FIFA Corruption and Small State Soft Power

Vladimir Putin made a good point in his condemnation of the indictment of 14 FIFA officials by the US Department of Justice this week: is this any of their business? Yes, FIFA is a corrupt organization. Yes, many members of FIFA’s all-powerful Executive Committee have been implicated in a number of corruption scandals. Yes, Putin has skin in the game because Russia was awarded the 2018 World Cup as part of a rigged dual bidding process in 2010 that also gave Quatar its controversial 2022 World Cup–a process that allegedly took corruption to a much higher level and that now is under investigation. Furthermore, given his aggressive and deceptive policies against sovereign nations formerly in the Soviet orbit, Putin is not a likely candidate to occupy the moral high ground in issues other than riding topless through the Siberian tundra.

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FIFA President Sepp Blatter in 2010 disclosing Russia and Qatar as hosts of the 2018 and 2022 Word Cups (BBC News)

Yet, Putin makes a point worth exploring. Here is what Putin said about the arrested FIFA officials: “They are accused of corruption – who is? International officials. I suppose that someone broke some rules, I don’t know. But definitely, it’s got nothing to do with the USA. Those officials are not US citizens. If something happened it was not in the US and it’s nothing to do with them. It’s another clear attempt by the USA to spread its jurisdiction to other states. And I have no doubt – it’s a clear attempt not to allow Mr Blatter to be re-elected as president of Fifa, which is a great violation of the operating principles of international organisations.”

Let’s look at Putin’s argument in a reversed order. So how do international organizations work? They are incorporated in the country where they are based. FIFA is incorporated in Zurich, Switzerland, as a tax-exempt “Verein”–a club or association–with few financial reporting requirements. Except that there balance sheet has a few more digits than that of the local stamp collector club. De facto, FIFA operates like a large global, post-national corporation even though its members are continental and national federations. It has become a money-making machine even though on paper it is just a non-profit club. So the legal structure within which FIFA operates is woefully inadequate for the kind of business it does.

The next question is: if FIFA really is so corrupt, and not even Putin denies this, why would the host country, Switzerland, not investigate FIFA and bring charges?  For starters, corruption per se is not a crime under Swiss law. If corruption leads to unfair competitive practices, this can be prosecuted under the Unfair Competition Act. (Ironically, the Swiss parliament currently is considering the implementation of an anti-corruption statute which actually may make a difference in the future.) This is one reason why over two dozen major international sports organizations, including the International Olympic Committee, are based in Switzerland. (Other reasons are reliable and secretive financial services, an excellent transportation infrastructure, a pleasant environment, and good shopping for their wives.) They have created a culture of collusion with Swiss authorities who are going easy on these organizations in return for them doing business in Switzerland. Switzerland sees the presence of these organizations as a source of soft power–a small state specialty the Swiss are proud of. There are cases of Swiss authorities backing off when the organization under scrutiny threatened to leave the country. In short, the Swiss authorities never would have investigated FIFA on their own, particularly as the FIFA president, Sepp Blatter, is a Swiss national.

There is a striking over-representation of small states in the Executive Committee, FIFA’s governing body. This is part of the FIFA system. The Cayman Islands, for instance, did nothing to investigate Jeffrey Webb, one of the vice presidents who now is suspended. It is not in the interest of small states to investigate its citizens who sit on important international boards and thus give their countries outsized influence. Of the seven FIFA officials arrested in Zurich this week, six represent small states. And then there is Teflon Sepp, the FIFA president, who so far miraculously has escaped prosecution. It is instructive, in this context, that the US has taken Chuck Blazer, its own corrupt FIFA official, out of circulation. He now is an informant for the US government.

This brings us back to the original question: what business of the U.S. is it? The indictments were brought under the Racketeer Influenced and Corrupt Organisations Act (RICO) of 1970. This implies that FIFA is treated as a Mafia-like criminal organization. As long as just one aspect of the crime, like wire fraud, originates in the U.S., the entire web of crimes can be prosecuted under U.S. law. This hook allows U.S. authorities to go after crimes that were largely committed abroad. The hook here is the Confederation of North, Central America and Caribbean Association Football (CONCACAF), a regional FIFA suborganization, that is based in Miami. Not surprisingly, most of those indicted are indeed associated with CONCACAF.

