Maybe we should blame John Grisham. In his breakthrough best-seller The Firm, the young lawyer Mitch, played by Tom Cruise in the movie, has to make regular trips to the Cayman Islands where the corrupt law firm he works for creates hundreds of shell companies for the assorted cast of money launderers, tax dodgers and gangsters who are its core client base. Ever since then, the murky ‘offshore centre’ has become a staple of the post-Cold War thriller: a place where, amid the palm trees and skyscrapers, sharply dressed financiers salt away billions, safely out of view of any government.
As the latest offshore scandal broke last week, with the release of millions of documents from Bermuda known as the ‘Paradise Papers’, it was hard not to see echoes of Grisham’s 26-year-old book colouring the coverage. The Queen has investments offshore, we are told, in tones of shocked breathlessness. Lewis Hamilton has registered his private jet in the Isle of Man. Wilbur Ross (Donald Trump’s commerce secretary) is fingered in the cache, as is the Tory donor Lord Ashcroft. Inevitably, Apple is swooshing a few tens of billions around from one jurisdiction to another. So is
Nike. Even Bono, a figure more saintly than Her Majesty, turns out to be implicated, alongside — rather less surprisingly for someone who once belted out ‘Material Girl’ — Madonna. As the millions of papers are sifted through, no doubt many more famous names will be held up for public shame and ridicule. Inevitably, there are calls from politicians for clampdowns and inquiries and prosecutions amid sanctimonious lectures about how every deal routed through Grand Cayman is costing us all a school or a couple of hospital wards.
Yet there is a problem with this reaction. It is a very long way from the truth. In fact, there are lots of perfectly legitimate reasons why companies, funds, or even individuals might want to have an account or a subsidiary in an offshore centre. It doesn’t automatically make them a tax dodger, a gangster or a money launderer. And we shouldn’t automatically assume that it does.
In reality, in a globalised economy, offshore finance plays an important role, enabling money to move across borders relatively easily. Rather oddly, a lot of the media seem to have decided that while it is fine for people and goods to move around the world, having a bank account or an investment in a different country makes you virtually a criminal.
To understand why that is crazy, just think about some examples. Say you are setting up an investment fund which is going to collect money from investors in Britain, Germany, Singapore or anywhere else people happen to have some spare cash. You will then put that into businesses you think look good wherever you are lucky enough to find them. If it is based in one offshore centre with zero taxes, it can simply raise cash and pay it out from there; investors can then pay whatever taxes are due where they live. That is far less hassle than paying British or American or German taxes which many investors will then have to claim back.
Alternatively, imagine you are a finance director of a major multinational. You have dozens of subsidiaries. Wouldn’t it be easier to have a place with zero tax, where money could flow in and out of all those units? Of course it would. Or think about a professional who contract-hops from the Middle East to South America to China and back again. Why not organise your payments in a single place, and then pay whatever is owed locally when it is due?
The world already has an extensive network of free ports, tax-free zones where goods in transit can be processed or temporarily stored without having to pay local tariffs. There are an estimated 3,500 of them across 135 countries, facilitating the movement of goods around the world. They have helped trade grow hugely over the past couple of decades. Offshore centres might once have been ‘sunny places for shady people’ as Somerset Maugham memorably put it. But in the past decade, they have been forced to clean up their act and are now mainly financial ‘free ports’ — places where cash can easily be parked and transferred as it moves around the world.
For all the moralising, one of the interesting things about the leaks is not how much wrongdoing they expose, but how little. Take last year’s Panama Papers scandal, for example. From a similar dump of data to the one seen this week, you might expect hundreds of investigations and prosecutions to have followed. After all, more than 11 million documents were made public. In fact not much happened. The Icelandic prime minister resigned. In total, more than 150 investigations were launched worldwide. Malta has apparently recovered £5.6 million in taxes. In this country, HMRC was reported to be looking at 22 cases, although there is no sign of any extra tax being charged yet. For all the drama, it was pretty small beer. The reason? All the data revealed might have been interesting, and made for some lurid headlines, but very few people turned out to be breaking any laws. In only a handful of cases were taxes being evaded or money-laundered.
Sure, some companies are using offshore vehicles to reduce their tax bills. But so what? The left likes to argue that multinational companies are under-taxed, and if we could only squeeze more money out of them public services would be in far better shape. There is not much evidence for that; in fact, the latest economic studies show something far more interesting. Corporation taxes are mostly passed on to consumers in the form of higher prices and to workers in lower wages — and it is the least skilled workers who get hit hardest because they are the least mobile. Make big companies pay more — as the Paradise campaigners say they should — and it is the poor who will suffer most. That hardly seems like much of an improvement.
On closer inspection, it turns out that offshore centres are used by just about everyone. Most pension funds use them, including those looking after the savings of the politicians queuing up to condemn them. They are part of the infrastructure of globalisation, as much as the container ships, airports and fibre optic cables. It is ironic that many of the same people who proudly describe themselves as citizens of the world think that applies to everything except money.
They want to turn back the clock to a world where you could only invest in British companies if you were British or German if you were German. A world with few multinationals and little cross-border investment. We can recreate that with a hysterical witch hunt if we want to — but we will all end up a lot poorer as a result.
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