James S. Henry is an economist, lawyer and investigative journalist, and former chief economist at McKinsey & Co. He is the Edward R. Murrow Fellow at Tufts University’s Fletcher School of Law and Diplomacy. In his report “The Price of Offshore Revisited”, he estimates there may be as much as 32 trillion dollars of hidden financial assets held offshore by high net worth individuals. He is author of the acclaimed investigative economics book, The Blood Bankers, and his articles and citations have appeared in The New York Times, The Wall Street Journal, The New Republic, The Nation, The Conference Board, The Washington Post, Harpers, Fortune, Jornal do Brasil, The Manila Chronicle, La Nacion, and many others. He is a senior adviser to the US Tax Justice Network.
BENGER: I’m fascinated by the loopholes in FATCA, which enable countries like Switzerland to continue to be a tax haven. Can you explain that?
HENRY: Well one is pension funds and insurance companies are totally left out of the Swiss agreement with the United States, and in Switzerland, both of those are big players in private wealth management. So for example, if you’re wealthy enough, you want to have a 5 million Euro insurance contract, you’re paying a 20 million Euro premium per year, you know, you cancel that contract in 10 years and decide you don’t need the insurance anymore, the ‘insurance’ turns out to have been a nice way of transporting all sorts of wealth without any reported, to an industry that is exempted from FATCA.
Secondly, a lot of people have wealth that is not reportable under this because it is simply left out. One example is ‘gold vaults,’ enormous vaults in Zurich airport with big paintings and gold, and diamonds and other valuables. We just found that a New York art dealer has several thousand paintings parked in the Geneva Airport. He might be the largest owner of Picassos. So, it’s a nice way to launder money. If you have 50 million bucks and you want to buy a ‘Picasso’ in the airport there, he’ll, kind of, gladly sign it over to you.
BENGER: But this is what struck me so much about the story. It’s not so much illegal tax evasion; it’s this mainstream, this massive outflow of money. With pension funds, investment funds, how much is it? How mainstream is it and how much is being hidden offshore?
HENRY: Well it’s mainstream in the sense that it’s a big number, but it’s not mainstream in the sense of the concentration of the activity, I mean the top 10 million people in the planet are what we’re talking about. That’s about 1.4% of the world’s population, they own all of the offshore wealth and by our estimates, that’s at least 21-32 trillion dollars of financial wealth that’s as of the year 2010, it’s grown since then. Furthermore, there’s a lot of non-financial wealth that they own, which is not in those numbers. Real estate, the whole city of London is owned offshore; much of Miami, New York, and Zurich, is owned by offshore companies. You have the world’s shipping industry, is entirely offshore. You have lots of art collections and other kinds of physical assets that are owned through offshore companies. So if you’re talking about an extraordinary amount of so called ‘missing wealth’, that’s simply not accounted for in our statistics for wealth and equality. And all of that belongs to a tiny fraction of the world’s population. The more we know about it, the more games we identify.
BENGER: Now you’ve tried to put a number to it, but you’ve also admitted it’s a bit like a black hole. And there are two elements of that. There’s secrecy, and governments have collaborated in this secrecy. It’s very, very difficult for me to find out from the Canadian government exactly how much money is going offshore.
HENRY: Well for example, the Bank for International Settlements is a multilateral institution, it sits in Geneva, they have data on cross-border assets, bank assets especially, and deposits from all the 41 financial centers that report to them. But they don’t release the matrix, which would tell you how much, say, Canadians have in Swiss banks, they only issue a global number. So as of the year-end in 2010, we know that there was $7 trillion of cross-border deposits by non-banks, most of it by individuals. But we don’t know what the breakdown is country by country, but assuming that the 7 trillion was just a fraction of the total portfolios that the high net worth individuals have, typically bank deposits would be on the order of no more than 20-25% of the total, that allows us to scale the $7 trillion up to the total of $21-$32 trillion. We didn’t, sort of, backstop that and corroborated it by looking at it independently by looking at other data.
