The end of European empires during the mid-twentieth century and the independence of former colonies was many things: an oft-violent conflict between unequal opponents, a clash of ideas and ideologies, a struggle over rights and self-determination. Less frequently considered is that decolonization involved a dramatic movement of money and a legal reorganization of access to assets and investments. Having tracked these movements, I have found a surprising connection between decolonization and the expansion of tax havens and tax haven business during the 1950s and 1960s.
During the 1950s and 1960s, talks between independence movements and metropolitan governments, and in some instances, prolonged, violent wars signaled the coming end of white rule in many parts of Asia, the Middle East, Africa, and the Caribbean. Especially wealthier Europeans both in the colonial world and Europe began to worry. Well-connected, versed in money and legal matters, they sought out advice from lawyers–“capital coders,” as Katharina Pistor refers to them–and bankers in Nairobi, Algiers, and London. With their control over nearly every aspect of society now in question, these white settlers were deeply afraid of the consequences that their loss of power could bring. White European settlers, officials, and businessmen thought in stark racial hierarchies and refused to see non-white colonized subjects as potentially capable entrepreneurs. Moreover, revengeful new leaders could impose restrictions on European business activity, investments, and capital movements after independence, could impose higher taxes, or worst, could resort to the nationalization of European property without adequate compensation. To avoid any possibility of having to share the wealth they had extracted from their former subjects, settlers liquidated much of their assets and sent them abroad. Such hot money departing decolonizing empires did not simply return to, say, France, or Britain. That might also involve having to share some wealth and being part of the social contract of progressive taxation. Instead, disinvestment from empire during the 1950s and 1960s spurred a flow of money into a number of well-known and emerging tax havens.
The Origins of Tax Havens
Switzerland, the US State of Delaware, and the British Channel Islands, among others, had become tax havens beginning in the late nineteenth century and during World War I. When progressive income taxes were introduced and applied on a wider scale during these years, it immediately prompted especially wealthier individuals and companies to refuse to pay their share. The quest for tax havens only increased after World War II, during which taxes once again had increased in many countries. Savvy lawyers and accountants soon fanned out to set up more and more potential tax havens with added bank secrecy laws and highly flexible corporate and trust laws.
During the 1950s and 1960s, this quest for new havens took advantage of the uncertainty and the need for moving capital that came with decolonization. Several havens emerged in former and ongoing dependent territories of the British Empire: Bahamas, Cayman Islands, British Virgin Islands, Malta, Hong Kong, and Singapore, among others.
The expansion of tax havens in the Bahamas and British Channel Islands during the early 1960s was fueled in part by funds departing the decolonizing world of the British Empire. In the Bahamas, the white British political elite of what was then still a British colony was simultaneously the ruling economic class on the island. The Bahamian finance minister at the time was a lawyer whose local law firm benefitted neatly from the business of company and trust registration that came with expanding tax haven business. The Bahamian colonial government thus had a material interest in seeing “tax havenry”, as dismayed London tax authorities described it, expand. The settler colonies of Kenya and Rhodesia were particularly active in dispatching money to some of the new trust companies and law firms operating in the Bahamas. Such early colonial business was crucial in allowing the legal and financial ecosystem that makes up the tax avoidance industry to establish itself in newly emerging tax havens. A similar process was unfolding in the French Empire. During the 1950s and 1960s, France’s large settler colonies in North Africa moved towards independence. Tunisian, Moroccan, and Algerian settlers, officials, and businessmen began sending money to the tax haven of Switzerland.
Postcolonial Strategies of Tax Avoidance
When wealthy, privileged white settlers pondered where to safely stash their cash, fiscal circumstances in both Europe and the colonial world shaped their choice. In metropolitan Britain or France, tax rates especially on wealthy earners had reached the high rates associated with the midcentury decades, when taxes helped build welfare states and moderately redistribute wealth. In contrast, colonies had for the longest time enjoyed unusually low or even zero tax rates for whites as settlers and lobbyists had vehemently opposed progressive income taxes. Often, these settlers and local entrepreneurs were represented in the same colonial legislative assemblies that had to approve taxes to be introduced – on themselves. Once taxes came, Europeans proved adept at evasion. Colonial governments regularly looked at long arrears in tax payments as enforcement was difficult. Officials in London frequently complained about lacking properly trained staff to help with income tax administration and collection. This made it easy for Europeans to simply delay payment forever or cheat. The situation regarding taxes on colonized subjects stood in marked contrast to white taxation. Various levies on colonized populations reached substantial amounts and were often harshly enforced with the help of police violence. In the empire, white “tax morale” – willingness to pay a tax – was notoriously low.
Law – or more precisely, legal arbitrage – is the infrastructure of tax avoidance and evasion. Law also became the prime vehicle for repackaging everything from assets to a company presence during the onset of decolonization. A Bahamas-registered company could hold the shares of a Kenyan agricultural company. It could receive as a gift securities of someone who was in the process of leaving Kenya to become resident in the UK, so as to avoid estate tax in the UK. Another example involved a Bahamas company set up to receive the assets of a company in Kenya as the Kenya company stood to be liquidated soon. The purpose of such legal recoding, to paraphrase Katharina Pistor’s work, was most commonly to create distance between the actual owner of assets and the funds themselves. Through a trust structure, for instance, the beneficiary of a trust capital could truthfully claim to have no direct control over assets if asked to hand over valuable foreign exchange to a cash-strapped newly independent government. At the same time, as long as assets legally remained in a tax haven and did not follow the beneficiary to a new place of residence, they stayed out of the clutch of different tax authorities as well. The most commonly used legal forms were trusts and holding companies. In many instances, however, funds thus relocated and repackaged did not just sit idle. Once money arrived in Switzerland and the Bahamas, Swiss bankers bought securities on behalf of their clients, especially on the US stock market. Fear of expropriation, limits placed on the repatriation of profits, and restrictions on foreign activity in key strategic resource industries led investors to think twice about the precise legal form of a business presence on the ground (a branch, a subsidiary, a joint-venture, for example). Rather than sink funds into cumbersome and difficult to liquidate brick and mortar trappings, increasingly many investors preferred portfolio investment. Foreign investment in stocks and bonds gradually outstripped direct investments by the 1970s. Decolonization therefore became part of a much broader transformation of global capitalism, one that rendered capital more mobile.
Conclusion
Little is known about the fate of colonial fiscal regimes after independence. More work is needed to establish whether newly independent governments left elements of colonial taxation in place, and whom such regimes might have benefitted under the new order. It is clear, on the other hand, that newly independent countries were bequeathed with the networks of expertise that had enabled and promoted late colonial capital flight and tax evasion. Thus apprised, local elites in the post-colonial world soon discovered the advantages of a Swiss bank account. During the 1950s, Swiss banks were actively recruiting clients among wealthy locals in the Middle East and North Africa and in certain Latin American countries, as one example. Companies newly investing in what was now called developing countries continued to enjoy the same generous tax holidays of ten years or more. Such investment incentive programs had begun under colonial rule. Problems like elite corruption and the erosion of corporate tax bases in low-income countries of the global south should be viewed in light of who built these systems and who, as US or European consultants, lawyers, bankers, and accountants continues to enable such practices.
