FTX’s Bahamas Headquarters Was the First Clue: Stephen Mihm

In retrospect, Sam Bankman-Fried and his cryptocurrency gang gave investors ample reason to steer clear of FTX: misleading claims that investments were covered by the Federal Deposit Insurance Corp., too-cozy-for-comfort relations with government regulators and other problematic behavior.

But the biggest red flag may have been the first: the crypto exchange’s relocation to the Bahamas. For centuries, the island nation has been defined by its close ties to dodgy, even criminal finance. Far from being an anomaly, FTX was simply the latest in a long line of sketchy enterprises.

The outlaw status of the Bahamas dates back to the 17th century, when the islands became the most important base for piracy in the Caribbean. While the British eventually drove the pirates away, the colony never lost its reputation for lawlessness.

After the British Empire abolished slavery in 1838, the local planter elite launched a new enterprise, salvaging ships that ran aground on the island. They lured ships to their doom through decoy lights and bribes paid to captains. Between 1858 and 1864 alone, 313 ships mysteriously ran aground on the Bahamas, their valuable cargos plundered.

During this same period, the Bahamas hosted blockade runners selling guns to the Confederacy. After the Civil War, the islands became a natural staging area for smugglers eager to dodge US tariffs. Then, during Prohibition, the islands became a staging area for bootleggers shipping rum to the US.

These illicit ventures gave rise to a ruling class of White merchants and property owners dubbed the “Bay Street Boys,” which one early assessment described as “the most reactionary group of businessmen in the colonial Caribbean.” This clique disenfranchised the Black inhabitants while exempting themselves from corporate and property taxes.

After the end of Prohibition in 1933, the Bay Street Boys developed a new racket, offering to help wealthy Americans evade the high taxes of Franklin D. Roosevelt’s New Deal. Typical of the new venture was the so-called Bahamas Insurance Company. It was, one witness later testified, “an insurance company which had no invested capital; which had no income; which had no assets; which [had] nothing; it was just a shell.”

Regardless, the new entity proved a most effective, altruistic undertaking. In a tongue-in-cheek account, the Christian Science Monitor described it as “giving first-aid treatment for Americans with uncomfortably high incomes.” The cure, which involved bogus interest deductions and fake loans, allowed taxpayers to reduce their liabilities to a pittance.

As tax historian Joseph Thorndike has noted, this was but one of many dodges peddled by the Bahamian elites at the time. The most successful and enduring was the personal holding company, which permitted tax-averse individuals to assign their income to an enterprise that was, in reality, nothing more than a name plate hung on a building owned by one of the Bay Street Boys.

Despite crackdowns, the Bahamas retained its reputation as a place where one could hide money from prying eyes. Soon the Bay Street Boys began forging close ties to organized crime figures, including famed mafia accountant Meyer Lansky.

Like other syndicates, Lansky’s circle had significant stakes in casinos in Cuba. As Fidel Castro’s Communist revolution gained steam, Lansky moved his operations to the Bahamas, forging close ties to Wallace Groves, a former Wall Street speculator who did time in prison for fraud before reinventing himself as a Bay Street kingpin.

So began a new chapter in the island nation’s relationship to criminal finance. As Lansky and his associates opened casinos in the Bahamas, local financial institutions became increasingly enmeshed in money laundering, a competency that eventually attracted other unsavory characters, including a growing number of drug traffickers.

Swindlers also set up shop on Bay Street. They launched bogus insurance companies that took premiums in exchange for, well, nothing; and fictive companies that sold shares of stock to credulous US investors.

Lansky’s lobbying helped shield these petty criminals from prosecution, particularly by securing laws that protected the release of financial information to criminal investigators outside the country. The growing presence of organized crime would eventually spark a populist revolt that dethroned the Bay Street Boys and set the stage for independence from Britain in 1973.

That same year, the IRS came remarkably close to exposing the role of the Bahamas in tax evasion, money laundering and other crimes. During an investigation dubbed Operation Haven, two agents managed to photograph the contents of a briefcase carried by an official of Castle Bank, whose clients included figures from organized crime.

Then, without explanation, the Justice Department closed the inquiry. In 1980, the Wall Street Journal revealed the reason: Castle Bank was also a financing arm of the CIA. Intelligence officials quashed the investigation by arguing it posed a threat to national security.

This affair, told in detail in Alan Block’s Masters of Paradise, helped guarantee that the banks of Bahamas would continue to operate in secret, protecting their clients. These included entrepreneurs such as Hugh Hefner and Bob Guccione, as well as bona fide criminals. By decade’s end, more than 300 “banks” operated in the newly independent nation.

From the 1980s onward, the Bahamas continued to refine its role as a place where foreign nationals could park their ill-gotten gains, launder money and evade taxes. In 2000, the Organization for Economic Cooperation and Development put the Bahamas on a “blacklist” for its failure to cooperate with other countries in sharing information.

Initially, the Bahamas refused to accede to the OECD’s demands. Eventually, it opted instead for what one researcher has described as an “obfuscating strategy,” exploiting loopholes in the Common Reporting Standards to protect its well-heeled clients from scrutiny. The problems haven’t gone away in the intervening years; the European Union recently put the Bahamas on a tax haven blacklist.

Still, the growing pressure to comply with international norms may have prompted some Bahamian policymakers to consider new avenues for attracting foreign investment, much as the end of Prohibition spurred the Bay Street Boys to move from bootlegging to tax evasion.

In 2020, the Bahamas passed laws that sought to turn the nation into a crypto powerhouse. And not long after, Bankman-Fried set up a new FTX headquarters on — yes — Bay Street.

In retrospect, his arrival confirmed the prescience of a British colonial official writing about the Bahamas in 1961.

“This particular territory,” he complained, “attracts all sorts of financial wizards, some of whose activities we can well believe should be controlled in the public interest.”

More From Other Writers at Bloomberg Opinion:

• FTX Benefited From a Suspension of Disbelief: Burgess & Hughes

• Matt Levine’s Money Stuff: SBF Missed FTX’s Risks

• FTX Is WhereGambling and Wall Street Collided: Aaron Brown

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To contact the author of this story:
Stephen Mihm at smihm1@bloomberg.net

To contact the editor responsible for this story:
Susan Warren at susanwarren@bloomberg.net

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