This type of aggressive extraterritorial jurisdiction is mostly seen with great suspicion and contempt in other countries as it tends to show U.S. authorities as overzealous, overbearing and overreaching–even though soccer fans would be glad to make an exception here. Over the years, such extraterritorial prosecutions often are directed against small states and its citizens. A good example is the U.S. pursuit of Nazi Gold in Switzerland in the 1990s–at a time when Swiss neutrality no longer was of use to the U.S. So the question remains if the U.S. prosecution really will be able to uproot FIFA corruption. The fact that Blatter himself was not indicted makes me think that it won’t. And the other question is how long it will take for small countries to feel trampled by this very assertive U.S. prosecution. So far, authorities in Switzerland have cooperated–hence the Zurich arrests. But it is unclear how long they will. Ironically, then, the solution may have to come from within FIFA, as Blatter himself demanded today. What Blatter can’t see is that this only has a chance of working without him as president.

Islamic Extremist Iconoclasm–and Its Christian Precedents

In recent days, there has been a global outcry about the destruction of the ancient Assyrian site of Nimrud by ISIS. Over the past few years, many invaluable antiquities and irreplacable world heritage sites have fallen victim to Islamic extremists in countries like Iraq, Syria, and Afghanistan. The theological justification for these acts is that these artifacts are idols which propagate a false religion and seduce the faithful to stray from the path to true faith.

Perhaps the most spectacular act was the the destruction of two giant Buddhas in Afghanistan by the Taliban in 2001. Ever since then, Islamic extremists have destroyed valuable antiquities up to the most recent atrocities committed by ISIS. Aside from expunging idols of false religions, the destruction serves a second purpose: it has become part of a propaganda war in which ISIS is shocking Western audiences in order to remain relevant. The destruction of antiquities and its documentation in videos thus serve as propaganda stunts not unlike the brutal and inhuman beheading videos.

While these are despicable acts, the fact that we infidels find these acts reprehensible is part of the reason why they were committed in first place. I decided not to link images in order not to fuel this propaganda effort by the Islamic extremists. The “propaganda video featuring the apparent destruction of the Mosul Museum” also raises the possibility that these accounts are actually exaggerated. It appears that many of the destroyed artifacts actually were plaster replicas–which reinforces the point about the propaganda stunt.

It is useful to remind ourselves that the Christian tradition had its own moments of sometimes violent iconoclasm–the theologically motivated destruction of religious artifacts. In the 8th and 9th centuries, the Byzantine Empire went through two periods of iconoclasm, for instance. But the most virulent example of Christian extremist iconoclasm is the Protestant Reform of the 16th century, promoted by Lutherans like Andreas Karlstadt and the two founding figures of the Reformed Church, Huldrych Zwingli and Jean Calvin. They regarded the visual representation of the divine as a form of heresy and ordered the systematic destruction of religious art in churches they controlled.

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Damaged relief in Utrecht Cathedral, desecrated in 1566 during the iconoclast fury in the Netherlands. (Wikipedia)

The Protestant iconoclastic fervor was as virulent and extreme as the destructive energy displayed by the modern-day Islamic extremists.  In the Zwinglian part of Switzerland, and particularly in Zurich, churches were purged of all religious images in 1524. Wooden art was publicly burned, and stone sculptures damaged and destroyed with heavy tools. Similar purges happened in some South German cities in the following years. A wave of iconoclast riots swept through the Low Lands in 1566 as an expression of Calvinist assertion against Spanish-Catholic rule.

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Removal and public burning of religious icons in Zurich in 1524. (Wikipedia)

Citizens were incited by preachers to remove idolatric religious art and to ritualistically destroy it in an act of public performance that amounts to a publicity stunt–an aspect which is reflected in many images from the period. Pre-Reformation church art had been commissioned and sponsored by prominent noble and patrician families whose members continued to identify with it. Reformers staged these acts of destruction to shock the entrenched establishment: the point was to destroy what was emotionally dear to its members. Just like with the destruction of antique treasures, there was a theatrical aspect to Reformation-era iconoclasm. So the barbaric destruction of antiquities at the hands of ISIS is not an Islamic specialty–rather an outgrowth of misguided religious fundamentalism. The examples from Christian history vividly illustrate the point.

