Offshore, National Security and Britain’s Role

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The long recession precipitated by the 2008 financial crisis fed political failures across the world, increasing inequality and polarising societies to the point of social breakdown. As far-right movements threaten to take liberal democracies back to the 1930s, it is becoming increasingly clear that the offshore system, where wealth continues to accumulate in staggering quantities, is a source of serious and intensifying threats to international and national security. In this edition of Tax Justice Focus our guest editors Jack Blum, Charles Davidson and Ben Judah explore these threats and how we best tackle them. The following blog reproduces their editorial.

Editorial: Offshore, National Security And Britain’s Role

Jack Blum, Charles Davidson, and Ben Judah

The British public is used to being warned of systemic threats: terrorism, weapons of mass destruction, Russian espionage, even climate change have been front and centre of the national debate over the preceding decades. However, the British public is much less used to a sustained presentation of the acute risks posed to national security by ungoverned spaces in the financial sector that is supposed to be the country’s competitive advantage. This special issue of the Tax Justice Focus aims to fill this void in the public’s understanding of these threats from the murky world of offshore finance.

Corruption, quite simply, is not small beer. Illicit finance, the proceeds of crime and corruption, is today a central feature of the world economy. The International Monetary Fund has estimated that money laundering accounts for between 2% to 5% of the world’s GDP. The ease with which criminal and corrupt money can move through multiple jurisdictions  is the result of decades of failed regulation on both sides of the Atlantic, which has created a nexus of anonymous shell companies, secrecy jurisdictions and tax havens that come together to form the world of offshore finance. 

Ilicit finance is emphatically not something that happens ’over there.’ Some estimates put the share of the UK’s GDP derived from money laundering as high as 15%.[1] London is both one of the critical nodes of the world financial system and a gateway to the offshore world: with countless financial and legal service providers ready to shuttle their clients’ wealth to secrecy jurisdictions under British sovereignty like the British Virgin Islands or the Cayman Islands which have become hubs of illegal activity. All this has helped London become a favoured location for oligarchs, whose needs and wants have become a staple of the professional services sector. Since David Cameron’s premiership, there has been growing concern in both London and Washington over growing Kremlin influence in the UK, suspicious murders and the connections of British politicians current and former to foreign autocrats. It has become a widely held view on both sides of the Atlantic and on both sides of the political divide that the UK has failed to tackle both the threat of money laundering and the political and security threats that come with it.

The following essays explore why failure has taken place and what can be done to remedy it. The first lens we use is structural. How does one situate the scale of illicit finance in an understanding of global financial flows? In our first essay Yakov Feygin, the Associate Director on the Future of Capitalism at the Berggruen Institute, takes a bird’s eye view of the system, exploring the relationship between the fundamental structures of global finance, the role of the dollar and the place of offshore finance as an enabler of corruption and authoritarianism. This is the international system in which Britain, the City of London and UK’s global territories find themselves.

What are the consequences for democracies existing in such an environment? In our second essay Camila Vergara, a Postdoctoral Research Scholar at the Eric H. Holder Jr. Initiative for Civil and Political Rights at Columbia Law School, investigates the rise of transnational oligarchic power and the struggle to protect domestic national security when the offshore system both facilitates oligarchic power within democratic societies and offers them enormous room for manoeuvre for malign influence. Vergara offers a framework to understand Britain’s backdrop of news stories concerning current and former politicians’ links to kleptocrats and authoritarian powers.

These are clearly threats to democracy: but what frame should progressives use when highlighting these dangers? In our third essay, Grace Blakeley, a staff writer at Tribune magazine and author most recently of The Corona Crash: How The Pandemic Will Change Capitalism, critiques the concept of national security from a left perspective and suggests a new way of conceptualizing these threats more in tune with progressive language. Blakeley sets out how progressives concerned by the rise of kleptocracy can reach new audiences.

In our fourth essay, moving onto solutions, Nicholas Shaxson, author most recently of The Finance Curse: How Global Finance Is Making Us All Poorer, argues that if we are to look to the US, EU and UK to use their hegemonic power to dismantle this system, they need to overturn the power of their own financial sectors. The way to do that is to harness national self-interest in each place, by showing how oversized financial centres harm the countries that host them. This harm is found in many spheres: economic, political, democratic, cultural — and in the domain of national security. And in our final essay Edoardo Saravalle, formerly of the Centre for New American Security and the Senate Banking Committee, makes the case for the United States promoting the transformation of privately controlled financial nodes like SWIFT into internationally controlled financial infrastructures to ensure that public goals, not private interests, set the agenda. Both essays set out what could be real foreign policy goals for a government determined to reshape global finance for the better.

As the editors of this series, we want to take this opportunity to contribute one final component to this discussion: the question of law enforcement. The sheer scale of illicit financial flows in the global system shows that the existing regime of international agreements and cooperating bodies has been largely toothless. The Financial Action Task Force (FATF) has been in existence since 1989 and has had powers to issue a blacklist and a greylist since 2000. The United Nations Convention Against Corruption (UNCAC) is now in force in all but a handful of countries. But despite this the ability to stem these financial flows — illustrated simply by the vast sums moving within and between national jurisdictions — remains lamentable and lacklustre. There is not so much a lack of tools as a lack of willingness to use them.

In Britain and the United States the understaffing of the bodies charged with defending the financial system is a threat in and of itself. For example, in Washington the key Financial Crimes Enforcement Network (FinCEN) has only around 300 staff and a budget of just $118m a year. Despite the vital role FinCEN plays its annual funding amounts to roughly the purchase cost of one F-35 jet. In the UK, the National Crime Agency, which deals with the full range of serious and organised crime, has less than 5000 staff and only around 1250 of them are investigators. Companies House, the body charged with registration of corporate entities in the UK employs less than 1000 staff despite over 4m companies being incorporated in Britain, with a further 500,000 new registrations every year.

Britain has a unique role to play in making finance safe for democracy. It is responsible not only for the City of London, which still competes with Wall Street as the capital of global finance, but also for Crown Dependencies and Overseas Territories such as the Isle of Man and the British Virgin Islands, which provide invaluable niche services to both licit and illicit actors. Should the UK choose to embrace a leadership role by enforcing the rules already on its books and staffing up adequately to meet the risk of financial insecurity it could achieve significant impact in cleaning up and closing down the loopholes of the offshore system. However, that same centrality to global finance also gives Britain a unique ability to be a bad actor. This is why it is in the interests of all the democracies that post-Brexit Britain brings meaningful transparency to both the metropolitan centre and the offshore periphery. A lively and robust debate in Britain about the security and democratic threats, not just lost tax revenue, posed by the offshore world is the first line of defence against such an eventuality. We hope this special issue of the Tax Justice Focus can help start it.

You can download the full version this edition of Tax Justice Focus here.

Jack Blum is a leading legal authority on money laundering who has helped investigate many major white collar crimes including the Bank of Credit and Commerce International (BCCI) collapse and the Lockheed overseas bribes scandal. Charles Davidson is editor and publisher of The Offshore Initiative (www.offshore-initiative.com) and was Executive Director of the Kleptocracy Initiative at Hudson Institute between 2014 and 2018. Ben Judah is the author of This Is London and Fragile Empire.

[1] Ali Alkaabi, Adrian Mccullagh, George Mohay, Nicholas Chantler, ‘A Comparative Analysis of the Extent of Money Laundering in Australia, UAE, UK and the USA,’ SSRN Electronic Journal, January, 2010.