READ: "Millionaires’ Markets: A Deep Dive into Offshore Havens" by Lena Zeidan (Student Research Paper)

American University of Beirut: Politics of the Sea

By: Lena Zeidan

Abstract

In light of the recent Pandora Paper leak, this essay aims to examine the rise and potential fall of the offshore world. Previous literature examines several definitions and classifications of the offshore world as a geographical location, an imaginary legal realm, and as a process for the advancement of class interest. This paper considers the different characterizations and distinctions of this hidden world, through an examination of the history of its rise in relation to the sea and colonialism, and offers insights into the transformation of state relations through the lens of global connectivity and finance. This paper relies on various forms of research including literary and scholarly work, news outlets and journalism publications, and most notably, the expertise of the interviewed professional for this paper, Mrs. Zeina Moawad, an Anti-Money Laundering and Combatting of Financial Terrorism Compliance Manager at the corporate BEMO Bank based in Lebanon, aiming to provide a well-rounded deep dive into the different facets of the world of the Offshore.

Introduction

In October 2021, the public received what was labeled by the media as the biggest journalism partnership leak in history. Around 3 terabytes of data were released uncovering the names and financial schemes of some of the major world leaders and political elites. The Pandora Papers shook the world as they shed light on the hidden realm of the offshore, revealed to be a utopian playground for the world’s elites looking to accumulate illegitimate wealth through the exploitation and manipulation of the capitalist free markets and secrecy jurisdictions of the globe. Despite the historical presence of this world on the sidelines of the global economy, only now was it made apparent to the public that the end of the abuse of the offshore system is nowhere in sight since the main beneficiaries of this system were revealed to be the same political leaders that could help regulate the system. In a globalized world where the gap between the poor and the wealthy continues to grow, this leak revealed the interdependency between wealth and global politics, and the role of governments in between both.

The lands of seclusion, secrecy, and lack of accountability have been proven to attract the world’s elites, as they pursue the exception and exemption provided to them in the world of legal fiction (Campling & Colas, 2021). While the offshore world is not an unregulated space and its use is not unlawful, its abuse for the intentions of tax evasion, money laundering, and lack of reporting is. The offshore world has been a topic of debate by many scholars as they attempt to define, discern, and dissect this hidden realm. However, the opacity of the offshore has stood in the way as many of its facets remain open to interpretation, such as its true impact on the global economy, the history of its rise and continuity, and the incentives of world leaders to abate its abuse. This paper examines the link between the offshore, colonial states, and the Law of the Sea, establishing the similarities between colonial states and their colonies, as well as current capitalist states and their offshore dependencies. After the Law of the Sea recognized the principle of the distinction between the legal and physical borders expanding the concept of state sovereignty and the limits of the exertion of power, state influence over these former colonies morphed and transitioned into different forms of control as capitalist states indirectly structured the offshore states’ economic and financial institutions to their benefit.

The Pandora Papers leak was not the first of its kind. It was preceded by several similar exposés, namely the Panama Papers released in 2016, which also revealed several key players of this field. Despite the availability of the information, little has been done to persecute and hold the individuals and corporations involved accountable. This paper interviews Mrs. Zeina Moawad, an Anti-Money Laundering and Combatting of Financial Terrorism Compliance Manager and Expert based in BEMO Bank, a corporate bank in Beirut, Lebanon, to speak on the matters of the limitations to accountability, the future of the Offshore, and the possible solutions for the regulation of the Offshore world. [1]

