The Cayman Islands, 2026? Photo from U.S. Department of Defense.
Two related pieces of today's news got me thinking. First, China's super-rich are increasingly moving their money offshore, to the point that it's starting to cause some issues with the country's financial system. The other item was Gawker's document dump about Mitt Romney's tax haven dealings.
Tax havens are one of those big deals (a low estimate puts their holdings at $5-7 trillion) that weren't noticed that much until times got really tight.
What would happen if a country like China — or hell, even a smaller regional power — invaded a tax haven, declared it occupied territory, and forced the transfer of the funds stored there to its own system?
While all those funds might be ones and zeros zipping around out there in the ether, they touch down at some points. Banks, even offshore ones, are legal entities staffed by people with the power to approve transfers, account freezes, etc.
I'm not an electronic finance expert (and if you are, please feel free to weigh in here, I'm sure there's plenty I'm missing), but my impression from seeing things like a near-collapse due to trading algorithms is that the financial system resembles a lot of aging infrastructure: ad-hoc, spliced-together hybrids of old and new models. For that reason, it seems hard to wholesale control or have a "break glass in case of invasion" switch stopping transfers or moving all the funds in a given country's system to somewhere safer.
Banks are well-prepared against robbers pointing a gun at a branch manager and shuttling away money, but when an invading army can force multiple levels of a hierarchy to quickly comply, it becomes a much more problematic scenario.
Of course, this won't happen tomorrow. In addition to the financial, diplomatic, military, and legal clusterfuck that would ensue, a lot of the elites of said nations use these same havens.
But it's an interesting possibility, and there's more here than meets the eye.
Elites change, and it possible some country's rulers will one day see more gain than loss in sacking a tax haven, especially if they can combine cyberwarfare and diplomatic pressure with a more conventional military strike.
The country (or entity) taking over an offshore haven would have to be nasty enough to deter an obvious counterstrike by other pissed-off nations. But the same revenue crunch that makes this option more appealing makes getting into prolonged overseas conflict trickier, and "let's go to war for tax havens!" might be a problematic rallying cry on the home front. It's possible that other powers will just grumble, ask "where's my cut?" and look for similar targets instead of outright invading.
This wouldn't necessarily have to be a nation, either. Though a move like this would certainly be harder for a stateless entity to pull off, it's possible to envision really ambitious insurgents, pirates, or criminal syndicates using this as the ultimate smash and grab job, funneling the money from a tax haven into their own grey accounts.
There are less dramatic ways to affect a similar seizure. A very different, more aggressive UK government could summarily declare that the Channel Islands, for example, were part of the country and thus no longer tax havens (who would stop them?). A nation leery of outright invading a place like the Caymans (which is under UK protection), might instead back a local uprising or coup d'etat in return for an agreement to send some of the cash their way.
All these possibilities have major consequences, of course, not least of which is another huge nail in the coffin of the whole Westphalian sovereignty system. But that's already teetering and was often only honored in the breach when it came to smaller states.
In part, I'm bringing all this scenario-spinning up because a lot of speculation about the future gives nation-states short shrift. Plenty of futurism envisions them "withering away" due to money moving out of their grasp and the increasing strength of stateless entities.
Indeed, nation-states do have less power than they used to, for a lot of reasons. But as Wikileaks has brutally found out, "less power" is a very different thing from "no power." Nations and the people who run them still have a huge toolbox at their disposal, not least of which is the ability to occupy a piece of earth and threaten everyone there with bodily harm. It's a crude instrument, but not to be underestimated.
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