In July 1969 the Bank of England wrestled with the problem of tax havens within the sterling area:
Events in the Caribbean are moving quickly: there has been a considerable build-up of activity since sterling devaluation …The smaller less sophisticated islands are receiving constant attention and blandishments from operators who aspire to turn them into their own private empires. The administrators of these places find it difficult to understand what is involved and to resist the tempting offers which gear the developments of their own islands to tax and banking concessions, involving the minimum, or the complete absence of Exchange Control. Any prolification [sic] of trust companies, banks etc, which in most cases would be no more than brass plates manipulating assets outside the islands, could quickly get out of hand and produce substantial gaps in the exchange control fence.Footnote 1
The concern that tax havens might become, or already were, “private empires”–figuratively and practically replacing the ossifying vestigial institutions of the British Empire—indicates the wider context of the creation of the tax havens. The Bank of England’s palpable expression of a loss of control over business and finance, and perhaps even the sterling area itself, reflects a remarkable reversal; where business and finance once had aided the creation of empire, it now sought to exploit its decline. As this article will demonstrate, the creation of the tax havens was itself a product of powerful economic actors that sought to exploit opportunities created by decolonization that elsewhere had caused disruption and difficulty for business and finance.Footnote 2 The interpretation that we develop here is that they achieved this by creating zones of low or no taxation, limited regulation, and negligible oversight. In so doing, they replicated environmental conditions that had prevailed before 1914, especially in the City of London. In 1968 the Financial Times observed that “[o]ne of the few 19th century laissez faire economies still in vigorous working order is to be found in Bermuda.” This “nostalgic condition,” they wrote, had “some advantages … among them are the absence of income, corporation, and capital gains tax.”Footnote 3 Tax havens were, therefore, from the outset, and remain today, places with (i) low or no taxation, (ii) where nonresidents could legally locate assets without the necessity to undertake significant business activity, in order to (iii) escape or reduce liability to taxation, and (iv) benefit from secrecy and lack of regulatory transparency (these being four of the main characteristics of tax havens, as recognized by the Organization for Economic Cooperation and Development [OECD]).Footnote 4
Tax havens and their impact on politics, society, business, and economy remain of considerable importance in popular discourse, to policymakers, and within contemporarily focused political studies and social science.Footnote 5 Within the field of business history, there is a growing literature on the impact of taxation, tax havens, tax avoidance and evasion, and related practices.Footnote 6 In UK economic history the importance of taxation to the domestic business environment is now established.Footnote 7 Within international economic history, research has emphasized the relationship between state actors, the emergence of the international taxation regime, and the development of the offshore economy,Footnote 8 while the importance of taxation to colonial governance and as a factor in decolonization is noted in the field of imperial/colonial history.Footnote 9 The growth in this literature has highlighted how taxation-related research in the fields of economic and business history is in general comparatively underdeveloped. However, within this literature, there are emergent debates that we specifically address.
The first is a debate about the role that capital movement played in the development of tax havens. Ogle begins by asking “what happened to European-owned assets when Europeans left the colonial world during the end of empires” going on to argue that decolonization was “accompanied by a liquidation and removal of European assets.” Footnote 10 Ogle conceives of this movement as being monetary, stating that “[s]ome money returned to metropolitan contexts, if only temporarily, awaiting new opportunities…. importantly for the story outlined here, a significant share of funds was moved to an emerging system of offshore tax havens.” Footnote 11 This was a consequence of a “money panic” by colonial Europeans at the end of empire. This argument builds on previous work by Ogle that argues “when Europeans retreated from the colonial world abroad in the 1950s and 1960s, some returnees sought to prolong the favorable tax arrangements that had come with empire.”Footnote 12 This interpretation has been rejected by Farquet, who argues that Ogle “overestimates the influence of capital flight from extra-European countries during the postwar decolonization on the growth of tax havens, failing to connect qualitative and microeconomic evidence with macroeconomic tendencies and to correctly assess the importance of the liberalisation of capital flows in Europe at the time.”Footnote 13 Farquet further disagrees with Ogle over the issue of decolonization which he argues “was not the driving force of this second life of the offshore economy … although there were some important movements of capital from North Africa and from Latin American countries to France and the United States, respectively, the fortunes of rich countries constituted the bulk of the wealth that nourished the rebirth of offshore finance.”Footnote 14
This debate raises several interrelated questions that we (at least in part) address here. The first is the relationship between decolonization and tax havens. Most island tax havens had been (or still were) colonial states, so in that sense, there is an obvious connection in relation to their own political and economic development (the Bahamas, for example, figures prominently in this article; it became formally independent in 1973, having been self-governing since 1964). Nevertheless, the question raised by Ogle is that it was colonial Europeans moving their capital that was causal to the development of tax havens. The data we present in this article contributes to this debate. Specifically, we examine the volume of capital movement to tax havens and the mechanism of the movement of capital to tax havens—in particular to explore the role that business and finance played in this process.Footnote 15 We demonstrate that the “movement” of capital was complex, but of critical importance is an understanding of how beneficial ownership rights could be transferred, rather than capital itself. Beneficial ownership relates to who ultimately controls and benefits from an asset and may be different from the legal owners.Footnote 16 This helps to explain how individuals and corporations moved capital into tax havens, a key element of how they operated in practice.
The second area of debate is with reference to the complex relationship between political risk and corporate structures. Boon and Wubs, writing about the historical development of Dutch tax havens, note that offshoring domicile was a precaution against a possible third world war.Footnote 17 Thus in the postwar period, there was a normalization of restructuring corporate structures as a prophylactic against political-economic upheaval.Footnote 18 In this article, we observe three articulations of this. First, with reference to decolonization in the British Empire, the possibility that the use of a tax haven might provide a means of retaining control over assets located in colonies (this, note, is a slightly different point to the one raised by Ogle). Second, fears that the British government in the UK might introduce a more hostile taxation environment could be effectively preempted, or reactively foiled. Third, political instability in other regions of the world (notably in Latin America) might encourage corporations and business leaders to take advantage of tax havens to minimize risks of political uncertainty, civil war, or political revolution or unrest. The issue of corporate restructuring also allows us to comment on the relationship between tax havens and the disappearance of the “free-standing company” corporate form in the course of the twentieth century.Footnote 19
The focus of this paper is, then, to address these debates by bridging between the organizational approach of business history and the system-wide approach of economic history by exploring the relationship between business at an organizational level, and the creation of tax havens and the political-economic system that has been described as the “offshore world.”Footnote 20 Specifically, we examine five interrelated and interacting domains that shaped the island tax havens of the British West Indies in the course of the mid-twentieth century. These are as follows, and form the structure of the article.
First, we examine the context of metropolitan financial and commercial services and the decline of the City of London as the context for the rise of tax havens. Second, we chart the history of the institutional structure of the tax havens. Third, we establish the nature and volume of international capital investment in the postwar period in order to explore the dynamics of capital mobility with reference to tax havens. In the fourth and fifth sections we outline, respectively, the banking and commercial services, and business activities, provided by and undertaken in tax havens.
