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Very wealthy people have reasons why they would be willing to pay people and countries for the ability to park some of their wealth in a place where nobody would know about it. They could just be those avoiding paying taxes in their home country, or criminals who must hide their loot, or kleptocrats who are robbing their own country of its resources, or simply a spouse trying to protect his wealth from a potential divorce settlement. There are a collection of nations, politicians, lawyers, accountants, thugs, and others who provide services to this community of the ultrawealthy. It might be considered a plutonomy that lives under its own rules, separate from the world in which most of us live. This is the picture Oliver Bullough presents in his revealing book Moneyland: The Inside Story of the Crooks and Kleptocrats Who Rule the World. He provides this perspective on “Moneyland.”
“This is the place that I call Moneyland—Maltese passports, English libel, American privacy, Panamanian shell companies, Jersey trusts, Liechtenstein foundations, all added together to create a virtual space that is far greater than the sum of its parts. The laws of Moneyland are whichever laws anywhere are most suited to those wealthy enough to afford them at any moment in time. If a country somewhere changes the law to restrict Moneylanders in any way, they shift themselves or their assets to countries with more generous laws. If a country passes a law that offers new possibilities for enrichment, then the assets shift likewise.”
“They move their money, their children, their assets and themselves wherever they wish, picking and choosing which country’s laws they wish to live by. The result is that strict regulations and restrictions do not apply to them, but still constrain the rest of us.”
“This means Moneyland has neutered the core function of democracy—taxing citizens and using the proceeds for the common good—which in turn has disillusioned many people with the democratic experiment altogether.”
Much of this money has a corrupt origin. The governments and people that benefit from it entering their country have the choice of rejecting it and modifying the laws that provide it legitimacy, or they can revel in the fees earned in servicing this wealth. Too often it is the latter path that is taken.
“The world’s response to these developments has been entirely predictable…Time after time, countries have chased after the business they have lost offshore…thus making the onshore world ever more similar to the offshore piratical world…Taxes have fallen, regulations have relaxed, politicians have become friendlier, all in an effort to entice the restless money to settle in one jurisdiction rather than another. The reason for this is simple. Once one jurisdiction lets you do what you want, the business flows there and other jurisdictions have to rush to change, too. It is the Moneyland ratchet, always loosening regulations for the benefit of those with money to move around, and never tightening them.”
In 2007, the US was presented with the opportunity to fight back against Swiss banks that were participating in a scheme to defraud it of income tax revenue. Bradley Birkenfeld came forward as a whistleblower and revealed his activities as an employee of UBS, a large Swiss bank. The Treasury Department estimated that it was losing $100 billion every year in tax revenue to schemes like those Birkenfeld described. The Swiss had long claimed the secrecy of their banking operations were necessary to protect their wealthy clients from harm. They seemed to justify everything on the basis of sheltering Jewish assets from Nazis almost a hundred years ago. This time, however, the US had the will and the power to act. In 2010, it passed the Foreign Account Tax Compliance Act (FATCA).
“Under FATCA, if foreign financial institutions declined to reveal the identity and assets of American clients, the government would impose a thirty percent tax on any investment income received from the United States. It was a pretty compelling offer…Foreign banks could continue to help Americans break the law but, if they did so, they would be cut off from the US market, and under constant threat of a multibillion-dollar fine.”
The US requires citizens to file a tax return even if they are living and working in another country. Therefore, simply moving offshore is no relief from the tax laws. The sheer size of the US economy and the necessity of financial institutions to deal with dollar-based assets forced them to come to terms. Once that happened, it was much easier for other countries to agree to similar terms with Moneyland participants.
“And where the Americans led, the rest of the world followed. European countries agreed to swap information with each other; and the various British tax havens agreed to exchange data with the UK. All these efforts culminated in 2014 with the Common Reporting Standard (CRS), under which countries agreed to automatically swap information about all the assets that each other’s residents hold in each other’s banks.”
This sounds like an example of great progress in eliminating illicit activities. However, recall Bullough’s warning that when things change in Moneyland, the wealthy respond by finding more accommodating sites to deposit their money. In this case, the more accommodating site would be the US itself.
