My year of tax evasion

You’re driving along. It’s dusk, a hot meat pie awaits at home. You’re almost there, dog tired. You pass a road train successfully – whew – and your attention turns idly back to an earlier conversation, then across to the podcast you’ve got on. You blink, and you’re in a ditch with blood running down your face.

That’s ethics. It sneaks up on you, sideswipes you when you’re not paying attention.

It’s common to think of ethics or morality as rational affairs. There’s an out-of-control train, and a bunch of idiots standing around on a track, and a switch. You know the drill. You know exactly what’s happening and what the consequences of your actions will be. You have time to think it through, and your attention is fully focused on the dimensions of this decision you have to make. And most of all, there is a decision. Throw the switch, or don’t.

But ethics seldom crystallises in a nice little parable like that. It’s embodied stuff. Pattern recognition. Gut feelings. Conduct and behavior, some complex cocktail of intention, habit, instinct, reflex. And it’s all in a messy, real-time world, with multiple demands on your attention, where the contours of the thing you’re dealing with are fuzzy and misnamed. You might not even know you're dealing with it. If there is a decision to be made, it’s sitting about two-thirds of the way back in your brain, ill-formed, nascent.

Like, nobody ever says, “Hey, would you like to call out some dodgy deals that you’re helping some investment banks do that rip off the public, weaken our democracy and threaten economic stability, even at risk of losing your legal practicing certificate, or are you good with it?” The thought never occurred to you, and that’s the crux of the issue, isn’t it.

And you know what? You don’t get off the hook just because you didn’t fully will the consequences, or even really know what kind of thing you were doing, even as you're up to your eyeballs in it.

Here’s what happened. I was at a loose end in 2001, age 28. Old enough to know better, not old enough to know, as they say. My Yale law degree had failed to yield a judicial clerkship or a summer associate position with a firm, due to what must have been a blindingly clear ambivalence about lawyering.

I spun my lassitude into a further degree in Germany, then a fun year in Australia. Finally, existentially adrift and with debts piling up, reluctant acceptance of a position with a New York corporate law firm. Cleary, Gottleib, Steen and Hamilton. A place good people go to be unhappy, as the young associates there not-joked. I called a friend, he called the recruitment director, and a ten-minute phone conversation later I had a job some people work their ass off for their whole life to get.

[The firm's name is no secret, but I have decided not to use individual's real names and not to reveal the identity of my client below. They are not entitled to remain anonymous, yet if I revealed them now I fear the main result would just be a take-down order against my little blog.]

You cannot imagine a person more out of their skin than I was, presenting myself for duty on my first day. I had cut off the ponytail I sported since I was fifteen. I had two adequate suits, which I wore on alternating days, hoping nobody would notice there were only the two. I had no watch, no blackberry, cheap shoes that hurt my feet, and no idea what I was doing there. Most of all, I had no sense of entitlement to anything, and in that respect I stuck out like an enormous sore thumb. Or I felt like I did.

I had a secretary, or a third of a secretary at least. Isabel from New Jersey. She was my mother’s age, and spent her days playing candy crush and talking about The Sopranos with her cubicle-mates. I never would have dared ask her to do anything, even if I had had anything for her to do.

The firm’s cafeteria served better food than most restaurants I had ever been to. At a firm party, there was a guy making sushi to order on the spot. I had no idea such things were possible. My office looked out on the World Trade Center, right across the street.

Somebody from Citibank called me, to help walk me through their private banking services. I was a kid with $100K of law school debt whose biggest asset was a set of Billy bookshelves, but as I now had prospects, I had access to private banking.

Everything about the firm amazed me, and simultaneously reminded me of how much I didn’t belong there. There were cultural signals I knew I was missing, but I didn’t know what they were. I’m spending time on this, because you have to know how off-centre I was, how deeply uncomfortable my day-to-day was in this place. Ethics is embodied, right? And I was living a life where social and professional self-preservation were what my reptilian brain was spending most of its time on. I was entirely lacking in confidence and conviction.

In the first week, when asked what department I might like to start practicing in, I foolishly said I might like to try several different ones. “Another rube, send him to Securities!”, I imagine the intake coordinator thinking.

So off to Securities I went. I didn’t know what a security was. Still don’t really. But I can tell you this: on a scale from boring to stultifying, Securities Law comes in as the most intellectually deadening experience you can have outside of the solitary block of your local state penitentiary. 

In the seven months I was in New York, I worked on exactly two deals, one after the other. While they were afoot, they were my entire life. They were called “structured finance” deals.