Terminology and Definition

In this paper, the term “offshoring” refers to the movement of money across borders to locations with distinct, laxer policies. These host countries are typically the destination of High Net Worth Individuals and Corporations aiming to make use of the privileges and benefits offered, which include secrecy, low taxation, and lenient regulation.  Locations offering the financial services that are distinguished from onshore regulations are officially referred to as Offshore Financial Centers (OFC), however the common, often pejorative, term is Tax Havens. While OFCs offer a variety of financial services, such as offshore trusts and holding companies, Tax Havens are characterized by their differentiated taxation (Hampton, 1996). Despite the controversy in the terms, the Offshore System studied in the paper refers to both. The Offshore has been a topic of examination of many scholars who have offered varied definitions depending on different characteristics. It has been described as both an actual geographical location and as a realm of legal fiction characterized by secrecy and lax controls. While primarily referring to island nations that offered specialized financial services, the term offshore now also includes any region outside the home country with differentiated laws and regulations. The main premise is the connectivity to global finance that these jurisdictions provide while still offering exclusion from the geographical mainland and the regulatory norms. (Campling & Colas, 2021).

As given by Ronen Palan (2003), the Offshore “refers not to the geographical location of economic activities, but to the juridical status of a vast and expanding array of specialized realms”. He denies the ideation of the offshore as a process or a market and instead prioritizes the regulations that make way for more discreet financial activity with a reduced level of state interference and heightened protection (Palan, 2003) Nicholas Shaxson (2016) offers instead the blunt reality that the offshore refers to the place that offers elites the needed institutions to get around the responsibilities owed to society, a getaway from the jurisdictions of the home country. This is a common perception of the offshore wherein questions of classism, criminality, and corruption are put into view when examining the ways this system promotes class interest, making way for the concentration of wealth and lack of transparency in transactions, undermining the democratic systems put in place. It is evident that the offshore not only allows escape from taxes but also offers an escape from liability and accountability, as the legally justified tax-neutral locations, claiming to make way for more efficient global exchange, house illicit activity that remains hidden in the secrecy jurisdictions. While previously regarded as simply fiscal paradises frequented by the upper class, the centrality of Tax Havens in the global economy and the impact of the lost revenues are becoming more apparent.

History of the Offshore

The Offshore is not exclusively maritime, however, its origins heavily depend on the Laws of the Sea. The Sea played a major factor in the establishment of the idea of the Offshore as it redefined the definition of borders and introduced the conceptualization of the modern power dynamics that go beyond the limitations of natural delineations. Borders that were initially established to block the movement of people, money, and goods have become an important factor in the ideation of heterogeneous global capitalism (Mezzadra & Neilson, 2013), expanding the dominion of states beyond their own zone of sovereignty. The Offshore allowed states to exert their power beyond their realm and rely on the labor and resources of other economies by externalizing their financial activities to create fictional boundaries that, although geographically independent, rely on the political influence of the associated major states. This concept can be traced back to the establishment of the Exclusive Economic Zones, the initial expansion of state dominion to cover areas beyond their geographically delineated boundaries of sovereignty. The “Mare Liberum” vs. “Mare Clausum” debate presented the dilemma of the proper classification of the commons as open to all nations, or as a region under the restricted use by sovereign states. Had the sea remained an area of free rule, the term “Offshore” would have different implications, and would indicate a free for all market not regulated by the political and economic influence of certain states. However, the ideation of the Sea as a free zone was not entirely adopted, and the conceptualization of the Exclusive Economic Zones gave rise to the first idea of fictional boundaries, which also reconceived the idea and use of the term “Offshore” as it fell under the classification of rule by states beyond their boundaries. This redefined the term “shore” to go beyond a description of the physical region in between the sea and the land, and now includes the “legal parlance to describe juridical boundaries” as stated by Palan (1998)

This is not the only influence of the Sea on the offshore. The 2021 Corporate Tax Haven Index ranking countries based on how much their financial structures allow the reduced taxation indicated that the British Virgin Islands, the Cayman Islands, and Bermuda all were the highest in terms of “haven score”, with the United Arab Emirates as a new entry in the Top 10 (The Guardian, 2021). The commonality of islands and coastal states as leading tax havens is no coincidence, and this history is traced back to the idea of the islands and the sea as a place for hidden illegal activity. The vast Sea historically has been characterized as a region of exemption and exception, distinguished from state law enforcement and sovereign rule. The sea, seen as a minimally regulated space previously, housed several of the world’s negative externalities as its depth and vastness made it possible to hide illegal trade, toxic waste, nuclear weapons testing, and, as examined throughout this paper, illegitimate wealth. The offshore rose and flourished in islands which offered seclusion and connectivity simultaneously, allowing access to the global economy while providing heightened levels of secrecy distinct from onshore policies and regulation. 

