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The Offshore Drain: Who Makes the Money Disappear?

Posted: 21/05/2012 14:25

A week ago a German-born, British-educated lawyer called Michael Little was arrested at Kennedy Airport as he flew into New York. Mr Little is 61, once served in the Royal Marines, and lives in the English countryside with his wife, who was with him on the flight and would have watched him being led away. Bail was set at $2 million.

Little sounds like an unusual man. He qualified as a lawyer only in 2005, after a career as a trader and a financier in London and New York and at an age when most people have one eye on retirement. His wife runs a company that uses horses and riding to treat disabilities of various kinds. And amongst his interests, listed on the website of the Bournemouth chambers where he practises, are sailing, chess and eschatology (the study of death, judgement and the afterlife - with an accent, for the time being perhaps, on the judgement part). According to charges brought by the IRS and the US Attorney for the Southern District of New York, however, his most significant professional contribution has allegedly been to help the heirs of a wealthy fund manager hide $10 million in Swiss bank accounts that he nominally controlled.

$10 million isn't, sadly, a lot of money, and the tax due on it was certainly not newsworthy. What did merit a handful of reports in the business pages and the offshore journals was that people who do what Little is alleged to have done tend not to get arrested, and certainly not for such modest sums. The Wall Street Journal described the event as "a fresh warning to U.S. taxpayers who haven't confessed secret offshore accounts", and very probably the IRS was hoping that it would be exactly that. Little wasn't arrested because his alleged crime was egregious; he was arrested as an example.

Hiding money offshore

You can understand why the IRS might be keen on discouraging les autres. The hiding business is in glowing health. If you're rich, and irresponsible, and don't feel like paying tax, you'll need people to tell you how to hide your money; and chances are if you're rich enough someone will actually do the hiding for you. The same is true if you're a corrupt politician or some other breed of well-to-do criminal. Most of it heads offshore, of course, into that dark archipelago of tiny islands and pretend nation states, and like all strange destinations, it's a place that requires a guide: a qualified professional who can show you around.

Estimates are difficult to make, because it's hard to count what you can't see, but the United Nations reckons that between $800 billion and $2 trillion are laundered each year. (My own view is that this fails to take into account the full extent of political theft in developing economies, and that the real amount is much, much higher). That figure won't include tax evasion, which for some reason is still seen as a lesser crime, but some estimate that every year $3 trillion of taxes go unpaid, and the more conservative put it at around $1 trillion. Precise numbers aren't important, provided they indicate the scale of the hiding being done. Let's say that altogether the money being washed and stashed is somewhere between $2 and $5 trillion, or 3% to 8% of global GDP. Enough to pay off Greece's national debt a dozen times over.

It's one of the charming quirks of the system that you probably need to be a lawyer or an accountant - someone who has trained in a professional discipline, cemented his respectability, sworn oaths - to know how to move this money around: to establish the companies, open the bank accounts, keep track of the fees and the transfers and the documents. This is rougher still, but if only $1 trillion heads illegally into offshore accounts, and if the average account is worth $10 million a year, and your average frontman has two such accounts at any one time, you would need 50,000 frontmen to handle it all. (That may seem like a very large number, but there are a great many lawyers in the world - around a million in the US, a million in Europe, over a million in India - and almost as many accountants.)

An unprosecuted crime

That's a lot of potential prosecutions, and a lot of potential good if they were made. But if these people were being held to account in anything like the numbers they ought to be, we'd hear about them; and eventually, instead of scuttling around unseen, they'd be forced out into the light. As it is, very few get to court, let alone to prison. Unless the country where the original crime has been committed really cares, investigations tend to collapse for want of evidence and international cooperation. A month ago, German prosecutors who had worked for six years on a prominent Russian corruption matter abruptly dropped all charges, an action so routine that only the Wall Street Journal saw fit to report it.

So whether guilty or not, Michael Little can count himself unlucky. The reason he came to the attention of the IRS was that his clients were American (and one of them, according to a special agent involved, prepared to cooperate as witness in an ongoing investigation). Had they been from Russia, or China, or most of Europe, or Latin America - almost anywhere else, in fact - he'd no doubt be at liberty right now.

 

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