CAPITALISM'S ACHILLES HEEL Dirty Money and How to

Magnitudes and Misunderstandings 193
any intellectual or other activity performed in Georgetown, Grand Cayman.
It lies instead in the tax benefits or in the secrecy space afforded by routing
the transaction through the offshore circuits. Without such offshore ‘spaces’
there is no economic reason to divert a transaction through a tax haven en
route to a large capital market.” 40 And as another commentator cogently observed:
“[T]ax havens as states . . . have learned to use their legislative capacities
as ‘baits’ to attract business into their jurisdictions. Such apparently
rational arrangements between states and private operators are . . . deeply
disturbing, not least because the two parties to the exchange, one of them a
sovereign government, handle highly charged . . . issues . . . in purely utilitarian
terms. The willful misuse of ideas and practices that go to the heart of
the legitimacy of the modern state . . . is the most disturbing aspect of the
tax haven phenomenon.” 41
There are some uses of tax havens and secrecy jurisdictions that have become
routine and at the same time risky.
• Much of what is called “offshore banking” is the business of borrowing
money from nonresidents and lending money to nonresidents.
Major banks participate in this from offshore entities, in order to
avoid the bank reserve requirements that would apply onshore. Ultimately,
the risk of this activity conducted without reserves is borne
by the home institution, its central banker, and the taxpayers of the
home country. 42
• Offshore investment funds are unregulated. They often take gambles
that are not fully disclosed and keep books in ways that would not be
acceptable onshore. The most threatening element of their operations
is the ability to leverage and hedge investments in unsupervised
ways. Long-Term Capital Management came close to collapse in
1998, posed a major risk to global financial stability, and was rescued
through intervention of the U.S. Federal Reserve Board.
• Concealing liabilities in tax havens has become big business. “Structured
finance” often makes use of offshore special purpose entities to
shield debt, in deals that draw close to or become criminal frauds.
With this technique, Enron produced the biggest corporate failure in
history.