wealthy and powerful.

Secrecy jurisdictions allow wealthy people and companies to stay on top.

Further defenses of tax havens only get more absurd. Tax haven apologists argue that secrecy protects powerless people against greedy big governments. This isn’t just wrong – it’s the opposite of what’s true.

Tax havens help elite foreigners, not ordinary citizens. They usually ring-fence their economies away from the services they offer, meaning they only provide low tax rates and secrecy to non-residents. Residents have to pay normal taxes similar to those of countries that aren’t tax havens.

Tax havens implicitly admit that the world can’t function without taxes. If everyone paid close to zero taxes, no one would have a fire department.

The accounting firms, lawyers and banks who serve as intermediaries for tax havens charge such exorbitant prices that their services are only profitable if you already have a lot of money.

Rudolf Elmer, who worked for banks on Mauritius and the Caymans said the minimum amount they’d hide was €3 million.

Tax havens are simply a tool for elites to maintain their money and power. They also provide large corporations with a competitive edge over small- and medium-sized enterprises.

Consider the idea of deferred taxes. Profits held in tax havens aren’t taxed until they’re repatriated – sent back to the country they came from. So when big companies use tax havens they do have to pay their taxes at some point, but not when they’re actually due. They essentially get interest-free loans from the government.

Tax havens also allow wealthy people to pay less tax than they should. In fact, in 2006, billionaire Warren Buffett had the lowest tax rate of all those in his office staff, including the receptionist.

The United States went from fighting offshore accounting to turning into an offshore player itself.

In 2009, the Tax Justice Network published their Financial Secrecy Index for the first time. Some obvious candidates took the lead: the UK, Cayman Islands, Switzerland and Luxembourg were in the top five. But can you guess which country was considered the world’s most important secrecy jurisdiction? The United States!

The United States has a rather ambiguous stance on offshore tax avoidance. The Carter administration created the Gordon Report, which was the world’s first major survey on secrecy jurisdictions. It condemned tax havens and called on the United States to lead the world in a global crackdown.

It was published only one week before Ronald Reagan was inaugurated. He supported low taxes and a small state. The Gordon Report was buried almost immediately.

Later, the Clinton administration proposed regulations that would provide OECD countries with information about bank deposits owned by American citizens. Once again, the proposal was later dropped – this time by the Bush administration, which also favored low taxes.

The United States even has domestic methods of obscuring and avoiding taxes. States like Delaware provide immense corporate secrecy.

You can create a shell company in Delaware for less than a thousand dollars. You don’t have to provide any information on what the business is, or who the directors or owners are.

You can simply use the name and address of an agent in Delaware who administers thousands of similar companies. As we saw earlier, that agent can be a lawyer who can withhold any information from authorities due to attorney–client privilege.

Barack Obama once criticized Ugland House on the Cayman Islands for housing over 12,000 companies. Anthony Travers, the chairman of the Cayman Islands’ Financial Services Authority, responded by suggesting Obama focus on Delaware instead – a single office at 1209 North Orange Street, Wilmington, houses 217,000 companies.

The world’s most prominent offshore system is centered around the UK.

The British Empire disintegrated throughout the twentieth century as its various colonies gained independence. Close political relationships remained, however, and in the second half of the twentieth century, these relationships formed a critical system of tax havens.

The British system of secrecy jurisdictions is a web with three layers.

The first layer consists of three crown dependencies: Jersey, Guernsey and the Isle of Man. They’re still substantially controlled by the UK, but they’re independent enough that the UK can deny any responsibility if another country complains about them being tax havens.

The second layer consists of the 14 overseas territories, and it includes some of the most famous tax havens. The Cayman Islands, for example, is part of this layer. The Cayman Islands are the world’s fifth largest financial center and one of the most globally infamous tax havens.

The third layer includes secrecy jurisdictions like Hong Kong, Singapore and the Bahamas.

This system has several purposes. It essentially works like a spider web that launders money.

Just as a web catches insects, the British web catches money from nearby countries. It attracts money, then launders it and funnels it back to London, where it’s invested.

Imagine a well-known Mexican drug lord who wants to invest his money in something legal. He can’t just go to London and deposit drug money into an account. Instead, he might pay it to a trust in the Bahamas. That trust will then send it to another trust in Jersey, which could in turn invest it in a real estate fund in London.

The British spider web is the largest system of its kind in the world. In fact, economists Richard Murphy, Ronen Palan and Christian Chavagneux have estimated that this web holds over a third of all international bank assets. Including London, it’s almost half.