The US solved its problem with FATCA, but it did not reciprocate in kind by joining CRS. The Obama administration worried about this asymmetry, but any suggestion that data might be shared on US bank accountholders with other countries generated a furious response from bankers. Bankers understand Moneyland and recognized the advantage of the post-CRS situation, and knew how much money they would lose if they had to disclose information. Interestingly, the US banks resorted to the ancient claim that the Swiss had used successfully for many years: secrecy was required to protect account holders from crooks and terrorists. Once again, big money won.
“Financial institutions from more than 100 countries have to share information on assets held by US citizens or residents, but US institutions don’t have to send anything back in return. US institutions will be fully informed about what’s going on elsewhere in the world, but their counterparts in other countries will be completely blind as to what’s happening in the United States.”
“Some Florida Banks relied on foreign deposits for up to 90 percent of their capital, which meant almost none of the banks’ clients were paying tax on their interest at all.”
Bullough describes the financial chicanery a state will go to gain access to Moneyland funds using Nevada as an example. The legal loophole of choice for Moneylanders seems to be trust laws. A trust is an agreement between an individual with assets and a trustee (usually a lawyer or financial firm) as to how those assets will be handled. It was assumed that trusts would have a finite duration and, after it closed, assets would be taxable. For some reason, perhaps involving campaign contributions, the federal government did not impose a uniform time limit to a trust; rather, it left it up to states to set a limit. To gain a competitive advantage, some states abolished any limit at all; Nevada seemed to be thumbing its nose at other states by setting its limit at 365 years.
“By 2003, at least $100 billion (and probably much, much more) had poured into states with these long-lasting so-called dynasty trusts, creating a powerful incentive for other states to change their laws to abolish their own limits.”
Nevada has gone to great lengths to make their trusts more desirable to the wealthy.
“Nevada is particularly proud of its asset protection ordinances, which mean that—providing two years have passed since you put your property in trust—your creditors have no way of getting hold of it…If a man owns a company, puts it in trust, then gets divorced, his ex-wife has no claim on those assets at all, and nor do his children. And thanks to the generosity of Nevadan law, you can even be a beneficiary of your own trust, which means you’ve given your property away, so it can’t be taken away from you, and yet you retain all the benefits of owning it…There has not been a single case of a creditor ever managing to pierce a Nevada trust.”
Lax laws had generated a loophole that US residents could take advantage of; it would take the initiation of CRS to attract the vast amount of foreign money. The trick would require making a trust and its assets a foreign trust in terms of US tax law, while at the same time making the trust American so it avoids any reporting to a foreign nation. Bullough quotes Peter Cotorceanu on the process of establishing the “foreignness” of a trust.
“’The simplest way to do it, and there are lots of others, is just give one foreign person, one of a laundry list of powers: for example, give a foreign protector the right to remove and replace a trustee. Bang, that’s a foreign trust,’ Cotorceanu said. ‘It doesn’t matter that the trustee is in the US, that it’s governed by Nevada law, that all the assets are in the US, that the bank account is in the US. If one power on the laundry list is held by a non-US person, that makes it a foreign trust for tax purposes’.”
“But there’s a better bit. If it has a US trustee—such as Alliance Trust Company of Reno, Nevada, for example—then it is American for the purposes of the CRS, and thus immune to its provisions…which means a rich Chinese businessman, or a Russian, or whoever, can park their money here with no fear that information about it will drift back to its home countries authorities.”
“The trust is American under foreign law, and foreign under American law: it doesn’t exist anywhere.”
South Dakota plays the same game as Nevada, but while Nevada does not publish a tally of the assets held by its trust companies, South Dakota does.
“In 2006, before the UBS storm hit, the state’s trustees held an already impressive $32.8 billion—that’s around $42 million per head for every South Dakotan. By 2015, that total had reached $175.1 billion; and then rose by almost a third in just the next twelve months. In 2016, the state’s recorded total was $226 billion, which was $261 million for every resident of this prairie tax haven.”
This welcoming of foreign money into our system is not only unseemly, it is dangerous. These people who come here with their assets are law breakers. At best, they are tax dodgers; at worst, they are violent criminals who are willing to kill those who might endanger their funds, as the Russians have demonstrated. They do not come to enjoy our freedoms, they come to take advantage of them. And it is so easy for wealthy undesirables to buy their way into US residency. A mere $500,000 investment can purchase a green card under the EB-5 visa program.
Let us finish by recalling Bullough’s earlier warning.
“…Moneyland has neutered the core function of democracy—taxing citizens and using the proceeds for the common good—which in turn has disillusioned many people with the democratic experiment altogether.”