This article is based on a synthesis of archive documents and historically contemporary serial publications. Archive documents have been drawn primarily from the Bank of England Archive, and the UK National Archives, in London, and the Barclays Bank Archive in Manchester.Footnote 21 The serial publications we have drawn on include The Economist, the Financial Times, The Times, and the Guardian. The periodization adopted in this article is necessarily flexible but focuses on the period after the foundation of the Bahamas Freeport in 1955, and the abandonment of capital controls by the UK government in 1979. It was in this period that the growth of tax havens dramatically expanded.Footnote 22
Metropolitan Financial and Commercial Services and the “Decline” of the City of London
The City of London emerged as a trading center and entrepot as a consequence of its position as a port and the importance of London as the UK’s largest urban area.Footnote 23 By the beginning of the twentieth century, the City was the world’s most significant international financial center, possessing internationally important financial services including capital markets, insurance, and banking, alongside a range of complementary professional services, such as law and accountancy.Footnote 24 At the core of the City of London’s enduring role as a leading international financial center was its large international banking cluster.Footnote 25 International correspondent banking networks centered on London provided the architecture of international finance, with London as the hub of the international payments system.Footnote 26 In turn, this provided a platform for the City to develop new markets, such as the foreign exchange market.Footnote 27 As a large agglomeration economy, the City was also an important international commercial center, which both housed and provided business services (such as secretarial and administrative support) to nonfinancial firms.Footnote 28 Importantly, the City was the headquarters of many thousands of “free standing companies” (FSCs) whose “brass plates” gave a domicile to international businesses whose operations were across the globe in a wider range of sectors.Footnote 29
The period before 1914 was one of low taxation (both corporate and personal), and minimal regulation.Footnote 30 This is important because this low-tax regime was not able to survive significant changes in the national and global economy in the course of the twentieth century. In particular, the greater importance of the state in the economy brought with it increased taxation and more economic intervention.Footnote 31 The City increasingly concentrated on finance and moved away from commerce and international trade.Footnote 32 This poses a question of what happened to the commercial services and international business activities that were previously located there, a question that is connected to the apparent disappearance of FSCs in the middle years of the century.Footnote 33
London’s merchant banks also faced challenges in the postwar period. As a consequence of deglobalization, the decline of the UK in the international economy, and the rise of the large-scale multinational corporations that internalized international trade, the traditional role of merchant banks in providing international trade finance began to fade.Footnote 34 A response to this challenge was to develop new markets and services, such as the development of “offshore” financial markets, especially the Eurocurrency and Eurobond markets in the 1960s and 1970s.Footnote 35 The Euromarkets were based on regulatory arbitrage, allowing US dollars and other currencies to be held in London, away from the strict regimes that governed capital movements in the Bretton Woods era.Footnote 36
The underlying business model for these activities was to avoid or evade the restrictions on capital movement and regulation that were a feature of the Bretton Woods system and were associated at a national level with the increased role of the state. The most common historiographical view of this financial innovation is to view it as being in response to a changing external environmentFootnote 37, whereby “the dynamism of the markets and firms” that enabled the City to “overcome the exigencies of war, regulation, [and] government intervention.”Footnote 38 However, it is also possible to look at this as the attempt by financial firms to remake the low-tax, low-regulatory environment that had predominated in the heyday of the City before 1914. Seen from this perspective, the development of offshore markets in the City in the 1960s and 1970s was part of a deeper process of developing avoidance and evasion measures more widely. The argument that we develop below is that the tax havens became the physical location for business activities that had previously been carried out “on-shore,” largely in the City of London.
The Institutional Structure of Tax HavensFootnote 39
The institutional structures of tax havens were, in general, composed of low or no territorial taxes (including beneficial tax treaties); banking secrecy laws and trust legislation; and private tax deals between local authorities (“tax holidays”) and tax-exempted corporations.Footnote 40 These features were often combined with liberal conditions for the gambling industry (in the form of casinos) and convenient flag registries for shipping companies.Footnote 41 The Bank of England summarized the institutional structure and formation of the island tax havens as follows:
Broadly speaking, a tax haven may be described as a centre, the level (or non existence) of whose tax is sufficient to attract funds from a higher-taxed centre, give also appropriate trust legislation and a stable political climate. Once the conditions for a tax haven are established, the necessary institutional framework begins to grow, usually in the form of trust companies. … The environment is also encouraging to other forms of business enterprise including the registration of commercial companies, brass plates and off-shore company operations, the creation of free-ports and duty-free areas. The territories in which these developments take place usually begin to enjoy certain fringe benefits such as income from registration fees and licenses. It is also probable that some local “development” may be stimulated, such as improvements in hotel facilities and in communications. There will be some increase in the level of local incomes and in the standard of living … it has to be recognised that there are important examples of success in real development in tax haven conditions of which the principal is probably Freeport, Bahamas.Footnote 42
Trust legislation enabled UK residents to pay little or no tax on shareholdings, either held in the UK or overseas.Footnote 43 The legislation that was enacted in the islands enabled avoidance measures to be undertaken.Footnote 44 Reflecting on the development of the Cayman Islands as a tax haven, the Ministry of Overseas Development in London thought tax havens were controversial because they were “inevitably propounded in an atmosphere of geniality, lavish hospitality, implied generosity, and overwhelming urgency … [but t]hey are invariably staged against an impossibly tight deadline, with an implicit threat of jam today or none tomorrow.”Footnote 45
Critically, they were also mimetic:
They are almost always in package form – the provision of a deep-water harbour in exchange for x acres of freehold; the construction of roads and schools in return for exclusive water-rights; the metamorphosis of unhealthy swamp-land in return for dredging and sea-reclamation monopolies, and so on.Footnote 46
This kind of “cut and paste” development, which spread from jurisdiction to jurisdiction, began in the Bahamas and Bermuda.Footnote 47 In 1955 the Hawksbill Agreement between the Bahamas Government and the Grand Bahama Port Authority Limited—a private company that still exists—created a freeport in West Grand Bahama. Financed by US investors the freeport established a deepwater harbor that possessed its own jurisdiction separate from that of the Bahamas and included tax concessions.Footnote 48 In 1956 Bermuda established a similar freeport.Footnote 49 After the Bahamas had put in place wide concessions for trusts with the Banks and Trust Companies Regulation Act in 1965, the Cayman Islands followed with the similar Trust Companies Law of 1966 (in effect from 1967).Footnote 50 The Caribbean islands of Antigua, Barbados, Grenada, Jamaica, and St. Vincent all legislated to give preference to International Business Companies before 1970.Footnote 51 Combinations of these mechanisms then spread across the former British Empire into new regions, including the Indian Ocean, the Pacific, and the Middle East.Footnote 52 Tax haven “operators” (those accountants, lawyers, and business officials who became adept at organizing business in tax havens) helped spread the legislation. Some, such as Gordon Guttridge and Milton Grundy became well-known, and appear in the archive as actors of note.Footnote 53
The Bank of England noted that operators in the British West Indies looked for new opportunities in the Pacific once they were “priced out of the Caribbean,” indicating that the region was the leading edge and the proving ground for the development of tax havens.Footnote 54 For example, in 1970 the Bank of England expected Bahrain to adopt some of the business that had previously been undertaken in the failed tax haven of Beirut in Lebanon.Footnote 55 And, following a sterling contraction in June 1972, which left some tax havens outside the sterling exchange control fence (for example, Bermuda), many tax haven operators shifted to low tax dependencies in Europe that had remained within the sterling area such as Jersey, Guernsey, the Isle of Man, and Gibraltar. The Bank of England noted that in December 1972 “tax avoidance business for resident and non-resident account is growing very rapidly in Jersey and Guernsey and there is every sign of it spreading to the Isle of Man.”Footnote 56
Freeports usually operated without tariffs, but they also provided tax holidays, in some cases stretching for many decades.Footnote 57 For example, the exemption from taxation in Bermuda was for thirty years. As the Economist noted, “Bermuda is thus in the company registration business.”Footnote 58 Companies that were registered (or reregistered) in tax havens enjoyed tax advantages conferred by local legislation, such as the International Companies Act of Barbados. As long as a firm was owned by nonresidents and did not trade goods or services in Barbados then it was exempt from most taxation. Trading companies were completely exempt from taxation, while investment companies paid a local tax of only 2.5 percent. Under the terms of the Double Tax Agreement in force at that time between the UK and Barbados, if the Barbados tax was paid, the “promoter” (i.e., the person forming the new company) could secure a refund on all UK tax levied on dividend payments.Footnote 59 As a memo for Barclays observed:
Dividends for an IBC [international business company] would in any case usually be liable to tax on the shareholder in his country of residence, which largely nullify the benefit received by the company [of being located in a tax haven]. To avoid this we arrange for investments to be transferred by the promoter to the IBC in exchange for share of a nominal amount in the IBC, the balance of the consideration being left on loan with the company. This loan is repaid at intervals from the company’s income, these repayments still being treated in most countries in this area as capital and not as taxable income.Footnote 60
This reveals corporate tax planning using a variation on debt-financing / thin capitalization to avoid taxation. On this point, the source is clear that Section 412 of the 1957 Income Tax Act “militates against a UK resident taking advantage of these tax avoidance measures’ something which the bank felt compelled to tell potential clients. Nevertheless, as the source goes on: “having done that, however, we consider our duty ends and we advise the promoter to obtain advice in the UK as to how these provisions in the UK Act affect him … If he still wishes to set up an arrangement in Barbados we will act for him, unless we know that he is evading rather than avoiding tax.” Footnote 61 That is, once satisfied they had discharged their legal obligations around evasion/avoidance, they were prepared to take the rest on trust.
