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29 August 2018

Moneyland: how the super-rich looted their own countries to create an elite global haven

The global rich now move their money, their assets and themselves wherever they wish, choosing which countries’ laws they wish to live by. Britain is welcoming them with open arms.

By Simon Kuper

One day in 1992, in the middle of London’s housing slump, a businessman from the freshly collapsed Soviet Union walked into a Kensington estate agent’s office. He and his two business partners each bought homes for cash, at prices ranging from £200,000 to £320,000. “This appears to have been the first sale of London property to private buyers from the former USSR in modern British history,” notes the investigative journalist Oliver Bullough in his eye-opening and essential book Moneyland.

Bullough argues that much about how the world works today – from worldwide kleptocracy to declining public services to London’s transformation – can be explained by offshore wealth. His key formula is: “Money flows across borders, but laws do not.” The global rich therefore “move their money, their children, their assets and themselves wherever they wish, picking and choosing which countries’ laws they wish to live by”. He has travelled from Reno, Nevada to Kiev to research the geography of what he calls “Moneyland”.

Like other journalists who have dipped into this shadow-world – such as Luke Harding and Chrystia Freeland, who is now Canada’s foreign minister – Bullough served a stint reporting from Russia. He moved there in 1999, ludicrously optimistic (as he now admits) that the country would grow into a proper democracy. He has since written two highly regarded books about Russian history and politics. It takes a Russian speaker to dissect Moneyland, because much of its money has fled the former USSR.

Moneyland is a surprisingly recent phenomenon. From the end of the Second World War until the 1970s, moving money across borders was very hard. That was how the Bretton Woods summit in New Hampshire in 1944 had designed the economic architecture of the postwar world. Your money almost always stayed in the country where you had acquired it.

This constrained the City of London. In the first few postwar decades, it became an apathetic place where a smattering of underworked bankers had long liquid lunches. In the 1960s the Square Mile was still dotted with wartime bombsites. The banker who did most to change this was Siegmund Warburg, a refugee from Hitler’s Germany. He resolved to get his hands on the piles of secret money that were lying unused in Swiss banks. The Swiss had been hiding cash for foreigners for centuries. Before Word War Two, rich French people began driving across the border with suitcases full of francs that they wanted to conceal from the taxman. Later, both refugees from the Nazis and postwar Nazi fugitives stashed their money in Switzerland.

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From the early 1960s, Warburg forced his way through the Bretton Wood regulations and began lending out this money internationally in the form of “Eurobonds”. The City creaked back to life. The Bretton Woods system collapsed in the early 1970s, and capital controls gradually disappeared. Money began crossing borders. Tax havens arose that, in Bullough’s characteristically well-chosen phrase, “rented out their sovereignty” to rich foreigners. The Caribbean island of Nevis, for instance, brought in American attorneys to write laws that would lure tax-dodgers.

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But before the 1990s, most of the wealth in Moneyland was still Western. That changed with the fall of the Soviet Union and the economic rise of China (though Bullough has little to say about the latter). Suddenly there were lots of newly rich people, many of them crooks, looking for safe places to keep their money.

Crucially, Moneyland’s conveniences made it possible to hide unlimited wealth abroad. That raised the incentives to loot wealth in poorer countries. The French economist Gabriel Zucman estimates that 52 per cent of Russian household wealth is now offshore. Much of it is in shell companies – a key Moneyland device because investigators can spend most of their time just working out who owns the company. Putting your assets in a shell company, Bullough explains, is “like picking up a dog turd with a plastic bag: it keeps your hands clean”.

Much of this money surfaces in the Moneylanders’ two favourite cities, London and New York (with Miami not far behind). Roberto Saviano, the Italian expert on the mafia, calls Britain the world’s most corrupt country. In 2015, a report by Deutsche Bank on flight capital (money moved abroad by anxious owners) found that in the previous decade about £96bn had entered the British economy “without anyone noticing”.

But you notice it on Bond Street. A class of enablers has arisen to help Moneylanders perform parts two and three of what Bullough describes as their eternal cycle: “steal-hide-spend”. London overflows with lawyers, bankers, accountants, estate agents, public relations advisers, luxury-goods sellers, restaurateurs and art dealers who make their living servicing criminals. They see themselves as neutral, highly skilled professionals who (mostly, anyway) work within the law. They have school fees and mortgages to pay, everyone else is doing it too, and if this business wasn’t in London it would just go somewhere else – all of which is true. London’s enablers send their kids to expensive schools and spend weekends in the Cotswolds. Meanwhile, some children in Ukraine can’t get cancer treatment because their looted country’s health service doesn’t have the medicines. Moneylanders usually have no long-term stake in the success of their home countries.

Polite enablers never ask the client where he made his money, but they often know. Omar Bongo (president of Gabon from 1967 to 2009) channelled some of his millions through Citibank. When regulators enquired, one bank employee replied that they never “asked our client where this money came from. My guess… is that the French government/French oil companies (Elf) made ‘donations’ to him.”

One real-estate tycoon did particularly well out of never asking his customers questions. Donald Trump didn’t even want to know who they were. A Reuters investigation last year of 2,044 units in seven Trump-branded developments in Florida found 63 Russian owners, but, says Bullough, “far more remarkable was the fact that fully 703 of the units were owned via corporate vehicles”, meaning that nobody had any idea who they belonged to.

