Seeking competitive advantage, tax shelters, and escape from the watchful eye of regulators, multinationals and other companies are increasingly turning to offshore entities to process their finances. This business is done via front companies located in a handful of Caribbean tax havens, as well as in Switzerland, Liechtenstein, and the Channel Islands, and even in some remote islands in the Pacific Ocean.
In all, says William Brittain-Catlin, a BBC producer and investigator, such deals have become central to how global finance is done today. The trouble, he says, is that they create competitive inequities, foster criminal activity, and allow massive Enron-like cover-ups of financial shenanigans.
The book focuses on the Cayman Islands, where some 80 percent of international banking transactions occur and a third of its wealth is held, he says. He explains how the country turned to offshore banking as a means of survival as other commercial activity waned. The Caymans were quite savvy in the ways they structured legislation to protect the country from outside criminal investigations, while supporting the rights of their offshore entities to maintain privacy. "In Cayman," writes Brittain-Catlin, "the protected freedom of the individual in the secret realm is put into law."
Doing business there is as simple as can be. It involves little more than registering a company name; information on ownership, directors, nature of the business, and other business essentials are not included in the registration process. Once registered, the entity can be used to finance deals tax-free. For example, the author says that Wal-Mart has three subsidiaries in Cayman that regularly issue bonds worth anywhere from $500 million to $1 billion to finance growth. Most Fortune 500 global corporations do the same. But it's not just tax advantages that businesses seek, he adds. Competitive advantage—or at least competitive parity—is another driving force of offshore dealings. If your competitors use offshore subsidiaries to drive down taxes and drive up margins, don't you have to do the same to remain competitive?
One common technique used by many multinationals to increase profit margins is "transfer pricing, which allows global corporations to engineer lower overall tax rates by taking advantage of different national tax systems." Some companies devote entire departments to determine how to take advantage of such transfers. Of course, many of these dealings are perfectly legal, at least the ones we see, says Brittain-Catlin. "Publicly quoted companies always disclose the identities of at least a few of their offshore subsidiaries, to keep regulators off their backs, but these are merely the public froth that floats to the surface," he charges. "Many thousands of others remain secret and unknown, linked up inside corporations in order to concoct and preserve financial firepower and competitive advantage."
But even legal offshoring comes with big costs to society, the author argues, listing everything from associated money-laundering schemes to the funding of terrorism. Offshore accounts are also tied up in many of the latest corporate and country financial meltdowns—just review the hundreds of offshore accounts set up by Enron.
In the end, the book doesn't offer many solutions, but attempts to make the case that the growth of this secret world threatens key values of capitalism and civilized society such as equal opportunity and fairness, because it favors those who skirt the rules at the expense of those who don't.
- Ann Cullen