The Bank of England thought that the growth of tax havens created three problems, namely, adversely affecting the balance of payments, reduction in taxation, and exchange leaks and reserve losses. Footnote 62 In contrast, the leaders of the island states of the Caribbean clearly saw the possibility of attracting financial business as a means of development. Footnote 63 Freeports, as part of the tax-free apparatus were seen as a way of attracting tourism to the islands, especially in the form of cruises. Footnote 64 As a Treasury official wrote to the Bank of England in 1969, “while from our point of view tax haven developments of any kind are unwelcome, and those in the Sterling area doubly so, from the point of view of the Islands themselves becoming a tax haven may be their only hope of salvation.”Footnote 65
International Capital Investment and Tax Havens
While economic historians have developed extremely good data with reference to British overseas investment before 1914, no similar systematic surveys exist for the period after 1914, including the postwar period that we are focusing on here.Footnote 66 This points to the need for considerable further work in relation to both statistics and individual case histories that cover this period, but this section nonetheless begins this task by examining the changing international investment position of the UK in the postwar period. Given the perception of the decline of the UK in the world economy at this time, it is perhaps surprising that between 1962 and 1979 the external assets owned by UK interests grew by 319 percent in real terms, once adjusted for inflation. Those assets owned by the private sector grew by 354 percent. At first sight, therefore, the impact of the tax havens on overseas capital investment appears not to have dented the UK’s position as an overseas investor via capital outflow. However, these headline figures mask a more complex picture in the data.Footnote 67
As shown in Figure 1, the overall level of private investment abroad (defined as direct and portfolio investment overseas) rose from £37.1 billion in 1962 to two peaks of £50.7 billion in 1968 and £51.9 billion in 1972, before declining to £34.1 billion by 1979. Yet financial investments abroad (including commercial bills, trade credit, claims in Sterling and Foreign Currencies [i.e., deposits held overseas]) grew dramatically across the same period, from £10.1 billion in 1962 to £133.5 billion in 1979. As Figure 1 shows, 1969 marked the moment when the overseas assets of the financial sector became greater than the foreign investment of the nonfinancial corporate sector. Indeed, such was the decline of UK direct investment, that by 1979 the total external assets of the public sector were roughly half that of the nonfinancial corporate sector, a situation that would have been unimaginable in the pre-1914 period.
Figure 1. UK External Assets, 1962–1979 (£ million; 1979 prices).
Sources: 1962, 1964, 1966–1969 from “An Inventory of UK External Assets and liabilities: end-1969,” Bank of England Quarterly Bulletin, 1970, Q3, 308–319; 1970 and 1971 from “An Inventory of UK External Assets and Liabilities: end-1971,” Bank of England Quarterly Bulletin, 1972, Q2, 213–219; 1970 and 1971 from “An Inventory of UK External Assets and Liabilities: end-1971,” Bank of England Quarterly Bulletin, 1972, Q2, 213–219; 1972–1974 from “An inventory of UK external assets and liabilities: end-1974,” Bank of England Quarterly Bulletin, 1975, Q2, 182–187; 1975–1978 from “An Inventory of external assets and liabilities: end-1978,” Bank of England Quarterly Bulletin, 1979, Q2, 160–166; 1979 from “An inventory of UK external assets and liabilities: end-1979,” Bank of England Quarterly Bulletin, 1980, Q2, 166–172.
The decomposed figures for UK direct investment and portfolio investment indicate that both were in decline between c. 1972/3 and 1979 (see Figure 2). UK direct investment (excluding oil, insurance, and banking) rose from 1962 onwards to a peak of £24.6 billion in 1973, before declining to £16.5 billion by 1979. Yet the stock of portfolio investment collapsed from its peak of £23.4 billion in 1973 to only £9.5 billion by 1979. This collapse in real terms is even more profound given the relative shift of the pound against the dollar across this period, which increased the nominal value of these overseas investments where they were in the dollar zone or were dollar-earning. The sterling devaluation of 1967 began a slide in the value of the pound that resulted in it slipping below $2 for the first time in 1976.Footnote 68 It is further at least a possibility that this capital outflow was connected to the election of the Labour government and fears around increased taxation as was reported to Barclays International by one of the trust companies located in the Bahamas at the time.Footnote 69
Figure 2. UK Foreign Direct Investment and Portfolio Investment, 1962–1979 (£ million; 1979 prices).
Sources: 1962, 1964, 1966–1969 from “An Inventory of UK External Assets and liabilities: end-1969,” Bank of England Quarterly Bulletin, 1970, Q3, 308–319; 1970 and 1971 from “An Inventory of UK External Assets and Liabilities: end-1971,” Bank of England Quarterly Bulletin, 1972, Q2, 213–219; 1970 and 1971 from “An Inventory of UK External Assets and Liabilities: end-1971,” Bank of England Quarterly Bulletin, 1972, Q2, 213–219; 1972–1974 from “An inventory of UK external assets and liabilities: end-1974,” Bank of England Quarterly Bulletin, 1975, Q2, 182–187; 1975–1978 from “An Inventory of external assets and liabilities: end-1978,” Bank of England Quarterly Bulletin, 1979, Q2, 160–166; 1979 from “An inventory of UK external assets and liabilities: end-1979,” Bank of England Quarterly Bulletin, 1980, Q2, 166–172.
The implications of the data discussed are twofold. First, the decline in the real value of both direct investment and portfolio investment implies that capital outflow was occurring in this period, intensifying in the 1970s. Second, the dramatic rise in overseas financial investments is indicative of the increased importance of international finance to the UK economy from the 1960s onwards. Both of these things provide the context for the role that tax havens played in these processes, both as a mechanism for the external outflow of capital and as part of the architecture of international finance in the early phases of the period of financialization (i.e., the primacy of financial interests in business, economy, and society) that gathered pace towards the end of the century.Footnote 70
However, the question of the order of magnitude of capital moving to tax havens is somewhat conjectural because of the secrecy under which banks and other financial institutions operate. Indeed, both the Bank of England and the UK Inland Revenue were themselves contemporarily unable to produce accurate figures.Footnote 71 One Bank of England memo indicated that the figure might be “£5-10 million a year,” based on balance of payments data.Footnote 72 Board of Trade data available to the Bank of England indicated that “direct investment” (i.e., outward foreign direct Investment) had been £11.3 million in 1965 and £12.1 million in 1966, while portfolio investment was estimated at only £0.1 million in 1965, minus £1.5 million in 1966 (as a consequence of disinvestment), £0.1 million in 1967, and £.2.1 million in 1968.Footnote 73 In 1969 the Bank of England thought that the annual outflow of funds from the UK might be as much as £20 million per annum.Footnote 74 While these figures do not look large in and of themselves, they are annual figures of the flow of capital. Estimates given anecdotally to the Bank of England by the Vice-Chairman of the Trust Corporation of the Bahamas at this time indicated that “his own Corporation administered Sterling Area assets of the order of £350 million to £450 million in value,” noting that as the Trust Corporation was the largest of all of the trust companies in the Bahamas the overall total of assets under the combined control of all the trusts in existence was likely to be slightly greater than the amount under the Trust Corporation’s control. This would put the overall level of sterling area assets under trust control in the Bahamas alone at somewhere between £700 million and £1 billion, in 1969.Footnote 75 Of this, perhaps as much as half would have been assets that were located in the UK itself. Footnote 76 The Bank of England further estimated that the equivalent assets in Bermuda might be one-quarter of those in the Bahamas, possibly indicating that the overall level of trust-held assets might be as high as £1.25 billion, of which potentially £600 million might be located in the UK. Footnote 77 Another Bank of England estimate of overseas sterling area portfolio investment was that the value of corporate securities (both equities and bonds) was “about £950m” in 1969.Footnote 78 It was thought that pension funds were held in tax havens (for example, Shell were thought to have located a large fund in the Bahamas), and these might be held in tax havens for financial advantage. Trading companies might benefit from holding their liquid balances in tax havens, something that tended to rise at times of higher taxation.Footnote 79
This creates a puzzle in relation to how to think about the nature of the investments that were moved to tax havens. There were two basic divisions: between direct and portfolio investment; and a second division, between home (UK) and overseas investment. As the Bank of England observed:
It is well recognised that … the greater part of the funds handled by the territories simple pass through the books of the companies or institutions concerned and are invested elsewhere. Indeed, it is believed that in many cases the funds used never leave their country of origin. In the Bahamas and Bermuda trusts and companies are estimated to be handling funds which in total amount to something of the order of £1,000 million, all of which is invested elsewhere.Footnote 80