One way is to look at how much the top 50 banks involved in the International Private Banking Market have, in terms of assets under management, and non-managed assets, like deposits and brokerage accounts. And that adds up to about 12.1 trillion, as of year-end 2010 for the top 50, and 6 trillion of that belongs to the top 10 players in this industry. Players like Credit Suisse, UBS, HSBC, J.P. Morgan, City Bank, Goldman, Société Générale, BNP Paribas, Deutschebank. These are all the same players that were responsible for the financial crisis, got huge bailouts, were also the big lenders to the Third World back in the 1980’s. And here in this corner of reality we find them helping the wealthiest people on the planet take money offshore, and hide it and conceal it, and not be taxed on it.
BENGER: What do you know about Canadian banks, say, in the Cayman Islands?
HENRY: Well, I’m not a scholar of Canadian banks specifically, but in the course of studying the haven industry for three decades, I have come across the extraordinary role that Canada has played in the Caribbean, with respect to, let’s say, the creation of tax havens like the [unclear]. The Bahamas is a great example of a tax haven essentially designed by a Canadian banker. In the case of the Castle Bank and Trust scandal in the early 70’s, you had several Canadian investors who turned up involved in that bank and helping to organize it. And it’s well known that Bank of Montreal, Scotiabank, RBC…you know RBC has, I think, about 1200 employees in the channel islands. Now what are they doing there? I think it’s a fair question. If they’re not there for offshore banking, are they just there for the milk?
BENGER: It’s the same thing in the Caymans. The biggest bank in the Caymans is Scotiabank, and are they there for the locals or the tourist industry?
HENRY: Well Scotia[bank] is actually the bank of choice throughout Central America, you’ll find a lot of Scotia[bank] branches if you go there. I’m not saying that they’re alone in this by any means, or that we need to single out, I don’t think it’s a profitable activity to single out any country/bank systems. It’s really a global problem, and we need to tackle it globally, otherwise we’ll never clean it up. But until there are standards for ‘pirate banking’, as we call it, that basically make it more costly for these big, fancy global organizations to essentially devote their best brains to laundering money, and moving money offshore, and making trusts and accounts. I mean the point is, you can talk about individual havens like the Cayman Islands, or BBI, or any number, there’s about 75 of them now, compared with just 15 in 1970.
But any one of those havens can live or die, and the global private banking industry behind it will not give a damn. They’re using, typically, multiple havens to protect any individual’s wealth. You know, a Cayman Island trust, a BBI shell company, maybe a foundation in the Netherlands, as the head of IKEA uses while he lives in Switzerland. There are complicated multilateral structures that are not made at home, they’re not things where [you can go open] a Cayman bank account. But the truly rich are not doing this on their own. They’re hiring the world’s leading law firms, accounting firms, and banks to arrange this system for them.
BENGER: The other thing I want to point out is, which you talk about, is that I was in the Caymans and a guy told me, “listen, it takes an average of 13 months for a CRA order to do one file.” And he clicked on his phone with his credit card, and he said, “I can move $150,000 from Macao through here to the city of London with three clicks of my credit card. These places are no longer geographical, there are no palm trees, you’ve just got the virtual.
HENRY: The globalization of finance has basically overwhelmed the nation state system, and so whole countries have turned themselves into selling sovereignty for purposes of tax evasion. What we’ve seen, at the same time worldwide we’ve seen a pronounced decline in tax rates since the 1980’s, both corporate and individual in most OECD countries. At the same time, we’ve seen this explosion of the offshore industry. So it’s not the high tax rates that are driving people offshore, it’s the offshore industry that is driving tax rates down. We’ve had a cycle of intense tax competition, which this global industry has allowed to game the system. I remember Jack Welsh, I used to work at GE back in the late 80’s, and he used to say, “If we could do it, we’d love to put our factories on ships. We’d move them around from one country to another, and just on a daily basis, we’d take orders, and your workers want to work for this much, and your workers want to work for that. That would be the world we’d love to have with the labour.”
We already have that for capital. Capital can be instantly wired and can now be accessed with ATMs and cards, you know, you could have an account in Zurich and withdraw money in New York. It’s become much easier to hide money than to tax it. So what’s resulted from this fundamental mobility of capital is that the costs of governments, the essential services of health, and police and fire, and national defense, that we all have to figure out how to pay for, unless we privatize the whole thing in some libertarian pipedream, those essential services are being shifted to the backs of the middle class and the poor; people who are not mobile. And small businesses as well cannot take advantage of these schemes. So basically you end up with a tax code, which is much more regressive, relying on VAT taxes, sales taxes, excise taxes that are not avoidable by the so-called ‘immobile’ factors of production.
