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Digital Subscriptions > Prospect Magazine > June 2016 > The world’s hidden wealth

The world’s hidden wealth

Britain leads the world in offshore finance—it must reform its tax havens

From Britain’s perspective, the most significant element of the recent Panama Papers scandal was David Cameron’s involvement. Amid the 11.5m documents leaked from Mossack Fonseca, the Panamanian law firm, were revelations that forced him to admit he profited from an offshore trust set up by his late father. Though the reported profits of £19,000 were modest, his involvement with the scheme chimed with a deep unease about the role of elites in Britain and other western societies. The campaign for Britain to leave the European Union is being harnessed to this anti-establishment sentiment.

The other big story for Britons was that Mossack Fonseca’s favourite jurisdiction for incorporating secret shell companies for its clients was not Panama, but the British Virgin Islands. The BVI, alongside other tax havens such as the Cayman Islands, Bermuda and Gibraltar, is a British Overseas Territory. These places—along with Jersey, Guernsey and the Isle of Man, the Crown dependencies closer to home—sport the Queen’s head on their stamps and bank notes. The Queen also appoints their governors or the equivalents, and their laws are approved in London, where their final court of appeal sits.

In the early 1970s the Bahamas, then a British colony, was the dirty-money haven for North and South America—it was a favourite of the mob in the United States. When Bahamian Premier Lynden Pindling led the island nation to full independence in 1973, the offshore money fled almost overnight. “It wasn’t that Pindling said or did anything to damage the banks,” explained Milton Grundy, a lawyer and tax expert. “It was just that he was black.” Most of the hot money went to the nearby Cayman Islands, with its reassuring British-run system.

The offshore world scoops up all sorts of money. There are companies involved in perfectly legal businesses, who base themselves offshore because it’s easier. There are those who want to avoid regulation, or tax. And there are those at the criminal end, who are disguising the proceeds of crime. It is part of the frustration with offshore finance that the lines between these types of money are so blurred and this leads to a curious double game. Offshore jurisdictions want to create an appearance of probity, so as not to frighten those with money—but they also want to keep standards as low and unobtrusive as possible. The classic offshore pitch is therefore that the jurisdiction can be trusted not to steal the money that is deposited there, and that if your line of business is in any way morally dubious, don’t worry—no questions will be asked. A Bank of England internal memo from 1969, marked SECRET, gives a flavour of the attitude: “We need to be quite sure that the possible proliferation of trust companies and banks, which in most cases would be no more than brass plates manipulating assets outside the Islands, does not get out of hand. There is of course no objection to their providing bolt holes for non-residents.”

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In Prospect’s June issue: Bronwen Maddox lays out the case for Britain to stay in Europe—the position taken by the magazine. Mikhail Gorbachev explains his hopes for Russia, suggesting that the claim democracy is bad for Russia is “balderdash.” Rachel Sylvester looks at the Conservative Party and explores what might happen to the Tories after the EU referendum. Also in this issue: Nicholas Shaxson and Alex Cobham unpick the world of hidden money and what Britain can do about tax havens. Neil Kinnock argues that Labour isn’t making progress under Jeremy Corbyn and Jason Burke examines Islamic State and the networks that underpin their attacks. Plus Stephen Bayley asks was BritArt any good?