Reader Inquiry: Tax Havens, aka the Sunny Bahamas

Can any of you shed light on these reader questions about tax havens? The US tolerance for tax havens is puzzling, given that the US taxes citizens on their income earned anywhere in the world, and takes a dim view of foreign bank accounts (I am under the impression the rules have been tightened even further since then, but as of 2004, having more than $10,000 in a foreign bank account was asking for perma-audit).

I’ve been thinking more about the offshore tax haven system, and here are some

(1) I can’t think of a minimally plausible justification for the offshore system. For instance, Willem Buiter has said the obvious, “Blockade the tax havens.”

However, I have heard little talk about regulatory reform addressing this issue, which is bizarre for political reasons: What could you possibly say publicly about your reasons for being against money laundering and tax evasion? Taking up the issue would seem an obvious winner.

(2) Already in 1994 (per Frank Partnoy’s FIASCO) Wall Street was heavily into the use of tax havens in order to construct derivatives. Quite a bit earlier (around 1980) Citi got nailed by a whistleblower for using offshore accounts to evade taxes (I think they paid a tiny penalty). When did the US financial system first become inextricably intertwined with secrecy jurisdictions?

(3) It appears that the US had laws against being able to incorporate, etc., off shore until the late ’60s, and then the laws were dropped or weakened. Who lobbied for that? Why?

(4) CDOs were typically companies incorporated offshore. Why would they have been illegal if incorporated in the US?

Yves here. Perhaps I am too conspiracy-minded, but my theory is: there are no doubt people that governments want to transact business with in ways that cannot be traced, and sometimes the amounts must be so large that suitcases with cash are a bit awkward (think arms merchants and mercenaries). So you need a secret banking system (as in not subject to political scrutiny) that is still somewhat reputable (as in funds deposited there will be there in five years). So some jurisdictions are allowed to be in the business of having said banks. They therefore have to be permitted to conduct other business to mask the reason why they are tolerated (as in the tax haven status is a by product).

The problem is that this theory is unprovable (as in even if it were true, no one with inside knowledge would be permitted to reveal the real reasons). So I suspect other theories have at least as good explanatory power and some evidence in support of the theory.

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  1. attempter

    Does the tolerance for Switzerland throw any light on this? The argument above sounds similar to how it was convenient to both sides in the war to have a “neutral” (i.e. nihilistic) Switzerland.

    Indeed it seems Switzerland still plays something like the role described for the offshore lawless zones, but openly, what with its official declarations that it doesn’t recognize the legitimacy of other countries’ tax laws, and probably lots of other laws involving money, stealing it, etc. As they proved with the Nazis, their attitude is, if you can get the cash/gold to them, they don’t care how you got it, they’ll defend it as yours.

    So there we have something like the model of a stable banking system for use by those everyone knows are criminals.

    The questions in the post are good except for the one about the politics. It’s clear that nobody in the kleptocratic system has any desire at all to make arguments which are politically winning in the absolute sense, since they think they can serve the rackets with whatever political fraud like the sham finance bill and still win.

    1. DownSouth

      United States = Banana Republic

      For those lacking first-hand knowledge of how this works, here’s an example:

      Swiss authorities have informed U.S. officials that they have discovered a trust fund containing more than $240 million that they suspect belongs to Raul Salinas de Gortari…the former president’s older brother, U.S. diplomatic sources and law-enforcement officials said.

      If the Swiss finding is a Raul Salinas’ fund, it would dwarf the amounts found in dozens of separate bank accounts held by him in Swiss, British, French and Caribbean banks, and could raise the total of his hidden fortune to at least $360 million, Mexican and U.S. officials say.

      The revelations of his fabulous wealth is not only raising outrage OUTRAGE…in this country struggling to emerge from its worst economic depression in 50 years, but is also drawing questions about the role played by prominent Mexican businessmen and U.S. corporations in the case.

      Mexican, Swiss and U.S. investigators cooperating in the case are focusing much of their attention on Citibank CITIBANK First National City Bank . The bank’s New York…private banking office managed Raul Salinas’ accounts and set up secret trust funds for him overseas.

      Raul Salinas would send an employee with a check to Citibank’s offices in Mexico City, where the money would be exchanged through Tyler Corp., a Citibank subsidiary, into U.S. dollars and transferred to the bank’s New York offices.

      From there, the funds were sent to the bank’s subsidiaries in Zurich and London, where they were deposited in Citibank-staffed shell companies such as Trocca Ltd. and Brennan Ltd., investigators say.

