The scandal of the tax havens

Offshore financial centres, such as Jersey and the Bahamas, now play host to a third of the world's

Where did all the money go? Not so much those billions that disappeared from computer screens when the stock market began its downward slide in the summer. Rather, I am thinking of those missing chunks of the last $4.8 billion International Monetary Fund loan to Russia, now being sought by Russian interior ministry officials.

According to those who know about these things, a large proportion of the missing IMF money left the Russian economy via the secretive and anonymous circuits of offshore finance centres. It re-entered the capital markets in private hands. For all we know, it is probably here - invested from there in the City of London.

"It's not fanciful," says Adam Courtenay, the editor of Money Laundering Bulletin. "It could have gone to Cyprus or another offshore centre, then sent to another trust somewhere like Jersey, set up by lawyers in the City of London, and then reinvested by them. The trail gets lost - that's what money laundering is all about."

Most of these offshore centres are tiny pin-pricks in an atlas, like Jersey or the Bahamas, the British Virgin Islands or Labuan in Malaysia - though Luxembourg, Switzerland and even offshore aspects of London, New York and Dublin ought to be included as well. But these tiny places now host a staggering amount of the world's wealth.

Because of the secrecy that surrounds them we can't know how much. The most recent estimate is around $6 trillion, approximately the annual world trade in goods and services, or about one-third of all global wealth.

Take the Cayman Islands. By 1994 they were playing host to as many as 546 banks, though there were actually only six in the George Town capital of the kind that actually cash cheques. Only 69 had a physical presence: the rest were just nameplates and legal entities. It's the same in the offshore financial centres nearer home. Deposits in the Channel Isles and the Isle of Man probably amount to £400 billion.

Then there is the money that simply passes through the offshore centres on its way somewhere else. One American study believes that up to half of all global transactions are conducted electronically via the offshore financial centres.

Why so much? That depends on who you talk to, but there is no doubt that offshore anonymity encourages big companies and rich people to use these tiny islands as a means of avoiding or evading tax. And secrecy is important if the money happens to be a missing IMF loan.

A Home Office report on the Channel Islands and Isle of Man, commissioned from a retired Treasury official, Andrew Edwards, is expected next week. Edwards lists a series of abuses, including Jersey's failure to help foreign authorities investigate tax evasion and other frauds, and the "Sark Lark", whereby islanders are paid to be bogus directors of foreign companies.

One inhabitant of Sark was found to be on the board of as many as 2,400 companies, most of which he knew almost nothing about. Another was a nominee director of the Mil-Tec Corporation, registered in the Isle of Man, which was involved in supplying arms to the Rwandan Hutu militias at the time of the 1994 genocide.

Among Edwards' recommendations are that the 100,000 offshore companies registered on the Channel Isles should be forced to file proper accounts and tell island regulators who owns them. But he stops short of requiring that they reveal the identity of directors publicly, fearing that this would turn business away to other jurisdictions.

But even in the Channel Islands not everybody is happy with the present system. Jersey's economic adviser, John Christensen, resigned from his post four months ago, having spent 11 years telling Jersey politicians that their growing offshore finance industry would inevitably lead to a vulnerable single-sector economy.

Christensen says: "I think it imprudent to base an entire economy on a sector that would not only crowd out the island's other industries - tourism, agriculture and light manufacturing - but would inevitably attract criticism about fiscal free-riding."

Now he believes it is probably too late. Demand from financial services has made it impossible to diversify - homes for first-time buyers cost £170,000. "There is simply no available skilled labour, and the cost structures are prohibitive for most other industries. The banking cuckoo has taken over the nest."

He argues: "Inward investment into the UK or any EU member state has no need to route itself via tax havens, other than where it is trying to obtain an unfair tax or regulatory advantage, or where it wants to avoid disclosure of its provenance. Too much of the capital flowing through the offshore circuits is engaged in speculative activity rather than being committed to long-term investment. The impact of such vast sums moving in and out of equity markets and currencies without effective regulation has created a global economy that is probably beyond the control of nation states."

Multinational companies increasingly route their deals through tax havens - the goods may be made onshore but the invoices are issued offshore. Using tax havens for transfer pricing allows companies to disguise their onshore profits. Brazil's petrol giant Petrobras, for example, is battling with local tax authorities at the moment, because it routes 75 per cent of its fuel and lubricant via the Caymans: "intelligent strategy to reduce the financial costs of its transactions," it says.

Over half of Australia's top 200 companies are thought to use the offshore centres of Vanuatu and the Cook Islands as part of their tax-minimisation strategies. In Jersey and Guernsey, non-resident companies have been able to adopt new types of tax status, which means they can negotiate tax rates of less than 2 per cent. Some companies use offshore invoicing to avoid the sanctions on, for example, Bosnia.