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Destruction of religious art in the Church of Our Lady in Antwerp in 1566, staged as a communal act. (Wikipedia)

 

Estonia’s Russian Legacy and Putin’s Greater Russia

When British defense secretary Michael Fallon publicly stated last week that the Baltic states of Estonia, Latvia and Lithuania were at high risk to be drawn into armed conflict by Vladimir Putin, much like Ukraine had been over the past year, and that NATO had to prepare for Russian aggression, the media in the West took note. But to people in the Baltic region, this was old news, as I experienced first-hand during a visit last Fall when I had a number of discussions on the topic with colleagues at the universities of Tartu and Tallinn. They confirmed that the Russian covert campaign Fallon warned against in fact had already begun.

Estonia is a classic case of a small country that has been tossed around by history. Estonia was dominated by foreign powers for most of the last millennium: Danes, Germans, Swedes, and Russians, both of the Tsarist (1710-1918) and Soviet flavors (1940-41; 1944-91). In spite of that, Estonia has been able to maintain a cultural and linguistic identity over the centuries which forms the core of its national identity today. To Estonians, the Russian legacy weighs particularly heavily as Tsarist Russia began to russianize Estonia in the late 19th century, the construction of the highly visible Russian-Orthodox Alexander Nevsky Cathedral occupying the symbolic spot across from the Toompea Castle being the pinnacle of that effort.

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Russian-Orthodox Alexander Nevsky Cathedral (1894-1900) on the symbolic Toompea Hill in Tallinn, Estonia.

Estonia was traumatized in particular by the Soviet occupation of 1940 and its subsequent integration into the Soviet Union. While foreign control over the centuries, even by Tsarist Russia, had been comparatively benign, Soviet rule was ruthless and oppressive. The Estonian response after independence in 1991 was a strong anti-Russian backlash and assertive policies to pursue integration into the Western economic and military systems by seeking membership in Nato and the European Union and by joining the Eurozone. The only Russian celebrated in Estonia today seems to be Boris Yeltsin whose supportive role in Estonia’s quest for independence in 1991 was recognized by a plaque in his memory in 2013–which has a distinct anti-Putin edge. The plaque was affixed to the bottom of the massive wall that fortifies Toompea Hill–which since the Middle Ages had been the locus of foreign power.

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Plaque in memory of Boris Yeltsin in Tallinn, placed on the historic city wall in 2013.

But the most obvious legacy of almost 50 years of Soviet rule is a large ethnic Russian population. The Soviet Union used massive forced migration to pursue its goals. According to the Estonian government, the Soviets killed or deported about 60,000 Estonians, or more than five percent of Estonia’s population, between 1940 and 1949. At the same time, a large number of Russians relocated to Estonia, both voluntarily and forcibly. While in 1934, 88.1% of residents of Estonia were ethnic Estonians, their share had dwindled to 61.5% in 1989.

Estonian independence turned the privileged Russian population into losers. Restrictive citizenship laws which are based on the ius sanguinis, disenfranchised many Russians living in Estonia: ethnic Russians, even those born in Estonia, were not automatically given Estonian citizenship but rather had to undergo a naturalization process that required knowledge of the Estonian Language. This turned out to be an insurmountable burden for many Russians. As a result, there were many stateless people in Estonia whom Estonia euphemistically calls “people with undetermined citizenship.” Ironically, it is the European Union which, through its European Commission Against Racism and Intolerance, pressured Estonia to improve the plight of the Russian population in Estonia. According to the Estonian government, the situation has vastly improved: while in 1992, 32% of residents of Estonia were stateless, in 2014 only 6.5% were, with another 9.2% holding foreign passports, mostly from other former Soviet republics.

