In mid-April, economist Michael Hudson told The Real News Network that global oil and mining industries and the U.S. State Department created Panama and Liberia for the express purpose of tax evasion.

Read a full transcript of Hudson’s exchange with host Sharmini Peries below.

—Posted by Alexander Reed Kelly.

SHARMINI PERIES, TRNN: It’s the Real News Network. I’m Sharmini Peries coming to you from Baltimore.

Within a week the 11 million documents called the Panama papers, published by the International Consortium of Investigative Journalists, has become 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 the police in Panama 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. Joining us now from New York is Michael Hudson. Michael is a distinguished research professor of economics at the University of Missouri, Kansas City, and he’s 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. And if you want to know more about that book, on our site you’ll find Chris Hedges interviewing Michael Hudson on this book. 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 have a canal. And it was created very much like Liberia. It’s not really a country in the sense that a country has its own currency, its own 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 just on criminal people laundering money, Panama wasn’t designed to launder money. It was designed to launder earnings. Mainly by the oil and the gas industries, and the mining industry. And Panama and Liberia were long noted as having flags of convenience. That meant that oil tankers and mineral ships would register themselves under the corporate flags of Panama or Liberia, or some other country that used the U.S. dollar, not its own currency.

Well, I first found out about this about 40 years ago, when I was doing a study of the balance of payments for the oil industry. And 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. And they don’t have an income tax in their country, because they’re not a real country. And we sell then 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. We don’t 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 from the Federal Reserve and the Treasury Bulletin. I see here’s Europe, here’s Latin America, here’s Africa and Asia. I can’t find where these profits are. And he said, ah, look at the very last line. And it’s international. And I said, well, international, of course, aren’t all these countries, Europe, international? He said, no. International means they’re really part of, they’re part of the United States abroad. They’re the offshore banking centers. Panama, Liberia, et cetera. So I found out that basically Panama, Panamanian companies, were set up initially to register oil tankers and mineral ships in order to make the appearance of taking all of their profits on the transporting the oil, or the copper, or the minerals, from third world countries to the United States and Europe.

And the United States went along with this. This made the oil industry tax exempt really since the 1920s. The income tax was created in 2013, 1913 and 1914, and it was intended to capture basically economic rents. But the big rent extractors, oil and gas and minerals, got away with that.

PERIES: Michael, you have 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: Yeah. From a State Department person who’d gone to work for Chase. I was–. The problem that America had in the 1960s was the Vietnam war. The entire balance of payments deficit of the United States in the 1950s and the ‘60s, right down to the early ‘70s, was military spending abroad. And the problem was that the dollar was either going down or the United States had to sell gold, and that’s what led to Nixon finally taking the dollar off gold in 1971. Well, the United–it’s tried to fight against that.

So the State Department came to Chase, and they said, we’ve got to figure out some way of getting enough dollars to balance the military deficit. And we found out the way to do it. We want to make the United States the new Switzerland of the world. The most–Michael, can you make a calculation of how much criminal capital there is in the world? How much do the drug dealers make, how much do the, criminals all over, the dictators. How much goes to Switzerland, and how can we get this criminal money in the United States? Well, 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 we would support the dollar. And Chase had already, when Chase had been asked to have a bank in Saigon so that the Army and other people wouldn’t put their money in French banks that would end up with General De Gaulle cashing it in for gold, Chase said, okay, we will help set up banks.

And other banks really did this not to evade the law, not 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. They had declared their independence, but in order not to be a real country, in order to attract flight capital to England, they rejoined the empire as a colony so that they could serve as money laundering. And the idea was to have all of this money come to the United States.

Well, all of this context can easily be 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: Michael, which is a question I wanted to ask you. 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 such as Nevada, Wyoming, and South Dakota are considered the new Switzerland of tax evasion. Explain how the process works, because this is all interlinked.

