The Finance Curse. Nicholas Shaxson
not least in the City of London,” gushed British prime minister Margaret Thatcher at a luncheon for him in London in 1985. “We shall continue to offer the widest possible trade opportunities to you.”15
As the murderous Jean-Claude “Baby Doc” Duvalier of Haiti and the grasping Ferdinand Marcos of the Philippines looted their treasuries, American and British bankers in London and Zurich got rich. By some estimates, over half the money borrowed by Mexico, Venezuela, and Argentina in the late 1970s and early 1980s “effectively flowed right back out the door, often the same year or even month it flowed in.” In Venezuela it was nearly dollar for dollar. The ordinary citizens of these countries had to shoulder the burden of crushing debt repayments. In the unpoliced Euromarkets, there was nobody to stop it.16 The American financial system was increasingly intertwined in complex webs with those of other countries, “no more reducible to Wall Street than the manufacture of iPhones can be reduced to Silicon Valley,” as one account put it.17 Tax evasion, crime, bad accounting, bank scams, gray-zone semilegal rip-offs, pump and dump schemes, and especially lax financial regulation: it all came together in one unholy, messy, fast-growing festival of finance centered in London.
Long after the formal trappings of the British Empire had crumbled, here was another giant looting machine run out of the City of London. It needed no British soldiers and was predicated on tight secrecy. It was all but invisible.
The Euromarkets grew some more and just kept growing. The Bank of England routinely rebuffed American requests for ideas on how to tackle the growing problems and tensions. “However much we dislike hot money we cannot be international bankers and refuse to accept money,” a Bank of England memo said. “We shall do lasting damage.” The Americans pressed further, and the British screw-you became more explicit. “It doesn’t matter to me whether Citibank is evading American regulations in London,” said James Keogh, a top Bank official. “I wouldn’t particularly want to know.”18
Like a slow-motion explosion, the Euromarkets rapidly accelerated financial globalization. They metastasized beyond Britain, beyond dollars, and beyond anyone’s control, morphing into a frenzied financial battering ram, which would combine with Hayek’s and Friedman’s ideological pushback against government intervention to smash holes in exchange controls and the cooperative international infrastructure. More and more cracks were appearing in the walls of the dam, and the massive oil price surges of the 1970s threw everything into further confusion. The Bretton Woods system was rubble. And so began a new era of free finance, engendering massive profits for the financial sector—and in turn much slower global growth, rising inequality, global crime, and more frequent financial crises across the Western world.19 It was precisely what Keynes had warned about.
As this chaos had been unfurling, another set of darker developments, umbilically linked to the Euromarkets, was gathering pace. This particular variety of mayhem goes back as far as you like, but a good place to start is with the Wall Street financier Wallace Groves, an associate of the Meyer Lansky crime syndicate that was operating casinos out of Miami in the 1950s. The US Mob ran offshore gambling and crime operations in nearby Cuba and had thoroughly corrupted the government there, ultimately triggering a populist revolt that began in 1953 and eventually brought the Communists to power under Fidel Castro.
Groves had settled in the nearby Bahamas, an old offshore pirates’ den that had once hosted the notorious Blackbeard and the bloodthirsty Henry Morgan (who was so successful as a pirate that the Queen knighted him and appointed him lieutenant governor of Jamaica). Groves set up casinos and other profitable businesses in the British-ruled Bahamas, catering heavily to American clients outside the reach of US law enforcement, and he deployed his profits to subvert the thuggish Bahamian elite, known as the Bay Street Boys. As the Communist threat to the Mob’s Cuban operations grew, the Mafia turned its attentions to the Bahamas as an alternative. In 1955 the Bay Street Boys gave Groves a two-hundred-square-mile concession to develop a port and free-trade zone, exempt from taxes until 1980 (subsequently extended to 2054) and largely free of the rule of law too. This anything-goes, libertarian free-for-all tax haven prospered greatly, though it contributed relatively little to the rest of the Bahamas, apart from corruption and some jobs, which mostly went to shady expatriates. A British official in 1968 worried that it had become “a separate city state.” As the empire crumbled, British officials were reluctant to alienate the elites in another potentially restive colony by outlawing this lucrative and fast-growing offshore activity.
All this would have been troubling enough for the US and British governments. But other British territories in the region had noticed the money pouring into the Bahamas tax haven and wanted to copy it. A race to the bottom got under way, led by an unholy triumvirate of money-scenting local colonial elites, a few (mostly American) promoters of tax haven schemes, and a coterie of (mostly British) accountants and offshore lawyers to help set it all up.
The British National Archives for this period tell a remarkable story, with officials from government departments becoming aware of tax haven activity popping up like Caribbean mushrooms on island after island, then engaging in a whirlwind of official correspondence, chasing after it all. Different departments pushed and pulled in different directions. The treasury, for its part, fretted about losing tax revenue to these tax havens, while seeming quite unconcerned that tax and crime-fighting authorities in the United States and elsewhere were being undermined and cheated. The Bank of England seemed most worried about shoring up exchange controls and the Bretton Woods architecture—these places were obvious points of leakage. But again, it showed little or no concern for North or South American governments and citizens, whose countries’ tax and crime-fighting systems were being undermined by these British havens, mostly known as British overseas territories. The Foreign Office seemed delighted with the dirty-money game, since it would help these tiny territories become self-sustaining, so they weren’t a drain on British foreign aid budgets.
Aside from the Bahamas, the main territories in question were (and still are) the last fragments of the British Empire: fourteen semi-independent nations including seven global tax havens—Anguilla, Bermuda, the British Virgin Islands, the Cayman Islands, Gibraltar, Montserrat, and the Turks and Caicos Islands. Alongside the tax havens of Jersey, Guernsey, and the Isle of Man around the British mainland, known as the Crown dependencies, these colonies did not cut all their ties with Britain when the empire collapsed.20
In many of these places banking was conducted in both pounds sterling and US dollars, which were supposed to be kept separate under the safety hedge of the Bretton Woods system. Banks were supposed to keep two sets of books for the different currencies and implement exchange controls carefully between them. But arbitrage between currencies was highly profitable, and these libertarian paradises didn’t want to play by the rules, especially if there was big money to be made. By the 1960s all sorts of curious creatures were scurrying through the holes in the Bretton Woods boundary hedge that ran right through the middle of all these tax havens. Among the best known and the earliest of these creatures were the Beatles, whose film Help! was shot in 1965 in the Bahamas because the band had to live there for a while in order to make it work as a tax shelter. There’s a memo in the archives from a Bank of England official in 1969 that quivers with alarm:
Events, however, seem to be moving rather faster. The potential gaps in the Exchange Control hedge can no longer be contained by occasional visits. The smaller, less sophisticated and remote Islands are receiving almost constant attention and blandishments from expatriate operators who aspire to turn them into their own private empires. The administrations in these places find it difficult to understand what is involved and to resist tempting offers.… Tax haven proposals by a US resident are leading them to have second thoughts about the need for Exchange Control at all. We might need to station a man somewhere in the area.21
Fabulous and enticing promises began to mount. The memos going back and forth are ferocious by crusty British civil service standards, describing a game of whack-a-mole in these outgrowths of the Euromarkets, an offshore whirligig running faster and faster, driven by foreign criminals, shady characters, and anti-regulation bankers. Someone from the Overseas Development Ministry was gung ho for secret banking and seedy shell-company business because it “attracts entrepreneurs and financiers,” he said, arguing that this was a fine way for these Caribbean