While the issue of “people with undetermined citizenship” appears close to resolution, the integration of ethnic Russians remains a critical issue. An estimated 24% of the resident population are ethnic Russians, and they mostly represent the underprivileged classes in Estonian society. The concentration of Russians is particularly high in urban areas: in Tallinn, the capital, perhaps half the population is Russian, and in the Narva region along the Russian border almost the entire population is Russian–which creates an opportunity for Putin to unfold a similar scenario as in Eastern Ukraine.

This constellation will give Putin ample talking points to repeat what he is currently doing in Ukraine (and what he had done in Georgia before), particularly as Estonia has not dealt with the Russian minority in an exemplary fashion. The pattern is as simple as it is predictable: creating border incidents, developing a rhetoric of assisting beleaguered ethnic Russians in a former Soviet republic, infiltrating the border area with Russian special units in disguise to stir unrest, creating a phony and fabricated resistance and separatist movement, gradually occupying territories and integrating them into his Greater Russia.

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Tallinn presents itself as a Northern European city: there are few traces of the Russian past.

One of the legacies left to us by Soviet Communism is the fiction of international brotherhood which supersedes nationalistic divisions characteristic of capitalist societies. The implosion of Yugoslavia with all the resulting ethnic conflicts speaks to that. The Soviet policy of settling ethnic Russians in far-flung parts of the Soviet empire is another such legacy. It creates ethnic conflict in so many of the former Soviet republics, and even in areas that lie within the Russian Federation. The Baltic states today very much are afflicted by these Soviet settlement policies–and they create an opportunity for Putin to justify his Greater Russia rhetoric.

Conditions in Estonia are ripe for Putin’s strategy to unfold. In fact, stage one has already begun. Russia has been creating small border incidents with all Baltic states as well as with Finland, most commonly air space violations. The most egregious so far has been the capture and abduction of Eston Kohver, an officer of the Estonian Internal Security Service, from Estonian territory on September 5, 2014. Kohver still is in Russian custody at this writing.

Which gets us back to Mr. Fallon’s point. It appears likely that Putin will employ the same strategy in the Baltic states that worked so well in Georgia and Ukraine. In Georgia and Ukraine, Western powers could claim that their interests were not directly at stake. The difference is that the Baltic states are members of Nato, as is Poland, for that matter. We now know that managing Putin’s aggressions after the fact is futile. Yes, Nato promised not to station its troops on the former Soviet sphere of influence. But Russia also guaranteed Ukraine’s territorial integrity in 1994 in exchange for Ukraine giving up the nuclear weapons it had inherited from Soviet times. It is now time for Nato to increase its commitment to the sovereignty and territorial integrity of the Baltic states, before Putin has a chance to unfold his time-tested strategy on them.

Postscript added on March 2, 2015: The looming conflict with Russia also overshadowed yesterday’s parliamentary elections in Estonia. In the media, the outcome was represented as a victory for the governing Reform Party. But their coalition with the Social Democrats actually lost the majority in parliament as support for both parties declined slightly. One of the factors is that two new parties will be represented in parliament. Most importantly, the pro-Russia Center Party gained some votes and now enjoys support from 24.8% of the electorate (24% of residents of Estonia are ethnic Russians) and will continue be the second-largest party. It is likely that the Center Party will remain the main opposition party. The concern is that Putin will be able to use both the large number of ethnic Russians and the political support they have within Estonia as a wedge issue.

Potassium Iodide for the Masses

In early November 2014, my mother who lives in Switzerland received a small package in the mail from  the Swiss Army Pharmacy (Armeeapoteke) which contains 12 potassium iodide pills. It was mailed to all 4.9 million Swiss residents who live within 50 km (about 30 miles) of a nuclear power plant, to be used in case of a nuclear accident, paid for by the operators of the Swiss nuclear reactors. As Switzerland has a resident population of about 8.2 million, 60% of all Swiss residents received such a package. The astounding fact, of course, is that 60% of Swiss residents live within 30 miles of a nuclear power plant, including residents of the Zurich, Basel and Bern metro areas.