I remember the first meeting on the first deal, called “Project Cheshire”. Our client was a Wall Street investment bank, right around the corner. The counterparty was a London investment bank. I sat for two hours around a boardroom table with two dozen other people. The diagram of the deal was projected on an enormous screen. There were perhaps a dozen different legal subsidiaries involved – some in the Caymans or Guernsey or Bermuda – and maybe 40 different contracts. The diagram had big-money arrows going all over the place. Hundreds of millions of dollars were washing through this diagram, going this way and that, splitting up here and then rejoining down the path. The mechanisms of transfer were loans, puts, calls, guarantees, indemnities, and things more exotic still. Financial engineering at its best, or worst.

I had no idea what any of it was for. Nobody thought to explain to me what it was about, and I didn’t ask.  

Instead, I was given tasks suitable for any high school graduate with basic computer skills and a functional cortex. Things like “we’ve decided to change the governing law in this part of the deal from Bermuda to Delaware – could you reflect that in the draft contracts please Chuck?” I would have a list of such changes, and would spend long full days processing them, producing and distributing new and revised drafts. The pressure of just getting this right was immense, and not helped by the fact that I had no idea what the function of any element of this byzantine transaction was.

I worked 60-hour weeks, then 75-hour weeks as the closing of the deal approached. It was like working in a foreign language. I bought an air mattress and stored it under my desk. Often it simply wasn’t worth the 40-minute commute to my shoebox apartment in Park Slope, in terms of sleep foregone.

Weeks went by. Finally, I plucked up the courage to ask one of the senior associates on the deal, “Hey, uh, Craig? I think I get that this deal is a loan, but I can’t tell if our guy is loaning them the money, or their guy is loaning us the money. It looks like there's about $1.2 billion dollars going in each direction. What’s the, uh, underlying commercial substance here?”

“Oh, that’s a … really interesting question Chuck. I think you should ask Joan that.”

Joan was the corporate partner. Some little warning bell inside me said I should maybe probably not actually ask Joan that.

Ethical slippage one. Failure to ask what the fuck it is you are actually involved in.

Project Cheshire closed. The senior VPs in charge for each bank had to sign each page of a stack of documents perhaps 1000 pages thick. It took a long time.

I started on deal number two, Project Taurus. I grew to like some of my colleagues. There was a senior associate from a West African nation, who thought it was unfair that all the tax havens were in the Caribbean, and wanted to set one up in his home country. Joan was warm and chatty, and took an interest in my direction at the firm. I was "off to a running start", I was told. Didn't feel like it.

Once, Rosemary, the tax associate on the deal, joked about Rob, the tax partner. Rob was treated as a sort of genius by the investment bankers. I got the sense that he was actually the mastermind of these deals. You might think that law firms just provide advice in response to their clients, but here it was more like the firm coming up with a structure and pitching it to the banks.

Anyway, over lunch Rosemary quipped Rob’s eczema was karmic retribution for all the evil he was bringing into the world. “Evil, what do you mean?”, I didn’t ask. “So, if he’s got us working on evil deals, how do you feel about that?”, I also didn’t ask.

I just chuckled knowingly, afraid of appearing stupid for not knowing what exactly she meant.

Ethical slippage two: Failure to pick up on obvious signals. Ethical slippage three: being afraid others will think you slow or unsophisticated. Being uncomfortable in your own skin.

“Structured Finance” is a great phrase, isn’t it? Like, “finance” just means money stuff, and “structured” is a nothing adjective denoting seriousness. Structured finance is so much better than the unstructured kind. “Hey Dad, I’m working in structured finance”, I would say on the phone, and neither one of us had any idea what it actually meant. He was proud of me anyway.

Ethical slippage four: failure to give things their real name.

Project Taurus ramped up, my hours crept up towards the 60/week mark again as July turned to August, then all-nighters in September. One evening, I had wrapped things up around 1am. I said goodnight to the automated window washing pod that endlessly went up and down the World Trade Center, which occupied my entire field of vision. I had a funny sense of affinity with that pod – something about the relentlessness of the tasks we both had.

I slept in the following morning, and awoke to a rain of burnt paper confetti falling over Brooklyn. Never saw the pod again.

Despite being out of our offices, we heroically closed Project Taurus just two weeks after the attack. The juxtaposition of those two events horrifies me, makes me physically nauseous to this day. But it didn’t at the time. As the world lurched, violently and suddenly, as bodies were incinerated at home and then abroad, we continued our work as financial termites.

