The menace of Putin’s kleptocracy seeped into Britain long before he started stacking up armoured divisions on the Ukrainian border. Yet the money has kept flowing, Britain has kept fencing his cronies’ stolen wealth, and repeated promises to tackle the problem have achieved nothing.

This failure is a national embarrassment, and has fuelled a mess of conspiracy theories: that the Tories are bought and paid for; that the Kremlin has kompromat to keep ministers in line; that the City of London has a special hotline into the heart of parliament.

The real story, however, is far more alarming, but requires some telling, because you can’t understand London’s love affair with Russian money without understanding the story of how the City was reborn as both a financial centre and the engine of our national economy. They are, in fact, the same story.

Once you understand this, you can see why government after government has been so reluctant to drive the oligarchs’ money away. They’re like doctors watching a cancer grow bigger and bigger in a vital organ: operating will cripple their patient, so they leave it in place, even though — eventually — it will kill him. But this choice can’t be postponed much longer. If we want to save British democracy, we need to take a scalpel to a tumour that was seeded all the way back in 1955.

Back then, the Soviet Union had a problem. Its great rival the United States had ended World War Two as the undisputed centre of the world’s economy; if the USSR wanted to trade with the world, it needed dollars. The global financial system was less globalised in those days. In order to secure democratic control over wealth, governments imposed limits on money in ways that are hard to comprehend now. They restricted how much money you could move across borders, for instance, or what interest rates you could charge on loans you made.

Suggested article

What Ukraine can learn from Israel

By David Patrikarakos

That meant that, if you had dollars, you kept them in the United States, where they were subject to the scrutiny of the Federal Reserve. But Soviet officials worried that, if Cold War tensions became more tense, and if their dollars were in New York, the US government might seize them, thus cutting Moscow off from international markets.

The City of London had a problem too, albeit a very different one. Britain was broke, with a huge hangover of debt left from funding its war effort. The capital flows that had sustained financiers’ incomes had shrivelled, and sterling had lost its role as the world’s leading currency. Banks were moribund, and ambitious young Brits preferred to work in academia, industry, or government.

The solution to the two powers’ problems came thanks to two banks: the Moscow Narodny (MNB), which was Soviet-owned but London-based, and the Midland, a scrappy challenger unable to attract the deposits it needed to compete with its more established rivals. MNB lent its dollars to the Midland, which used them to buy pounds, with which it could grow its UK business.

It may not sound like much, but these two banks had invented the most consequential financial invention of the second half of the twentieth century: the Eurodollar. By transacting with dollars outside of the United States, they kept the American currency’s upsides — its strength and convenience — while removing its downside: the heavy hand of the US government.

As sterling declined further, more London banks began to appreciate this new form of currency, which could move across borders unimpeded, could be traded easily, and was completely unregulated. They used pounds for domestic transactions, but kept different accounts for the Eurodollars, which they described with a word borrowed from maritime law to describe something outside the reach of government: offshore. Soon other banks noticed the innovation too, arriving from Japan, from continental Europe and from the United States to take advantage of the new discovery.

The Eurodollar could have appeared almost anywhere, and embryonic versions did appear in Canada, in Switzerland and elsewhere in Europe. But in those countries the governments recognised the threat that footloose currency posed to their sovereignty and snuffed it out. Memories of the Great Depression, and of the misery and war that followed it were still raw, and democratic politicians wanted to make sure they could always put people before wealth.

Suggested article

The lesson of l’affaire Huang

By Aris Roussinos

In the City, however, the Bank of England loved the idea of setting money free, so it did. “It is par excellence an example of the kind of business which London ought to do both well and profitably,” a Bank official wrote in 1963. “If we were to stop the business here, it would move to other centres with a consequent loss of earnings for London.”

At that time, the market was worth around $5 billion. Within four years, it was worth $13 billion. By the end of the Sixties, it was worth $40 billion. That was when other countries started to surrender, to scrap their own efforts to stop their banks from leaving, and the market really took off. Now, it’s the biggest in the world: all dollars are offshore, so are pounds, euros, Swiss francs and — with a few exceptions — pretty much every other currency in the world.

This business model did not stop there. Our financial professionals looked for countries whose governments were imposing limits on wealth that its owners found onerous, and undercut them. In the Cayman Islands, Americans found a ready haven for all the money they didn’t want to pay taxes on, and this once-obscure turtle-fishing archipelago is now a world class financial centre. In the British Virgin Islands, tycoons from China and criminals from Latin America found cheap, opaque shell companies to hide their ownership of assets behind. And in Britain itself, generations of oligarchs — from the oil-rich countries of the Gulf, from the ex-colonies of Asia and Africa and, of course, from the post-communist countries of Eastern Europe — found a warm welcome.

What we offer them is a haven: not just a tax haven, but an everything haven. They can buy property here and they don’t need to tell anyone about it, because they can hide their ownership behind a shell company. They can manage their liquid wealth here too, either in a discreet bank or a boutique private office. They can send their children to one of our world-class schools, buy their art at one of our auction houses, and meet their friends at a ritzy restaurant while their wives and/or mistresses shop at Harrods (because, let’s be honest, these oligarchs are pretty much all men).

