Trust In the Heavens and British Financial Imperialism

The enduring legacies of British colonialism and its Anglo-Saxon legal culture of secrecy continue to fuel a clandestine financial system rooted in practices honed during imperial rule. This parallel and extremely powerful system embodies the intertwined histories of colonialism and capitalism. In South Africa, landlessness and illicit financial flows are persistent historical continuities and undermine efforts to address socio-economic disparities.

Despite being widely discussed in public discourses, the nexus between landownership and illicit financial flows remains largely overlooked. Both phenomena are rooted in the secrecy fostered by the Anglo-Saxon legal system, mainly through Trusts. Organisations like Oxfam note that global inequality not only exists between states but also within states, where the gap between rich and poor continues to escalate.

South Africa exemplifies the intertwined interplay of colonialism and capitalism, with landlessness and capital flight serving as prime illustrations. Thus, modern economic theories and (mis)governance often promote a sense of blind faith or reliance on external forces by countries. This downplays the critical reality of financial secrecy and its profound impact on shaping the modern world.

This article examines the role of Trusts as a mechanism for hiding, protecting and diverting wealth away from public scrutiny. This results in opaque financial systems and exacerbates inequality. Often directly linked to Trusts, illicit financial flows encompass activities like money laundering and tax evasion. These flows signify the movement of funds through channels that evade legal and regulatory frameworks.

Understanding how money secretly moves (illicit flows) is key to tackling inequality. These hidden movements are not random but a built-in part of a pitiless global economic system that favours the wealthy and rich countries. In 2020, economist Gabriel Zucman estimated that USD 7.8 trillion, or about 8 percent of global wealth (and 40 percent of corporate profits), was hidden in tax havens.

History of the Offshore Business Model and Trusts

Facilitated through tax heavens and the banking system, illicit flows have been part of the UK’s offshore business model since the height of the decolonisation period in the 1950s. The mantra of offshore banking is, ‘We will protect and after you when you bring your money here, and we are not going to put you in prison but will let you do what you want.’

According to the IMF, the super-rich and corrupt turn to tax heavens to hide their ill-gotten gains, resulting in governments losing up to USD 600 billion in tax revenue annually. Supported by another less spoken-about secrecy called ‘light touch regulation’, the City of London institutions began establishing offshore branches in former outposts of the British Empire throughout the 1960s. They aimed to create offshore centres with strong secrecy legislation to attract capital from across the globe.

Today, Swiss banking secrecy is the most notorious and well-known, but that is only one kind of secrecy. Another kind of secrecy, which is very British, is a Trust. The Trust is “a very slippery, complicated, and devious mechanism.” Legend has it that Trusts emerged from the time of the Crusades when the Knights would leave their assets in the care of Trusted stewards. In simple legal language, Trusts ultimately play with the concept of ownership.

The concept of ownership in law is more nuanced than it might initially appear. Thus, the settlor (the individual establishing the trust), in this case the Knights, would transfer legal ownership to a designated individual, often a lawyer, acting as the trustee. From a legal standpoint, this transfer would sever the settlor’s ownership of the assets. The legal separation created by this transfer would render the assets exempt from taxation and effectively shield any connection between the settlor and the assets from public scrutiny.

A noteworthy aspect of Britain’s offshore jurisdictions is that there are no prerequisites to becoming a trustee: anyone can establish and serve as one. Furthermore, there is no registry or official certification for Trusts. Only the involved parties know the Trust’s establishment, as there is no registration or financial disclosure mandate. Consequently, trusts within these offshore heavens function as largely clandestine entities, operating outside the purview of formal oversight or mandated reporting requirements.

Trusts form the base of all the transactions that secrecy jurisdictions such as Jersey push through the international financial system. The scale of assets involved is staggering, amounting to trillions of dollars in capital, ostensibly belonging to no one for taxation and other purposes. This encompasses financial assets and various tangible assets such as art, real estate and luxury items (and possibly soccer players).

Illicit financial flows have strengthened Western currencies and contributed to their financialisation, stemming from the deindustrialisation of their economies starting in the 1960s. Washington’s military expenses in Vietnam prompted the government to devise a plan to make the US the ‘Switzerland of the world’, attracting flight capital.

Offshore banking centres were then set up in the Caribbean, attracting illicit funds from Latin America and other criminals. This practice and similar actions by Britain led to the rapid growth of offshore financial markets dominated by British dependencies. Nonetheless, these funds were deposited back into the US financial system, artificially stabilising the dollar’s value.

Nebulous sovereignty and the fundamental principle of Anglo-Saxon secrecy

The 2018 Jersey Double Taxation Agreement between several British overseas territories and the UK reportedly aimed to combat tax evasion by facilitating the automatic exchange of ownership details of bank accounts and their usage. As the first signatory, the Cayman Islands purportedly demonstrated a commitment to combating tax evasion, aligning with the UK’s broader objectives.

