Smoke, mirrors and an off-shore haven for cash

Enron. Parmalat. Hugh Hefner. Wal-Mart. The Russian Mafia. Rupert Murdoch. Italian Prime Minister Silvio Berlusconi’s media empire. The hedge fund Long-Term Capital Management. Al Qaeda. The CIA. General Electric.

What competitive advantage do (or in some cases, did) all these entities have in common?

If you answered, “Byzantine offshore financial structures,” you won. You’re probably already there: in some drowsy palm-shaded tax haven. But the rest of us, the wage-earning uninitiated, now have the chance to take an eye-opening cruise to the Caribbean refuge of buccaneer banking. Welcome to the Cayman Islands, courtesy of William Brittain-Catlin’s hardball report, “Offshore: The Dark Side of the Global Economy.”

The author, a sometime BBC reporter-producer and a corporate investigator for a highly regarded business intelligence firm, is well-trained and well-placed to tackle the daunting task of uncovering and charting the seismic shift of money from visible, more or less accountable onshore corporate headquarters and banks to the burgeoning, floating offshore world. How much money is involved? In 1999, he writes, “U.S. multinationals had $400 billion of untaxed earnings ... in offshore pools. By the end of 2002, the amount was about $639 billion.” Such numbers are numbing -- and hard to get at. Offshore finance is, after all, a virtual world whose very raison d’etre is secrecy and anonymity. It is a world of smoke and mirrors, of holding companies nested within holding companies in a baffling set of apparently empty Chinese boxes.

Historically, offshore institutions have served a variety of purposes -- to hide personal wealth from a soon-to-be-ex-spouse or spendthrift heirs, for example. Today, they cater primarily to large and super-large organizations, whether legal -- Murdoch’s News Corp. and General Electric -- or downright criminal -- the Russian Mafia, Al Qaeda. The attractions are threefold: first, to amass and reinvest profit free of taxation; second, to raise money as well as structure and close deals free of regulation or irksome governance; and, not least, to funnel money untraceably anywhere in the onshore world -- a function Brittain-Catlin says is prized by terrorists and government intelligence services alike.

The Cayman Islands are hardly the only offshore incorporation and banking center with global reach; there are trusty standbys such as the Bahamas and Liechtenstein, and new stars such as Vanuatu and Nauru near Fiji. Nor are Enron and Parmalat the only corporate heavyweights to have gamboled and gambled in the candy shop of offshore opportunities. The Caymans have become a major, innovative player, helping support such capital inventions as transfer pricing, securitized future income and tax-free mutual funds. By focusing on the Caymans’ 40-year progress from impoverished former shipbuilding colony to boom-protectorate with a per capita gross domestic product higher than that of the United States, Brittain-Catlin shows with ground-level, captivating detail how random factors (a risk-seasoned yet conservative culture; an underdeveloped, English-based legal system; the construction of an airstrip at just the right moment) created the ur-soup from which offshore financial life evolved.

The author’s opening case study, tracing the rise and fall of Enron, throws halogen-like clarity on the rewards as well as the risks that mega-corporations embrace when they move financial assets and operations offshore. Enron sets a fearsome example of how a company can eviscerate itself through greed: Executives working deep in the offshore network contrived “structures so abstract, so detached from reality that they become merely instruments of deception [to] preserve the freedom they imagined was theirs by right.... “ Their strategy, stripped of fancy jargon, involved raising money to cover losses by selling the expectation of rising Enron stock prices, which then “fed back into a world of lost jobs, worthless stock, and vanished pensions.” Additional incisive studies of corporate offshore losers and winners drive home the point that onshore societies not only suffer from the loss of tax revenue (and eroded services) but also pay dearly, in the form of bailouts and restructurings, for disastrous losses when the game goes bad.

“Offshore” succeeds brilliantly at confronting what it terms “the complexity ... the death’s-head mask of capital’s technical control.” It also works on another ambitious level. Citing thinkers from Ptolemy through Kant and Rousseau, Marx and Freud, the author situates the new phenomenon of global offshore finance within the broad stream of Western philosophy and social development. On the whole, these reflections are cogent, graceful and persuasive, though at times more hindered than helped by a proliferation of overstretched metaphors.

At the end of the day, Brittain-Catlin’s vision of the present economic (dis)order verges on the apocalyptic: “We live in the era of offshore capitalism -- where no one or nothing can remain rooted to its government except through force of war and violence, total sacrifice to the market, and the dehumanizing hunt for ever more extreme forms of self-protection that war and market impose on us.” “Offshore” is not a perfect book. It is, however, an important book, one that should be read by anyone truly wishing for better or worse to understand this world. *