'After Dirty Air, Dirty Money'
The offshore system started with the Swiss, who in the 1930s opened numbered bank accounts purportedly only to hide the money of victims of the Nazis. People who feared confiscation of their wealth would deposit it in accounts identified by number, not name, so the Germans could not trace and seize funds. The money could be claimed only by someone who knew the number.
From the beginning, reputable uses provided cover for disreputable ones. French elites put money in Switzerland to evade taxes, and in the 1950s, mobster Meyer Lansky, who got worried after US crooks were nabbed on tax evasion, bought a Swiss bank. His operatives would deposit cash in Miami banks as earnings from his Havana casinos, then wire-transfer it to Switzerland, safe from US investigation and seizure. Increasingly, rich people all over the world went offshore to evade taxes.
Big banks discovered that there was profit in helping such people, and they established "private banking" departments with offices in secrecy jurisdictions such as the Cayman Islands and Switzerland. Private banking profits are generally twice those of most other departments, but clients think they're getting a bargain. Some open offshore accounts with foreign brokers who handle investment funds free from income and capital gains tax. To access cash, clients get credit cards issued by offshore banks and stock brokerages so that records of accounts and charges are not on file at home.
Corporations use offshore banking to move profits to jurisdictions that tax them less or not at all. Using "transfer pricing," a US company that wants to buy widgets in Hong Kong makes the purchase through a trading company in Grand Cayman. The trading company, which it secretly owns, buys the items in Hong Kong, then resells them to the US parent firm at a falsely high price, reducing taxable US profits. Between 1989 and 1995, nearly a third of large corporations operating in the United States with assets of at least $250 million or sales of at least $50 million paid no US income tax.
Criminals of all stripes depend on offshore. In May 1994 the UN embargoed arms to Rwanda, but arms traffickers based in Britain, France and South Africa used offshore financial centers to carry out their transactions. In 1999 the German secret service reported that a Liechtenstein combine using secret foundations, companies and bank accounts served the international drug cartels, and particularly the mafias of Italy, Colombia and Russia.
Today, there are about sixty offshore zones. With 1.2 percent of the world's population, they hold 26 percent of the world's assets. According to Merrill Lynch & Gemini Consulting's "World Wealth Report," one-third of the wealth of the world's high net-worth individuals, or nearly $6 trillion, may be held offshore. Offshore havens also hold an estimated 31 percent of the profits of US multinationals.
As offshore banking has grown, so has an awareness that it harms the public interest. In 1970 Congress voted to require taxpayers to report foreign bank accounts. In 1985 a Senate investigations subcommittee report said offshore thwarted the collection of "massive amounts" of taxes, guessing at up to $600 billion in unreported income.
In 1989 the G-7 countries created the Financial Action Task Force, largely to deal with drug-money laundering. However, Stiglitz, who served as head of President Clinton's Council of Economic Advisers before going to the World Bank, says the offshore issue "didn't come up much" in the United States until the Asia meltdown in 1997 and subsequent problems.
One of the causes of the Japanese financial crisis was the collapse of Daiwa Bank and Yamaichi Securities, which used offshore accounts to hide losses. Then there was the Russian bank disaster of August 1998, caused by crooked managers lending massive amounts to offshore companies they secretly owned, and the failure a month later of Long-Term Capital Management, which routed its transactions through the Caymans, where they were invisible to US and other countries' regulators.