      Under U.S. money-laundering laws, banks are not supposed to accept or look the other way when receiving huge amounts of money from clients who cannot justify such income. Raul Salinas was a mid-level government official who at the height of his government career in the early ’90s – when he made the huge money transfers abroad – reported income of $190,000 a year.$240+MILLION+IN+SWISS+BANK+MAY+BE+SALINAS‘.(NEWS)-a064939704

      The former president, Carlos Salinas de Gortari, was the United States’ point man—-his charge was to implement neoliberalism-on-steroids in Mexico. So he and his family had the full and unconditional support of the United States government.

    2. Tom Crowl

      At some point the whole “empire of hidden wealth” is doomed. Though the holders of this wealth are likely to make it Hell for everyone during the process of discovery.

      As ‘wealth’ tokens (money) become increasingly tied to the global data system there are a rising number of opportunities for information ‘leaks’ whether accidental or intentional.

      David Brin’s fictional “Helvetian War” forms part of the background for his Science Fiction novel “Earth”… literally a war on Switzerland which arises our of the discovery of just how much ‘wealth’ is hidden away there by corrupt players around the world.

      Sure, a bit fanciful… but an entirely predictable eventuality based on how technology tends to proceed… (the hypothesis is that secrecy defenders won’t be able to keep up in the final analysis).

      Technology is going to change the framework for quite a number of political ‘debates’ fairly soon regardless… e.g. take that issue regarding “national I.D. cards” and the fear of ‘big brother’ having everybody tagged!

      It’s a very reasonable concern. But you won’t save your privacy by fighting the initiative. Within a few years, data collection will be so thorough that no “I.D.” cards will be necessary… cameras viewing you in public places and/or other methods of tracking (no implanted chips necessary)… will be able to reliably I.D. you.

      I’m not advocating here… I’m just trying to clue you in to what’s already a fairly likely near-future.

      Dr. Brin’s view on this evolution towards unavoidable ‘transparancy’ is that the only possible way to deal with it is to make the data available to everyone…

      See “The Transparent Society” by David Brin for more on this
      Brief overview here:

      From the wiki article:

      Brin argues that true privacy will be lost in the ‘transparent society’; however, we have the choice between one that offers the illusion of privacy by restricting the power of surveillance to authorities, or one that destroys that illusion by offering everyone access (including the ability to watch the watchers). He argues that it would be good for society if the surveillance is equal for all, and the public has the same access as those in power.”

  2. YK

    This is similar to fighting the war on drugs. Drugs are very easy to fight. Just legalize them. One reason this is not happening is that there is a lot of dirty money going through the drug distribution system. This is how the government finances projects like secret CIA operations.

    1. reskeptical

      I disagree that simply legalizing drugs is the end of drug related problems. Expending so much money on “fighting” the criminal organisations that profit from them isn’t maybe the best solution either. It’s a cultural problem.

      1. aet

        Yes, a problem stemming from the culture of prohibition, which is in turn based upon intolerance.

      2. DownSouth

        Ah, but you‘re losing sight of the big picture. The “war on drugs” is but a camouflage. It amounts to little more than a pretense to justify interfering into the internal affairs of Latin American countries (and maybe Afghanistan too?). The ultimate goal is the implementation of neoliberalism—-“at the point of a gun if necessary,” as the neocon Max Boot so candidly put it.

        President Bill Clinton proclaims that “protecting our people, our territory, our way of life” are the objectives of U.S. national security policy, goals that are to be advanced “through engagement and enlargement”—-NAFTA and drug control are listed as two key elements of such “engagement and enlargement.”

        “U.S. National Security is a global strategic doctrine, relative to maintaining economic, political and military supremacy in its zone of influence” is how Mexican politilogue Adolfo Aguilar Zinser defines these same policies.

        U.S. “National Security” is a Cold War concept codified in the 1947 National Security Act, which also created the National Security Council, to combat Communist penetration of U.S. spheres of influence. In the name of its hallowed “national security,” the United States has mounted military invasions and suppressed internal dissent in Latin America, encouraged political assassination, civil wars and military coups, winked at torture, applauded fraudulent elections and ignored genocide. In the process, the US. Has also transformed itself into what Daniel Yergin labels “a national security state—-a nation in which external and national security concerns become dominant and domestic concerns are subordinated….”
        –John Ross, The Annexation of Mexico

      3. liberal

        “I disagree that simply legalizing drugs is the end of drug related problems.”