BENGER: Now, I spoke to a few leaders in this business of moving money around. You know, as the apple guy said, legal tax avoidance. And their argument is, that money is so much better used in the hands of capitalists, unfretted capitalism, and that the money eventually comes back to Canada. $170 billion may be leaving, but eventually it comes back to Canada and benefits all of us. Now what is your assessment of where that money goes?
HENRY: That’s poppycock. I mean, that’s kind of a religious declaration. We’ve heard it for decades from the neoliberals, without any particular regard for the facts. The facts are, we’ve had 30 years of this kind of nonsense, and it hasn’t produced a higher growth rate, it hasn’t produced healthy capitalism. In the last decade, I don’t know if these folks missed that period, but we’ve seen a pronounced crisis in global economy. Not only in the traditional developing countries that have had some problems, they’re actually doing better than they were. The actual globalization of the crisis has only occurred in the past 6 years. Since 2007, we’ve seen no sense of strong recovery, various budget cuts and austerity throughout first world countries.
BENGER: But let me just cut to the chase. What I’m looking for here, is what you say, most of the proceeds of capital flight and tax evasion are never repatriated to source countries, but sit idle in relatively low yield offshore investments.
HENRY: Well I would say first of all, the so-called capital being put to work offshore is nonsense, I mean a lot of this is sitting there idle, earning less than 1% returns or even negative returns. If you know anything about Swiss banks, you know that they are one of the least efficient in the world. It’s likely to cost you 200 Euros to transfer money; it’s a high cost system. The only reason to have money in Switzerland is for the tax benefit, and there’s no question that this money could be better spent and better put to use if we actually made it more difficult to evade taxes. So, if you look at the developing world, for example, right now the developing world has on the order of $5.8 trillion of gross-external debt. On the other side of the balance sheet, they have about 6.5 trillion of official reserves, and then when you take account of our analysis, of the un-recorded capital flight from developing countries, like Mexico and Argentina or Russia, since the 1970s, that adds up, in terms of current value, on the order of $9 trillion. So all told, you have the developing countries as a group, being a net-creditor to the first world, on the order of $11 trillion. And most of that capital has flown the coup and is not coming back, and it’s sitting there being reinvested in relatively low-yield assets, which are much less productive than if we could find a way of bringing that capital back home or if we could tax it and have it used by the state.
BENGER: Now we’re collapsing a lot of stuff in a short period of time, but since you came out with your report, the 31-32 trillion, lots of stuff has happened on this story it’s vaulted to global prominence. We have the Starbucks business in the UK, we have Apple in the States, and now we have the G8. We have Cameron, Roulande and Merkle saying this is the number one agenda item. I don’t know if you know what happens at these summits, but what do you think is going to happen, and is it going to be effective?
HENRY: Well one of things we’re worried about is that Canada is going to block the proposal to have beneficial ownership declaration, that’s one of the concrete policy objectives. The thing about this is there are very specific concrete things that we are proposing; this isn’t kind of a whiney, airy-fairy complaint. They’re exact and specific measures like automatic information exchange, like country-by-country reporting. On the corporate side, ultimately like a formulary apportionment or unitary taxation like Canada and the United States already have for their corporate taxpayers, these are all very concrete proposals. Finally, it is true that the G8 has taken up this call and the OECD is also looking seriously at developing some reforms of the corporate tax system, that’ll be out in June. We also have a G20 meeting in September, and the G20 has just announced support for automatic information exchange as a global platform at their meeting in Washington, DC last month. So, all of this is extraordinary progress from those of us who have been working for tax justice for, you know, in my case 30 years of study and 10 years of tax justice work. But, again the proof is in the pudding. For example, automatic information exchange: we take a country like Switzerland, which is already designing ways around FATCA, I didn’t mention omnibus accounts, another factor that wouldn’t be picked up by automatic information exchange.