Ethical slippage number five: believing oneself to be outside or above history, and ignorant of the close network of mutual accountabilities and reliances that bind humans to one another.

Project Cheshire and Project Taurus were tax evasion structures. They had no commercial substance. They were examples of regulatory arbitrage, whereby minor differences in the tax, accounting, and bankruptcy codes of different countries are used to move assets off balance sheet, and reduce taxable income and/or capital reserve requirements.

These deals often involved highly aggressive interpretations of relevant laws, and many probably would have been found illegal had the relevant tax and other regulators had the full detail in front of them. But the enormity of these structures, and their cross-jurisdictional breadth, including in tax havens, made them impossible to scrutinize from the outside.

Let me be clear about the consequences: as a result of these deals, major investment banks lowered their tax bills by billions of dollars over decades. My salary came from ripping off the public to benefit rich bankers, and doing so in the most reckless way possible. The deals made the banks highly interdependent, in ways that were not transparent to regulators. Structured finance massively increased the severity of contagion that would occur if one bank went under. This is of course exactly what happened in 2008. And we know now, also, that the arrogance of Wall Street and the arrogance of Silicon Valley are primary determinants of the US populist backlash, and the failing trust of Americans in our democracy and our economy.

And for 15 years, nobody blew the whistle. Of the thousands of people involved in these transactions over this period, nobody blew the whistle. Including me.

From around 2005, Barclays Bank (not my client) started to come under scrutiny in the UK by tax authorities for particularly aggressive "tax planning". Finally in 2009, an anonymous leak laid out the full structure of several Barclays deals. At the very same time the investment banks were being bailed out by governments, they were continuing to develop cynical and probably illegal structures to avoid paying their fair contribution back to society.  

Barclays was forced to wind up its structured finance division in 2011. Some jurisdictions adopted anti-avoidance provisions in their tax codes to make it harder to do these deals. Nobody went to jail, or had to repay their bonuses. As far as I know, our client in these transactions never faced any consequence.

It’s hard to convey how foggy my thinking at the time was about all this. I didn’t think about the ethics of these deals at all. I knew I was personally not in a good place, and I needed out. It was self-preservation that had me looking for an exit, not righteousness.

With our offices damaged, the firm indicated that any associates should make it known if they were willing to spend some time in one of the overseas offices. It was a lifeline I grabbed with both hands, and within a few weeks I was headed for Brussels. I spent a year or so there, still awkward but at least working on more ethically neutral transactions. Finally I bailed, and redirected myself to something I actually cared about, landing a job as a lawyer with a Melbourne conservation group.

It has taken me 25 years to have the clarity to write this piece.

Here's the thing: everybody in that firm believed themself to be a good person, I am sure. The partners exhibited care towards the associates, the place is remarkably diverse, most of the lawyers there lean Democrat. The sense that “I’m a good person, and this is a good firm” is one of the insidious things that allowed the firm to do dubious work. The belief in one's own intrinsic goodness can only decrease the chance you will actually conduct yourself ethically. There is no intrinsic goodness, there is only the goodness of one's conduct in the world.

Refusing to call things by their real name is another. Structured finance was a key euphemism here. “Tax effective structures” was another – it sounds way better than “tax evasion”. These deals were swaddled with such linguistic gymnastics, and things simply unsaid, and they were essential the whole enterprise. You can’t really tell the young lawyer “look here Chuck, we’re helping these bankers get out of paying their taxes – here’s the scam…”, and then go to the charity dinner and tuck your kids in. Well, I don’t think most people could. Being able to talk euphemistically is perhaps the essential element in how all this happens. It’s how good people talk themselves into doing dubious things.

I remain intrigued and disturbed at how easy it was for me to exist in a moral fog, to become gradually complicit in something I would have rejected outright had it ever been put squarely to me, or indeed had I ever thought to spell it out for myself.   

One more thing: the firm made no place for ethical conversations. For a profession so awash in ethical standards as law, this may seem surprising. But lawyer’s ethics are technical in nature, and perversely the volume of professional ethical obligations can blind lawyers to broader societal issues. Perhaps the partners discussed these things around their table, but nowhere was there room for junior staff to raise concerns or to deliberate about the nature of the work.

I do try not to beat myself up about this, a quarter of a century later. In the first and biggest ethical challenge of my professional life, I get perhaps a D+. I managed to extricate myself, but I never called this stuff out, even internally. I wish I had found the words to do so.