Tax havens are the single most significant problem for developing countries.

Have you ever wondered why some developing countries get billions of dollars in aid but don’t seem to improve?

One reason for this is that corrupt politicians steal foreign aid using tax havens.

The illicit outflow of money from developing countries is called capital flight. In 2011, Global Financial Integrity estimated that total capital flight from all developing countries was over $1.2 trillion in 2008.

This number is greater than the total debt or official development assistance from developing countries. For every dollar of foreign aid they lost another ten. Their leaders take the aid and hide it in tax havens.

The University of Massachusetts Amherst published another study on capital flight from 40 African countries between 1970 and 2004. It found that with interest, these countries’ capital flight amounted to $607 billion – more than two and a half times their international debt.

The elites of other developing countries also get rich from tax havens. In the early 1990s, government bonds from countries like Argentina yielded up to 45 percent in interest. Michael Hudson, an economist, found that this foreign debt wasn’t held by bondholders in North America or Europe.

Argentina’s debt was held by Argentinian insiders who operated from offshore centers. They knew the debt would be serviced because they were affiliated in some way with institutions like the Argentine central bank.

A US Federal Reserve official once said of Latin American countries, “The problem is not that these countries don’t have assets. The problem is they’re all in Miami.”

The scale of this problem is enormous. In fact, in 2007, the biggest source of foreign investment in India wasn’t the United States or some other wealthy country. It was the tiny tax haven of Mauritius, which had 43 percent of the total.


The key message in this book:

Tax havens are nothing more than tools for wealthy and powerful people to maintain their wealth and power. By allowing global elites to avoid their taxes, they further the gap between rich and poor. They also take an enormous toll on the developing world and make it even more difficult for small- and medium-sized business to compete with major corporations. Tax havens don’t help oppressed people or keep the economy more free, they do quite the opposite.

About the author

Nicholas Shaxson is a journalist who has written for the Financial Times, The Economist Group, African Energy, and the insider newsletter Africa Confidential. He is the author of the highly acclaimed Poisoned Wells: The Dirty Politics of African Oil and an associate fellow with the Royal Institute of International Affairs in London.


Economics, Finance, Business, History, True Crime, Taxation, Journalism, Politics and Social Sciences, Politics and Government, International Taxes, International Tax Law, Banks and Banking, Banking Law, Corrupt Business Practices, General and Miscellaneous Taxes, White Collar and Nonviolent Crime

Table of Contents

Prologue: An offshore awakening
Welcome to Nowhere
Technically Abroad
The Opposite of Offshore
The Great Escape
Construction of a Spiderweb
The Fall of America
The Drain
The Life Offshore


A thrilling ride inside the world of tax havens and corporate masterminds

While the United States experiences recession and economic stagnation and European countries face bankruptcy, experts struggle to make sense of the crisis. Nicholas Shaxson, a former correspondent for the Financial Times and The Economist, argues that tax havens are a central cause of all these disasters.

In this hard hitting investigation he uncovers how offshore tax evasion, which has cost the U.S. 100 billion dollars in lost revenue each year, is just one item on a long rap sheet outlining the damage that offshoring wreaks on our societies. In a riveting journey from Moscow to London to Switzerland to Delaware, Shaxson dives deep into a vast and secret playground where bankers and multinational corporations operate side by side with nefarious tax evaders, organized criminals and the world’s wealthiest citizens. Tax havens are where all these players get to maximize their own rewards and leave the middle class to pick up the bill.

With eye opening revelations, Treasure Islands exposes the culprits and its victims, and shows how:

*Over half of world trade is routed through tax havens

*The rampant practices that precipitated the latest financial crisis can be traced back to Wall Street’s offshoring practices
*For every dollar of aid we send to developing countries, ten dollars leave again by the backdoor
The offshore system sits much closer to home than the pristine tropical islands of the popular imagination. In fact, it all starts on a tiny island called Manhattan. In this fast paced narrative, Treasure Islands at last explains how the system works and how it’s contributing to our ever deepening economic divide.


