Avenfield, Rockwood Estate, the string of luxury London apartments owned by children and spouses of top politician — each leak of hidden wealth features England’s capital. From fashionable Paris to the Big Apple, numerous cities are homes to the global rich and powerful so why does London feature so prominently when estates acquired by ill-gotten wealth makes media rounds?
The roots of it lie in Britain’s colonial history. An article by BBC “Paradise Papers: The accident that led to Britain’s offshore empire” explains that when the sun set on the British Empire after World War II, a few scattered islands wanted to maintain imperial ties. To reduce the economic dependence of places such as the British Virgin Islands, the British government awarded them a special tax-exempt status. It created conditions for a thriving financial services industry and eventually led to the creation of the era of offshore accounts. As a tax haven, the British Virgin Islands host 678 out of the 716 companies revealed by the Pandora Papers, according to the Guardian.
At the start of the 20th century, income tax was in single digits and progressive taxation, charging richer people a higher rate, had barely begun. As World War I progressed, the state charged more and more income tax leading to a top rate of 30 per cent by 1919 and hence accountants started devising ways to avoid taxes for their wealthy clients. Money could be parked in places like the Isle of Man, which in theory was not part of the British Empire and therefore could not be taxed.
A bigger hullabaloo was created in Pakistan when the New Zealand cricket team walked off without playing a match than when the Pandora Papers made a splash
The Bretton Woods conference in 1944, at the end of World War II, resulted in an agreement to control movements of capital to curb speculative flows that exacerbated economic crises. This alarmed banks whose businesses relied on financing projects in former colonies. Therefore, the Bank of England allowed commercial banks to continue foreign lending as long as the lender and borrowers both were residing somewhere other than the United Kingdom and the lending was in a currency other than the sterling.
This led to the creation of the Eurodollar — defined by Investopedia as “US dollar-denominated deposits at foreign banks or at the overseas branches of American banks. Because they are held outside the United States, Eurodollars are not subject to regulation by the Federal Reserve Board, including reserve requirements”.
A global offshore financial market — the size of which increased from $1 billion in 1960 to $45bn in 1970 — that was under the control of no single state, governed by no act of Parliament or Congress but which allowed unlimited sums to be borrowed or lent. By 1980, the Eurodollar market was worth more than half a trillion and is estimated to be over $13 trillion today.
The existence of offshore accounts featured heavily with the Enron crisis in 2001 as well as the 2008 financial crisis that led to the Great Recession. Places like the Bahamas and Cayman Islands were used to keep legitimate hedge funds because of their tax-free and regulation-light nature. Thus, they were part of the ‘investment vehicles’ that were kept off bank’s balance sheets while purchasing billions of mortgage-backed securities that increased risks in the global financial system that eventually led to the crash.
The Guardian estimates that more than £170bn of UK property — roughly four-fifths of Pakistan’s GDP — is held overseas, much of it anonymously. The justification is that buying property through offshore companies is legal but it allows Britain’s property market to be used for tax avoidance and money laundering purposes. While a quarter of offshore company owners are exposed as British, about 7pc come from India.
However, claims a Pakistani corporate tax lawyer with more than 25 years of experience, times have changed in the last decade or so. While previously, lawyers could not be held culpable for the actions of the clients, regardless of the loopholes found by their services, now they are held as accessories to the crime as well.
Furthermore, “creating offshore accounts causes reputational damage and creates liabilities, which is why mainstream law firms avoid it,” he said explaining that they were usually created by an individual lawyer or an accountant that acted as an intermediary for a contact in a tax haven.
With a history of tax evasion stemming back to the collapse of the British Empire and World War I, it is unlikely that Pakistan’s corrupt elite will not continue to use offshore accounts.
However, the country which created a bigger hullabaloo when the New Zealand cricket team walked off without playing a match than when the Pandora Papers made a splash will probably let the outrage fade away. As Hafeez Pasha said, while reminiscing on his own short term as Finance Minister “people have a sense of resignation about the role and privileges of the elite.”
Published in Dawn, The Business and Finance Weekly, October 11th, 2021