This meant that there might be a significant difference between the gross outflow, and the net real outflow, with substantial funds effectively reinvested in the UK.Footnote 81 However, the Bank worried that this would lead to a “steady build up of a general United Kingdom liability to trusts and companies in these territories” [i.e., in tax havens], so eroding the position of the UK as a net creditor nation, and damaging the integrity of the sterling area by allowing capital to flow out freely in contradiction to exchange control policy at this time. Footnote 82 The risk that was posed by the control of these assets moving to tax havens was that the “brass plate and offshore companies could seek to invest sterling funds in NSA [non-Sterling Area] markets.” Footnote 83 For example, real estate could be purchased by UK residents in a tax haven and then sold to non-sterling area residents for settlement in a third currency. Footnote 84 In this way, individuals could avoid the exchange controls that were designed to stop them from moving capital outside of the sterling area. Real estate development was a significant part of the development of the island tax havens, and adverts for investment opportunities were placed, for example, in The Economist. Footnote 85 At first sight, this would have been for the development of the tourism industry, but a second function seems to have been to allow wealthy UK individuals to expatriate capital. Substantial land speculation “where there is strong American and Canadian interest” provided “a ready market for this kind of deal.”Footnote 86 This further adds to the importance of the island nature of the tax havens; beachside hotels, resorts, casinos and housing were an important feature of one mechanism that explains the flow of funds into, and thereafter out of, the tax havens.Footnote 87
Another mechanism that was used involved the sale of property in the UK to an overseas registered company for the purpose of moving capital out of the UK. In 1973, the Inland Revenue reported that UK property was being sold to Bahamas registered trust companies for a price below the prevailing market value.Footnote 88 A chain of Bahamas-registered companies would then buy and sell the property between themselves until it matched the true market value. The original property owner would then repurchase the property from the Bahamas registered company for its real market value. If the original property vendor owned the trust companies or held beneficial rights in them, then they would then control the amount of capital that was moved (i.e., the higher later repurchase price, minus the initial sale price) outside the UK, while continuing to own the property in the UK. In this way, capital could be moved out of the UK without incurring exchange controls, and without triggering capital gains tax on the sale of the property in the first instance.Footnote 89
The Bank of England considered the risk of leakage out of the sterling area via the tax haven to be “quite high,” though it also noted that there also existed “other more important leaks and embarrassments” including the Persian Gulf States and Hong Kong.Footnote 90 Indeed, the tax haven system was part of a broader infrastructure and repertoire of techniques used by businesses and individuals for avoidance, evasion, regulatory arbitrage, reporting opacity, and so on.Footnote 91
To further complicate matters there has been an ongoing debate about the extent to which UK overseas investment, especially when it was at its greatest, was either direct or portfolio in nature. This directly relates to the conceptualization and theorization of the firms that were invested in. While economic historians have tended to see Free-Standing Companies as being of a portfolio natureFootnote 92, some business historians looking at specific sectors have challenged this, indicating that the head office in London was a meaningful site of management. While there might be an agreement that, say, utility companies in South America were managed and directed locally (the investment, therefore, being of a portfolio nature), this does not apply to some other investments where there is increasing evidence that they were meaningfully managed at a strategic level from the head office in London.Footnote 93 A further complicating factor is the location of the investors themselves, whether they were based in the UK, elsewhere in the sterling area, or outside the sterling area. This was a policy concern for the Bank of England in seeking to limit leakages of capital out of the sterling area.Footnote 94 There are no easy solutions to these conceptual and evidential problems, primarily because of a lack of detailed data, but also because the incorporated vehicles that investments were wrapped in were becoming increasingly complex. There were several corporate reregistrations of corporate domicile away from London to a third country in this period that may also provide part of the explanation, as might the absorption of British-registered overseas companies into multinational conglomerates already domiciled overseas.Footnote 95 The habit of reconstituting Free-Standing Companies, which involved the practice of separating and combining assets into new corporations, was well known in the history of overseas mining companies in particular but becomes even more complicated with reference to nesting corporations or shares in companies within trusts. The extent to which this involved trading company structures, trusts, or shell/holding companies located in tax havens remains an open question that itself demands further research. Given what we know about the contemporary business environment and use of such vehicles in tax havens, the question is not whether it occurred, but how business historians can excavate that history from the opacity of the havens themselves.
Banking and Commercial Services in Tax Havens
One legacy of Britain’s role as an imperial power was the widespread presence of British banks across the world. Some, such as the Hong Kong and Shanghai Banking Corporation (HSBC) were formed in colonies themselves, while others, such as Standard Chartered, were formed in London to provide banking services overseas.Footnote 96 The UK domestic retail banks also developed international banking capabilities, either by having bespoke international banking departments (as was the case with Lloyds and the Midland) or by creating a separate banking vehicle to undertake that kind of banking, as was the case with Barclays Dominion, Colonial, and Overseas (Barclays DCO), that became Barclays International in 1971.Footnote 97
Banks were essential in the development of the island tax havens. Their function was to offer banking services to clients, in terms of supplying credit, holding deposits, facilitating transactions, and transferring information between nodes in the international network of banks.Footnote 98 The architecture of this banking network was centered on the major financial centers—notably London and New York—but was supported by correspondent banking relationships that linked banks from all over the world to the centers, and so to each other.Footnote 99 While the development of the Euromarkets in London in the late 1950s and 1960s created a substantial offshore financial market in the City, banks continued to maintain a physical presence overseas via branches and agencies. For example, the Bank of London and South America (BOLSA) under the leadership of George Bolton had pioneered the development of the Eurodollar market in London and created the Bank of London and Montreal (BOLAM) in 1958 as a joint venture with a Canadian bank, the Bank of Montreal. BOLAM was headquartered in Nassau, in the Bahamas, and concentrated in both the Caribbean region and Central America.Footnote 100 Barclays DCO opened a branch in Cayman in 1953 and was followed a decade later by the Canadian banks.Footnote 101 British retail banks also took opaque or unreported equity stakes in island banks. For example, in the early 1970s, the Midland had an interest in the Bank of Bermuda, while National Westminster provided the top management for Butterfields, a Bermudian bank that was founded in 1758, and is still in existence. Footnote 102 Banks in Nassau, Bahamas also included RoyWest (a joint venture formed by the Westminster Bank and the Royal Bank of Canada) Bank of Nova Scotia, Barclays DCO, Chase Manhattan, the Sassoon Group, and the Royal Bank of Canada—as well as the Bahamas International Trust Company (BITCO). Howard Revington, the manager of BITCO said of the Bahamas, “[w]e like to think of ourselves as the future Zurich of the Western world.”Footnote 103 A sense of the business done by Barclays DCO in the Cayman Islands, for example, can be seen in a report from October 1968. In it, he notes that between March and October 1968, some £2m had been received in deposits from the mining conglomerate the TANKS Group, half of which was funneled through CITCO, a trust company based in the Cayman Islands (discussed further below).Footnote 104
Tax planning was at the heart of the business that these banks cultivated in the tax havens. For example, in considering establishing a local bank in the Bahamas, Barclays noted that “the [Bahamian] Government appreciates the importance of having strong international banks for Foreign business … [a] local company would, of course, have tax advantages (we could presumably keep profits out of the UK and use elsewhere free of tax)—but there are pros and cons.”Footnote 105 Barclays DCO/International offered company management services in Montserrat, the British Virgin Islands (BVI), and Barbados at the end of the 1960s. The costs of company formation were low, ranging from £125—£150. The bank’s annual fee for management of the “brass plate” was EC$550 per year, with a $1 charge for any entry to their books. In the case of investment companies this was “negligible,” but for trading companies would depend on the number of invoices the bank had to handle. Footnote 106 The cost of forming trusts was even lower, at just £25, with the bank making money on a percentage of the scale of the assets transferred. The first $25,000 cost 1 percent; the next $100,000 cost 0.75 percent, the next $125,000 at 0.5 percent and then anything above $250,000 was charged at 0.25 percent.Footnote 107 Trusts incurred an annual management fee of only $50, but there was also a withdrawal fee of 1 percent of the amount withdrawn.Footnote 108
The Barclays International branch on St Thomas, one of the American Virgin Islands, had been used principally as a means of funneling dollars into the London-based Euromarkets, “operating as a legal way to export dollars without infringing US Exchange Control Regulations, the branch accepting dollar deposits and deploying them in London at a turn.”Footnote 109 US dollars circulated freely on all Caribbean tax havens, but were legal tender in the British Virgin Islands, which also enjoyed a double taxation agreement with the United States.Footnote 110 The Bank of England regarded the BVI has being de facto in the dollar area. Footnote 111 With reference to Bermuda, which joined the dollar zone in 1972, a Barclays International report in 1973 observed that since the break with Sterling “international tax haven business was on a plateau and I cannot see it increasing, which is not to say that the Euro-currency business of existing companies will not grow.”Footnote 112 This indicates an important feature of some island tax havens, perhaps especially those that were in the dollar zone, was as a conduit for dollars to flow out of the United States and into the Eurodollar market in London from where the funds could be recycled. As the Bank of England observed, the “growth in tax havens has tended to be concentrated in areas adjacent to the USA because it is from there that the greater amount of new business emanates.”Footnote 113