        Depends on the drug. Furthermore, there’s more we can do than simple legalization.

        For example, marijuana: stuff is pretty cheap to grow. You could make it entirely legal (subject to things like can’t drive high), but make selling it illegal.

        Meth, probably should make illegal. But most drugs, people who are hooked should be able to go to a govt-sponsored shooting gallery if they can prove they’re hooked. No more profit incentive to distribute.

        1. Jojo

          For example, marijuana: stuff is pretty cheap to grow. You could make it entirely legal (subject to things like can’t drive high), but make selling it illegal.

          This would not make big business very happy! Big tobacco would just love to be able to get into the marijuana growing & distribution business.

          With most of our politicians owned by business, they will not undercut or close business out of an opportunity at profit.

          Meth, probably should make illegal. But most drugs, people who are hooked should be able to go to a govt-sponsored shooting gallery if they can prove they’re hooked. No more profit incentive to distribute.

          Yeah, then we’ll get people protesting that we are discriminating against meth addicts!

          Shooting galleries are OK by me as long as the addicts stay on premises and are not allowed outside. We don’t need a bunch of zombies sitting on curbs, on the sidewalks against buildings nodding out or bumping into things as they stumble down the street. It’s annoying and it doesn’t set a good example for others.

          1. Vinny


            Marijuana is a “gateway drug”. Many people who start on it eventually end up on hard drugs like crack, cocaine, meth, LSD. And besides, marijuana a pretty bad drug itself. Moral of the story: don’t share joints with your kids.

            I should know. I worked with addicts for many years as a doctor.


  3. K Ackermann

    I doubt the accounts are for weapons. There is plenty of support through the Weapons Offset trade.

    Weapons offsets are potentially very costly, but it’s hard to tell because they are not always done in full daylight. It is common practice for some country to demand concessions from the weapons manufacturer for the privilege of selling the weapons. The concessions are commonly equal in value to the weapons sale. What the other country wants can range from a promise to build a factory in the country to manufacture the weapons there (which siphons jobs away from the US), to arranging the purchase of some exported product (which might kill the sales of a domestic producer).

    Weapons offsets can arranged through:

    American Countertrade Association
    Defense Industry Offset Association
    International Reciprocal Trade Association
    National Association of Trade Exchanges
    Corporate Barter Council
    Investment Recovery Association

    These non-profit, government-subsidized organizations will know just who to call in the government to orchestrate the offset trade. The government employs thousands of contractors for this.

    Without even knowing it, you have been funding a huge vertical support structure to assist in the delivery of weapons to other countries with the manufacturer pulling in all the profits.

    The government is teeming with parasites.

  4. psychohistorian

    The American financial system is one of the key elements of our imperialism. We want to be seen as bringing Freedom and Democracy to countries when our real intention is to enslave them in consumerism and debt.

    It shouldn’t surprise anyone that the offshore banking functions are “extensions” (albeit a bit shady or even criminal at home)of Wall Street…..I think this fits under the out of sight, out of mind ploy.

    Why are there no banksters in jail yet? Oh yeah, they are doing Gawd’s work….or is that Greed’s work.

    1. aet

      I think that there may perhaps be a moral distiction to be made between willing and unwilling slaves, and the compassion we ought to feel for such.

  5. Matt

    Word on the street is that US “old money” to avoid estate taxes, income taxes, and litigation had assets in offshore trusts. All of this predates the 1980s example.

    England had the Isles of Man, Jersey and Guernsey for “offshore” purposes.

    Nowadays, companies like GE offshore their profits and on shore their losses so they pay little or no US income tax. Enron did the same on an interstate basis as well, except they had no real net income.

    Entities also go offshore for different accounting rulings for example as it relates to their Repo 105s, MBS and CDOs.

  6. skippy

    Curious question in an economics/business blog.

    Why does a B grade blackjack player pocket 3/4 of his winnings…out of sight and mind to the dealer/pit bosses…so they don’t change dealers..rules to the game.

    So many tax havens out there Costa Rica, Lichtenstein, Africa, just spend some time in certain countries, only to meet well placed professionals offering umbrellas.

    Then there is the most profitable exercise sans the Fed discount window….drugs.

  7. Avg John

    Might as well ask why companies keep 3 sets of books. One set for reporting and complying with tax law, one set for financial reporting for investors, and a managerial accounting system used to actually manage the company operations and cash flows. Could they actually be reconciled? For most companies, probably not.