The economic reasoning for the dependence of Small Island Economies (SIEs) on Offshore Finance lies in the geographical and geopolitical distance that enforced constraints on their economic activity. Their isolation did not allow them to diversify their economies in terms of trade and doomed their GDPs to rely solely on tourism and limited exports such as the fishing industry. As such, they resorted to commodifying their juridical sovereignty, and relied on the financial sector to bolster their economies through profiting from global capital surplus (Campling & Colas, 2021)

The Offshore and Class Warfare

Over the time, the emergence of the offshore became heavily linked to the impact of colonialism as it became evident that a great number of offshore locations were former colonies or dependencies of major capitalist states. Campling & Colas (2021) refer to the historical overlap between prominent OFCs and historical authority of colonial states over these jurisdictions. They contend that with the expansion to overseas territories and the rise of the system that allowed the accumulation of capital, a new artificial legal world was imagined where the ocean provided a chance for enrichment. The imperial past of the offshore states, which witnessed slavery and resource appropriation, is instead reduced to a modern utopic playground under the influence of states’ ruling parties, morphing the historical forms of controls and exploitation into more modern institutionalized colonization, as these capitalist states indirectly structured the financial and juridical systems of the tax havens to their benefit. The emergence of tax havens as formalized entities came in various parts of the world around the 20th century, when countries such as Liechtenstein and Switzerland purposefully implemented low taxation to encourage development. However, the offshore world was being imagined years prior to this formalization, as the combination of the accumulation of wealth and the building of colonial overseas territories set in motion the idea of the creation of disconnected lands used for capital circulation. The interference of the sovereign capitalist states in the establishment of tax havens can be seen as a revolutionized system of exploitation and control. For instance, Jersey, a former crown dependency of the UK, and Gabon, the center of France’s offshore financial network, each provide playing fields for the relative states to carry out illicit activities, ones that cannot be done in the homeland as they would threaten the democratic system set in place. Additionally, by doing so, these colonial states still maintain a level of control over their former colonies by influencing their economic and financial structures, forming a network of political jurisdictions aimed to serve the interest of the ruling capitalist elites.

In today’s world, the prominent characterization of the offshore world is that its politics heavily depend on the financial interests of other states. The local politics of the island or enclave has no bearing on the overall structure set in place to help capitalist states and individuals accumulate wealth, and specialize in the business of making money (Shaxson, 2016). This raises a debate of the prioritization that tax havens place on individualism, disregarding the democratic system set in place to ensure corporations and individuals contribute back to the societies that allowed them the accumulation of their wealth.

With the multinational corporations avoiding tax, the weight falls on the local businesses and average income individuals who have no choice but to commit to the regulation of their homeland. It is this middle and lower class of society that ends up sustaining the national economy through their taxable income, to make up for the losses in escaped taxes. This shift creates a lack of efficiency in the economy, draining and straining the economies of developing countries in specific.  

The Panama Papers revealed the intricacies of the offshore world, leaking the abusers of the system. The papers revealed the names of the world leaders, political elites, and corporations that have been involved in the corruption and criminality of this system, making use of shell companies and tax schemes to evade their dues. This included around 35 current world leaders and politicians from 91 countries according to the International Consortium of Investigative Journalists (ICIJ, 2021). The offshore has been viewed as a marginalized world solely for the social elites, however, its impact on the structure of the global economy is becoming more and more evident as it becomes clear that state institutions are largely involved in their rise and their abuse. According to a 2018 study done by the International Monetary Fund, almost 40% of all global investment, equivalent to $12 trillion, is globally invested in empty shell companies, and of this, $7 trillion is linked back to politically unstable countries (Damgaard, 2018). This instability reflects the state of the homeland countries as they suffer from a lack of government revenues for development due to corruption.  

