“Offshore is not only a place, an idea, a weapon of the finance industry it is also a process, a race to the bottom to where the rules laws and outward signs of democracy are worn away.”.—Nicholas Shackson
This is a most unusual year; a new king and a coronation, but not of the same person. On Monday, October 24th, the Conservatives chose their fifth leader in 12 years with commendable speed. But there has been little media coverage of the poisoned chalice from which Rishi Sunak must now sup to avoid a Conservative car crash in the looming 2024 election. Jeremy Hunt has steadied an alternate fiscal ship after the Trussonomics Titanic hit the market iceberg and foundered with all hands. Hunt’s reeling back Kwarteng’s £45 billion unsupported tax giveaway helped, but jumpy Gilt markets still piled rising interest rates onto Treasury and mortgage payers alike, and so widened the fiscal hole Hunt needs to fill back to £30 – £40 billion.
How to fill it? All debate so far has been among rising taxes, cuts in public spending and more borrowing if neither suffice. But little is ever made of the tax evasion, in which UK is a world leader. This is not only because Britain invented the tax haven but also because an establishment still makes considerable use of them.
Tax in Exile
Tax havens are referred to as “Offshore Financial Centres” (OFC), defined as “a country or jurisdiction that provides financial services to non-residents on a scale that is incommensurate with the size and the financing of its domestic economy”. While there are many would=be OFCs, Britain cornered the market early on.
Britain controls the Crown Dependencies of Jersey, Guernsey and the Isle of Man, plus the Overseas Territories of Anguilla, Bermuda, British Virgin Islands, Cayman Islands, Gibraltar, Turks and Caicos Islands. All have fingers in the tax haven pie, some deeper than others.
Many large corporations—especially US ones—engage in tax avoidance. US States, such as Delaware and Nevada specialise in such moves. Recent EU moves against global conglomerates highlighted Amazon, Starbucks and others shifting all their profits to lower tax countries. Britain already plays this game too. But where it has yet to capitalise is on the scale of tax evasion (not avoidance) by rich individuals. Despite being the leader in OFCs, the recent largely ineffectual clamp-down on Russian oligarchs showed just how beyond the UK’s control OFC’s have become.
So what are we talking about here? The Cayman Islands are the poster boy for IFOs. According to the Financial Stability Forum–International Monetary Fund, the barely 71,000 inhabitants cause tax losses of over £35 billion to the rest of the world. Half a million per capita—that’s some GDP from coconuts and palm oil. Others are well up the running: British Virgin Islands at E4 billion; Jersey at £2.5 billion. Let’s be clear: not all of this is tax lost to HMRC. But in the case of the last two, most of it is.
A Shell as Shield
So why does HMRC not send in the Marines and claim what is theirs? As you might guess, it’s not that simple. On first appearance, all of what goes on in OFCs—certainly in British ones—is legal and above board, at least technically. But OECD research showed OFCs harboured 8–10% of global wealth in tax-tax-neutral structures What are these structures? Welcome to the wonderland of shell companies.
Shell companies have no employees and are not publicly traded, and they don’t deliver any goods or services to earn revenue. They exist solely to hold and move assets on behalf of individuals. Although they exist in normal tax environments, such as the UK, IFCs generally don’t have the same ownership transparency requirements of the UK. Not needing to reveal who owns the company’s assets is of great use to both those seeking simply to avoid tax to those wishing to salt away illicit gains. Even in those OFCs requiring a named owner, provision of a different name can often be arranged.
As the name suggests, shell companies are hollow, usually existing only on paper and registered in an OFC. The British Virgin Islands have over 10,000 companies registered in the same two-storey building. Things get complicated when shel companies own other shell companies and “shadow” owners conceal true owners.
The Shelist of Then All
This all requires some deft understanding of accounting, local and international law. There are a number of firms specialising in such services. But the daddy of them all is Moosach-Fonseca (a.k.a. “MosFon), based in Panama Vity, but with subsidiaries in many key countries.
MosFon takes care to present itself as a reputable law firm which performs due diligence with all its client and complies with all laws wherever it dos business. However, a spectacular leak from its internal databases in 2017 and published as “The Panama Papers” threw interesting spotlights onto its dealings, its many clients and the “services” it provides. For example:
- Sergei Raldugun, a well known Russian cellist, claimed not to be rich or a businessman, nor to know any VIPs when he set up several shell companies via MosFon. The accounts now contain over a hundred billion dollars and it turns out he is an old friend of Vladimir Putin from the 1970s and has long been godfather to Putin’s elder daughter.
- German law is very clear that all company ownership must be transparent and public. But that law applies only inside Germany. Their second–largest bank Commerzbank helped clients evade taxes. A Luxemburg subsidiary established shell companies in Panama via MosFon to evade EU taxes.
- Iceland’s PM Sigmunder Gulafson failed to declare holdings in his offshore Wintris shell company in BVI. He used it to privatised the country and manipulate share prices of his holdings. He was caught out by the 2008 collapse and UK saves were burned when the IceSave subsidiary of Landisbanki went under.
MosFon asserts it never works with end clients, only with brokers and banks. But several trails led from the Panama HQ to a Geneva subsidiary to a Swiss law firm in Zurich and on to a number of clients. This is pure deception.
“Shell companies are to a wide range of wily criminals what getaway vehicles are to bank robbers; they allow criminals to escape”.— Former US Tax Investigator Keith Praeger
The Rich Country Club
The 37 nations of the OECD spent much of the last decade attempting to get agreement on rules that prevent tax avoidance by wealthy individuals and major corporations. But OECD countries are responsible for 39% of the world’s corporate tax abuse, of which the UK’s “independent” territories were responsible for a whopping 29%, or three-quarters
Countries graded by the OECD as “not harmful” are responsible for 98% of the world’s corporate tax abuses.
“Tax havens are thriving and efforts to tackle the problem co-ordinated by the Paris-based club of rich nations, the OECD, have failed.”—Tax Justice Network, quoted in The Guardian March 18th 2021
A Remedy for Rishi
It is estimated that between £100 and £150 billion in tax revenues around the world are lost through OFCs, with around £65 billion die to British dependencies alone. Clearly not all of that could be recouped for HM Treasury. But currently even sanctioned Russian oligarchs are laughing all the way to their tax-free bank.
There is already £3.5 billion lost through allowing non-dom residents to live tax free—as Rishi Sunak’s wife did before the fact became public. Rich UK individuals have more than £854 billion stashed in (mostly British) offshore accounts. That in itself means0.92 per cent lost from GDP
There are surely billions that could be smoked out of the fiscal veils of secrecy MosFon and its ilk throw around stashes hidden in dependencies under British control by the likes of Bashir Assad or Sepp Blatter. If Rishi wants to pay the nurses and be the low-tax prophet he once claims, without selling the silverware, offshore would be a good place to start.
“Within the financial sector, it would have been impossible to have had the financial crash without shell companies.”–House of Commons Finance Committee