What Greece and Oregon have in common and why money launderers should care about the US defense bill

Hello, and welcome to Oligarchy. We are tracking how Covid-19 and the world’s response to it is affecting the super-rich — and what that means for power and politics.

CAN WE CELEBRATE THE NDAA YET? 

I read a history book recently, which described how baffled European powers were when, towards the end of World War One, they came up against the US political system. Accustomed to a world where, if a government said it would do something, that thing tended to get done, they suddenly had to tussle with the concept of the separation of powers. The president might want to join the League of Nations, but if Congress says ‘nah’, then it wasn’t going to happen.

Here in the UK, ordinary citizens (well, me, at any rate) have faced that same steep learning curve over the last four years, as Donald Trump has tussled with ever more obscure aspects of the U.S. Constitution. We only have a few more weeks of his stress-testing approach to government left, but now – as a last Christmas present – we have to try to understand the veto-proof majority.

Both houses of Congress have now passed the National Defense Authorization Act by the kind of large majorities that stop the president being able to veto it. But what if he vetoes it anyway, as he has – once more – promised to do: because, apparently, “THE BIGGEST WINNER OF OUR NEW DEFENSE BILL IS CHINA”

Why does this matter for a newsletter about oligarchs? Because the NDAA is about much more than defense. The annual defense bill seems to be just about the only thing that Republicans and Democrats are prepared to cooperate on, so they push in things will little obvious connection to the armed forces, and that’s why the NDAA contains not just procurement plans for weapons systems, but also America’s most important anti-money laundering reforms in a decade. I wrote about the NDAA’s provisions on shell companies last week, but it also has important measures relating to whistleblower protection for insiders who reveal details about criminal misuse of the financial system.

After decades in which anti-money laundering efforts are judged by how many boxes they tick, this finally shifts to focusing on whether those efforts actually do something in the real world, like stopping money being laundered.

  • “The updates are informed by overarching efforts by global watchdog and private sector groups to prioritize “effectiveness” over technical compliance, at both the country, law enforcement and financial institutions levels,” notes the Association of Certified Financial Crime Specialists.

Not everyone is happy: lawyers that represent whistleblowers, for example, think that the measures do not give enough money to the clients that the measures will recruit for them. But, in general, it’s a big deal.

  • “The global law enforcement and national security community will reap enormous benefits from anti-money laundering policy that stops bad actors from using shell companies to shepherd crime across international borders. We applaud Congress for taking action on this essential issue,” said Bank Policy Institute President and CEO Greg Baer, whose organization represents the biggest financial organizations in the United States.

And this brings back to whether President Trump, as a parting gift, is going to chuck this reform in the trash, and whether a veto-proof majority will stop him doing so. So, what does a veto proof majority mean? Sadly, it doesn’t mean the measure can’t be vetoed. If Trump refuses to approve the NDAA, it goes back to Congress, where two-thirds majorities in both houses will have to approve it, again, in order to overrule the president. If they don’t, Congress will have to start over in the New Year

In short: the future of this measure and – by extension – the immediate prospects of the financial health of the world, depends on whether Republicans are prepared to stand up to Donald Trump in the next fortnight, and do the right thing. I for one am not going to be buying champagne just yet.

NON-DOMS ON THE MED

One of the reasons that securing beneficial ownership transparency for shell companies has proved such a difficult thing to achieve in the United States, is that a small number of – generally smaller, poorer, or lower population – states has long made a living from selling corporations so people and companies can undercut the regulations of larger, rich and more populous members of the Union. Delaware is the most famous example, but Nevada, Oregon and others have also paddled in this particular pool.

This dynamic seems to repeat itself in any political set-up where money and people can flow freely between jurisdictions, but laws are constrained by borders. Weaker members of the federal structure exploit their privileges at the expense of their stronger neighbors.

This same dynamic allowed Jersey, the Isle of Man and Gibraltar to undercut the United Kingdom; and, interestingly, it’s increasingly evident in the European Union. An obvious example is the golden passport industry, which I’ve written about before, and which has long allowed Cyprus and Malta to sell foreigners the right to live in France, thanks to their right to issue EU passports to anyone they like. We are now seeing a similar dynamic develop with taxation: EU states are competing for each other’s’ wealthiest citizens.

Greece has a new tax available to wealthy non-Greeks, who can move to the country and – as long as they pay an annual fee of €100,000 to the government — avoid paying any further tax on income earned outside the country. It also gives its lucky applicants exemption from foreign inheritance or donation tax.

It is a policy modeled on a weird anomaly in British law, which allows someone to live in the UK and yet claim to be somehow “domiciled” elsewhere, and thus be what is called a “non-dom” for tax purposes. 

  • “One attraction of a non-dom program for a global businessperson is that you don’t have the administrative costs associated with managing trusts and paying taxes in a number of jurisdictions,” said Yiangos Charalambous, a tax consultant.

Greece was following Italy’s lead, which has also been seeking to poach wealthy EU citizens so they come and spend the money they’ve earned elsewhere in the union in its shops. Last year, Italy brought in regulations aimed at rich foreign pensioners, which would charge them just seven percent tax on worldwide income. And Italy was in turn copying Ireland, Malta, Luxembourg and Britain.

  • It is possible to structure a non-domiciled person’s tax affairs so that their Irish tax exposure can be managed to acceptable levels.” And that rather begs the question: what exactly is an acceptable level of tax? And what’s to stop another country coming along and offering a level of tax that makes Ireland look unacceptable?

Unlike in the United States where, the NDAA’s anti-money laundering measures will pass, if not this year then next, and unlike in the United Kingdom, where the government in London eventually forced its associated tax havens to shape up; there is no strong federal government in Brussels to force members of the European Union to stop undercutting each other. It’s not impossible to imagine – in a decade or two — a whole shoal of tax havens fighting each other beneath the table of the German economy, all attempting to grab the scraps it lets fall, by offering ever more generous tax breaks. That seems a long way from the European dream to me.

WHAT I’M READING

John Le Carré is often referred to as the great novelist of the Cold War, which of course he was. But he was also the great novelist of kleptocracy. After the end of the Soviet Union, he turned his gaze away from studying human weakness and hypocrisy in the secret world, towards examining those same qualities in a new generation of villains. In The Night Manager, The Constant Gardener, A Most Wanted Man, and many other of his post-1991 novels, he exposed better than anyone the complicity of the Western establishment in the looting of the developing world. 

This memoir of his life, and his relationship with his father, is a reminder of what an extraordinarily good prose stylist Le Carré was. I’d read it now, if I was you. May he rest in peace.

See you next Wednesday,

Oliver

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Oliver Bullough

Oliver Bullough is an author and journalist from Wales, who specializes in writing about financial crime, often when it has links to the former Soviet Union. His most recent book is Moneyland, why thieves and crooks now rule the world and how to take it back, and he is currently trying to write another one despite lockdown.