In addition to banking there was also the presence of accounting firms, such as Price Waterhouse, who were engaged in advising island governments how to arrange their legal and regulatory regimes to maximize business as a tax haven.Footnote 114 Cayman, for example, was home to offices of some of the major accounting firms—Peat Marwick, Cooper Brothers, Price Waterhouse, and Panell Fitzpatrick—who provided the domicile for some twenty companies by 1968.Footnote 115 Between and 1968 and 1969 the number of expatriate legal and accounting firms based on the Cayman islands grew from three to seventeen, indicative of the burgeoning business to be done.Footnote 116 Accounting firms and banks offered similar services to clients, as did a particular form of trust management company such as the Bahamas International Trust Company (BITCO) and the Cayman Islands International Trust Company (CITCO). These international trust companies were established by consortia of banks to provide local registration services. For example, CITCO was established in 1966 “to conduct trust and banking business”:
The company offers a full range of management, secretarial, trust and executorship services to companies and individuals from outside the Islands as well as to residents. The company is sponsored by a group of leading banks, including Barclays DCO, trust companies, and other financial institutions on both sides of the Atlantic and is designed to serve those individuals and corporations who require first-class financial service.”Footnote 117
On foundation CITCO was a flimsy organization, employing one employee in a single-room office, with a part-time secretary. Nevertheless, it had obtained the “management” of ten companies in its first six months of operations.Footnote 118 There was clearly no capacity for active management to be undertaken, and its sole function was to be the nominal domicile of brass plates, replicating the function that had previously been common in the City of London, especially before 1914.Footnote 119 Barclays DCO did, however, believe that the international business via CITCO would increase, and contemplated moving an income tax specialist to Cayman to build up the international side of the business.Footnote 120
Such trust companies were initially fed business by the banks that took shares in them.Footnote 121 This was not always successful. In the early 1970s, the parent banks of the International Trust Company of Bermuda (ITCOB) had failed to supply it with enough business, and it was making a loss.Footnote 122 Unable to garner new business on its own, Barclays International sought simply use it to maintain the brass plate trusts and other companies that already used its services. Around the same time as this, Anthony Tuke, the Chairman of Barclays, was critical of CITCO on a similar basis:
CITCO themselves are not a very inspiring organization … it is rather a pity that CITCO is regarded by the BITCO directors as a poor relation, and although they have a board meeting held there from time to time it is a rarity for the top Directors to attend. With the benefit of hindsight we should, of course, have had our own Trust company, but we are in CITCO now and we must make the best of it. I have never understood what prompted us to put all these mortgages to CITCO, thus in effect handing over 75% of the profit to Hambros, Rothschilds etc.Footnote 123
In fact, Barclays did not set up its own trust company on legal advice. S.G. Mogford, the Vice-Chairman of Barclays International, explained that this was to distribute control for client preference. “In practice we have not only aimed at achieving a spread between different companies to avoid one controlling company, but also as regards the overall shareholding in order to ensure that no one ‘country’ had control,” he wrote, adding that “a number of our BITCO customers have laid great emphasis on this.”Footnote 124 CITCO was set up “as a complement to our local banking operations, as in the early days, there was virtually no trustee business,” noting that the mortgage business Tuke had questioned was a deliberate subsidy to support the business.Footnote 125 As we know with hindsight the tax havens registration business, including Cayman, expanded rapidly. By 1975, there were more than 170 banks and trust companies located there, up from just over twenty only five years before.Footnote 126 Similarly, BITCO also enjoyed success, continuing to trade alongside dozens of other Eurocurrency oriented banking institutions with branches in the Bahamas by the end of the period covered here.Footnote 127 The number of trust companies established in tax havens mushroomed, so that by the 1970s there were often dozens in each tax haven.Footnote 128
Company management by BITCO and other trust companies was founded on opacity; they might have no knowledge of the identity of the beneficial owners of the companies they incorporated.Footnote 129 Where BITCO supplied board members (in over seventy percent of companies in 1960—see Table 1), those directors would only act on the direct instruction of the beneficial owner…Footnote 130
Table 1. Companies managed by BITCO in 1960Footnote 131
By 1960 the number of companies managed by BITCO was 156 (see Table 1). Investment companies, mainly consisting of investment trusts, made up two-thirds (sixty-seven percent) of the total, while trading companies made up one-quarter (twenty-five percent). Of those twenty-six companies which were not designed as being either an investment or a trading company by BITCO, three were shipping companies, five were insurance companies, five were likely property management companies, one was a public relations company (Inter American Public Relations Ltd), one was a bank (the Bank of London and Montreal Ltd), and the remainder appear to be investment trust companies, holding companies, or shell companies. The insurance companies were mostly captive insurers (i.e., wholly owned subsidiaries formed to insure the business itself). General Overseas Insurance, for example, was a “house company” of the US petroleum company Mobil Socony, while Central Caribbean Insurance Company Ltd handled “only Tate and Lyle business.”Footnote 132
BITCO was directly represented on the board over seventy percent of the companies to which they provided managerial services in 1960, but proportionately had greater representation on investment company boards (eight-three percent) than trading company boards (sixty-seven percent). A similar pattern can be seen in relation to who the bankers were of the different companies. Barclays DCO held the bank accounts of forty percent of investment companies and twenty-three percent of trading companies, while Empire Trust held the accounts of twenty-five percent of investment companies, but sixty-four v of trading companies. Overall, Empire Trust in New York were the bankers for fifty-one of all companies, compared to forty-six for Barclays DCO. This reflects that by 1960 a substantial amount of BITCO’s company management business was coming via the Empire Trust rather than from Barclays DCO, and much of it was American owned corporations either transferring assets to BITCO managed companies, or relocating subsidiaries to the Bahamas.Footnote 133 This was caused by the “deterioration [of political conditions] in places like Panama, Cuba, Venezuela and other South American countries and the worsening of their relations with the USA,” Barclays DCO reported, going on to state:
American off-shore companies no longer wish to go to such countries, and tend to leave them if there already. Citizens or companies of those countries are looking for a safer place to which to move their affairs, and they are finding it with BITCO under the Empire Trust “checking accounts” system.”Footnote 134
Empire Trust provided check clearing and deposit services in New York for corporations managed by BITCO, so allowing them to access the US financial system, and to transfer money from New York to Nassau—a potentially important service for US corporations seeking to move business to Nassau. BITCO itself kept an account with Empire Trust of US$1 million.Footnote 135
The issue of political instability leading to capital flight, changes of domicile and relocation of beneficial ownership of assets was clearly seen by BITCO as an opportunity that included “Indians and others in East Africa who are in present unsettled conditions are contemplating moving their funds elsewhere, are looking for safe haven,” as well as Hong Kong and Singapore that, in retrospect, turned out to be more stable and became tax havens themselves.Footnote 136 The preponderance of corporations with Empire Trust bank accounts, however, appears to indicate that the US corporations were more important in developing the company management business for BITCO in the early 1960s, with Barclays DCO noting that following “attacks on such companies in places such as Panama, Venezuela, Cuba etc and these companies are looking for a safer haven for their funds.”Footnote 137 “By far the largest number of our clients originate from the United States of America,” one BITCO executive wrote, going to explain that the UK provided “relatively few” clients because of financial regulations preventing capital movement.Footnote 138 However, in other correspondence BITCO indicated that “[t]he falling off of Trust Business emanating from the United Kingdom has resulted almost directly from the result of the [1959] General Election … [t]his trend might well, however, be reversed in a year or two’s time if the fear of capital taxation were renewed in the United Kingdom.”Footnote 139 The 1959 election had been won by the Conservative Party with a large majority. However, in the preceding years the Labour Party had held substantial leads in opinion polls for most of the preceding parliament.Footnote 140 This implies that domestic UK concerns about the willingness of the Labour Party to tax capital owned by UK residents (whether overseas or in the UK) was contributory to the early development of the company management business by BITCO. This supports the view that the primary clientele of BITCO were corporations engaging in tax planning and seeking a reduction in taxation on overseas capital, though private individuals also had a role to play in transferring beneficial ownership of assets from one jurisdiction to another. Footnote 141 BITCO was candid that the function of moving to the Bahamas was to “obtain maximum tax benefits.”Footnote 142
Business Activity in Tax Havens
From the 1950s onwards firms from a range of sectors including were registering in tax havens with the burden of UK taxation widely cited as a reason. Footnote 143 In this section we outline the business activities in tax havens by shipping companies, trading companies, and investment holding companies.
