The Scandal of the Tax Havens

Article excerpt

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

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 [pounds]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. …