Months after the Great Recession brought the global economy to its knees, a financial management company called International Exchange (ICE) created a way for the world's biggest banks to keep trading in the very financial instruments that contributed to the crisis in the first place.
This article first appeared in Salon.
To help those clients duck U.S. tax laws, ICE created an offshore entity in the Cayman Islands, and registered it in a building known as Ugland House — one of the most notorious locations for offshore tax shelters.
Salon reported in September that Sen. Kelly Loeffler, the ultra-wealthy unelected Georgia senator who faces a heated runoff this January, helped establish and market that tax dodge and give the banks a new lease on derivatives trading. In 2009, Loeffler was the top communications and marketing officer at ICE, and had been married to the company's founder and CEO, Jerry Sprecher, for several years. They bought a $10.5 million mansion that year.
(Sprecher is the chair of the New York Stock Exchange, of which ICE is the parent company. The couple is worth between $800 million and $1 billion, per Forbes, an extravagant amount that has made Loeffler a target of political rivals.)
Though ICE pushes back against the notion that its clearinghouse allows companies to avoid U.S. taxation, the new disclosure of its use of Ugland House — for years pilloried and parodied as one of the most egregious examples of an offshore tax dodge in the world — sharpens questions about the company's true intent.
It also raises questions about the activities of Sprecher and Loeffler, at a time when Americans were reeling amid generational global economic turmoil.
In 2008, high-risk derivatives trading wrecked the global financial system. The complex financial instruments to blame included credit default swaps (CDS), in which lenders essentially sell someone else the risk that a borrower will default on their loan. CDS trades grew so popular and so widespread that when banks began to fail, it set off a brutal chain reaction around the world.
But just a few months after markets crashed that September, ICE, under Sprecher's leadership, set up an offshore CDS clearinghouse for the largest banks in the U.S., as well as foreign banks such as Deutsche Bank, UBS and Credit Suisse. The idea was to add a layer of protection to the trades.
Unlike many other countries, including the European Union, the United States taxes income earned overseas — at a rate of 35%. If that money gets reinvested abroad, however, the tax is deferred. In other words, if American companies put profits from their foreign subsidiaries in offshore holding companies, they can access it tax-free.
Those deferrals add up. In 2014, the Joint Committee on Taxation projected the revenue loss from deferrals at $83.5 billion, and the nonpartisan Economic Policy Institute estimated in 2017 that deferred taxes on offshore profits will cost the U.S. $1.3 trillion over the next decade, or about $126 billion a year.
Nearly 100,000 companies worldwide avail themselves of the Cayman Islands' 0% tax rate to duck corporate taxes — twice the size of the territory's population. Ugland House, a modest five-story building in the capital of George Town, is home to nearly 19,000 corporate entities, or one corporation for every three square feet of space in the building.
Former President Barack Obama remarked of Ugland House in 2008, "Either this is the largest building in the world or the largest tax scam in the world."
The press has frequently profiled Ugland House. In 2013 the Associated Press called it "a notorious tax shelter." Foreign Policy magazine said in 2012 that "the building makes a mockery of the U.S. tax system." The Economist wrote that it was "a symbol of all that is wrong with offshore financial centers." In 2009, the year ICE registered its Cayman clearinghouse, Rachel Maddow said that Ugland House was one of the "go-to destinations for U.S. companies to set up fake headquarters so they can avoid paying U.S. taxes on their profits."
Loeffler's forebears in the Senate — Democratic and Republican alike — went after Ugland House by name.
In 2009, the year ICE registered its Cayman clearinghouse, Sen. Carl Levin, a Michigan Democrat, introduced legislation targeting Ugland House specifically:
The bill is a new addition to the Stop Tax Haven Abuse Act designed to address the Ugland House problem. It focuses on the situation where a corporation is incorporated in a tax haven as a mere shell operation with little or no physical presence or employees in the jurisdiction. . . . The objective of this set up is to enable the owners of the shell entity to take advantage of all of the benefits provided by U.S. legal, educational, financial, and commercial systems, and at the same time avoid paying U.S. taxes.
At a Senate Finance Committee hearing the year before, as the global economy was showing the first cracks from the high-risk trading that ICE later revived in the Caymans, Sen. Chuck Grassley, R-Iowa, said American taxpayers should not pay a higher price "because sophisticated tax cheats move dollars offshore," and singled out Ugland House:
Today, we will hear a lot of complicated reasons for why those 9,000 Americans chose to conduct business out of the Ugland House in the Cayman Islands. And today, we will also hope to get some straight answers from our witnesses about why they do so. And the answers have a lot to do with tax evasion. Offshore tax evasion costs Americans tens of billions of dollars every year. . . . We owe it to hardworking honest taxpayers to make sure that their tax burden does not increase because sophisticated tax cheats move dollars offshore.
Sen. Max Baucus, D-Mont., told the New York Sun in 2008, the year before Sprecher's company established its Caymans setup, that Ugland is "one of the most likely places shady tax transactions could be sheltered."
"If American companies are setting up shop at the beach just to avoid their tax obligations, we can't keep our heads in the sand," Baucus said, emphasizing, as Grassley did, a need to "make sure honest American taxpayers are not footing the bill for corporations that aren't paying their fair share."
Sen. Byron Dorgan, D-N.D., said in 2007 that Ugland House was "the poster child for offshore tax haven abuses," a view shared in 2008 by fellow North Dakota Democrat Sen. Kent Conrad: "Of course, the only business they are doing in this building is monkey business, because what they are doing is claiming they are doing business there in order to engage in tax avoidance."
Sen. Sheldon Whitehouse, D-R.I., made a similar quip in 2011: "The notion that 18,000 corporations are doing business out of this building — that gives a whole new meaning to the phrase 'small business.' But there is no real business going on here. The business that is going on here is funny business, under the Tax Code."
The ICE Cayman Islands arrangement incentivized the largest American financial institutions to execute CDS trades around the world by allowing them to dodge U.S. taxes on their profits.
Sprecher then created a system that rewarded the people whose recklessness had destroyed the economy only months earlier. He found a way to give new life to their CDS trades, which had cost millions of Americans their wealth, homes and livelihood. And Loeffler, his wife and ICE's top marketing officer, helped package and sell the product.
More recently, Loeffler and Sprecher appear to have tapped another tax loophole for themselves, in the form of a provision in President Trump's 2017 tax bill that turns private jets into flying tax shelters. The couple bought the plane last December, when Loeffler was appointed to the Senate by Georgia Gov. Brian Kemp. She stepped down from ICE to take the job, but her husband is still CEO, and she still holds a stake worth half a billion dollars — and sits on a committee that regulates the business.
In June 2009, the year after the bottom fell out of the global economy and a few months after ICE registered its Cayman Islands holding company, the couple purchased their $10.5 million Atlanta mansion. They call it "Descante" — relax.
Loeffler's campaign did not reply to multiple detailed requests for comment for this article. An ICE spokesperson did not provide comment.