“This book is a vigorous and well researched polemic against financial deregulation…” ―Richard Cooper, Foreign Affairs

“Shaxson’s story of offshore banking is nothing short of Shakespearean, a drama full of secrecy, treachery and corruption in which wealthy countries, companies and individuals collude to horde wealth in a complex global network of largely unregulated tax havens. To realize this end, they install corrupt leaders, exploit indigenous populations and, ultimately, deny both developed and developing nations of vital tax dollars. There is much here that should generate outrage…An admirable job of both arguing the consequences of offshore banking and providing a succinct history of the practice.” ―Kirkus

“A blistering account of the role that tax havens play in international finance. . . brilliant.” ―London Review of Books

“Perhaps the most important book published in the UK so far this year.” ―George Monbiot, The Guardian

“Shaxson provides a fascinating narrative that is both analytically compelling and rich in institutional detail.” ―New York Times Economix blog

“A useful critique.” ―Tyler Cowen, Marginal Revolution

“Treasure Islands, Nicholas Shaxson’s excellent book on the global offshore tax system.” ―FT Alphaville

“Treasure Islands has prised the lid off an important and terrifying can of worms.” ―Literary Review

“Shaxson shows us that the global financial machine is broken and that very few of us have noticed.” ―New Statesman

“In this riveting, well-written expose, Shaxson goes deep into the largely unexamined realm of offshore money. In the process, he reveals that this shadow world is no mere sideshow, but is troublingly central to modern finance, with the US and the UK as leaders. The resulting abuses are widespread, ranging from tax revenue stripping from African nations to individuals and corporations escaping enforcement and accountability. A must read for anyone who wants to understand the hidden reasons why financial services firms have become so powerful and impossible to reform.” ―Yves Smith, creator of Naked Capitalism and author of Econned

“Treasure Islands shines the light on some very dark places. It reads like a thriller. The shocking thing is its all true.” ―Richard Murphy, co-author of Tax Havens: How Globalization Really Works

“At last, a readable – indeed gripping – book which explains the nuts and bolts of tax havens. More importantly, it lays bare the mechanism that financial capital has been using to stay in charge: capturing government policy-making around the world, shaking off such irritants as democracy and the rule of law, and making sure that suckers like you and me pay for its operators’ opulent lifestyles.” ―Misha Glenny, author of McMafia: A Journey through the Global Criminal Underworld

“Trade and investments can play a profoundly productive role on the world economy. But so much of the capital flows that we see are associated with money laundering, tax evasion, and the wholesale larsony (sic) of assets often of very poor countries. These thefts are greatly facilitated by special tax and accounting rules or designed to “attract capital” and embodying obscure and opaque mechanisms. Shaxson does an outstanding and socially valuable job in penetrating the impenetrable and finds a deeply shocking world.” ―Nicholas Stern, former Chief Economist for The World Bank

“The real challenge to America’s economy comes not from China – but from the Caymans, the Bahamas, and a whole hot-money archipelago loosely under the control of the City of London. If only as a civics lesson, read this astonishing book to find out the true political constitution of the world.” ―Thomas Geoghegan, author of Were You Born on the Wrong Continent?

“Far more than an exposé, Treasure Islands is a brilliantly illuminating, forensic analysis of where economic power really lies, and the shockingly corrupt way in which it behaves. If you’re wondering how ordinary people ended up paying for a crisis caused by the reckless greed of the banking industry, this compellingly readable book provides the answers.” ―David Wearing, School of Public Policy, UCL, London’s Global University

“An absolute gem that deserves to be read by anyone interested in the way contemporary globalization is undermining social justice. Give it to your sons, daughters, families, favorite legislators and anyone else needing stimulation of their thought buds. This masterpiece illuminates the dark places and shows the visible hand of governments, corporations, banks, accountants, lawyers and other pirates in creating fictitious offshore transactions and structures and picking our pockets. This financial engineering has enabled companies and the wealthy elites to dodge taxes. The result is poverty, erosion of social infrastructure and hard won welfare rights and higher taxes for ordinary people. Tax will be the decisive battleground of the twenty-first century as no democracy can function without it, or provide people with adequate educations, healthcare, security, housing, transport or pensions. Nicholas Shaxson has done a wonderful job in lifting the lid off the inbuilt corruption that has become so naturalized in the western world.” ―Prem Sikka, Professor of Accounting, University of Essex, UK

“Over my holiday last week, I read Nick Shaxson’s book – Treasure Islands. I would go as far as saying this book is the No Logo for a new century” ―Sunny Hundal, Liberal Conspiracy

“Shaxson has undertaken a big task with the book Treasure Islands: Tax Havens and the Men who Stole the World. But the task is well worthy of examination, as it is so vital to the shadowy infrastructure of the global financial system… provides an easily digestible overview of the labyrinthine nature of the world of offshore finance.” ―Seeking Alpha

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An Introduction to Offshore

THE OFFSHORE WORLD IS ALL AROUND US. Over half of world trade passes, at least on paper, through tax havens. Over half of all bank assets, and a third of foreign direct investment by multinational corporations, are routed offshore. Some 85 percent of international banking and bond issuance takes place in the so-called Euromarkets, a stateless offshore zone that we shall soon explore. Nearly every multinational corporation uses tax havens, and their largest users—by far—are on Wall Street.