    Does the public’s general perception hold that an audited set of financial statements imply that the company’s books are free of error and fraud. Yes. But in actuality, it just means that the so called “independent” auditing firm has determined that the chance of fraud or material errors being uncovered is low enough to issue a clean “opinion”.

    Want to solve these mysteries? Let’s “publicly” audit the auditors. Let’s publicly inspect the work of the IRSs auditors and “independent” CPA firms. Take a sampling of the largest of the multi-nationals and painstakingly trace their cash flows and the assumptions used for cost transfers they use to value their products. Reconcile the income they report report for tax and financial purposes. No, I mean really reconcile it, compare it to the work of the IRS auditors and accounting firms, and present the results to the public.

    Fat chance. That would violate their rights. These soulless multi-national devils have the same citizenship rights as you and I, at least here in the U.S., and probably greater rights in tax haven countries.

    The entire system is a fraud and we all know it, deep down on some level. Too scary to think about. I would guess that it goes like this. “Play ball, pay a reasonable amount of tax and we will not inspect your books. Make waves, and you will find yourself on the wrong end of an intensive IRS audit, and believe us, we can easily find tax code violations and access heavy penalties.”.

    In my opinion, pretending the tax code and the entire system and tax industry is anything but a complete, complex fraud and joke will lead you nowhere in your quest to answer such legitimate questions as this. You will just find a bunch of clever lawyers and CPA firms that have been carrying on their business of billing for billions of dollars of services for decades, and have convinced themselves they provide a legitimate and useful service.

    Audit the fed, and audit the auditors.

    1. aet

      You have a recursion problem on yer hands.
      Sooner or later, a set of auditors will themselves not be subject to further audit.
      And if you should begin to suspect them too?

  8. Avg John

    Oh, one last thing. Want to solve the budget deficit problem. Make it a law, that executive bonuses are based on the earnings a company reports in their tax filings instead of GAAP earnings and other arcane formulas. Betcha that reported taxable income and related receipts would soon sky rocket. After all, the tax can be shrugged off as other people’s money.

    1. aet

      I had thought that companies only make enough profit every year to pay their taxes…that’s what they all seem to be saying, anyway.

  9. Rex

    I’m not seeing any real answers posted, and I don’t have any either, but here’s some thoughts.

    Back in the early 70’s I read some book about the world coming unglued – then there was the 1st gas crunch – and I got motivated to put some money in a safe place. The book told me about Switzerland so I opened a Swiss bank account. I was poor, so not much, maybe 1-2k$ max. At that time it was easy to open the account by mail.

    It was cool to have a Swiss bank account, but a few years later, the world seemed ok, so I closed it.

    I sometimes wonder what would have happened if I kept it. Near as I can figure, a few years later the Govt started demanding to know on my tax forms if I had any accounts such as this so they could have some of that money.

    Would I have lied? Would I easily have been caught? Why was I a criminal if I had a previously legal account? All hypothetical to me, because I closed it.

    So now we have all these crafty, twisted mega-corps who spend huge amounts of efforts to disperse or relocate themselves. Enron and recently Transocean come to mind as examples.

    So regular people can’t stash their money off-shore per our tax laws. Didn’t the Supreme Court just tell us how Corps are people and have big-pocket free speech rights. Cool. Let the F–ers have the same off-shoring money rights as us people.

    Can any lawyers work that angle? I know, it’s probably just my stupid dream, but it sounds right from a reciprocity point of view. If the Corps are people, make them knuckle under like people or stop claiming to be people.

    Sorry if this argument is too lame, but I digressed a bit as I wasn’t hearing much that addressed the (1)(2)(3)(4) questions in the original post.