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60% of Swiss residents live within 50 km of a nuclear power plant (red dots)

Switzerland has five operating nuclear power plants–one of the highest per capita rates in the world. They were put into service between 1969 and 1984. Current plans call for the retirement of all stations between 2019 and 2034–which would give each plant a fifty-year life span. There are no plans to replace the current plants, but it is unclear if enough alternative energy can be generated to make this plan work.

The distribution of potassium iodine happens every ten years in Switzerland–with the innovation this year that the radius was expanded from 20 to 50 km. It is an interesting scheme which only is thinkable in a highly organized small country as the logistical challenges and the political pitfalls of such an endeavor are substantial in the best of circumstances. It also is indicative of a reactive, defensive stance typical of small countries: small countries rarely have the means to determine their own destinies. They tend to be caught in a web of dependencies consisting of larger nations or international organizations. Therefore, their actions tend to respond to the external circumstances they cannot control nor change.

Form a public policy viewpoint, this initiative is a dicey proposition. On one hand, it represents an admission by the Swiss federal government that nuclear power is potentially unsafe which may erode public support for nuclear power in a small country that heavily depends on it. On the other hand, it represents an effort of a responsible government that seeks to protect its civilian population against possible dangers. The protection of the civil population has a long tradition that goes back to the early years of the Cold War over which neutral Switzerland had little influence.

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The Mühleberg nuclear power plant is located in a densely populated area just outside of Bern. (Source: Wikipedia)

While Switzerland of course controls its own nuclear power program, the potassium iodine program follows the same small-state action pattern: it accepts the existence of nuclear power generation, on which Switzerland depends, as the status quo. In a sense it also downplays the true possible consequences of a nuclear accident experiences in the disasters at Chernobyl (1986) and Fukushima (2011). It blocks out the unthinkable questions of what happens if entire landscapes where millions live become uninhabitable, and it does not consider if and to what extent potassium iodide is effective against the fallout of a nuclear accident. Therefore it also could be argued that the Swiss government is creating a false sense of security while camouflaging the real impact of a nuclear disaster.

Environmentalists point to all these pitfalls. Greenpeace, in fact, sent an official-looking flier to all affected households in which ambiguous language raises doubt about this government program it pretends to support and about the nuclear program in general. Residents are urged to seek more information at the http://www.info-jod.ch/ web site whose URL looks very official as well. Only the web site itself makes it clear that this is a Greenpeace effort that has nothing to do with the Swiss government, and further links are clearly marked as Greenpeace pages.

Such a broad distribution of potatssium iodide would be unthinkable in the United States. The web site of the Centers for Disease Control and Prevenction (CDC) contains some information, but citizens have to actively seek it. Furthermore, the web site explains in some detail how the medication should be administered in the case of a nuclear emergency but does not instruct the public in how to gain access to it. By comparison, the Swiss openness about this program and about the inherent risks of nuclear power are remarkable. What is not clear yet is how this Swiss government program will move the public perception of nuclear power and whether this will reduce its acceptance in Switzerland.

 

Swiss Direct Democracy: a Model for Europe?

Small states by definition are too small to be good at everything. So they tend to bundle their resources to excel at one or two things. Like chocolate, or watches. But small states are also laboratories for ideas–like the plan to make Sweden an oil-free society by 2020. The Swiss contribution to the global melting pot of ideas is direct democracy. In Switzerland, a sufficient number of signatures can force a popular referendum on any federal law or can require a vote on a constitutional amendment on any issue imaginable.

To be sure, direct democracy is a beautiful thing–even when people make stupid decisions. Switzerland, the haven of direct democracy, showcases both the brilliance and the absurdity of direct democracy as a system of governance. While the Swiss elect a parliament, as do citizens in other democracies, the Swiss also can use referendums to undo the work of the very same parliament they just elected. So direct democracy essentially creates a parallel system that can control and even bypass the parliamentary process.