Tax havens don’t just offer an escape from tax. They also provide wealthy and powerful elites with secrecy and all manner of ways to shrug off the laws and duties that come along with living in and obtaining benefits from society—taxes, prudent financial regulation, criminal laws, inheritance rules, and many others. Offering these escape routes is the tax havens’ core line of business. It is what they do.

Before getting into the real story of offshore, this chapter will lay some basic groundwork for understanding tax havens, offering a few essential principles, some brief history, and a short overview of where the tax havens are located.

* * *

Nobody agrees exactly what a tax haven is, but I will offer a loose description here: It is a place that seeks to attract money by offering politically stable facilities to help people or entities get around the rules, laws, and regulations of jurisdictions elsewhere. This definition is quite broad, compared to some others, and I have chosen it for two main reasons. First, I aim to challenge a common idea that it is perfectly OK for one jurisdiction to exercise its sovereign right to get rich by undermining the sovereign laws and rules of other places. Second, I am offering a lens through which to view the history of the modern world. This definition will help me show how the offshore system is not just a colorful appendage at the fringes of the global economy but rather lies at its very center.

I should also make a short point here about some confusion in the language. When I say “offshore,” I obviously am not referring to offshore oil drilling. I am also not talking about “offshoring,” which is what happens when a company moves a manufacturing plant or, say, a call center from the United States to India or China, perhaps to save on labor costs. When I say “offshore,” I am talking about the artificial movement or use of money across borders, and about the jurisdictions, commonly known as tax havens, that host and facilitate this activity. Once the money has escaped offshore, it is reclassified in an accountant’s ledger and it assumes a different identity—and that means, very often, that the forces of law and order will never find it.

A number of features help us spot tax havens. Here are some important ones.

First, as my colleagues have found through painstaking research, all tax havens offer secrecy, in various forms. The term secrecy jurisdiction emerged in the United States in the late 1990s, and in this book I will use it interchangeably with tax haven. I will call the whole global structure of these places, and the private infrastructure that services them, the offshore system.

Another common marker for tax havens is very low or zero taxes, of course. People and corporations use them to escape tax, legally or illegally. Secrecy jurisdictions also have very large financial services industries in comparison to the size of the local economy. These places also routinely “ring-fence” their own economies from the facilities they offer to protect themselves from their own offshore tricks. So they might, for example, offer a zero tax rate to nonresidents who park their money there but tax local residents fully. This ring-fencing is a tacit admission that what they do is harmful.

Various other telltale signs exist. Tax havens usually deny what they are and strenuously assert that they are clean. Search for “We are not a tax haven” on the Internet or “We are a transparent, well regulated, and cooperative jurisdiction,” and see what comes up. Each has its own way of addressing the critics: In the Cayman Islands, for example, accusations of lax regulation after scandals are routinely dismissed as media stereotypes that do not correspond to objective reality.

But there is one feature of a secrecy jurisdiction that stands out above all: that local politics is captured by financial interests from elsewhere (sometimes these financial interests are criminal interests). This is why I include “politically stable” in my definition: Meaningful opposition to the offshore business model will have been neutered in a serious tax haven, so that such irritants as local politics cannot interrupt the business of making money. And here lies one of the great offshore paradoxes: These zones of ultra-freedom for financial interests are so often repressive places, viciously intolerant of criticism. The offshore world is steeped in a pervasive inverted morality: Turning a blind eye to crime and corruption has become good business practice: a way of attracting money; while alerting forces of law and order to wrong-doing has become the punishable offense. Here in the tax havens, rugged individualism has morphed into a disregard, even a contempt, for democracy and for societies at large.

* * *

One of the first things to understand about offshore business is that it is, at heart, about artificially manipulating paper trails of money across borders. To get an idea of how artificial it can be, consider the banana.

A bunch of bananas typically takes two routes into your home: a real route and an artificial offshore paper trail. On the first route a Honduran worker, say, is employed by Big Banana, a U.S. multinational I’ve just invented, to pick the bananas, which are then packaged and shipped to Britain, sold to a supermarket, and sold on to a customer.

