COGS IN THE MACHINE: SMALL STATES, FINANCIAL CRIME, AND GLOBAL CAPITALISM.

• Author: Hudson, Michael
• Position: FEATURE

Journal of International Affairs (JIA): You're a Senior Editor for the International Consortium of Investigative Journalists (ICIJ). Can you describe for readers what ICIJ is currently ivorking on?

Michael Hudson (MH): As long as we're around, ICIJ is going to continue to report and write about the offshore financial system. But we also have other kinds of stories that we're doing, some of which aren't necessarily about offshore, but are maybe still about smaller states. Stay tuned for those. As you may have seen this year, we've done a series of stories about the telecom giant Ericsson and its problems with illegal payments around the world, especially in the Middle East. (i) In July, we came out with a new project about Uber and its lobbying and influence operations around the world seeking to change laws or even evade laws. (ii) The Uber story reflects the themes of everything we do, which is ultimately about creating transparency and fighting corruption and exposing the people and systems who enable it.

We're also going to continue to follow up on all our offshore projects. There are new developments all the time: there's always new legislation and new scandals, so we continue to follow up because the offshore system is entrenched, the system is powerful, the system is smart and adaptable. And the only way to bring about change is to just keep pushing and hacking away at these issues. As Teddv Roosevelt once said: "There is mighty little good in a mere spasm of reform." (iii)

JIA: On ICIJ's homepage today are stories involving a bribery case in Djibouti, a profile on Delaware as a "low profile tax haven," and a tax evasion scheme run through Mauritius, among others. Is it fair to say that small states and jurisdictions are at the center of financial crime?

MH: I would say no, in the sense that I don't think they are at the center of the system. They are key cogs; they are very important parts of the offshore system. They're part of the connective tissue, and the offshore system would not operate, or would operate much differently, if they didn't exist and weren't part of it.

The thing about the offshore system is that people often say "So-and-so moved their money offshore." That doesn't necessarily mean the money resides in Belize or the British Virgin Islands or Seychelles. That means the money is probably in a Western bank, because if you have money, you want to be able to spend it. But first, if the money involves ill-gotten gains, you need to launder it to disguise its ownership. You might have a trust in Belize that is controlled by a shell company in Cyprus that in turn is controlled by a shell company in Hong Kong whose directors are not human beings but rather another shell company created in Seychelles, and on and on. But eventually, if you're, say, the son or daughter of a corrupt dictator somewhere in the world, you're going to want to be able to spend that money shopping in London and New York. So you're going to have a US bank account, or a bank account in London. And often one of the key steps in money laundering is turning local currency into US dollars, because the US dollar is the de facto global currency. That conversion helps make dirty money appear cleaner and makes it easier to spend, easier to move.

The key here is that the offshore system is truly a global system, not just a hodgepodge of far-flung island hideaways. It's a machine that's all about interconnection, all about linking together multiple jurisdictions. Financial secrecy is a product that is bought and sold. The more secrecy you want, the more you pay. If you just want basic secrecy you can have a bank account in New York that, on paper, is controlled by an anonymous shell company in the British Virgin Islands. That's pretty simple. But that's an easier trail for investigators and even ex-spouses or tax authorities to follow, so you might want to have what's called "layering." The more layers of companies and trusts between you and your bank account, the more secrecy there is. And that's why all of these smaller jurisdictions, in particular island nations, are so important to the system. They provide the puzzle pieces, the building blocks of hard-to-trace shell companies and trusts, that make layering possible.

The small states play another important role in the offshore system. They draw much of the blame for offshore financial sleaze and direct attention away from the big players, the big Western nations.

After so many years of reporting on these issues, one of the axioms that I've come to embrace is that the smaller and less powerful a jurisdiction is, the more likely it is to be condemned for its role in the offshore system. These smaller, less politically-powerful jurisdictions have been traditionally the fall guys for the offshore system. Almost always the focus in the media, government, and multinational organizations is on the island paradises: the Caymans and the British Virgin Islands in the Caribbean, the Cook Islands in the Pacific Ocean, or the Seychelles in the Indian Ocean. The idea is:

"They're bad. They're at fault in this. We, the greatest powers on earth, the United States, the United Kingdom, the European Union and its member states, are shocked--shocked--that such a thing is happening. And we're going to work to reform the system and make sure that the British Virgin Islands and the Caymans and all the rest of the bad islands behave." JIA: If small states aren't at the center of the offshore system, then who is?

MH: The most powerful players in the offshore system are really the big Western countries, where all the money is and all the big banks are. A tax expert once said, "The biggest tax haven in the world is an island, and it's either Manhattan or the United Kingdom." They are the central hubs that tie together all the jurisdictions that make up the offshore system--and the vast majority of offshore-flavored cash moves through them or resides with them.

Say you're in the Democratic Republic of Congo and you want to move money and put it in a bank in Switzerland. As we've said, you probably want it to be in dollars. But you can't move dollars around the world in a direct line--you can't move money directly from the DRC or Angola to Switzerland or Belgium, if it's in dollars. It has to first go through a New York bank, one of the big banks that has a license from the U.S. government to move dollars around the world. The dollars have to go from country A to New York and then out to country B.

Many of the biggest banks in the world make substantial profits from these transactions. It's a profit center, through which billions and billions of dollars are passing and a small percentage for each transaction is earned as profit, just for being a middleman for each of these transactions. Thev make lots of money without putting any of their own capital at risk. This creates a disincentive for them to look too closelv at who's moving this money and whether the money might be the proceeds of crime and corruption or is fleeing oversight from law enforcement and tax authorities. Our 2020 FinCEN Files investigation, (iv) in partnership with BuzzFeed News and other media outlets, found that five global banks--JP Morgan Chase, HSBC, Standard Chartered Bank, Deutsche Bank, and Bank of New York Mellon--profited from suspect transactions, even after they paid fines to U.S. authorities for previous anti-money laundering failures and in some cases signed deferred prosecution deals. The fines that these banks were forced to pay were basically the cost of doing business.

Meanwhile, the United States, and to some degree the UK and the EU, have set themselves up as the global cops responsible for fighting offshore-enabled financial crime. Since they are not necessarily going to go after themselves or go after each other, they're going after the smaller players. It's the little guys who are met with threats of economic blacklists and sanctions. There's a really great paper by Steven Dean at Brooklyn Law School and Attiya Waris at the University of Nairobi called "Ten Truths about Tax Havens: Inclusion and the 'Liberia Problem.'" (v) They call the US a "superhaven:" it's a state that can combine secrecy and attractive rates of investment return. That's really a quantum leap over what other tax havens offer, especially smaller tax havens that are offering secrecy alone. When you go back to 2000, to the beginning of the global community making noise about doing something about global tax evasion, the big countries that controlled the Organisation for Economic Co-Operation and Development were searching, as Dean and Waris put it, "for an explanation for the failures of the international tax system" that the OECD had overseen for decades. Liberia was put on a blacklist, along with a handful of others--but none were the big players. As Dean and Waris note, the OECD did not see warravaged Liberia as a state spiraling into more years of brutal killing, it "saw a 'gangster' willfully engaging in 'harmful tax competition'."

Their argument is that this is simply a scapegoating of smaller countries, smaller jurisdictions. When I spoke to Dean about his paper, he said that the big nations, the rich nations, don't actually want the system to change in a way that harms their own economic self-interests. He said that offshore secrecy and tax avoidance are "not a breakdown in the system: this is a machine operating as it is supposed to work."

JIA: You describe the system...