A Foreign Office report about the offshore centres of the Caribbean is due soon, and in May the G8 backed a plan by the Organisation for Economic Co-operation and Dev-elopment to clamp down on what it calls "fiscal poaching". Add to that German concerns about $20 billion in lost tax revenues to "offshore centres" in Luxembourg, and US fears about drug money laundered through the Caribbean, and it looks as if the political will may exist to make a change. Tony Blair himself has spoken about "secretive and highly leveraged funds" operating on "an unprecedented scale".

But can he do anything? This is one of the rare occasions when Britain could act alone effectively. Most of the world's most prominent tax havens - from the Isle of Man to Gibraltar, the Caymans and Bermuda - are under British control or influence. "Britain is extremely well placed to lead international action against the tax havens," says Mark Hampton, another Jerseyman and senior lecturer in economics at Portsmouth University. "Given the key role that these havens have played in the current global economic crisis and the worsening poverty of millions, British government action at this stage would be in the spirit of developing an ethical foreign policy."

The capture of Jersey by the awesome power of world capital is reminiscent of Britain - where economic policy is tailored to suit the financial services industry, while manufacturing struggles away unsupported. In the end, it would be better for everybody if these escape routes for international capital were closed now.

The writer's "Funny Money: in search of alternative cash" will be published by HarperCollins in January

This article first appeared in the 13 November 1998 issue of the New Statesman, Why gays become politicians

Much more than a straight banana

Dumb Britain, where debate is dominated by a wilfully idiotic press, just doesn't get it about Europ

On 31 December 2001, I was with some English friends in a bakery in a small town in France called Sauveterre-de-Bearn. The shop, near the majestic Romanesque church, is the whole nine metres of a Joanne Harris cliche, except that the proprietor was not Juliette Binoche but a Monsieur Charrier, a willowy young man whose achievements in chocolate were famed from Pau to St Vincent-de-Tyrosse.

It was the eve of Europe's conversion to the euro, and Monsieur Charrier had created a new cake in the form of the double- crossed "e". My friends were charmed. This was not lost on the other customers in the shop. We were watched, closely but discreetly, as we made our purchasing decision. When we finally bought the euro-cake, the clientele broke into jubilant smiles: the British were going for the euro. It was all going to be all right.

It couldn't have happened here: little chance of a small baker in a small town; no euro, obviously; and worst of all, no grasp of European political realities by the general population.

The man on the Clapham omnibus, going home with his part-baked baguette, reduced-fat mozzarella and Greek-style yoghurt, has no real idea what the euro, let alone the European constitution, will mean for him. Dumb Britain just doesn't get it. Having spent a year in the Bearn, I know that my neighbours' chat about the Union is far more informed than comparable debate in Britain.

And how could debate here be informed, when it is held in newspapers that take the wilful-idiocy line on Europe, running stories on the threat from Brussels to straight bananas and smoky-bacon-flavoured crisps? Now, after decades of trivialisation, the same papers are suddenly anxious to lighten Dumb Britain's darkness. "The end of our nation!" screamed the Sun, which, let us never forget, is owned by an Australian-American. "A blueprint for tyranny!" and "The bonfire of our freedoms!" shrieked the Daily Mail, puffing its ludicrous knit-your-own referendum. Even the Americans were shocked; they blame the Second World War. The 2 June issue of Time illustrates a report on British Europhobia with a full-page picture of an ARP warden looking out for the Luftwaffe from an East End rooftop.

In Brussels, where I recently went as a guest of the European Parliament to witness the last hours of horse-trading over the final draft of the constitution, this sudden outbreak of rabies was viewed with dismay by the good Brits fighting our corner. They all agreed that the EU was far from perfect, but the constitution was being devised to make it work better. They all agreed, too, that there must be a referendum. (Though one of my media colleagues at the parliament asked how we could hold a referendum in a country whose population was 20 per cent functionally illiterate.)

Among the non-British there was, at best, the kind of indulgence extended to a very old dog making a puddle on the carpet: poor thing, can't help it. Some approached me with pitying smiles: "Of course, you don't have a constitution of your own. This is all new to you." Yes, they understood. Some of them.

"Why is it always a blame game?" demanded a young diplomat, who accused the British media of using Europe like a spittoon. "Why are we always talking about Europe in the third person - Brussels wants to do this, Brussels tries to do that? This is a democratic process and you are part of it. You have UK members, UK MEPs, UK staff serving a UK commissioner. Why this image of Britain as a reluctant bride?"