The motivation behind the British initiative was not necessarily to curtail banking secrecy but to capture a larger market share. This underscores the fundamental principle of Anglo-Saxon secrecy (Trusts), which forms the foundation for complex offshore structures created in every secrecy jurisdiction. These structures typically incorporate Trusts, shell companies, secret bank accounts and nominee directors.

Furthermore, these structures seek to obfuscate asset owners’ identities and facilitate recycling offshore wealth back into global markets. Creating these structures spanning multiple jurisdictions enables the creation of secrecy structures that are almost impossible to penetrate. A Trust typically serves as the central entity in these arrangements, overseeing and managing the assets below it.

The Trust holds ownership of various entities, including shell companies, providing flexibility in structuring ownership. For instance, a Trust might have trustees located elsewhere, beneficiaries in different jurisdictions and offshore companies. These companies may possess diverse assets, illustrating the eclectic array of Trusts and offshore secrecy structures employed.

Offshore lawyers specialise in creating increasingly ever more complex and obscure structures, contributing to the perpetuation of financial secrecy. The Panama Papers, a trove of leaked documents from the offshore law firm Mossack Fonseca, shed light on the widespread use of offshore heavens. Despite awareness of such practices, effective action is hindered by a system that protects the interests of a powerful few.

Repeatedly, officials from other countries have been informed by the British government that they lack the authority to intervene in such matters. However, the reality is straightforward: it's not a matter of lacking power but rather a deliberate choice not to act. Britain engages in a strategic game of pretence, asserting the independence of these territories only when it serves their interests.

The truth, however, is that Britain ultimately holds significant control over these territories. It not only appoints governors and senior officials responsible for foreign relations and defence but also possesses the authority to veto legislation. This control is wielded subtly, often through informal discussions rather than overt interference, allowing for a degree of political autonomy while ensuring alignment with British interests. Notably, the Cayman Islands are recognised by the UN as non-self-governing territories.

The UK government has not prioritised the independence of the Cayman Islands, as conveyed to the UN Special Committee on Decolonisation in recent years. While the committee was established to aid colonies on the path to independence, it is always argued that the Cayman Islands are not prepared for such a transition, given the lack of mandate from its people. This message echoes the stance taken when the Bahamas gained independence from Britain in 1967.

The City of London and British Financial Imperialism

The historical connection between Britain and its offshore jurisdictions provides a sense of security to offshore bankers and clients, facilitating the growth of these Frankensteins as trusted financial hubs. In reality, much of the wealth managed in tax heavens is controlled by London, with deals often negotiated and finalised in the British capital before being registered offshore for tax and regulatory purposes.

This arrangement allows the City of London to engage in financial activities that may be considered questionable, maintaining its position as a global financial powerhouse. It is important to stress that the decline of the British Empire did not diminish the City of London’s influence. Instead, establishing the London Euromarket enabled it to continue exploiting its networks and expertise.

When examining the escalating money flows through tax havens, it becomes evident that even as former colonial powers withdraw from their colonies, they continue to exploit developing countries. Wealthy individuals, organised crime and corporations from these former colonial powers increasingly transfer their assets offshore to benefit from secrecy and tax exemptions. With the global trend towards deregulation and economic liberalisation, this practice has become increasingly prevalent and accessible.

Today, up to half of the global offshore wealth is believed to be concealed within Britain’s secretive jurisdictions, making it a primary destination for flight capital. It is not coincidental that many of the losers in this capital flight find themselves trapped in Britain’s modern financial network, which echoes the historical dynamics of the empire. Often portrayed as heavily indebted, Africa reveals a stark contrast when considering the extent of its debts.

By the end of 2008, for instance, sub-Saharan African countries owed USD 177 billion in foreign debt. According to the World Bank, this figure more than tripled to about USD 1.14 trillion at the end of 2022. However, African elites and corporations continue to shift trillions offshore. This discrepancy highlights Africa’s status not as a net debtor but as a net creditor to the rest of the world.

Offshore capital movement by African countries worsens their financial burdens, with high-interest debts to international banks becoming increasingly challenging to repay. Secrecy jurisdictions drain wealth and tax revenues from developing countries, impeding their economic growth and development. This is in addition to a web of governance mechanisms designed to retain the status quo.

Despite efforts by some developing countries, such as Ecuador, to establish a more inclusive UN tax body, the UK and the US have repeatedly blocked these initiatives, especially during the 2015 Third International Conference on Financing for Development in Addis Ababa. Resistance to democratic decision-making in global tax matters purposefully perpetuates a cycle of corruption and inequality, where legal and criminal cross-border activities intertwine.

Only in December 2023 did the UN General Assembly pass a resolution to start work on a tax convention. However, treaty-making in the international system may take many years to no end. This means that tax heavens and Base Erosion and Profit Shifting (BEPs) will continue to thrive, benefiting major economies across the globe while others will forever lick their wounds.