If a business rival complains about them, they can settle the dispute in our commercial court, thanks to our world-leading legal sector. And if they want to keep an eye on how their adopted country is run, they can dine with a minister for not much more than they’d spend on a holiday. They can buy anything in London and, thanks to the way politicians have starved our enforcement agencies, no one with the power to do anything about it will ever know if the wealth was honestly acquired.

Suggested article

It's time for Boris to go

By Giles Fraser

Politician after politician has stood up in parliament to insist there is no place for dodgy money in London. But then the lobbying starts. Every one of these sectors — finance, law, estate agencies, auction houses, education — starts arguing for exceptions and loopholes, and nothing gets done. In 2014, for example, after it was revealed that specific shell structures called Scottish limited partnerships had been used to launder money stolen from Moldova, politicians from the Scottish National Party campaigned for the law to be tightened. Not only did this not happen, but the Treasury actually deregulated the structures further, so as to protect the competitive advantage of the City.

This is a supercharged version of that same business model cooked up by Moscow Narodny and the Midland back in the Fifties. It is reliant on British regulations, enforcement and oversight being weaker than those of other countries, so wealth comes here, and we can earn fees from it. It is not just oligarchs that benefit from our offshore services, but corporations too: the City earns fees from any wealth, whether honestly or dishonestly acquired.

The risk is obvious. If it isn’t enough that Britain is depriving other countries of money they need, and driving down levels of tax and regulations everywhere by providing a haven for the wealthy, we are also acting like a giant Florida for an magnified version of Al Capone’s gangsters, and giving them a playground from which to threaten the world. We are privileging the interests of the few over the wishes of the many, whether those happy few are evil, naughty, or just publicity-averse.

This is not a revelation. Multiple parliamentary enquiries have revealed the seriousness of the problem in recent years, including the Intelligence and Security Committee’s (ISC) 2019 probe into Russian wealth in the UK. Truss should be commended for saying she will do something, but let’s wait until the laws are on the statute books before congratulating her. After all, Boris Johnson battled to prevent the ISC’s Russia Report being published at all — and that is not the action of a man looking to put democracy before money.

In France, Poland and Denmark, they’re trying a different approach during the coronavirus crisis: geese that don’t provide enough feathers can hiss off. Those states have declared that companies that have used tax havens to reduce their tax liabilities will not be eligible for state aid to get them through the current downturn.

Britain hasn’t — so far — announced anything so stark, but quieter echoes of such thinking can be detected in the Government’s emergency bailout measures.

While Rishi Sunak has offered furlough schemes for salaried workers and support for many of the self-employed, the Treasury has so far declined to offer a specific package for people who are self-employed and paid through a limited company of which they are the sole director. That arrangement can have tax advantages to contractors, who pay themselves dividends instead of a salary.

(In the interests of transparency, I should note that some columnists use such a device for their journalistic earnings. I am not one of them.)

The refusal to include self-employed directors in the bailout has caused no little distress and anger; some of those people are contractors to big companies who have insisted that they will only pay fees to limited companies, not to contractors personally.

Suggested reading

Everything we do with tax is wrong

By Dominic Frisby

Yet the Treasury’s view, rarely stated explicitly, is not too far away from that of the French, Poles and Danes: if you choose to minimise your tax bill and pay less in to the state, you go to the back of the queue when the state is dishing out cash.

That’s an interesting place to start a conversation about tax after the crisis. Here, I do not mean the level and allocation of taxation. Those are second-order questions. I mean the purpose and nature of taxation. Never mind how much tax you pay, ask yourself why you pay it.

Historically, the point of taxation has shifted. Originally a tithe extracted by monarchs to support their households, tax became a levy imposed to support certain national endeavours (UK income tax was famously a temporary measure introduced by Pitt the Younger to fund the war against Napoleon) and then… what?

Whatever you think tax is now for, it is a fact of life in any modern economy, because such economies need a state and that state must be funded. But current taxation everywhere goes well beyond that needed to provide a de minimis state that offers nothing more than national defence and the rule of law. Taxes fund services and social security, healthcare and education, a range of activities that would have been unimaginable to Pitt.

But describing the things tax does is not the same as answering that question about why we pay it. Because there are two distinct answers to that question. For some, tax is transactional: you pay in and you expect to get something back.

Suggested reading

Should the rich pay more tax?

By James Kanagasooriam

Anecdotally, I know this idea of transaction is widespread and powerful. I used to work for a newspaper that often argued for a smaller state that spent less and lived within its means. Yet when the Coalition government of David Cameron moved to remove child benefit from higher-earners, we were inundated with angry letters from readers arguing that they had paid their dues in tax, so they deserved to get a regular handout from the Exchequer — even if they did use it to buy a slightly nicer bottle of wine in Waitrose.

