As a recent report from Fundación Alternativas demonstrates, fiscal paradises are now at the centre of a global financial network.  And it is not just in Spain that people are complaining.

One of the leading campaigners attempting to lift the lid on this shadowy and growing sector is experienced financial journalist Nicholas Shaxson. Born and brought up in Africa, his latest book, Treasure Islands: Tax Havens and the Men Who Stole the World, is currently on the bestseller list, which is no mean feat for a tome about the arcane world of high finance. Yet Shaxson’s book reads like a thriller and his argument is simple. The staggering growth of a borderless financial system over the past couple of decades, in which hedge funds, private equity and asset management have all flourished, has distracted attention from the increasingly important role of off shore centres in co-ordinating transactions. Tax avoidance by the wealthy and powerful is now being practised on an unparalleled scale with unprecedented ease. And, logically, if some are paying less than their due, then others – the vast majority of ordinary taxpayers – are having to fork out more.

I half expect to find bullet holes in the door or at least some abusive graffiti when I visit Shaxson at his home in Zurich. Surely a whistle blower on the murkier side of global finance cannot be the most welcome resident in a city which has a legendary culture of banking secrecy? Shaxson assures me that everyone has been very pleasant since he arrived to work in Zurich a couple of years ago. “The really problematic neighbour is FIFA which has its headquarters just a couple of streets away,” he jokes.

While book has been described as “riveting”, “blistering” and “gobsmacking”, Shaxson is a quietly spoken man with a talent for asking penetrating questions. So what is actually new in his book? Isn’t avoiding tax is as old as collecting tax? “What is new here is the scale of the problem”, he explains. “The growth of offshore tax havens is the great untold story of the global expansion in financial services over the past 20 or 30 years. The use – or abuse – of the tax havens is now endemic and is being recognised as such in country after country”.

To give an idea of the scale of the problem, Shaxson refers to the pronouncements of United States Senator Carl Levin, chair of Senate Permanent Sub-committee on Investigations, which has spent more than a decade looking at the issue. “The senators concluded that offshore tax abuses cost the US taxpayer about $100 billion in 2006 –the most recent figures. Now, the budget stand-off this year between President Barack Obama and Congress focused on some $70 billion of cuts. No one is naive enough to suggest that the revenues lost to tax havens would solve fiscal problems in the US or anywhere else. But what these figures do say is that more control over tax havens could be a part of the solution. For every dollar, pound or euro not paid in tax because money is being channelled offshore, those who do pay must contribute more.”

Even a part of the money lost to Government could make a real dent in the country’s deficit if it were collected. This surely is an argument that ought to appeal to the political left, right and centre. Whatever one thinks about the speed of debt reduction programmes, it is evident that the tax burden is greater for some if others evade paying their fair share. The worst-off suffer because cuts could be avoided if tax revenues were higher. Those in the so-called squeezed middle are being pressed all the harder because they must make up the shortfall for those who pay less than they should.So who uses tax havens? According to Shaxson, the better question is: “Who doesn’t?”

Established tax havens such as the Cayman Islands are well known. This tiny tropical paradise is now home to some 70 per cent of global hedge fund registrations. A single building, Ugland House, is the postal address for some 19,000 companies registered there for tax-dodging purposes. It is not just shady companies with opaque structures and unknown owners which benefit.

“In the past two or three decades, many more countries and companies have got in on the act. Take Google, for example. Over the past three years it has been estimated that Google has cut its tax bill by more than £2 billion by shifting non-US operations through overseas subsidiaries in Ireland and thence to Bermuda. The result? The rate of corporate tax paid by Google on non-US earnings was less than 2.5 per cent”.

Shaxson also has other targets in his sights. The City of London gets a double-barrelled blast. The Cayman Islands are a British Overseas Territory, as are the Channel Islands, Gibraltar and the Isle of Man. And so on. “What all these centres have a common is that they act as conduits for finance flowing in and out of the City of London”. So the City of London is a tax haven, too?

“Effectively yes”, says Shaxson. “The City is geographically in the UK, but governed by an unaccountable corporation with a culture of client confidentiality which often makes it nigh on impossible to follow a trail”.  Shaxson is particularly concerned about the extent to which tax havens are used by dictators to hide looted funds. He cites the case of Nigerian President Sani Abacha who took billions of illicit dollars with him when he was forced into exile. After Abacha’s death the new Nigerian government came looking for the money. The Swiss banks eventually coughed up $500 million. It was also known that Abaca had a number of accounts in London and the new Nigerian finance minister raised the issue “several times” with then Prime Minister Tony Blair. But only £3 million was ever returned. While banks in the City prevaricated, it was assumed that other monies from the Abacha estate were quietly moved to other destinations.

Shaxson’s ammunition against the City is politically explosive stuff and brings us to the heart of the issue. While organisations such as the G20 may promise that: “The era of banking secrecy is over”, no government wants to call time on its financial sector just yet. Tax revenues foregone will be traded against the prospect of capital flight to even more secret and safer havens and upsetting powerful financial lobbies. For many in the British Treasury, this is a scenario too dreadful to contemplate and, without a lot more public pressure the scam will carry on unabated. The wealthy, the powerful and the downright criminal will continue to exploit the global mobility of capital as though the crisis of 2007 never happened. 

By David Mathieson,

OPEX colaborador and former advisor of the UK Government