HUDSON: You usually have not only one or two, but often three or four. The idea is not simply to put money into the United States. Imagine you’re a Russian kleptocrat, or a Ukrainian kleptocrat, and you want to take a billion dollars, and you want to keep it safe. You’re not going to put it directly into a Delaware corporation, or a Wyoming corporation. The money is going to end up in a Delaware corporation. But if you put it right in then the U.S. government and the bank would say, wait a minute. Here is the president of Ukraine with a billion dollars, right, in our bank.

So what you have to do is you have to launder the money. Likewise with the Colombian drug cartel. 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, and I’ve met with individuals there, Americans who provide the service of setting up maybe 30 companies for the money launderer. And they will send the money, say, to the British West Indies. From the British West Indies it’ll go to Panama. And then it’ll go from Panama, ultimately, already being concealed, ending up in a Delaware corporation at the end.

Now, you can look in the balance of payment statistics and you can 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, you can look and see how many, how much American stocks, how much American bonds, how many American bank deposits, all come from these islands, and the magnitude is so enormous that that is what’s been supporting the dollar. And Congress is right behind this. In the 1960s, basically, criminals are the most liquid people in the world. They don’t want to tie down their money and property, because property can be seen, it’s visible. And finance in the balance of payments reports is called invisibles. So the idea, if you’re a criminal, you want to have your finance invisible, and you want to keep it safe. And the safest investment is U.S. Treasury bonds.

So there was an argument in Congress in the 1960s: do we want to have tax withholding on the Treasury bonds, especially to foreigners? And it was pointed out that most foreigners who hold Treasury bonds actually are criminals. And so Congress said, we need criminal money. We are not going to withhold criminal taxes. We’re going to make crime tax-free. We’re going to tax American industry, we’re going to tax American labor, but not foreign criminals, because we need their money. So we’re not going to withhold on what they hold through their fiduciary accounts in Delaware, was the main at that time, or New York, or London. So the London branch of the U.S. banks were the single major depositor and source of revenue of growth in the 1960s for Chase, for Citibank, and for others. They were called eurodollars. And the eurodollars flowing into these branches were very largely from drug dealing and 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. So the reason the Americans and the Canadians were not particularly noteworthy in the law firm’s records is the law firm was setting up money laundering, concealed means of getting money. But the oil industry doesn’t conceal it. The oil industry declares all of the income it gets, and the mining industry declares all the income that it gets from the Panamanian shipping companies, from the Liberian shipping companies. But because Panama and Liberia don’t have an income tax there’s no tax liability for this. It’s stolen fair and square from the tax collector.

PERIES: Wow. The big question here in all of these discussions and leaks is 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, say it doesn’t matter whether you take these in Panama or the United States. We’re going to treat the income that you declare from your Panamanian shipping company as earned in the United States, and we’re going to tax it.

Now, this explains why there’s not going to be a solution to money laundering. Because if you would solve the money laundering problem, and tax companies, you know, and their worldwide earnings, you would tax Apple on all of the income that it makes tax exempt in Ireland by using Ireland as a tax avoidance center, you would take on the largest vested interests in the United States. Oil, gas, monopolies. And 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. They’re going to 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 are the biggest corporations in the United States. That’s why the problem is not going to be solved. And it won’t be solved largely because the United States wants to support the dollar by attracting all of this money, just like England wants to support sterling 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 the Asian money launderers.

So the whole financial system, basically, has been criminalized in the process of being militarized, to subsidize the fact that countries like the United States and Britain have very heavy military budgets. This is how they finance the military budget, with money laundering by the world’s criminal class, and the byproduct is to leave the largest companies tax exempt, from Apple to Exxon, right down the line.

PERIES: And there’s a lot in there, Michael. Thank you so much for joining us today, and we hope to have you back to unpack some of those very important sections you were talking about in terms of solutions, as well as how to get legally at some of the people involved in creating these loopholes and evasions. I thank you so much for joining us.

HUDSON: Thanks a lot, Sharmini. It’s good to be here.

PERIES: And thank you for joining us on the Real News Network.

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