  10. Gerald Muller

    My point of view is maybe a little off center. First, I do not put in the same bag, countries like the BVIs, where a company can be bought and maintained for little yearly cost and where there is no need to even file a financial report, for the simple reason that there is no accounting, and countries where a company must file a yearly report, keep an accounting like anywhere else and where only banks are “protected” by secrecy laws. The first lot are for drug trafickers and maybe arms sellers whereas the other “benefits” mainly private citizens who think that their own countries have tax laws that are close to plunder. Just take a look at the Forbes “Tax misery index” and you will see what I mean. In this case, citizens who live in counbtries where the politicians shave their citizesn so that they can live in luxury have a case for not paying all their taxes. Of course, they could move to another country where taxes are not confiscatory, but that is not always easy. Think of doctors or dentists (the example of Buiter) where national diplomas are not recognized elsewhere.
    I have another exmaple which shows that things are, as usual, rather more complex than simple: in Slovakia, a few years ago, an newly elected prime minister, educated in the US, decided to enact a flat tax of 19% across the board, where taxes on companies was over 38% before. Opponents and economic commentators at the time are cried that this would ruin the country with company taxes revenues being divided by two. The result after one year was just the opposite: corporate taxes soared to almost twice as much as before tghe reform. The reason was simple: with 19% tax, which was deemed reasonable by most corporations, it was not worth anymore to cheat.
    The moral is that there is a boundary in taxes levied on the people and corporations of a country that are accepted by the vast majority. However, I ma not naive: there will always be people and corporations that think that any t

    1. liberal

      “I have another exmaple which shows that things are, as usual, rather more complex than simple: in Slovakia, a few years ago, an newly elected prime minister, educated in the US, decided to enact a flat tax of 19% across the board, where taxes on companies was over 38% before.”

      IMHO citing tax rates isn’t very meaningful unless combined with some description of what comprises taxable income.

      I highly doubt US corps pay an effective tax rate of 19% or more.

  11. i on the ball patriot

    “The problem is that this theory is unprovable (as in even if it were true, no one with inside knowledge would be permitted to reveal the real reasons).”

    You jest!

    Biggest commodity right after oil … drugs …

    So … we google …

    “cia offshore banks William Casey drug money”

    And we get …

    NOT all conspiracy nuts.

    Deception is the strongest political force on the planet.

  12. Dan Duncan

    This post is a mess…

    Question number 1, Yves asks: “What could you possibly say publicly about your reasons for being against money laundering and tax evasion?”

    It’s a loaded question. Furthermore, the phrase “The Offshore System” is ridiculously vague.

    Question Number 2: “When did the US financial system first become inextricably intertwined with secrecy jurisdictions?”

    Is this post about “The Offshore System” or is it now about “Secrecy Jurisdictions”? And no, they are not the same thing.

    That stated, there was no magical, “Ah Ha!” moment of becoming inextricably intertwined. The answer to the “question” is over the past 235 years. OK, now what does one do with this nugget of information?

    Question Number 3: “Who lobbied for that? Why?” Somebody connected to The Bush Dynasty. [Might as well just get it out of the way.]

    Question Number 4: “CDOs were typically companies incorporated offshore. Why would they have been illegal if incorporated in the US?”

    If you don’t know WHY they were illegal, how do you know they WERE illegal?

    I did enjoy,however, the manner in which the audience was primed at the end of the post.

    “I’m not trying to be too conspiracy minded…BUT…”

    Please. Could this get anymore Pavlovian?


    “The US is a nothing but a Narco-Weaponry-Financial-Wizardy-Imperialistic-Empire-Of-Hidden-Wealth!”

    1. i on the ball patriot

      “The US is a nothing but a Narco-Weaponry-Financial-Wizardy-Imperialistic-Empire-Of-Hidden-Wealth!”

      Woof! Woof! Woof!

      Deception is the strongest political force on the planet.

    2. Anonymous Jones

      In your own sloppy way, you echo (dully through mangled thickets of prose) many of the thoughts I had in reading the post and even more so in many of the comments, especially the ideas in the comments like the system can’t be “anything but a complete, complex fraud and joke.” There is actually a space between purity and complete fraud! Believe it or not! The system might be…oh, what’s the word? Complex?!?!

      The idea of accounting and abstracting lots of information into numbers set into predetermined time periods might not be easy to understand??!! You mean transactions that occur over years and years don’t fit well into a snapshot financial statement??!! That can’t be! The world is simple!!! Don’t tell me the world is complex. That’s insane!!!

      And really, people, there is also the ability to criticize certain aspects of the government without coming to the conclusion that we live in a narco-state!

      Many law abiding people use entities in offshore tax havens. Many foreign investors in the US do not want to open themselves up for scrutiny to the US government for completely legitimate reasons. Setting up holding companies in a tax haven can help that. All of you who so fear the US government and think it is completely corrupt, can you really not see why a foreign investor might not want to divulge the existence of foreign assets to the US government? Really?

