Invisible Money

and How It Gets That Way

The Very Quiet Conspiracy to Bankrupt the World

Part One of a Three-Part Series

Iddhis Bing

Americans have known about tax havens like Grand Caymans and the Bahamas for a long time, and we can thank the current Republican presidential candidate, Mitt Romney, for keeping the issue alive in the national debate. Who can forget the Senator from North Carolina's stirring defense of Romney's use of tax havens as the act of a patriotic American seeking to surrender as little in taxes to Washington as possible? Lindsay Graham portrayed Romney as a Good Ol' Boy who pays - should we be grateful? - a mere 15% on the harvest he rakes in every year.

The question I pose is this: should Romney pay taxes at all? Because if he were not running for president, he presently has any number of ways at his disposal that he might use to avoid paying taxes in toto. Legal, and quite popular, in the microscopically small circles where the Rich and the Insanely Rich congregate.

Romney may be nothing more than a wealthy bumbler but he is, for Americans at least, the point man for a large and very well-camouflaged system of tax dodging. Legal tax avoidance, both corporate and personal, is worldwide, and represents an amount of money in the trillions, this at a time when governments around the world hunt for tax dollars and announce austerity as the order of the day.

"Assets held offshore, beyond the reach of effective taxation, are equal to about a third of total global assets. Over half of all world trade passes through tax havens..." Those are the words of the hardy souls at the Tax Justice Network, who make it their job to monitor such things.

Take a second to digest those two assertions. The implications are enormous.

Behind them lies the reality that the peoples of the world, with the compliance of their governments, are being stripped of their wealth by a massive machine of occlusion. The goal of my next few articles is to make the system by which this theft operates a little more comprehensible to readers.

This theft – I used the word conspiracy to get your attention - is an integral part of a permissive banking environment, the result of deregulation which began in the 1980s and reached a crescendo of sorts with the repeal of Glass-Steagall Act in the U.S. in 1999. It really is, now, Business As Usual and is, in most instances, legal if skillfully camouflaged. It is achieved by a complex set of manoeuvers that include fiscal paradises, Advance Tax Agreements and a blizzard of financial "instruments" that conceal the objects underneath like a blanket of glittering snow.

A short history lesson is necessary if we want to come to some understanding of what is happening in the current world of tax avoidance. To that end, I interviewed Ed Perrin, a journalist whose documentary, part of the Cash Investigations series, recently aired on French television. Entitled Paradis Fiscaux, les petits secrets de les grandes enterprises (Fiscal Paradises, the small secrets of the big companies), it is part of a larger discussion that is only now breaking into the public arena.

Perrin has been covering the national and international scene for French public television since 1998. With timeouts for the uprisings in Libya and Egypt, and a race halfway around the world to Fukushima, he has worked on feature programs and investigative magazines since 2007. In 2008 he won the Dauphine Prize (TV Business news, long format) for his coverage of the subprime crisis.

The background and data which follow come from my discussions with Perrin, as well as my own research. (I also want to mention Richard Brooks, a former tax assessor who now writes for the British journal Private Eye, who accompanied Perrin on his travels to Luxembourg.) The opinions, unless otherwise stated explicitly, are my own.

A few salient facts to bear in mind at the outset:

Over 60% of all financial transactions worldwide take place within distinct, legal corporate entities. That is to say, they are intra-company affairs, moving assets from one part of an organization to another.

According to James Henry in The Price of Off-Shore Revisited, as of 2010 at least $21 to $32 trillion in the form of tax-free investments was missing in action from the world's ledger sheets. That figure too is worth a moment's contemplation.

At present, due to the highly complex and truly magnificent scam known as Transfer Pricing, many multinational corporations pay little or no tax at all - ever, anywhere, zilch, rien, niente, nada - or as close to it as accountably possible. They maintain well-equipped armies of lawyers to make sure it stays that way.

A Short Part of A Long Story

Starting in the 1970s, business in the United States and Europe became increasingly far flung and international, at the same time that the developing countries became ever more conscious of their status as economic colonies. Standard Oil begat Esso and Esso begat Exxon, Geigy became Ciba-Geigy, Sandoz acquired Gerber, Walt Disney climbed into bed with ABC and the boys in the AFL merged with the boys in the NFL. Soon the big conglomerates found themselves being taxed in two, three and more countries at the same time. A strategy of tax avoidance became necessary as a way of minimizing financial obligations for companies with global reach, and a body of regulations and agreements grew up that attempted to make sense of taxation.

Between their home base, source of production and commercial outlets, companies worked to avoid double and even triple taxation. But at some point tax avoidance mutated into tax evasion: Double Tax Agreements, as they are commonly called, became, in fact, Double Non-Tax Agreements. It was, to be fair, a new aspect of international law, attempting to deal with an unprecedented situation. This robust growth in the size and reach of American and European transnationals profited handsomely from Reagan Era liberalization and indeed, deregulation. When the push to deregulate the banks that began in the mid-1980s reached its stride during the first Bush administration, the party really got started. NAFTA was written by father Bush and its passage secured by his illegitimate (but worthy) son from Arkansas a few years later.

In 1991, Goldman Sachs asked the Commodity Futures Trading Commission, the CFTC, for a waiver on position limits, creating, in effect, a whole new field of food price speculation. The CFTC under Bush 41 agreed, with disastrous results that are still being felt in world food markets. The free market, laissez faire philosophy affects more than just money.