Likewise the state pension. Any politician who dares to question perks such as the winter fuel allowance and the seriously expensive triple lock of guaranteed annual rises immediately faces a storm of fury from recipients insisting they have “paid their stamp” and are thus entitled to endlessly rising living standards. Never mind the fact that their “stamp” was spent years ago and their pension payments are funded from taxes levied on today’s workers.

Is tax just a mandatory subscription fee you pay to provide yourself with services you might or might not want and might or might not use?

Another way to see tax is an insurance premium towards a group policy. This view is closer to the narrow financial facts of tax: the amount we pay in is not related to what we get back.

If you’re a privately-educated high-earner who drops dead at 60 without reaching a hospital, you may well contribute far more to the Exchequer than you receive in direct services. And if you’re born disabled or develop a complex chronic condition that limits your ability to work, you’ll very likely cost the state more than you pay in tax.

Government responses to the Coronavirus crisis show that insurance policy paying out, and might just shift, a little, the way politicians talk about tax. By and large, politicians tend to speak of tax as a necessary evil, something they try to do to people without them noticing too much. Hence the continued resonance of that Colbert quotation I began with: it’s used again and again in books and articles about tax, and with good reason — it’s still relevant today.

If you present tax as that necessary evil, tax avoidance and evasion make a certain logical sense. Especially if you believe (rightly or not) that you pay more in than you get back.

That belief is most often found in “self-made” people who have made money in business and appear to believe that their success exists almost wholly separately to wider society. If you built your firm through hard work and grit, who can blame you for losing sight of the social and economic infrastructure that was a necessary condition of your success? Roads, courts, clean air, policing, defence — take them away and see how long any business lasts.

Suggested reading

The hypocrisy of billionaire-bashing

By Justin Webb

(Some small-state conservatives still recall Ronald Reagan’s joke: “The 10 most terrifying words in the English language are ‘Hi, I’m from the government, and I’m here to help.” But as the historian Ian Morris has pointed out, in reality the 10 scariest words are “There is no government, and I’m here to kill you.”)

We don’t just pay tax so we can get stuff. We pay tax so that people — including us — can get stuff when they need it. Like an insurance policy, it only works through the pooling of risk — and contributions. Part of the reason a country like Germany has been able — so far — to absorb the coronavirus crisis better than others is a history of taxation levied and used to provide insurance against disaster: the Germans have almost too many ventilators and testing facilities, tax-funded precautionary capacity that now looks more prudent than wasteful.

Which brings us back to the companies that decide to skip a few premium payments by routing profits through off-shore subsidiaries, lending money between units and all the other clever wheezes. As voters wonder why their states’ insurance policies aren’t paying out as they expect during a fundamental challenge, is it any wonder that politicians feel little urge to help such firms?

But let’s go back to Colbert’s geese for a moment. It may well be politically expedient and even emotionally satisfying to let tax-efficient corporates go under right now. How many tears will be shed in the UK if Richard Branson loses his airline and his island?

But letting the noisiest geese starve won’t bring in so many feathers. The really interesting question about tax after the crisis is whether there’s now a chance to persuade more companies — and maybe some people too — to pay more tax.

Suggested reading

The 'green crap' lessons of 2013

By James Kirkup

If the crisis is demonstrating that tax is an insurance payment that can help protect everyone from grave harm, what is the social status of tax avoiders? The idea of shaming companies over their tax records is now old, and largely ineffective: there are lots of firms whose tax arrangements are famously ruthless and mean, yet how many have been successfully shamed into ending those arrangements? Most just use a fraction of the money they save in tax to employ a few more top-drawer PR folk to answer questions from annoying hacks and politicians, then carry on as before.

What hasn’t been tried enough is approval, the positive moral pressure of acclamation. Some companies don’t pay enough tax, but some pay lots.

According to PWC’s annual Total Tax report, Britain’s biggest 100 firms paid £84.7bn in tax last year, 11.7% of total government receipts.

Yet how many of them talk about their total tax contribution, about how many nurses or ICU wards they funded last year?

HM Revenue and Customs in recent years has experimented with behavioural science to get us to pay our taxes in full and on time. Self-assessment payers get bombarded with messages telling us “by this point in the year, most people have already done their tax return”, and so on.

The aim is “social proof”, the creation of a clear norm that people incline to meet. I wonder if the coronavirus crisis might just offer the chance to do something similar with tax on a much grander scale, part of a new social contract between businesses and the society that is now bailing them out and paying their furloughed workers’ wages.

I’m all for naming and shaming those who don’t pay their fair share of tax. It establishes that paying tax is an intrinsically good and selfless act, something made vividly clear by Covid-19. But we should make much more use of that. Since paying tax is a good thing to do, we should dwell more on those that do it the most.

Let’s have official league tables of the biggest taxpayers, with the winners celebrated and recognised: badges, honours, the lot. Hell, why not name hospital wards after those who did most to fund them? Imagine if the eight new Nightingale hospitals had been named for the eight biggest individual taxpayers in the UK on those league tables? And think how the companies and plutocrats who came lowest on the list might respond. There is more than one way to pluck a goose.