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Closing the Panama tax haven will require fighting the most powerful lobby in the world

Interview with Michael Hudson

Economist Michael Hudson says oil and mining industries and the U.S. State Department created Panama and Liberia for the express purpose of tax evasion

The following transcript is from an interview between Sharmini Peries, of the Real News Network, and Prof Michael Hudson. Sharmini introduced the topic as follows:

Peries: Within a week of the 11 million documents called the Panama papers, being published by the International Consortium of Investigative Journalists, they became a household name. The documents are connected to the Panama law firm Mossack Fonsesca that helped establish offshore accounts for some of the wealthiest and most powerful leaders to launder money and evade taxes.

On Tuesday 12th April the Panama police raided the Mossack Fonseca law firm to search for more documents linked to illicit activities. But what are they expecting to find, since we have already known for some time now that offshore accounts are being used to evade taxes by the banking sector, essentially white-collar crooks, at institutions such as Credit Suisse and others? But who is really behind the creation of these mechanisms and loopholes for tax evasion?

Our next guest, Michael Hudson, says Panama was created as a tax haven by certain sectors of our economy for this purpose. Thanks for joining us, Michael. Michael Hudson: Good to be here, Sharmini.

PERIES: Michael, so let’s begin with a short history of the creation of Panama and how it was bought from Colombia by the United States, and its relevance today vis-a-vis the Panama papers.

HUDSON: Well, Panama was basically carved off from Colombia in order to make a canal. And it was created very much like Liberia. It’s not really a country – in the sense of a country that has its own currency and tax system. Panama uses U.S. dollars. So does Liberia. And the real story that didn’t come out in the Panama papers, which naturally focused on criminal people laundering money, is that Panama was not designed to launder money. It was designed to launder earnings. Mainly by the oil and the gas industries, and the mining industry. Panama and Liberia were long noted as having “flags of convenience”. This means that oil tankers and mineral-transporting ships would register themselves under the corporate flags of Panama or Liberia, or some other country that used the U.S. dollar rather than its own currency.

Well, I first discovered this about forty years ago, when I was doing a study of the balance of payments for the oil industry. I went to Standard Oil, whose treasurer met with me to walk me through their balance sheet. And I said, I can’t figure out whether Standard Oil and the other oil companies make their money at the producing end of oil, or at the distributing end of refining and selling it.

And he said, well, we make our earnings right here in New York, in the Treasurer’s office. I said, what do you mean? He said, well, we sell the oil that we buy from Saudi Arabia or the near East at very low prices to the tanker company that’s registered in Panama or Liberia. They don’t have an income tax in their country, because they’re not a real country. And we sell the oil to the downstream distributors in the United States or Europe.

We sell that crude oil at a very, very high price. So high that there’s no profit to be made at all in refineries or selling the oil. So we don’t pay the tax collector in Europe anything. Neither do we pay the American government anything. All of our earnings are reported as being made in the tankers.

And I said, well, I’ve looked at the balance of payments reports here in the Federal Reserve and the Treasury bulletins. I see here’s Europe, here’s Latin America, here’s Africa and Asia. But I can’t find where these profits are. And he said, ah, look at the very last line – it’s international. Well, international, of course, but aren’t all of these countries and Europe international? He said, no – international means they’re really part of the United States abroad.

They’re the offshore banking centers – Panama, Liberia, etc. I found out that Panamanian companies, were set up initially to register the oil tankers and mineral ships in order to make the appearance of taking all of their profits from transporting oil, copper and other minerals from third world countries to the U.S. and Europe.

The U.S. government went along with this, making the oil industry tax exempt as early as the 1920s. Income tax was intended to capture basically economic rents, but the big rent extractors – oil and gas and minerals – got away with paying none.

PERIES: Michael, you indicated in one of your articles that you were actually approached by a State Department operative in 1967. Tell us more about that experience.

HUDSON: Yes, from a State Department person who’d gone to work for Chase. The problem that America had in the 1960s was the Vietnam war. The entire balance of payments deficit of the U.S. in the 1950s and the ‘60s, right down to the early ‘70s, was military spending abroad. A big problem was that the U.S. dollar was destined to decline unless the U.S. sold gold, and that’s what led to Nixon finally to take the dollar off the gold standard in 1971. The State Department came to Chase, and said, we’ve got to figure out some way of getting enough dollars to balance the military deficit. And they found a way to do it – by making the U.S. the new Switzerland of the world.

The end result was that the U.S. government went to Chase and other banks and asked them to be good American citizens, and make America safe for the criminals of the world to keep their money so that the U.S. dollar would be supported. Chase had done so already, when they had been asked to have a bank in Saigon so that the Army and other people wouldn’t put their money into French banks – which would have resulted in General De Gaulle cashing it in for gold, Chase said, okay, we will help set up banks.