Offshoring is branded as a way to optimize globalized finance and make it more efficient, as the needs of the islands to have a diversified economy based on profiting from the global surplus was met with the desire of states and individuals to bypass the rigid structures and supervision set in place in their national structures and norms. However, the externalities posed by this system are instead carried by the lower classes that are carrying the weight of the loss of the revenue that should have been provided by government officials and multinational corporations, as the latter benefit from the privileges provided to them by their homeland, that allowed them to accumulate wealth in the first place. When asked about this claim, and more precisely, asked about who this system is practically efficient for, Mrs. Moawad provides the following rebuttal:

“While the common perception is that this system would be beneficial to the economies of the Offshore States, seeing that it injects money in their economies and encourages foreign investment, the reality is that these institutions don’t even apply the standards that they offer to foreigners to their own residents, because they know that the lack of transparency and low taxes that they are encouraging would be harmful to their state. This system also severely harms the homeland states whose governments are not collecting the taxes needed as revenue for the sustainment of the national economy. The corruption in Lebanon is largely linked to the fact that government officials were some of the prominent names highlighted in the Pandora Papers.”

It is safe to conclude that if neither the homeland nor offshore states are benefiting from the system, then the only players left are the government officials, political elites, and large corporations, which are the main beneficiaries of this financial scheme set in place.

Corporations have been granted many benefits by society to allow them to suffer minimal losses and encourage their rise and growth, such as providing them with a “limited liability” framework, which provides protection to investors, because the assumption lied in the fact that these valuable players would in turn help advance the interests of the national economy. In return, these corporations were expected to uphold their duties to society, by paying their dues and maintaining transparency in their transactions and financial statements (Shaxson, 2016). Instead, they made use of the hidden world of the offshore to dodge both these duties, crippling the development of their home countries.

 Despite the opacity provided by the system, the existing channels of exposure, such as the Pandora and Panama papers, make it clear that it is not a matter of secrecy but rather a problem of unreachability and impunity, we know who is committing which crime, but their roles and positions in society and governance do not allow proper accountability. The following is Mrs. Moawad’s comment on the matter:

“Despite the leakage, the Ultimate Beneficial Owner (UBO) of the offshore companies cannot properly be indicated because of the process of layering that such institutions do. […] Even if the information of the UBOs was made available, persecution would have to be a governmental effort, which requires resources, and there is no incentive to carry this out. There are international norms and codes of conduct that could aid in the matters of accountability, such as the Common Reporting System (CRS) which requires information sharing between states. Lebanon for example is expected to share information with 170 countries. However, the Parliament did not pass this permit still, because they don’t want to allow this receipt of information. After all, it would not be to their [the government officials] advantage. They don’t want their names to be revealed.”

We can expect similar cases in other politically corrupt states, where the position of these elites in the governments undermines the democratic system established, making way for class interest at the expense of the proletariat.

Alternatives to the Offshore World

Envisioning an end to the abuse of the offshore system is not a practical reality. The free-market capitalist system will undoubtedly make way for the rise of such mutations in the financial markets, allowing the accumulation of wealth, despite the effects it might have on lower classes and the global economy. The offshore made way for loosened democratic controls, eventually allowing uncontrolled deregulation, threatening the foundations of our global economy. The question thus becomes not a matter of limiting and criminalizing the abuse, but rather offering alternatives to de-incentivize it. Mrs. Moawad offers several alternatives, such as a common minimal tax, applied to countries uniformly, eliminating the advantage that the tax havens provide to non-residents. These tax havens would no longer need to restructure and reduce collective taxes to individuals and corporations. Based on the case of political corruption in Lebanon, she suggests minimal requirements on politically exposed individuals, which includes lifting banking secrecy, by the reliance on information sharing between states, to make sure all individuals are cleared before assuming leading roles in governance. Declarations of financial statements should be a standard procedure for these individuals, making sure they pass the needed checks before reaching positions of political influence. She also places a big importance on international institutions to establish and stimulate new international guidelines and codes of conduct, similar to the CRS and the Foreign Account Tax Compliance Act (FATCA) to target financial crimes in domestic and overseas jurisdictions, replacing the reliance on governmental institutions to uphold the needed standards.