      Anyway, Dan, there is actually something worthwhile in your comment this time! (as long as someone is willing to endure your completely unearned belief in your own superior ability to recognize the reality of any given situation and your so tiresome need to criticize the entire community of NC readers even though we are so obviously (except to someone as obtuse as…OK, I won’t say it…) of different persuasions)

    3. Doug Terpstra

      “Question Number 3: “Who lobbied for that? Why?” Somebody connected to The Bush Dynasty. [Might as well just get it out of the way.]”

      Nice pre-emptive defense! But sorry, that’s only an invitation here. Remember BCCI?

      From the magazine issue dated Dec 7, 1992

      “BCCI was involved in some of the most sensitive intelligence operations of the Reagan-Bush years, including the secret sales of arms to Iran. When questions were raised about the CIA’s ties to BCCI after the shutdown of the bank, however, spokesmen for the agency insisted that its hands were clean. “Any allegations of unlawful use of BCCI by the agency are without foundation,” the CIA said in a statement.”

      “…Congressional investigators and others familiar with BCCI have their own theories about the CIA’s conduct. There are strong suspicions that the agency wanted to protect an important intelligence asset. As Norman Bailey, a former National Security Council official, said, the CIA was not interested in “blowing the BCCI cover.” There is another alarming possibility: some investigators believe a portion of money stolen from BCCI’s depositors financed covert operations sponsored by the U.S. government. If BCCI’s frauds were exposed, this source of funds would dry up. There are even indications that CIA officials were involved in the founding of BCCI…”

      More than just plutocrats evading taxes, as DownSouth notes above, illegal wars are a key reason banks like BCCI are not just tolerated, but created and nurtured. Gordon, below, offers a number of good links, including the History Commons site, showing that Poppy Bush was head of the CIA when BCCI was created in 1972.

      Read that link, then come back and apologize for your Pavlovian drooling on this site.

  13. liberal

    “I can’t think of a minimally plausible justification for the offshore system.”

    Huh? So the rich can avoid paying taxes. That’s obvious.

  14. Ghost of Joe

    I used to be an honest man. I am crumbling. No–I have crumbled. When they assessed me at $75,000 a fortnight ago I went out and tried to borrow the money, and couldn’t; then when I found they were letting a whole crop of millionaires live in New York at a third of the price they were charging me I was hurt, I was indignant, and said: “This is the last feather. I am not going to run this town all by myself.” In that moment–in that memorable moment–I began to crumble. In fifteen minutes the disintegration was complete. In fifteen minutes I had become just a mere moral sand-pile; and I lifted up my hand along with those seasoned and experienced deacons and swore off every rag of personal property I’ve got in the world, clear down to cork leg, glass eye, and what is left of my wig.

    Those tax officers were moved; they were profoundly moved. They had long been accustomed to seeing hardened old grafters act like that, and they could endure the spectacle; but they were expecting better things of me, a chartered, professional moralist, and they were saddened.

    I fell visibly in their respect and esteem, and I should have fallen in my own, except that I had already struck
    bottom, and there wasn’t any place to fall to.

    Mark Twain, “Taxes and Morals,” speech delivered Jan. 22, 1906

  15. James

    From the link below:

    Oddly enough, Marshall Langer is not a household name in America. And yet, Mr. Langer is a pioneer of enormous stature in certain circles, specifically tax avoidance and tax shelter venues.

    Marshall Langer is either the first, or among the first group, of architects of offshore tax shelters. Mr. Langer’s first book, How to Use Foreign Tax Havens, was published in 1975, some years after he created one of the earliest tax shelters in Bermuda. Later, he would expand to the Caymans and elsewhere.

    Among his many accomplishments relating to tax avoidance and tax shelters, Mr. Langer assisted the Central Bank of Barbados in developing that country’s offshore legislation and served as an Adjunct Professor on the faculty of the online LLM program of Global Tax and Offshore Financial Centers at St. Thomas University of Law.[14]

    If you love tax shelters, you’ll love Marshall Langer.

  16. anwynd

    Tax havens are an issue that instigate a lot of bluster but are already subject to thorough legislation.

    (1) Why does the offshore system exist?
    The offshore system must exist as long as international trade is permitted, jurisdictions differ in their tax codes, and tax deferral is permitted for income earned by foreign subsidiaries but not remitted to their domestic parent companies.

    (a) Why is the offshore system useful?
    International trade is useful for reasons beyond enumeration. Differing tax codes are of debatable utility but do promote competition. Tax deferral avoids double taxation and reduces administrative burden[1].