Other banks did this not to evade the law, or to break the law initially, but to be good citizens and attract crooked capital from all over the world. Now, the same thing happened with the British West Indies declared their independence, not in order to be a real country but in order to attract flight capital to the U.K. They rejoined the empire as a colony so that they could serve as a money laundering center. The idea was that all of this money would be sent to the U.S.

The context of all this can be easily traced. If you look at the money that goes into Panama and other offshore banking centers in the Caribbean, none of this money stays in Panama.

PERIES: Over the next few days there has been many questions raised about why there are not many Americans or even Canadians named in the leaked documents. Some speculate that this is because in the U.S. they don’t need tax havens, because it is one. States like Nevada, Wyoming and South Dakota are considered the new Switzerland of tax evasion. Explain how the process works, because this is all interlinked.

HUDSON: The idea is not simply to put money into the U.S. Imagine you’re a Russian or Ukrainian kleptocrat, and you want to keep a billion dollars safe. You’re not going to put it directly into a Delaware or Wyoming corporation. If you tried to put it in directly then the U.S. government and the bank would be well aware that the president of the Ukraine has a billion dollars in one of our institutions. So the money needs to be laundered.

Likewise for Colombian drug cartels. They’re not going to put the Colombian drug cartel balance in a Delaware bank. It has to go through a lot of stages. So the money goes out of the Ukraine and out of Russia into Latvia, primarily, into the banks of Riga. And the Riga banks will send the money, say, to the British West Indies. From the British West Indies it will go to Panama. And then it’ll go – already concealed – into, say, a Delaware corporation.

If you look in the balance of payment statistics, you will find liabilities of bank branches in Panama or the British West Indies – or whoever – to the U.S. head office. And you can find out the quantity of U.S. stocks, bonds and deposits that have come from these islands. Their magnitude is so enormous that clearly this is what has been supporting the U.S. dollar. Moreover Congress is right behind this.

During the 1960s, criminals were the world’s most liquid people. They didn’t want to tie down their money in the form of physical property, because property can be seen, it’s visible. And finance in the balance of payments reports is often described as “invisibles”. The general idea, if you’re a criminal, is to have your finance invisible, which will help to keep it safe. And the safest investment is U.S. Treasury bonds.

During the 1960s the U.S. Congress debated whether to have withholding tax on U.S. Treasury bonds, especially to foreigners. It was pointed out that most foreigners who hold Treasury bonds are actually criminals, and so Congress (to its shame) decided that it needed the criminals’ money and would not withhold taxes on that money. It decided to make crime tax-free. Thus U.S. industry and labor would be taxed, but not foreign criminals. So we were not going to withhold on what they held through their fiduciary accounts in Delaware, New York or London. The London branches of the U.S. banks were the single biggest bank depositors and source of revenue of growth in the 1960s. These deposits were called eurodollars. And the money flowing into these branches was largely from drug dealing, arms dealing, and third world dictators in Africa and other places.

So the whole international banking system, under U.S. pressure, was set up to facilitate the money laundering of drug capital. The reason Canadian and U.S. entities were not noteworthy in the law firm’s records is that the law firm was engaged in money laundering – concealing the means of getting it.

The oil industry doesn’t conceal it how- ever. The oil industry declares all of the income it gets. Likewise the mining industry declares all the income that it gets from the Panamanian and Liberian shipping companies. But because Panama and Liberia don’t have an income tax, there’s no tax liability for this. This money has been effectively stolen from the tax collector.

PERIES: What are the solutions to this problem, and is it attainable at all?

HUDSON: Well, the solution is to tax companies on their worldwide earnings.

If you know that a U.S. company – like Standard Oil, Exxon – now makes X billion dollars earnings, it doesn’t matter whether you take these in Panama or the United States. We should treat the income declared from the Panamanian shipping company as having been earned in the U.S. and tax it.

However we will not see a solution to money laundering, because if one sets out to adequately tax companies on their worldwide earnings, then one is taking on the largest and most powerful vested interests in the U.S. – oil, gas and other monopolies. I don’t think any politician is strong enough to attract campaign contributions from these main contributors and at the same time really push to tax them. Congress can go after the little guy, but it’s very hard to go after the little guy and the small tax evaders without catching the big fish.

And the big fish happen to be the biggest of the U.S. corporations.

That’s why the problem is not going to be solved, largely because the U.S. wants to support the dollar by attracting all of this money, just like the U.K. wants to support the pound by making itself the flight capital center for all of the biggest criminals in the world, from the Russian kleptocrats to the African dictators, to Asian money launderers.

The entire financial system has been criminalized in the process of being militarized, to subsidize the fact that countries like the U.S. and U.K. have very heavy military budgets. This is how they finance the military budget, with money laundering by the world’s criminal class, and the by-product is to leave the largest companies, like Apple and Exxon, tax exempt.


Michael Hudson is a distinguished research professor of economics at the University of Missouri, Kansas City, and is a former balance of payments economist for Chase Manhattan bank. He is the author of many books, and the latest among them is Killing the Host: How Financial Parasites and Debt Bondage Destroy the Global Economy.

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