Conclusion

Offshoring is the modern day reflection of the historical trend of the promotion of bourgeoisie interest while suppressing the rights of the remaining classes. Dating back to the discovery of overseas territories, the offshore world holds a tight grip on the global market today, influencing the politics and internal stability of several nations. This irregularity has become so deeply embedded in our economy that the loss of the unlawful funds could threaten the stability of the offshore states politically and economically. The question of the complicity of government in the rise of the offshore as opposed to being an actor in aiding its abatement remains a matter of debate in the offshore literature. However, with the modern day connectivity of the world and new reporting channels, the undoubted truth becomes more and more clear. The system allowing the rise of such international and large-scale financial crime is the same system that in the past allowed the encroachment of the sovereignty of other states. Where there is a profit to be made, capitalist states will bend and break rules to ensure they benefit.

Similar to the rise of the offshore, our current global economy can expect new forms of accumulation of wealth in response to the prominent technological innovations of our age. However, this time, it seems that the working class has a better chance. With the rise of Blockchain Technology, Cryptocurrencies, and Non-Fungible Tokens (NFTs), the universality of financial technology and its facilitated transactions could make way for a more level playing field in the unregulated and decentralized market. Mrs. Moawad warns about the risks of these innovations, claiming that cybercrime and what is labeled as COVID-19 Fraud (facilitated fraud due to the rise in the dependency on the online world) all are the most critical forms of financial crimes in our current time. Despite the risks, the future of these markets is hopeful, as decentralization offers a way to reestablish the links in between states, limiting state intervention and renewing free-market structures.

References

Campling, L., & Colas, A. (2021). Capitalism and the Sea: The Maritime Factor in the Making of the Modern World. Verso Books.

Christensen, J. (2012). The Hidden Trillions: Secrecy, Corruption, and the Offshore interface. Crime, Law and Social Change, 57(3), 325–343. https://doi.org/10.1007/s10611-011-9347-9

Damgaard, J. (2018). Piercing the Veil: Inside the World of Global Tax Havens and Offshore Banking. Inside the World of Global Tax Havens and Offshore Banking - IMF F&D Magazine - June 2018 | Volume 55 | Number 2. Retrieved December 12, 2021, from https://www.imf.org/external/pubs/ft/fandd/2018/06/inside-the-world-of-global-tax-havens-and-offshore-banking/damgaard.htm.

Guardian News and Media. (2021, March 9). UK Overseas Territories Top List of World's Leading Tax Havens. The Guardian. Retrieved December 12, 2021, from https://www.theguardian.com/business/2021/mar/09/uk-overseas-territories-top-list-of-worlds-leading-tax-havens.

Hampton, M. (1996). Creating Spaces, The Political Economy of Island Offshore Finance Centres. Retrieved December 12, 2021, from https://www.jstor.org/stable/27818744.

ICIJ. (2021, December 6). Offshore Havens and Hidden Riches of World Leaders and Billionaires Exposed in Unprecedented Leak. ICIJ. Retrieved December 12, 2021, from https://www.icij.org/investigations/pandora-papers/global-investigation-tax-havens-offshore/.

Mezzadra, S., & Neilson, B. (2013). Border as Method, or, the Multiplication of Labor. Duke University Press.

Palan, R. (1998). Trying to Have Your Cake and Eating it: How and Why the State System has Created Offshore. International Studies Quarterly, 42(4), 625–643. https://doi.org/10.1111/0020-8833.00100

Palan, R. (2003). The Offshore World: Sovereign Markets, Virtual Places, and Nomad Millionaires. Cornell University Press.

Shaxson, N. (2016). Treasure islands: Tax havens and the Men who Stole the World. Vintage.