Shipping Companies
The first corporations to move to tax havens were shipping companies. In the 1950s The Economist reported that the burden of taxation in the UK “was excessive for an international business like shipping.” Footnote 144 Rising shipbuilding costs meant that profit was difficult. It concluded that “British shipping becomes a shrinking fraction of world tonnage, and the fleets that set sail under flags of convenience–the flags of Panama, Liberia and Costa Rica–are … a rising proportion.” Footnote 145 British shipping owners looked to find a flag of convenience within the sterling area, often looking to Bermuda, though the statistics on flag registration indicate that the flags themselves were registered in Panama and Liberia, with the companies formed elsewhere.Footnote 146 Shipping companies with Bermudian registrations already existing by the mid-1950s included Shell, London and Overseas Freighters, Stanhope Steamship, and Silver Line. These took the form of co-owned companies, with no more than fifty percent ownership, that were not considered as subsidiaries.Footnote 147 It is clear that avoiding taxation was a causal factor. For example, the Anglo-American Shipping Company was incorporated in Bermuda in 1959 and was a subsidiary of Norness Shipping Incorporated. It had a capital of £7.5m with £2.5m in shares and £5m in loan stock, indicating that it was financed using thin capitalization. The IPO was organized by London merchant bank Montagu Samuel and Co. The company was originally to be registered in London but… “in order to secure the help of the two American institutions it was decided to register the company, whose ships are registered in London, in Bermuda … since there is no income tax in Bermuda (and the company has secured an undertaking from the Government that even if income tax in introduced, it will be exempt from it until at least 1986) the American institutions will receive their interest payments free of tax. The reason for American participation was that it was impossible to raise all the necessary funds on the London market.”Footnote 148 In the longer-run tax havens became the main source of maritime “flags of convenience.”Footnote 149
Trading Companies
Trading companies might undertake operations in the tax havens, or overseas—and in practice there is ambiguity as to what might be considered a trading company, a holding company, or an investment company. The UK Treasury was concerned that corporations nominally set up under a tax-free basis in order to undertake development work (such as building port facilities, hotels, or developing real estate—which would be classed as trading companies) were in reality established to create “brass plate companies … set up to enable tax to be avoided in other countries.”Footnote 150 The Bank of England believed that many companies registered in Cayman were dormant branches of companies already registered in other tax havens, and as such were “insurance against possible introduction of inhibiting regulations in those havens.”Footnote 151 The governance structure of the brass plates was to have companies registered in the name of number of nominee shareholders, so disguising ownership. Whether nested within trading companies, investment companies, corporate shells, or simply registered with a “brass plate” at an address in a tax haven, this poses a significant research difficult; the very opacity of reporting that made registration on the tax havens attractive to corporations acts as a barrier to knowledge about them.
Indeed, this was also a problem for the British government at that time. In the case of the Bahamas, for example, it was reported that “there is no way [of knowing about the firms] save by direct enquiry of the nominees (or their employees) or by chance leads.” Footnote 152 According to the view of the Commonwealth Office, and presumably also the Inland Revenue, there was “no legal means of piercing this vale of anonymity … [the] Government is entitled to no more information about these companies than any ordinary person who cares to pay the prescribed fee to inspect the register of shareholders in the company’s local office.” Moreover, the Bahamas authorities could not distinguish between firms that had British, American, or Canadian origins, and the Inland Revenue were informed that Sir Ralph Grey, Governor of the Bahamas, was equally unable to tell the British government “how many are registered in consequence of a genuine surge in any part of the Bahamian economy and how many are ‘shells’ for some activity undesired by the Inland Revenue,” for the simple reason that he did not know and could not easily find out.Footnote 153
Nevertheless, it is possible to reconstruct a sense of the ways in which these firms were constituted in this period. Offshore trading companies operated, in theory, as follows:
An American company that exports, say, tractors to underdeveloped countries, at a good profit, will export them at a price that is reasonable by American domestic standards but well below the actual selling-price. But it will, in theory, export them to its trading company in Monaco or Bermuda (the company won’t get the tractors, but it will get the invoices, bills of lading, and so on) and the deal, which contains the additional profit will pass through the Monegasque company’s books. The company will retain the profits–untaxed–and the American tax people will have lost a handsome chunk of revenue.Footnote 154
This then would leave the profit located in the tax haven. If companies wished to repatriate profits they would then take advantage of tax treaties between the haven and the home country to do so without having to pay taxation on profits earned overseas. Alternatively, capital could then be used within the tax-havened economic system. This is what one source referred to as “re-invoicing” so that “such part of the profit derived from selling in the international market that need not be attributed to manufacturing or handling within the United States can be earned by the Bahamian Company”; i.e., realized in the tax haven. Footnote 155 The Bank of England acknowledged that there was “no effective control over the operations’ of such companies located in tax havens.Footnote 156 The transfer of corporate assets was facilitated the creation of shell companies that were ready for off the shelf usage. Examples from the BITCO records in the Barclays Group Archive include companies with meaningless names, such as Prospero Limited, Queen Limited, Ragbag Limited, Salmon Limited and Swan Limited. Footnote 157 These companies were designed to be used in an emergency or with immediate effect “for someone who wants to move quickly,” and also to avoid American tax regulations that required new overseas companies to file with the Inland Revenue Service because “[t]he sale of an existing company –i.e, a shell–is not deemed to be the ‘formation of a foreign corporation.’”Footnote 158 In this way, a US owned corporation overseas could transfer assets into the shell for tax shielding or other benefits, or a business set up to undertake activities in the US could avoid US taxation.