Donald Trump Junior famously said in 2008, “In terms of high-end product influx into the US, Russians make up a pretty disproportionate cross-section of a lot of our assets.” That phrase could have been spoken by most of Moneyland’s enablers. The global luxury industry has been booming since the 1980s largely thanks to Moneyland. Swiss watchmakers and Bordeaux vineyards, for instance, depend heavily on wealthy (and often crooked) Chinese and Russians. In one beautiful incident recounted by Bullough, a photographer “Photoshopped a $30,000 Breguet timepiece off the wrist of the [Russian Orthodox] Patriarch of Moscow, as he sat at a highly polished table in 2012. The photographer neglected to remove the watch’s reflection however.”

The book offers many entrancing vignettes of Moneylanders’ spending. After Viktor Yanukovych is deposed as Ukraine’s president in 2014, Bullough reports from the bathrooms of his former palace: “The house held nine televisions, and two of them were positioned opposite the toilets, at sitting down height.” On the same theme, there’s the Israeli woman, who in the words of her New York fixer Dylan Pichulik (whose name Bullough gets wrong), “wears a diaper, because she can’t be bothered to go to the bathroom”. When Pichulik accompanied her in first class on a flight to Tel Aviv, she summoned the stewardess to change the diaper. Pichulik muses, intriguingly, on those who live in luxury: “You wake up in an apartment like that when you pretty much command the city, and you have this sort of castle to yourself. What does that do to your life on a daily basis, just waking up with that feeling and seeing that?”

Much of Bullough’s information on Moneyland comes from enablers: bankers, for instance, who publish research reports on the spending patterns of the global rich. But enablers simultaneously shield their Moneylanders from journalists. Bullough describes how Heidi-Lynn Sutton, a regulator on Nevis, “literally laughed in my face” when he asked uncomfortable questions. In the book, he takes polite revenge on her simply by recounting the interview.

In a perfect example of Moneyland’s pick-and-mix jurisdictions, the offshore rich live by British libel law. A public relations executive in London tells Bullough: “You try writing about one of my clients, seriously, we’d take you to the fucking cleaners.” The reform of the UK’s libel laws in 2013 has made it harder for “libel tourists” to win cases here, but they don’t have to. One bullying letter to an editor is often enough to kill an article, because few publications can afford to spend years fighting Moneyland’s lawyers even if they are confident they would win in court.

Moneyland keeps shifting its shape. There’s always a new product or loophole or jurisdiction. The latest fashion – especially for Russian and Chinese elites who don’t trust the systems that have made them rich – is buying passports. One Russian lawyer explains to Bullough: “Your money is offshore already and, once you have a new passport, you are effectively offshore yourself, beyond the reach of your home country’s law enforcement.” Malta, handily in the European Union, has reportedly raised over €2bn from passport sales, while more staid jurisdictions such as the UK mostly content themselves with selling residency. Bullough predicts that the next big thing will be poor countries selling ambassadorships. If you become ambassador to the Court of St James for some tiny island that you’ve never even visited, you have diplomatic immunity. Or you can offshore your embryo, as some enterprising Chinese officials now do. The husband fertilises the wife’s egg, and they implant it in a Japanese woman, who gives birth to their child in Japan. The child has a Japanese passport, a chunk of the family money is transferred to his Japanese account, and now the family has somewhere to flee to, just in case.

And there are always new havens. Western governments, keen to crack down on tax-dodging, in 2014 agreed on the Common Reporting Standard (CRS). This means that many rich countries now automatically swap information about assets belonging to each others’ residents in their banks. The CRS has decimated some ancient European tax havens. Switzerland now holds a quarter of the world’s offshore wealth, down from about 50 per cent a decade ago, estimates Gabriel Zucman. Jersey’s banking sector contributes £800m to the island’s economy, less than half the level of 2000.

But there are gaping holes in the CRS. It does nothing for most poor countries, because rich countries don’t swap information with them. And the biggest imaginable new tax haven has opened up: the US, which demands information on Americans who bank abroad yet refuses to divulge the equivalent information on foreigners who bank in the US. In Bullough’s words: “The United States had bullied the rest of the world into scrapping financial secrecy, but hadn’t applied the same standards to itself.” So you can now simply park your money in the US – ideally in Nevada or South Dakota, where you can set up a trust that will be tax-free for centuries. The Trump administration is currently deregulating the US even further.

Bullough’s subtitle is “how to take it back”, but his conclusion is pessimistic: given that there will never be global regulation in which every country participates, Moneyland will probably just keep growing. And London – despite the UK’s recent cooling on rich Russians, with Roman Abramovich now struggling to renew his visa – will keep taking its share of business. A few years ago the UK made some effort to crack down on offshore money, but now the government is too busy masterminding Brexit. “The anti-corruption phone just stopped ringing,” said Jon Benton, an ex-policeman who was senior adviser to David Cameron. If Brexit goes wrong, and capital flees the UK, the country will inevitably be tempted to slash regulations further and set itself up as a full-blown offshore haven.

Bullough has provided a model for how to tell a gripping and comprehensible story about a complex and crucial subject. You cannot understand power, wealth and poverty without knowing about Moneyland. 

Simon Kuper writes for the Financial Times

Moneyland: Why Thieves & Crooks Now Rule the World & How to Take it Back
Oliver Bullough
Profile Books, 298pp, £20

This article appears in the 29 Aug 2018 issue of the New Statesman, How politics turned toxic