Financial "instruments" - about which much more later - proliferated, as did accounting practices such as Ebitda, without anyone knowing exactly what the result would be. Then came the Clinton-era repeal of Glass-Steagel, at which point the genie was out of the bottle and all hell broke loose. We know what happens after that.

The above is nothing more than a brief summary. One could write a very different and no doubt harrowing version from the point of view of the developing nations, who, far from enjoying the fruits of the independence they fought for after World War II, have found themselves sinking deeper into financial dependence with each passing year.

The end result is that after 30 years of the greatest, most lopsided wealth production in the world's history, we, the people, our governments and public institutions, are being insistently told that we are broke and must cut back. Way back.

Readers may disagree with the imperfect précis above. I am interested in other viewpoints - but if anyone has a version with a happy ending, please pass it on.

TAX HAVENS ARE NOT FISCAL PARADISES

Tax havens are not fiscal paradises. The first is an almost traditional arrangement by which a small country or region, lacking in natural resources or industry, offers a low tax rate to investors. Fiscal paradises are the same idea - on steroids. In a fiscal paradise, any company, no matter how large or powerful, may, with the aid of half-a-dozen employees in a small second-floor office, establish a base from which they successfully avoid taxes in the countries where they operate.

Switzerland began as a tax shelter in the early 1930s, when its legendary "bank secrecy" was a euphemism for hidden Nazi plunder. (Court cases were still untangling that mess as late as the late 1990s.) Luxembourg became popular as a tax shelter for various European currencies and the U.S. dollar in the 1960s, although its "Holding Statute" was enacted in 1929.

The OECD (The Organization for Economic Cooperation and Development) is, in its words, "An international economic organization of 34 countries founded in 1961 to stimulate economic progress and world trade. It is a forum of countries committed to democracy and the market economy..." It is a club for the richest nations, not the only one but very important especially within the European sphere of operations.

Their rules are enacted by consensus and in 1998 when they declared that "All members' tax authorities must communicate about Advance Tax Agreements," two countries abstained from the decision: Switzerland and Luxembourg. This has given them wide latitude to do as they please in the matter of taxation, while still remaining members in good standing of the OECD.

In 2007 the European Court of Justice heard the case known as "Cadbury Schweppes Vodaphone," regarding tax environments in the different European Union countries. Their ruling stated that a tax regimen is "Legal so long as the structure is not wholly artificial."

Rarely, if ever, has a single adverb played such a crucial role in European and, indeed, world affairs. Accountants, tax officials, representatives of the Exchequer and Senior Tax Ministers employ the word as if it were a universal salve which cures all wounds. "Artificial? Is our deal to award Bloodsport International a steeply discounted tax rate hovering near zero artificial? Of course it is. But wholly artificial? I think not."

Without the judges' kind insertion of the mollifying adverb, the great fiscal paradises - in Europe at least - would have been dealt a death blow. As it now stands, they are free to do as they please: to shelter, to discount, to mark down, to erase, to rubber-stamp any sort of financial shenanigans no matter how ludicrous, no matter how fictional in relation to the real world. It's a bit like having Harpo Marx as your accountant: he plays any instrument you hand him like a virtuoso and he never says a word.

Pack Your Bags and Head Out for the Territories

So now you have completed a kind of short, prejudiced primer on the subject, a farrago of information meant to set the scene. If for some reason the subject fascinates you as it does me, bring along a few books for further reading: let me suggest Nicholas Shaxson, the TJN, James Henry (cited above), the ever-engaging Lee Sheppard at Tax Analysts.

Grab your things! It is time to jump on the train.

We are ready to plant our feet in the duchy of Luxembourg, northeast of France but in fact operating virtually everywhere around the globe - because that is where Perrin's documentary takes place. Luxembourg, hotbed of the Advanced Tax Agreement - although it is not the only one and we should mention, in that regard, Switzerland, Singapore and innumerable little islands where everyone would really be happier if they were fishing and not stuffing coconut shells full of plutocrats' ill-gotten gains.

Luxembourg, of which, in 1819, an Englishman remarked, that it is "Not very large but the streets are broader than the French towns and clean and the houses are good.... I got the cheapest of hot baths here I ever had in my life: one franc."

To Luxembourg we go for two other reasons: because it is the grand duchy which, through the Luxembourgeois Jean-Claude Juncker, semi-permanent President of the group of European finance ministers, Prime Minister since 1995, and President of the Eurogroup, which controls the currency, since 2005, wields such inordinate influence among our European cousins. To Luxembourg because that is where Perrin's cache of documents refers: a rich harvest of some 44,000 pages, from very deep within the tax-avoidance industry, which sets out in damning detail that country's collusion in international tax-theft. A stack of documents that may in fact be of some interest to the U.S. media should they ever decide to give up their wry reportage of the latest Tartufferies from the mouths of politicians and actually investigate something.

At the risk of being caught standing on my chair with a bullhorn in my hand, let me say again, slowly, for the benefit of Salon, Rolling Stone, 60 Minutes, Huff Po, the New York Times et al: Perrin has the goods on companies and individuals, American and European, and the easy way they avoid paying millions, if not ultimately cumulative billions, in taxes in their home countries. More detail than that I cannot give.

In the next installments, reader, you will learn exactly how the modern multi-national corporation gets its inexpensive hot baths in Luxembourg in 2012.

Iddhis Bing lives in Paris. For permission to reprint, comments and/or inquiries about this series, he can be contacted through this site.