But as many are finding, becoming a tax haven has unexpected costs. Precipitous economic, political, and social declines have occurred so often in such states that observers have coined a new term for it: “the finance curse.” When the "finance curse" strikes a country, there is a recurrent pattern: While its democracy, economy, and culture remain formally intact, they are increasingly oriented to and co-opted by international elites. In other words, such countries gradually become organized around the interests of people who don't even live there, to the detriment of those who do. The services produced by these countries protect cosmopolitans’ wealth, but the riches never flow to the the local producers, undermining their capacity for self-governance and social cohesion, as well as the development of infrastructure and institutions.

This has led to increasing economic fragility for offshore financial centers, along with political corruption and social decline, as evidenced by a rise in crime and violence. I experienced the latter in my own research on the global wealth-management industry: In the course of visiting 18 tax havens in every major region of the world, I encountered this social decay directly through a number of experiences, including being robbed at Pae Moana in the Cook Islands. A local fisherman I met afterwards said the rise in burglary and violent crime in the islands began with the growth of the offshore industry. Not only the wealth it brought in, but also the new value system focused on exploitation and greed, meant that “everyone calls us the ‘Crook Islands’ now.” The finance industry had begun to eat away at the nation’s democratic institutions: Referring to a recent political-corruption scandal, the fisherman said, “They’ve got our government in their pockets. I hate what they've done to my country.”

But as I learned, the workings of the finance curse have shaped not only the development of small post-colonial nations like the Cook Islands, but also that of seemingly wealthy and well-established ones. For example, recent reporting on the Channel Island of Jersey has documented the crippling of the country's economy, government, and society in one of the world's leading financial centers—a place that was once considered a "miracle of plenty" and a role model for other would-be tax havens.

The corrosion described by the finance curse has affected even some of the wealthiest financial centers, such as Luxembourg, which is the domicile of choice for $3.5 trillion worth of mutual-fund shares and over 150 banks. As a result of a robust financial-services sector that contributes 27 percent of the country’s economic production, the Grand Duchy boasts the highest per capita GDP in the Europe, far outstripping its nearest rivals, Norway and Switzerland. At first blush, Luxembourg would appear to be in terrific shape: a wealthy democracy, thriving in the center of Western Europe.