The City of London Is Hiding the World’s Stolen Money

In 1969, two years after the Cayman Islands, a British territory, passed its first law to allow secretive offshore trusts, an official government report struck an ominous note. A tide of glossy propositions from private developers, it warned, was washing through the islands. Cayman was fast becoming a state captured by shady finance.

Those were the pungent beginnings of a modern system brought to light by the Pandora Papers, an enormous data leak coordinated by the International Consortium of Investigative Journalists. The papers exposed a smorgasbord of secretive and questionable financial dealings by more than 330 politicians and public officials from over 90 countries and territories — and over 130 billionaires from Russia, the United States and elsewhere. On display was a dizzying array of chicanery and wealth hoarding, often by the very people who should crack down on it.

The revelations, published on Oct. 3, are global in scope. But if there is one country at the system’s heart, it is Britain. Taken together with its partly controlled territories overseas, Britain is instrumental in the worldwide concealment of cash and assets. It is, as a member of the ruling Conservative Party said last week, “the money laundering capital of the world.” And the City of London, its gilded financial center, is at the system’s core.

For Britain, whose bloated financial sector exacerbates widespread economic problems, that’s bad enough. For the world, at the mercy of an economic system rigged for the rich, it’s even worse.

The offshore ecosystem is, by design, fiendishly complicated. Many intricate and opaque instruments — including offshore trusts, tax loopholes and shell companies — plus banking secrecy and negligent financial regulation shroud the wealthy’s assets in murky legal mists. Central to it all are tax havens, such as the Cook Islands, British Virgin Islands and Jersey (one of the Channel Islands), which can operate like smugglers’ coves. The wealthy and nefarious take their money there to protect it, but also to escape from rules, laws and taxes they don’t like.

The wealth held in tax havens is staggering: Estimates range from $6 trillion to $36 trillion. And some tax havens are closer to home than many would imagine. The United States, with its shady Delaware shell companies and South Dakota trusts, has long been a big part of the secrecy system. A cluster of European countries, including Luxembourg, Ireland and Switzerland, offer another menu of escape routes. Asia, of course, has Hong Kong and Singapore.

But the British network is surely the biggest. The Tax Justice Network’s Financial Secrecy Index, a ranking of tax havens, shows that Britain and its “spider’s web” of offshore satellites would rank first. Over two-thirds of the 956 companies that the Pandora Papers link to public officials were set up in the British Virgin Islands.

Central to the process is the City of London. Through international stock market listings, currency trading, bond issuance and more, the City handles perfectly respectable financial activity from around the world. But it is also the main nerve center of the darker global offshore system that hides and guards the world’s stolen wealth.

Once the finance-pumping heart of the British Empire, the City has refashioned itself as a crucial conduit for international capital of all sorts. The key moment came when, amid decolonization, the Bank of England let the country play host to the new Eurodollar market. This was an almost unregulated and highly profitable offshore space, separate from the British economy, where foreign banks, mostly American, could do things they could not at home.

In the 1970s, this fast-growing market began to meld with Britain’s tax havens, and others, into a seamless global network. The British havens have since acted as collecting vessels for diverse financial activity from around the globe, legal or not, often passing the accounting, banking and lawyering to companies in the City.

In tandem, the two have caused untold damage. The tax revenue lost is eye-watering: Corporations use tax havens to escape paying an estimated $245 billion to $600 billion a year. (A new global deal for a 15 percent minimum corporate tax rate will curb those losses.) Individuals stash vast sums, too. But tax is only part of the story. The global game of deceit, played for decades by the wealthy and their functionaries in the City, has eroded the rule of law — and stripped away citizens’ trust in the system.

After the global financial crash in 2008, which exposed the extravagant excesses of the financial system, there were some efforts at reform. The “London loophole,” as the chairman of a U.S. regulatory agency, Gary Gensler, called it, was reined in. But now, as memories of crisis fade and Brexit begins to bite, the government wants to revive the City’s darker arts. “A New Chapter for Financial Services,” a key guidance document it published in July, clearly signaled a return to more permissive times. “Competitiveness” and “competitive,” code words for low taxes, weak regulation and lax enforcement, appear over 15 times.

Britain’s deference to shifty money is self-defeating. Its overly “competitive” financial center is a curse whose consequences are legion: regional inequality, an unbalanced economy, waning productivity, stalled investment, asset-price inflation and political corruption. After years of austerity, and amid food and fuel shortages, Britain can ill afford an oversize City.

But it’s the world that suffers the most. For shady businesspeople and long-serving political leaders, the offshore ecosystem provides impunity, cloaking capital and shielding wealth. Unaccountable and often untraceable, the system ensures that prosperity remains the preserve of the few. To overturn inequality and injustice, exposed so starkly by the pandemic, we must take on the havens — and the vested interests in London that protect them.

Nicholas Shaxson (@nickshaxson) is a staff writer for the Tax Justice Network and a co-founder of the Balanced Economy Project, an antimonopoly organization. He is the author of “Treasure Islands: Tax Havens and the Men Who Stole the World” and “The Finance Curse: How Global Finance Is Making Us All Poorer.”

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