Tax havens therefore became part of the internationalization strategies of businesses in this period. For example, the US oil conglomerate Mobil Socony registered various companies as subsidiaries of General Overseas Insurance (mentioned earlier). These included Mobil Transport (Bahamas) Limited, Mobil Holdings (Bahamas) Limited, Mobil Sales (International) Limited, Mobil Chemical Investments Inc. Mobil Investments S.A., and Mobil Trade Carrier Company.Footnote 159 Similarly, Lotus—a famous UK-based international motor racing team in the 1960s and 1970s—registered Team Lotus (Overseas) Limited in the Bahamas with BITCO in 1963 to facilitate international activities. They also registered a sister company called Lotus Indianapolis Project Limited, which presumably was engaged with American motor racing.Footnote 160
Tax havens were also used by mining-investment houses to incorporate companies that were used to control mining assets. The history of this kind of company in colonial contexts is well known in the international business historiography, with the incorporation and reconstruction of mining companies being a common element of the organization international mining conglomerates.Footnote 161 Mining companies organized this way have often been categorized as “Free-Standing Companies.”Footnote 162 Evidence of the existence of this this type of company is also present in the registers of companies that incorporate in tax havens, where they exist, and where there is access to them. Two examples of such registers are the Panama Papers and the register of defunct companies held by the Isle of Man Record Office. Both of these sources reveal company registrations for businesses that held assets overseas. To take two illustrative examples from these registers, International Minerals Ltd formed in the Isle of Man in 1968, and Overseas Mining Investments Ltd formed in the Bahamas in 1970, are both likely to have been vehicles for international investment in mining.Footnote 163 Similarly, from the BITCO archives, we find that in 1964 Tanganyika Concessions, the central component of the Tanks Group conglomerate, moved its corporate domicile from Southern Rhodesia to the Bahamas (having previously moved its corporate domicile from the United Kingdom to Southern Rhodesia in 1950). BITCO provided Tanks with corporate services and its official head office. The minutes of BITCO’s management committee noted that three of its officers had become directors of Tanks, and BITCO had become the secretary to the company. The reported reason for the move was to avoid political uncertainty in Southern Rhodesia, and also “to safeguard the freedom to remit home funds.” The Tanks Group’s stated motivation for the move was to “to retain freedom to dispose at will of its international securities and earnings.” There was also a marginal taxation advantage. Given that the majority of shareholders were based in Europe, and only about ten percent of Tankganyika Concessions investments were in Southern Rhodesia, this was the key feature (the majority of investments were in Congo and Angola, mainly invested in Union Minere, and Beuguela Railways, respectively).Footnote 164 What Tanks sought was to safeguard “its remission of funds to the UK.”Footnote 165 This reveals a key feature of tax havens, which was to enable corporations to move funds, and disperse profits, without being subject to either restriction or higher levels of taxation. It also underscores that the actual capital investment remained where it had previously been located. What changed was where the corporation profits were liable to taxation. Similarly, the British-South African mining conglomerate Anglo-American also used BITCO to incorporate mining related companies. In 1965, Anglo-American sponsored the formation the Mining and Construction Engineering (International) Limited. It had a capital of £50,000. The purpose of the company was to provide finance and included “technical know-how for engineering and construction on contracts on a world-wide basis.” Also formed in 1965 and associated with Anglo-American, the Boart (International) Company had an authorized capital of £2 million, and was formed in the Bahamas “as a medium for the provision of finance to a number of enterprises in various countries.”Footnote 166
Investment Holding Companies
It is known that wealthy individuals relocated themselves to tax havens to avoid paying tax, and that there are reported cases where business remuneration was paid via accounts in tax havens to reduce liability to taxation, and that there was a substantial flow of private funds to tax havens, usually placed in investment holding companies (also referred to as investment trusts).Footnote 167 Relatedly, Ogle claims that private individuals transferring money abroad was causative of tax havens.Footnote 168 Client files in financial archives are usually not accessible, if they have been retained at all. This is also the case for BITCO. However, some files have survived that relate to enquiries made by potential clients in relation to using BITCO services. These examples give a substantial insight into how BITCO operated to facilitate tax avoidance / tax planning.
The first example, from 1959, is that of J.C. Bamford, the owner of J.C. Bamford (Excavators) Ltd and Rocester Services Ltd who were in earth moving and machinery servicing business in Uttoxeter, England. Bamford sought advice on whether BITCO could establish a company in the Bahamas, ostensibly for the charting of yachts and shipping. Barclays would not be drawn on the legality of such an arrangement. Instead, questions of legality and liability to taxation were deflected to the client and their legal and accounting advisors, in this case Norton Rose, and Horton and Company.Footnote 169 This kind of deflection was important in establishing the arm-length approach of BITCO (and Barclays) in the company management business in tax havens, discussed further below.
The second example, from 1965, is that of Samuel Bailey Wright, who owned Hey Engineering in Coventry in England. This firm had become “an engineering-cum-investment holding company,” whereby the profits of the firm had been invested in securities that Wright intended for his own benefit.Footnote 170 However, with the onset of Corporation Tax and Capital Gains Tax in 1965, Wright faced the possibility of a substantial UK tax liability on the assets. Wright had sought advice from legal counsel on “the advisability of forming a Bahamas company … not with the idea of avoiding any tax whatsoever but merely to hold what can be considered his private fortune in the way of stocks and shares, leaving the engineering company to take care of that side of the business.” Footnote 171 He planned to eventually retire to the Bahamas. In response, Barclays DCO wrote to the Coventry branch of Barclays Bank for a confidential report on Wright’s “character, means and standing.”Footnote 172 The branch manager of Barclays Bank in Coventry then contacted the local branch of Westminster Bank with whom Wright banked to inquire about his standing, the outcome being that Wright was deemed “highly respectable and considered most trustworthy for his business engagements … [and] is highly regarded in machine tool circles.” Footnote 173 This appears to have been adequate for Barclays DCO to open an account in their Nassau branch with a £10,000 deposit from Wright.Footnote 174 Wright then liquidated Hey Engineering, resulting in £200,000 in cash and securities, and was liquidating other assets that would result in net proceeds of between £400,000 and £500,000. Taken with the proceeds of the sale of his firm, it would mean total assets that would be worth somewhere between £12.3 million and £14.4 million in today’s prices.Footnote 175
Of interest in this case is that Wright himself proposed a scheme to Barclays DCO and BITCO that would have involved Wright being given a £400,000 overdraft facility in London, and remitting the money to his Nassau account as a hedge against future exchange or capital controls. The overdraft would be liquidated by deposits to the Barclays DCO Gracechurch Branch, meaning that Wright would have access to liquid funds to the equivalent amount in Nassau.Footnote 176 BITCO wrote to Barclays DCO, stating that “the scheme you outline (if it could be worked) would prove very remunerative, and therefore merits careful study - especially as there are probably other people who are concerned lest the UK introduce restrictions of funds to other sterling area points,” but went on to say that “in the (unlikely) event of the United Kingdom introducing such restrictions, residence of the UK would be precluded from making payments to UK banks for credit to the accounts of non-residents in the UK.”Footnote 177 Consequently, BITCO concluded that the scheme was “fraught with difficulties,” Barclays DCO were “not enamoured of this devious method,” and the Bank of England opposed it.Footnote 178 Barclays DCO worried that the scheme might result in the Bank of England blocking transfers of Sterling to the Bahamas and elsewhere in the sterling area as a consequence. This “would presumably prohibit transfers of in Sterling to any other part of the world, which would place in jeopardy the millions of pounds owned by “foreigners” in the UK, including South Africa, Australia and all other points in the sterling area, and could even result in all our overseas investments similarly being blocked,” they wrote. BITCO had also advised DCO that “it could lead to Mr Wright divulging all the facts of the case,” something that DCO deemed “not desirable.”Footnote 179 Samuel Wright eventually dropped the scheme, though continued to move substantial deposits from London to Nassau throughout April 1966, after which no further information is present in the Barclays sources consulted.Footnote 180
What these first two examples indicate are the complex ways in which the different actors interacted to facilitate tax avoidance through tax havens. The avoidance schemes appear largely devised by lawyers and accountants, responsibility for their legality was undertaken by the client, and BITCO and Barclays DCO ostensibly only provided corporate and banking services respectively. Barclays and BITCO were keen to deflect any sense that they would be responsible for any breach of the exchange control regulations (“the position must be made quite clear [emphasis in original] to Mr Wright,” one source stated).Footnote 181 Second, there is a clear sense of the importance of opacity and secrecy, whereby more complex (and potentially profitable) avoidance measures were not undertaken in order that the broader structure of tax minimization remained unnoticed.