    Foreign subsidiaries of domestic corporations pay no taxes in the United States, but domestic subsidiaries of foreign corporations pay taxes in the United States. Controlled foreign corporation statutes prohibit deductions for parent-subsidiary transfers[2] except as permitted by reciprocal tax treaties.

    (b) Why is money laundering and tax evasion permitted?
    No jurisdiction knowingly permits money laundering. The OECD Financial Activities Task Force considers all jurisdictions as fully cooperative in efforts to stem money laundering[3]. Many offshore jurisdictions have stricter Know Your Customer regulations than OECD countries.

    There is no satisfactory definition of “tax haven” or “offshore jurisdiction”. The OECD, NBER, US District Court, and GAO have all tried and failed to define “tax haven” in a precise and useful way[4]. Willem Buiter’s definition is a jurisdiction that “offer[s] safety to tax evaders by granting anonymity, confidentiality and secrecy”, which fails to define tax evasion and ignores the fact most transactions in tax havens that result in tax reduction are neither anonymous, confidential, or secret.

    (2) When did the offshore system arise?
    The offshore system was anticipated by the Revenue Act of 1913[5]. Controlled foreign corporation statutes were enacted in the United States in 1962[6].

    (3) Why did the United States eliminate bans on incorporating offshore?
    I can find no evidence that the United States ever banned foreign subsidiaries or ownership of foreign corporations generally.

    (4) Why did collateralized debt obligations incorporate in foreign jurisdictions?
    The primary driver of Wall Street firms to use offshore jurisdictions is regulatory regime shopping. I have no knowledge beyond this.

    Final Note
    The United States is the largest tax haven in the world. Foreign persons, natural and legal, use US limited liability companies to avoid domestic taxes. Single-person LLCs inherit the reporting status of their owner. A foreign (non-resident) person with no US-source income is not required to file a single document with the IRS. A single-person LLC with no US-source income owned by a foreign person with no US-source income likewise files nothing with the IRS.

    [1] US Treasury report on The Deferral of Income of US Controlled Foreign Corporations, page 99 .
    [2] Ibid pages xi-xv.
    [3] OECD Financial Action Task Force report on High-Risk and Non-Cooperative Jurisdictions .
    [4] US GAO report GAO-09-157 on International Taxation, summary .
    [5] US Treasury op cit, pages 101-110.
    [6] Ibid page 110.

    1. anwynd

      My apologies, this was my first post and I didn’t realize my URLs would be stripped if flanked by angle brackets.

      [1] US Treasury report on The Deferral of Income of US Controlled Foreign Corporations, page 99 <;.
      [2] Ibid pages xi-xv.
      [3] OECD Financial Action Task Force report on High-Risk and Non-Cooperative Jurisdictions <,3417,en_32250379_32236992_1_1_1_1_1,00.html&gt;.
      [4] US GAO report GAO-09-157 on International Taxation, summary <;.
      [5] US Treasury op cit, pages 101-110.
      [6] Ibid page 110.

  17. gordon

    A few random links…

    A relevant Angry Bear post:

    A Business Week article:

    Make Of It What You Can from Narconews:

    The dear old Bank of Credit and Commerce International:

    The African connection:

    How little the corporations pay:

    How drug money saved the world:

    If you have time, read McCoy’s rather famous “The Politics of Heroin”. Out of date now, but still a great read for opening your mind to what’s possible. Have fun!

  18. Nick Shaxson

    The best (direct) response to your query so far comes from Lee Sheppard at TaxAnalysts in her Forbes article Our Hypocrisy on Tax Havens.

    Sheppard does a great job identifying key events and drivers of this thing – notably that this isn’t about a bunch of independent states going their own way – this is mostly about large powers setting up a system to benefit certain financial interests at the expense of everyone else – notably developing countries. Sheppard underplays the role of Britain in this – Britain is absolutely the biggest guilty party in this whole dirty game; the US followed the UK lead. The answer as to what these places are is fairly simple – they are places that seek to attract business/get rich by providing facilities for others to evade and avoid the laws, regulations and rules of other places. Tax is a part of it, secrecy is a part of it, financial regulation is a big part of it – and there’s more. This history, and much more (and the skewering of the standard tax haven defences such as “we are clean, transparent, cooperative and well regulated” or “they promote efficiency in the international financial system” and all the rest of it) is to be explored in great detail in my forthcoming book Treasure Islands” out next year

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