Key to this media blame-storm are the lies. Much of what our anti-Europe press is screaming about was a done deal that we democratically accepted when we joined. Now British journalists suddenly claim that we're victims of a multinational conspiracy. "Stealthily, slyly, Eurocrats have devised a constitution which . . . could soon destroy Britain's nationhood," claimed Simon Heffer in the Daily Mail.

Huh? Stealthily? In a building the size of a supertanker, with a huge debating chamber lavishly supplied with press galleries, a website updated daily, and tonnes upon tonnes of leaflets outlining the plans for the Convention and inviting all comers to sit in on the plenary sessions? Heffer sees no leaflets. Maybe he's overdue for a check-up at Specsavers.

Stealthy, no. Sly, not at all. Conspiracy, hardly. Just not sexy. And complicated. In every country in the Union, Europe is strictly for anoraks. The rounded contours of the European Parliament building promote a meditative state and the decor, in muted shades of taupe, beige, greige, gunmetal, charcoal, anthracite, donkey, putty, hopsack, elephant, pigeon, battleship, off-white, limewash and mushroom, tends to calm one to the point of catatonia. As Neil Kinnock says, "Dancing round the maypole is infrequent."

But let's be un-British for a moment. Let's forget the style and think about the substance. Let's dare to discover our inner anorak. What is happening here is the birth of a new kind of government. One hundred and five good and clever people are devising a political machine to be operated by 25 different - and sovereign - states. It is a long, wearying, agonised and difficult process. And, as our planet gets smaller and more acutely interdependent by the hour, it is a vital process, and absolutely worth the sweat.

Here's another story about the British in Europe. Recently, I was driving down a road in Italy with two English expat friends who are great animal lovers. They spotted an abandoned dog in a lay-by and immediately imagined the poor animal's pain, hunger and terror. They reframed their plans for the afternoon, and drove off to buy some food for it.

The animal, a skinny but attractive young hunting dog, was too frightened to come close, but as soon as we drove off it ran out of the undergrowth to the dish of biscuits.

As visitors to Italy will have noted, the lay-bys on arterial roads are frequently occupied by prostitutes, who make a Fellini-esque picture as they stand about on their platform sandals waiting for business. The next day, when my friends returned with more food for the dog, the lay-by was occupied by a skinny but attractive young prostitute, called Eva, from Hungary.

Eva assured us that she was happy in her work and equipped with her own passport and, rather than imagine any human pain or terror, my friend chose to believe her. Eva handed over the dog to my friends. They gave her 20 euros for it and left her in the lay-by. Then they called the vet, organised a nice soft bed for the dog (now also called Eva) and began to dine out on the tale of how they'd teamed up with the tart with a heart of gold to perform this heroic pet rescue. Morally dodgy? Sentimentally self-indulgent? Missing the big picture? Well, what can you expect of a Brit?

If our popular media are sloppy and irresponsible, our governments have made things worse by their own fears. The presentation of Europe in Britain has been a tissue of white lies, woven by one gutless government after another in the hope of not frightening the electorate.

"This is just a tidying-up exercise," chant the Labour MEPs, singing from Peter Hain's hymn sheet. "Let's just be part of a free-trade area," propose the Tories. Who are they trying to kid? This is the start of a new European age. To take the money and run is not an option. You really cannot con all the people all the time; even Dumb Britain has a certain bovine instinct for spotting spin.

Fortunately, Dumb Britain is not the only Britain. There is also Peter Mayle's Britain, sitting in cafes in Hackney and rubbing its hands over the underpricing of European property, mortgaging its bricks and mortar to buy in to limestone and crepi. There are no reliable statistics, but informed guessers estimate that at least a million Britons now have homes in France and Spain alone. Millions more dream of driving over lemons to a place in the sun, and a whole industry, including the Daily Mail's property pages, is there to help them. Buy-to-let may be a busted flush in Docklands, but a little flat in Bordeaux or a ski lodge in Hungary is looking good.

Then there is Nigel's Britain, named after my friend Nigel, a designer who lives in France. His company is registered in London, it buys leather in Cyprus, has it dyed and sewn in Hungary, and sells mostly in Milan. There are thousands like Nigel. When would they like to join the euro? The decade before yesterday.

Then there is Socrates/Erasmus Britain. Ten thousand British students studied at European universities last year - the year that this educational integration programme celebrated a union-wide total of one million participants.

Count in all these Britains, and their friends, their housemates, their siblings and their parents, and you have millions looking at the future of Europe with confidence and affection, who find Simon Heffer and his Europhobic friends an acute national embarrassment.

Deep France, by Celia Brayfield, will be published by Macmillan in May 2004

This article first appeared in the 13 November 1998 issue of the New Statesman, Why gays become politicians