A Brief History of Tax Havens

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Tax havens. A secret modern disease that has eaten away at the global financial system pushing millions of ordinary citizens into poverty? Or a practice as old as money itself that has always helped elites maintain their status?

Whilst protecting one's riches from government levies has been a priority of wealthy residents in every empire since Ancient Rome, tax havens as we've come to understand them – sovereign nations or regions that offer the wealthy the dream package of a place to escape tax and the added promise not to tell anyone about it – didn't come into their own until the 19th century.

And it would be at least another 100 years until their true impact, facilitating historic levels of inequality and placing the unique tax burden on the poor, would be realised.

Why Roman citizens hated taxes

To understand the complicated relationship between citizens, government and tax, it's worth starting with the Roman empire, where – as is evident in references from the Bible to ITV comedy Plebs – tax collectors were as hated as lawyers in modern day America.

Not only did citizens do everything in their power to hide their money, reportedly burying their expensive belongings when the tax man came to call, but the Roman government realised that they could curry favour with certain individuals by playing fast and loose with how much they taxed them.

Offshore company Sovereign Management and Legal Ltd claim that "Ancient Rome was a master in using tax free areas, a sort of early enterprise zone", adding that "Rome often used tax policy to reward friends and punish enemies. Cities which were loyal were often granted tax free status." Cites that didn't paid the price.

What they neglect to mention is that heavy taxation imposed by the government, and the desperation of citizens to do anything to avoid it, would later be blamed by some for the fall of the empire.

The birth of nom-doms

Fast forward centuries and another of history's formidable empires – the one which never saw the sun set – would entice people to run plantations in the colonies by promising not to tax their earnings.

These British settlers were the early day nom-doms: working and living in what was then part of Britain but not liable to British taxes. Today, an estimated 130,000 people are still taking advantage of this colonial hangover.

According to the Guardian, if you are a wealthy individual able to persuade HMRC that even though you are British and you live and work in the UK, but that it's not really your home because you don't intend to die there, then the advantages can be substantial: you can stash your money offshore to protect it from tax, and its all above the law.

And nom-doms are not the only hangover from the Commonwealth. According to Foreign Policy Magazine, British domination has been kept alive in the form of the world's most important tax haven network. It's just that the focus has changed, they argue, "from conquering the world to laundering its money, through treasure islands distributed across the planet, hiding pots of gold for corrupt leaders, tax dodgers, drug dealers and embargo breachers". Anti-poverty NGO Oxfam estimates that the amount of money lost to such tax havens could end world poverty twice over.

The Nazi tax haven

If nom-doms can thank their colonial forebears for helping them stay rich, they should also give a nod to the Vienna congress of 1815, which granted Switzerland status as a neutral country, making it the first "offshore" country, as it has come to be known today.

Not only has the small alpine country never engaged in a war since, it has become one of the best places to stash your cash, especially if you want it to be protected by the most officious banking secrecy laws in the world.

By the 19th century, the Swiss, with no access to the sea and no navy to go forth and conquer, had come to realise that neutrality was their trump card, according to the Financial Secrecy Index (FSI). The strategy paid off, and the country that championed banking services with the "utmost discretion" saw the "biggest ever cascade of money into Swiss banks" after the First World War.

"This wasn't only about Switzerland's safe-haven status. Tax was also a big part of it," explain the FSI. "As governments hiked taxes to pay for their respective war efforts, many wealthy Europeans escaped their share of the war effort and took their money away to Switzerland."

Another World War 21 years later brought the Swiss another tide of wealth, this time in the form of riches looted by the Nazis – some in the form of gold from the dental fillings of murdered Jews. The bankers stashed and squirrelled "without question", and in clear disregard for public hatred of Hitler's regime, add the FSI.

As Switzerland was girding its loins, governments, businesses and criminal masterminds around the world were also waking up to how they could benefit from offshore structures.

The tentacles of tax havens

According to tax expert Nicholas Shaxson, Al Capone's associate Meyer Lansky became obsessed with moving the famous mobster's money through tax havens. He started with Switzerland, but later took Capone's riches to Cuba and the Bahamas.

By the 1950s the remaining British colonies – whose ruling empire had run out of steam after the Second World War – had started to transform themselves into secret financial centres where, according to Shaxson, "private sector operators working in a zone of extreme freedom began to call the shots".

And it's from there that tax havens cemented themselves at the heart of the global economy, where "their tentacles have curled their way into pretty much everything", Shaxson added.

Although, tax havens no longer operate with the same level of impunity they once did. In early April, more than 400 journalists from around the world exposed the biggest data leak in the history of journalism: files from Mossack Fonseca, the world's fourth biggest offshore law firm, which implicated politicians and heads of state from 143 countries.

The #PanamaPapers, as they have come to be known, highlighted a secret web of offshore tax opportunities set up to help global elites stash their money, supported by a system enforced by their peers, who had a vested interest in keeping things secret.

As global outcry ensued, the citizens of Iceland forced their Prime Minister to resign and the Russian government denied that there was any proof in the allegations. It came as no surprise that the family of a very British prime minister, who had an upbringing reserved for a tiny proportion of the British population, was also implicated.