The second route—the accountants’ paper trail—is different. When a banana is picked in Honduras and shipped to Britain and sold, where are the final profits generated? In Honduras? In the British supermarket? In the multinational’s U.S. head office? And how do you work this out? How much do the corporation’s management expertise, or the brand name, or the insurance, or the accounting business, contribute to profits and costs? Which country ought to tax each component of the final profit? Nobody can say for sure, so the accountants can, up to a point, decide for themselves.

Here, in simple form, is what they might do. They advise Big Banana to run its purchasing network from, say, the Cayman Islands, and put a financial services subsidiary in Luxembourg. The Big Banana brand might be parked in Ireland; its shipping subsidiary in the Isle of Man; it might locate certain parts of its “management expertise” in Jersey, and its insurance arm in Bermuda. All are tax havens.

Next, each part of this multinational charges the other parts for the services they provide. So Big Banana’s Luxembourg finance subsidiary might lend money to Big Banana Honduras, then charge that Latin American subsidiary $10 million per year in interest payments for that loan. The Honduran subsidiary will deduct this $10 million from its local profits, cutting or wiping out its local profits (and consequently its tax bill) there. The Luxembourg finance subsidiary, however, will record this $10 million as income—but because Luxembourg is a tax haven, it pays no taxes on this. With a wave of an accountant’s wand, a hefty tax bill has disappeared. Who is to say that the $10 million charged by Big Banana Luxembourg is the real going rate—or just an accountant’s invention? Quite often it is hard to tell, although sometimes these prices are adjusted so aggressively that they lose all sense of reality: A kilo of toilet paper from China has been sold for $4,121.81, a liter of apple juice has been sold out of Israel at $2,052, and a ballpoint pen has been recorded leaving Trinidad valued at $8,500.

Though most examples are far less blatant than this, the cumulative total of these shenanigans is vast. About two-thirds of global cross-border world trade happens inside multinational corporations. And it is poor countries in particular, with their underpaid tax officials, that always lose out to multinationals’ aggressive, highly paid accountants.

What Big Banana has done here is transfer pricing (or mispricing), a common offshore trick that U.S. Senator Carl Levin calls “the corporate equivalent of the secret offshore accounts of individual tax dodgers.” The general idea is that by adjusting its internal prices a multinational can shift profits offshore, where they pay little or no tax, and shift the costs onshore, where they are deducted against tax. In the banana example, tax revenue has been drained out of a poor country and into a tax haven and funneled through to the wealthy owners of a multinational corporation. In October 2010 a Bloomberg reporter explained how Google Inc. cut its taxes by $3.1 billion in the previous three years through transfer pricing games known by names such as the “Double Irish” and “Dutch Sandwich,” ending up with an overseas tax rate of 2.4 percent. The problem is getting worse. Microsoft’s tax bill has been falling sharply, for similar reasons. Cisco is at it. They are all at it. Transfer pricing alone cost the United States an estimated $60 billion a year9—and that is just one form of the offshore tax game.

Worldly readers may still shrug and tell themselves that this is just part of the ugly flipside of living in a rich nation. If they do, in their reluctantly cynical way, they are suckers—for they are victims, too. The tax bill is cut not only in Honduras but in Britain and America too. The annual report of a real banana company listed in New York notes: “The company currently does not generate U.S. federal taxable income. The company’s taxable earnings are substantially from foreign operations being taxed in jurisdictions at a net effective rate lower than the U.S. statutory rate.” (Rough translation: We don’t currently pay U.S. taxes because we use tax havens.)

This may be quite legal—but when it happens, small businesses and ordinary folk must step in to pay the taxes that multinationals have escaped. “Small businesses are the lifeblood of local economies,” said Frank Knapp, member of a new group formed in 2010 called Business and Investors Against Tax Haven Abuse. “We pay our fair share of taxes, shop locally, support our schools, and actually generate most of the new jobs. So why do we have to subsidize multinationals that use offshore tax havens to avoid paying taxes?”

Multinationals, it has to be said, find it hard to cut their taxes to zero because governments take countermeasures. But it is a battle the governments are losing. The U.S. Government Accountability Office reported in 2008 that two-thirds of American and foreign companies doing business in the United States avoided income tax obligations to the federal government in the years 1998–2005, despite corporate sales totaling $2.5 trillion. Not only this, but the corporate transfer pricing abuses that I have just described are just one of several forms of tax abuse. Subsequent studies suggest the problem is getting worse.

