The sinister tale of how a century-old law was abused to turn Scotland into a tax haven, writes Oliver Bullough.
Scotland became a tax haven thanks to 17 words, and one enterprising crook – perhaps in Eastern Europe? – who spotted them. The words were remarkably dull (the Partnership Act of 1890: “in Scotland a firm is a legal person distinct from the partners of whom it is composed”) but important. It was these words that attracted conmen and fraudsters from Russia, Ukraine and elsewhere and helped them hide their theft of billions of pounds.
The discovery of this Victorian law, which defines Scottish partnerships as different to those in the rest of the UK, illustrates the phenomenon that I call Moneyland. The guardians and servants of the super-rich are constantly scanning the world for legal loopholes like this one, and then exploiting them for the benefit of their clients’ money and the detriment of the rest of us.
If they can’t find a useful legal loophole, they find a friendly jurisdiction happy to create one for them. Places from Jersey to Lichtenstein to the Marshall Islands have long made a happy living by tailoring their laws to the needs of the wealthy. This has created a virtual country in which the planet’s richest residents can choose how they live in a way the rest of us cannot: Moneyland, a place where, whoever you are, wherever your money came from, the laws do not apply to you.
The creation of Moneyland has helped the richest people monopolise an ever-greater share of the planet’s resources. According to Oxfam, the planet’s top 42 people own the same amount as the bottom half of the world’s population. Their ability to escape taxation and scrutiny means by next year, they’ll be richer still.
Combatting their misuse of the world’s financial architecture is crucial to the defence of democracy. Perhaps 10 percent of all wealth is hidden behind the ramparts of the tax havens, and outside the reach of national exchequers. Its owners escape any form of democratic control as a result, yet can use their money to subvert our politics, just like they do in Russia. Unless we want Britain to become a plutocracy as well, we need to combat Moneyland before it’s too late.
Scottish Limited Partnerships – Scotland’s own secrecy vehicle – appeared in 1907, in an updating of that 1890 law. They were used to secure agricultural tenancies, and remained distinctly unglamorous, until a century after their creation. That was when the enterprising crook spotted them. Within seven years, more SLPs were being created annually than had been created in the whole of their first 100 years, almost all of them linked to just 10 addresses.
Some of these SLPs were legitimate, and used by financiers to structure investment funds. But hundreds of them were dodgy, like the 119 SLPs abused in a scheme to secretly move $20 billion out of Russia in 2010-4. The SLPs were created by lawyers in the former Soviet Union, controlled from secrecy jurisdictions like Nevis or the Seychelles, so no one had any idea who owned them and therefore who was behind the crime that they were committing.
Thanks to that wrinkle in the law – the 17 words – the SLPs could enter into contracts on their own account, but hide the identity of their owners as successfully as anything registered in the most notorious tax havens. It took the UK government (although they are Scottish Limited Partnerships, they are not controlled from Holyrood) a decade to catch up with what the crooks are up to, and only now has Westminster decided to do something about them.
This highlights the mismatch in resources between Moneylanders and the rest of us. Crooks and tax-dodgers are always keen to keep more of their money, so there is an army of lawyers and accountants perpetually looking for tricks they can use. Governments are far less nimble, and take years to discover what’s happening. By then, the crooks will have already identified new loopholes.
Those loopholes can be anywhere. Switzerland used to be the world’s primary location for stashing money, but the United States cracked open its defences after the financial crisis, and much of the cash fled for safer places. Ironically, the US states of Nevada, South Dakota and Wyoming proved to be popular destinations for it, since they can protect secrets from the US Treasury in ways that foreign countries can’t.
If Washington ever gets as strict with its own tax havens as it has been with foreigners, then the money will shift somewhere else: Hong Kong, Singapore, back to Switzerland. There will always be somewhere that has laxer regulations than its peers, and that is why Moneyland will always be with us unless the whole world acts to stop it. This is a result of the fact that money can move freely and seamlessly around the world, while laws stop at national frontiers. The rich live internationally, the rest of us have borders.
This is the dark side of globalisation, and is a curiously recent phenomenon, a consequence of the invention of offshore finance in the City of London in the early 1960s. Before that, money was largely penned behind national boundaries, and rich people faced the kind of taxes their modern-day counterparts could never conceive of. There are no pop stars today singing – as The Beatles did – of the taxman taking 95 percent of their earnings. Taxes and regulations are for the little people, without access to Moneyland.
So is Scotland still in the offshore game? The UK government has promised to crack down on Scottish Limited Partnerships, but they have already declined in popularity, thanks to being forced to declare their true owners: a step that made them less popular with the kind of crooks who seek anonymity.
Curiously, however, Northern Irish Limited Partnerships are now surging in popularity. Just half a decade ago, the province was lucky if it registered five NILPs in a year, but now, there are almost 100 being registered annually. No one has any idea what lies behind this burst in activity or, at least, those that do know aren’t telling the rest of us.
If past experience is any guide, however, the Moneylanders will have made a few billion dollars out of the loophole before the rest of us figure out what it is.
Moneyland: Why Thieves and Crooks Now Rule the World and How to Take It Back by Oliver Bullough is published by Profile Books on 6 September at £20 hardback and ebook