Treasure Islands - Nicholas Shaxson [73]
It was a classic tax haven gambit: plug the deficits by exempting foreigners from tax, and watch as the world’s hot money rolls in. It was just as the memo handed to Hudson in the elevator had anticipated.
The loophole was supposed to be available to foreign investors only. Unscrupulous wealthy Americans, of course, got around that simply by covering themselves in a cloak of offshore secrecy and pretending to be foreigners.
“The Wall Street types were as happy as clams,” said McIntyre. “The rules were designed to facilitate tax evasion. It was a very hot business: People in high places liked it and fostered it. They didn’t think it was an ethical issue. . . . Nobody seemed to object, except my brother Bob and I.”23
The effects were immense. Having set up offshore-lite international banking facilities in 1981, America, by 1984, had a thriving homegrown offshore bond market.
“Suddenly,” noted Time magazine, “America has become the largest and possibly the most alluring tax haven in the world.”
From then on, a drip-drip of new laws and statutes nibbled away at America’s onshore defenses.
In the late 1990s, Bill Clinton’s treasury secretary and former Goldman Sachs cochairman Robert Rubin deepened the offshore corrosion with a devious new piece of legislation, the Qualified Intermediary Program. And here lies another nauseating tale.
U.S. authorities wanted to protect the nation’s own tax base by finding out about American accounts at foreign financial institutions. Yet they could not simply request all the information—about both foreigners and U.S. citizens—then simply sift out the U.S. tax cheats and ignore the foreigners. If it did receive information about foreigners, the United States would be obliged under its tax treaties to tell foreign governments about their citizens’ U.S. investments. Those citizens would then take their money out of the United States and park it somewhere else, where it would remain secret. U.S. deficits would widen.
The answer was to outsource the screening to foreign banks. They would tell the United States only about U.S. citizens and not pass on any information about foreigners. And if the United States did not have the information, then it would have nothing to exchange with foreign jurisdiction—and it wouldn’t be breaking its treaties. “The rules were designed to make it difficult for the U.S. government to learn who the tax cheats were,” McIntyre explained.24 “This evasion was intended to benefit U.S. borrowers by allowing them to borrow from the tax cheats at a reduced interest rate.”25 It was another classic offshore ruse. A tax haven sets up worthy treaties that require the haven to exchange information with foreign jurisdictions. Then they set up the structures to make sure that they never have the information to exchange in the first place. They keep their secrecy, but by pointing to their treaties they can claim that they are a transparent and cooperative jurisdiction.
Next, the banks simply lied to the U.S. authorities about what they were doing. Under cover of the Qualified Intermediary Program, members of the Swiss aristocracy would stalk the America’s Cup and Boston Symphony Orchestra concerts for wealthy Americans, then set them up with tax evasion schemes, even smuggling diamonds in toothpaste tubes to help them evade tax. Then they would check the box to confirm they were respecting American banking laws.
Rosenbloom encapsulated the cynicism in a nutshell. “The program was not aimed at identifying Americans,” he said. “The program was aimed at protecting the identity of foreigners while allowing them to invest in the U.S.” This narrow focus meant that only very clumsy or poorly advised American tax evaders would ever be caught.
A veteran official Washington investigator who asks to remain anonymous described how one American lawyer responded to the Qualified Intermediary Program. “This guy has a wonderful practice teaching people how to game the system,” he said. “The first thing he does