Everything depends on how these solutions are implemented, so I think if I were a defender of this current system, or someone with an interest in it, I would say, “Alright, we’re losing the public debate, we can’t really defend this anymore as a system, so let’s shift to a, sort of, low-level subversion strategy. We will make it take forever to implement these kind of reforms, and it’ll make it cost a lot, and we’ll just be fighting a long term ground war against this.” That’s the strategy that the smart money is playing here.
BENGER: You were the Chief Economist at McKinsey and Company yourself, right? You must still have colleagues that are on that side of the issue.
HENRY: Well I wouldn’t say it’s…the corporate world is interesting because there are lots of progressive people who ended up working for outstanding companies, McKinsey is an outstanding firm in general, they have creative people there, and people who care deeply about being on the right side of history. It’s also a tremendous window onto these big companies and banks, which most of whom were our favourite clients. So I don’t think that it’s easy to divide the world into pro-corporate and anti-corporate. Many of us favour a market economy that’s healthy, but we also favour democracy. So when those are in conflict, we have to choose democracy. In this case, there’s a conflict. In general, I think having a strong tax base, and a strong State that makes sensible decisions, has competent people doing regulation, is an absolute necessity for a Capitalist economy. Capitalists don’t always realize that or acknowledge it because on the individual level, they can be better off by gaming the system. But on a collective level, there’s no question that when Capitalism, when the State works and is well managed, and is doing the right things and is well financed, not with debt but with taxes, capitalists do well as well.
BENGER: Just to switch subjects here, transfer mispricing; this is such a fascinating example of keeping property offshore. Can you sort of give the ‘transfer mispricing 101’ and tell us what it is, and maybe an example?
HENRY: Well, transfer pricing is a fancy way of saying, in this day and age, a whole lot of international trade, in goods and services is intra-company. It’s within one company unit and another. It’s not subject to market forces. And when you have that kind of system, you have to decide, if I transfer my revenue to one subsidiary, am I transferring the revenue, or the costs associated with being in the business, am I charging that subsidiary the right number. We have a system that from a tax standpoint will allow companies to set up an unlimited number of offshore entities and treat them a real, even though they have very low activities. And secondly, in many markets, we don’t really have so-called arms length transfer pricing references. So, you can’t find it comparable to whether that company is actually using the right number.
So let me take the banana industry as an example. There we have a banana cartel, basically buying bananas in Ecuador for 13p a pound, and selling them in the UK for 65p a pound. In between the 65p and the 13p, there’s a whole lot of costs that appear, and that would be also the place where you would impose a tax cost, except for the artificial transfer pricing that goes on. So they set up a subsidiary in the Caymans to do financing, and a subsidiary in Luxembourg to do the bookkeeping, and a subsidiary in Ireland to hold the brands or intellectual property. And this goes on and on, and by the time it gets to the UK, there’s no profit to be taxed, because it’s been eaten up by all these intra-company transfer prices that no one can get a window on, unless they get a very expensive audit, so that’s the game that’s being played here, mostly because you have multiple havens, companies allowed to set up entities in them regardless of what they’re actually doing, and then these phony prices they can use to suck up all the inter-company…
BENGER: Ok, I promise that this is the last question, and it’s a lead in to a wonderful phrase at the end of your report: that what we have now is the huge secret of offshore…sorry, the huge secret of offshore economy has become the dark side of the global economy. Maybe if you can end with something like that.
HENRY: Well I think that the global economy has many layers, and part of them are underground, and off the books. They have become easier under globalization to transfer money anywhere in the world, to manage it from afar, to set up complicated secrecy arrangements, so that no one knows whose it is, essentially to avoid any responsibility for taxation. So that’s a principle problem. Another related problem is kelptocracy, because we’ve seen politicians all over the planet, rich countries and poor countries being able to essentially loot the public treasury, and then find places to hide it offshore. Switzerland being the historic champion in that activity of helping PEPs, politically exposed persons, hide their money. So, in both of those areas, we have glaring examples of where the underground economy on the global level is really contributing to undermining democratic institutions, because it’s reducing people’s fundamental faith that their elected officials are honest, and because it’s also allowing the richest people on the planet to hide money. In both those areas, I think there are some simple things we can do, not to fix the problem completely, but make a whole lot of difference.