Transfer mispricing is one of the most important reasons that multinationals are multinationals and why they usually grow faster than smaller competitors. Anyone worried about the power of global multinationals should pay attention to tax havens.

It is not just your bananas, of course. Much of the food you eat will most likely have taken a similarly twisted route into your home. The water in your tap may have traveled on a similarly ghostly paper pathway en route to your bathtub. Your television, its component parts, and many of the programs it shows also likely took offshore routes into your living room. The offshore world envelops us.

All these offshore games make markets profoundly inefficient. Wealth has been transferred from poor taxpayers to rich shareholders—but nobody has produced a better or cheaper banana here. These are untargeted government subsidies for multinationals, courtesy of the tax havens, and they don’t make multinationals more productive. When corporate managers focus on tax dodging they take their eyes off what they do best—making better goods and delivering them more cheaply to market. Add to that the time and billions wasted paying expensive accountants and lawyers to conjure up these schemes. And then there is the secrecy. A fundamental building block of modern economic theory is transparency: Markets work best when two sides to a contract have access to equal information. Treasure Islands explores a system that works directly and aggressively against transparency. Offshore secrecy shifts control over information and the power that flows from it toward the insiders, helping them take the cream and use the system to shift the costs and risks onto the rest of society.

David Ricardo’s theory of comparative advantage elegantly describes principles that lead different jurisdictions to specialize in certain things: fine wines from France, cheap manufactures from China, and computers from the United States. But when we find that the British Virgin Islands, with fewer than twenty-five thousand inhabitants, hosts over eight hundred thousand companies, or that more than 40 percent of foreign direct investment into India comes from Mauritius, Ricardo’s theory loses its traction. Companies and capital migrate not to where they are most productive but to where they can get the best tax break. There is nothing “efficient” about any of this.

* * *

The world contains about 60 secrecy jurisdictions, or tax havens, which can be divided roughly into four groups: a set of continental European havens, a British zone of influence centered on the City of London and loosely shaped around parts of Britain’s former empire, a zone of influence focused on the United States, and a fourth category holding unclassified oddities like Somalia and Uruguay.

The European havens got going properly from the First World War, as governments raised taxes to pay for their war costs. Switzerland’s famous secrecy law, making violation of banking secrecy a criminal offense for the first time, was enacted in 1934 in response to a French tax evasion scandal, though Geneva bankers had sheltered the secret money of European elites since at least the eighteenth century. Picturesque, little-known Luxembourg, specializing since 1929 in certain kinds of offshore corporations, is among the world’s biggest tax havens today: Well over $2.5 trillion is parked offshore in Luxembourg. In March 2010 South Korean intelligence officials indicated that North Korea’s “Dear Leader” Kim Jong-Il had stashed some $4 billion in Europe—profit from the sale of nuclear technology and drugs, insurance fraud, counterfeiting, and projects using forced labor; Luxembourg, they said, is a favored destination for the money.

The Netherlands is another major European tax haven. In 2006, while the Irish musician Bono browbeat Western taxpayers to boost aid to Africa, his band, U2, shifted its financial empire to the Netherlands to cut its own tax bills. Austria and Belgium are also important European havens of banking secrecy, though Belgium softened its laws in 2009. A couple of other small European micro-state havens are worth noting, including Monaco and Andorra, with occasional cameo roles from odd places like the Portuguese Islands of Madeira, which was central to a major Nigerian bribery scandal involving the U.S. oil service company Halliburton that resulted in the second largest fine ever paid in a prosecution under the Foreign Corrupt Practices Act.

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The second offshore group, accounting for about half the world’s secrecy jurisdictions, is the biggest. This is a layered hub-and-spoke array of tax havens, centered on the City of London, which mostly emerged from the ashes of the British empire. As I will show, it is no coincidence that the City of London, once the capital of the greatest empire the world has known, is the center of the most important part of the global offshore system.

The City’s offshore network has three main layers. Its inner ring consists of Britain’s three Crown Dependencies: the nearby islands of Jersey, Guernsey, and the Isle of Man. The authoritative U.S. publication Tax Analysts estimated conservatively in 2007 that just these three havens hosted about $1 trillion of potentially tax- evading assets. At a reasonable annual rate of return of 7 percent and a top income tax rate of 40 percent, the tax evaded on those could be almost $30 billion per year—and income tax evasion is just one of several forms of offshore tax and financial losses. Other losses, which I will explain below, are far bigger.