The third example, which stands in contrast to the first two, is that of Peter Ballenden, who in 1965 was the Chairman of the Swaziland Electricity Board. In April 1965, Barclays DCO in Johannesburg referred Ballenden to BITCO in order to establish an investment holding company. The motivation was as to avoid losing control over his personal assets when moving from Swaziland to South Africa, as he planned to do.Footnote 182 Barclays DCO contacted the City of London stockbroking firm Strauss, Turnbull and Company to advise on investments. “By reason of the fact that the beneficial owner of the company lives in Africa, the investment that this company makes will be in the nature of a nest egg, and it is hoped that the income will more or less pay for the expense of managing the company in Nassau,” Barclays wrote, going on state that “UK sources should be kept to a minimum and to think in terms of a small holding in foreign US dollar bonds - tax free to a holder resident outside the USA,” as well as Canadian, South African and Hong Kong based securities, citing Jardine Matheson and the Hongkong and Shanghai Banking Corporation as examples.Footnote 183 Strauss, Turnbull and Company wrote back to say that US dollar bonds, and stocks in Canada, South Africa, and Hong Kong would “provide a good spread of interests throughout industry together with a fairly wide geographical diversification.”Footnote 184 An investment company called Kingsland Trust was subsequently established for Ballenden in May 1965, but the levels of investment eventually routed through it were relatively modest, amounting to only a few thousand pounds.Footnote 185 Nonetheless, this case indicates how clients could be directed from DCO to BITCO, how the corporate structures were set up to enable investment with low taxation, and how investment took place through close collaboration between Barclays DCO, Strauss, Turnbull and Company, and BITCO. It also is explicit in noting that the function of the corporate vehicle that was established was to control and locate the beneficial ownership of securities in tax havens, where the securities themselves were located elsewhere around the world. In this case, the initial movement of capital from Swaziland was along the lines suggested by Ogle in that the motive was to avoid the constraints that would be imposed when Ballenden moved to South Africa from Swaziland. However, it is not clear that value of the investments confirms whether there was a “money panic” of the kind intuited by Ogle. Furthermore, the investment of some of the funds in companies in South Africa and Hong Kong indicates that this was not about taking capital out of the declining British Empire per se, but rather obtaining low taxation and greater control over capital while Ballenden remained both living and working within the British Empire (Ballanden went on to become a director at the Johannesburg office of Hill, Samuel, and Company, a London merchant bank).Footnote 186
Further evidence of the types of assets held by investment holding companies in tax havens is provided from a “sample” audit that BITCO carried out into one of its investment holding companies (called “D.1.07” in the sources) in 1960. This company contained two types of assets: sovereign debt (i.e., government bonds) and unit trusts (i.e., managed funds). The total of bonds owned by D.107 was £11,950 on purchase, or £1.14 million in 2022 prices (adjusted as a share of relative output; i.e., gross domestic product).Footnote 187 The company also owned 600 units of the Crosby Unit Trust (an investment fund organized by the merchant bank Robert Fleming and listed in London) trading at 14s 9d in January 1960. This would have been worth £443 in total, or £42,120 at 2022 prices.Footnote 188 What is salient here is the underlying capital assets in this company were already financially disintermediated in the form of unit trusts and debt. Though we do not know who the beneficial owner of D.107 was, or where they were based, the underlying assets remained unchanged, trading in public markets in London and elsewhere. The capital “movement” in this case—if it can be called that—would be in relation to where beneficial ownership was realized, rather than the underlying asset. Beneficial ownership is mentioned frequently in the sources and is of critical importance in understanding how tax havens shaped the structure of capital ownership.
Conclusions
In 1956, as the tax haven phenomenon began accelerating, The Economist observed of Bermuda:
“There is no income tax, profits tax, or capital gains tax. There are no taxes on dividends. There is no estate duty.” How long can this El Dorado last?Footnote 189
From our retrospective vantage point some seven decades later, we now know that the tax havens that were being created in the 1950s, 1960s, and 1970s were to become a permanent feature of the international business environment, and a permanent problem for nation-states in the form of taxes for which payment has been avoided. Tax havens have arguably become the “private empires” that the Bank of England anxiously worried about in the late 1960s—domains of economic activity beyond the realm of the institutions of global governance to control, demonstrating enduring intent by business and finance to shape the business environment, and the international political economy, to their own ends. Understanding how these conditions were historically constructed is of importance both to contemporary international political economy and the historiography of international business.
This article makes the following contributions to this endeavor. First, in the context of the political and economic upheaval associated with decolonization (and political instability more generally), alongside increases to taxation within already industrialized nations, we have demonstrated that the development of tax havens was the product of radical financial and business innovation that sought to retain control of capital and realize its profits with minimal or no taxation. In so doing they carved out a space in the international political economy that recreated the conditions that had existed more generally before 1914. Finance and business owed no allegiance to the increasingly moribund vestiges of the British imperial system in the postwar period, and sought to benefit from its demise.
Second, we have shown that the institutional structures required to operate a tax haven were replicated from tax haven to tax haven, an isomorphic process that created similar regimes of law and regulation, as well as the provision of comparable commercial and financial services in the form of the branches of well-known banks, “international trust companies” that provided brass-plate commercial services including company registration and domicile, and access to both legal and accounting firms. This indicates that the creation of the tax havens was intentional, the product of a combination of actors seeking to create preferential conditions within which to own and control capital.
Third, with reference to emerging debates about the causes of capital outflow to tax havens (in particular the positions articulated by Ogle and Farquet), we have been able to provide data that indicates that the capital outflow to tax havens was substantial, clearly indicative of significant change in the patterns of international investment. Ogle’s claim of a “money panic” whereby individuals from the decolonizing colonies moved money in sufficient volume to achieve this is, however, somewhat questionable. We present evidence (consistent with Farquet’s position) that the United States was an important source of capital movement to tax havens, in part triggered by political instability in Latin America. Similarly, corporations rather than individuals were a significant source of capital outflow to tax havens. And, while there are examples of colonial individuals moving assets to tax havens in the sources consistent with Ogle’s position, there are also examples of individuals based in the UK doing the same thing. Perhaps unsurprisingly, we therefore conclude that capital outflow to tax havens was multicausal and geographically diverse.
An additional contribution we make in this area a better understanding how the ownership of assets domiciled in tax havens were structured, and the importance thereof of “guinea pig” or nominal directors associated with international trust companies and legal firms acting for beneficial owners, who could be located anywhere in the world. The beneficial owners of assets that were moved to the nominal ownership of corporations domiciled in tax havens were able to realize profits without taxation and in secret, even where the underlying capital was itself not mobile. This was a fundamental restructuring of capital ownership within the international economy that allowed corporations and wealthy individuals to avoid tax while retaining control of capital, wherever the underlying assets were located. In some cases, this was a reaction to the possible loss of control of capital caused by decolonization or other political upheaval, rather than a direct flight of capital from the region that was experiencing upheaval. In other cases, it was simply naked tax avoidance.
Fourth, and related to the above, we have also substantively contributed to the historiography of the business history of tax havens by observing—albeit through fragmentary and partial evidence—the kind of businesses that moved to, or were formed in, tax havens, and the kind of business activities that they engaged in. The supplementary presence of freeports, real estate development, and a nascent tourist industry provided investment opportunities and mechanisms to move capital freely around the world, while avoiding taxation. We have been able to point to the role of the tax havens in facilitating the movement of capital out of the sterling area and, in counterpoint, the movement of dollars out of the dollar zone into the Euromarkets that, in London, were an offshore haven of a different kind. Tax havens are therefore not just static “havens” as stores for capital, but part of the dynamic structure of capital mobility that has characterized the international political economy of recent decades. Related, tax havens may also have been a factor in the disappearance of the “Free-Standing Company.” Many companies registered in tax havens appear to be structurally similar to classical FSCs—nominally single unit corporate vehicles controlling assets elsewhere. By playing a role in the restructuring of international business that occurred in this period, tax havens may have facilitated the absorption of FSCs into larger multinational enterprises as subsidiaries. Or, alternatively, a historiographically intriguing possibility is that the low tax environment and opacity of tax havens may have provided a kind of continuity for the FSC corporate form, long after similar kinds of company ceased to have their domiciles in the City of London, Edinburgh and Dundee, the chief cities of corporate registration period before 1914.Footnote 190
Yet this barely scratches the surface of what might yet be known, and further research is required. It is a significant problem that documentary records of businesses operating out of tax havens are so sparse. Indeed, given the opacity of tax havens by design, it is not surprising that business-level archival records are hard to access. This said, the detailed information in the Panama/Paradise Papers might provide answers, but at the time of writing access to their treasure trove of information is largely confined to the International Consortium of Investigative Journalists, whose massive online database is not particularly suited to historical research, and unfortunately reveals no corporate level data, even though they possess corporate level primary sources on which their database draws.Footnote 191 Additionally, there is a need for much better historical quantitative data in relation to international investment and capital movement in the postwar period, as well as a more acute understanding of how the investment companies in tax havens worked, what assets were on their balance sheets and how portfolios were managed, as well as how multinational corporations, international banks, and insurance and shipping companies, integrated the “offshore world” into their business operations and organizational strategies.
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