Treasure Islands - Nicholas Shaxson [71]
As offshore finance moved onshore, it became ever harder to tell the two worlds apart. And this, crucially, fed the giant blind spot, which persists to this day. Nearly every tax analyst took this blurring between onshore and offshore as a signal to stop trying to measure or analyze the secrecy jurisdictions, or just to focus on a few smaller, more colorful island havens. Palan, in his book The Offshore World, explains what was really happening. “Far from signalling the decline of offshore,” he wrote, “the process “must be interpreted as the embedding of offshore in the global political economy.”20
John Christensen remembers noticing this blind spot in 1986. He was working as a development economist in Malaysia and came across some odd local structures known as deposit-taking cooperatives. These were unregulated quasi-banks that took large volumes of deposits from Malaysian widows and orphans and channeled the money offshore. In July 1985, one of these cooperatives offered him a king prawn luncheon at a sumptuous office penthouse in Kuala Lumpur, washed down with Guinness and Courvoisier. As the lunch wore on, it became apparent that the chief financial officer, a leading light in the Malaysian Chinese Association, wanted to steer the conversation toward Christensen’s childhood roots over six and a half thousand miles away in the crown dependency of Jersey, and he was especially interested in its status as a tax haven. He wanted to know if it was safe to invest.
Christensen resolved to look into the cooperatives. “The whole thing was a massive scam,” he said. “The Central Bank wouldn’t regulate it and nobody else would touch it. Everyone said ‘keep away.’” Their international offshore dimension made it impossible for anyone locally—whether curious depositors or government regulators—to find out what was really happening: how profits were being shifted to insiders and risks heaped onto the shoulders of ordinary Malaysian depositors or taxpayers. After doing detailed research, Christensen was able to get an article published in the Business Times of Singapore in December 1985 before leaving the country as the ensuing scandal broke. Within months the central bank had suspended twenty-four cooperatives amid a massive run by depositors.
Back in Britain Christensen spent a couple of months combing libraries and seeing all the economists and capital markets experts he could find to try to understand where the money was flowing and how the offshore system worked. Nobody knew anything. “I don’t think anyone understood how malevolent this thing had become,” he said. “There was no useful information anywhere.”
As the Vietnam War heated up, Michael Hudson worked out that the whole of the U.S. balance-of-payments deficit could be attributed to the costs of Vietnam. And the deficits, later worsened by the great Reagan tax cuts of 1981, posed a quandary. American companies needed to borrow money by issuing bonds, but if they borrowed it all at home, they would compete for funds with the U.S. government, pushing up interest rates and crimping economic growth. So it would be best if they could borrow from overseas.
But there was a hitch. A French investor, say, who wanted to buy some bonds faced a simple choice: either invest in American bonds, and pay a 30 percent withholding tax on the bond income, or hop on the “coupon bus” to Luxembourg and earn income tax-free, and in secret, from Eurobonds. Many investors saw this as no choice at all. They shunned American bonds.
So American policymakers had a problem.