The advantage of this system is that politicians are forced to come up with laws that most likely would withstand the test of a popular referendum. So compromise is essential for the system to work. The drawback is that ordinary people like you and I could come up with something really stupid at the kitchen table and get enough signatures to force a popular vote on it—like the successful initiative to ban minarets in Switzerland. This creates opportunities for populist groups to bypass the parliamentary system altogether. This can be a good thing as long as an educated electorate can be trusted to act in the interest of the republic. This assumption will be seriously tested in the votes coming up in Switzerland this coming Sunday, November 30.

Swiss direct democracy is the envy of democratically-minded people all over the world. But the tool of the constitutional initiative has been mostly used by populist groups on the left and on the right who do not have broad parliamentary support. While leftist initiatives, like the constitutional amendment to abolish the Swiss Army, have failed consistently, the initiatives and referendums launched by the right frequently have been successful, like the vote against Swiss membership in the European Economic Area in 1992 or the vote to curb “Mass Immigration” earlier in 2014.

It has become fashionable among the populist right in Europe to promote direct democracy, most prominently the United Kingdom Independence Party (UKIP) in Britain and the Alternative für Deutschland (Alternative for Germany; AfD) in Germany. There are reasons to doubt that these movements are more democratically inclined than mainstream parties—in fact, there is evidence to the contrary. Rather, they promote direct democracy because of its populist potential: they see it as a tool to implement their anti-immigration and anti-EU agendas. One of the outspoken supporters of Swiss-style direct democracy is the euroskeptic Daniel Hannan, a journalist and Conservative British Member of the European Parliament. When Swiss voters banned minarets in 2009, Hannan wrote a column with the title “Switzerland bans minarets: long live referendums, even when they go the wrong way.”

So Europe will be watching as Swiss voters will cast their ballots on November 30. There are two contentious issues to be voted on, both with consequences that will reach far beyond Switzerland’s borders. One of them is the popular initiative with the official title Rettet unser Schweizer Gold (Save Our Swiss Gold). Its declared intent is to secure the Swiss National Bank’s gold reserves with the specific stipulations that the National Bank needs to hold at least twenty percent of its assets in gold, that it does not have the right to sell gold reserves, and that the gold must be physically stored in Switzerland. Its populist appeal is evident in the language: the phrases “our Swiss gold” makes it sound like the Swiss have a birth right to the gold that has been chiseled out of Swiss Alpine granite–rather than mined by sweat labor in Botswana.

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“Protecting the wealth of the people”: deceptive imagery to support the Gold Initiative.

Experts agree that the initiative does not make sense economically as the gold standard to support currencies has long been abandoned around the globe. But the impact would be felt globally as gold prices would rise substantially because the Swiss National Bank would be required to buy large quantities of gold. Furthermore, the Swiss Franc would rise in value to unprecedented heights which would do serious damage to the Swiss export industry. Already before the vote, the Euro briefly dropped to below the magic barrier of 1.2 Swiss Francs.

The second ballot issue is the so-called Ecopop initiative. It is a hard-core anti-immigration measure sugar-coated in language that feigns concern for the environment. It creates a horror scenario in which twelve Million people would live in Switzerland by 2050—the current resident population is eight million–which would cause the Swiss landscape to be paved over by concrete and destroy biodiversity. It seeks to limit net migration into Switzerland at .2 percent of the resident population or at currently about 16,000 individuals per year in order to keep the resident population stable and  to limit the environmental degradation associated with overpopulation. The increase in 2013 was about 100,000 so the impact on migration indeed would be serious.

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Ecopop horror scenario: deceptive images showing Lucerne littered by highrises by 2050.

The consequences would be dire: it would stop immigration almost completely (which is the true intent of the initiative), deprive the Swiss economy of a much-needed labor force, irreversibly harm Swiss universities and research institutes, and force the cancellation of the extensive system of bilateral treaties with the EU which are critical for Switzerland–which is another undeclared objective of the initiative. As a result, Switzerland would lose direct access to EU markets and all the benefits the country enjoys from its current status of de-facto integration without the burdens of full membership. It also would embolden Euroskeptics in EU member states to demand similar measures in their countries.

Both ballot initiatives show the difficulties of addressing complex issues in a globalized and networked world by means of direct democracy. It is easy to convince ordinary voters to tell the National Bank to keep their gold in their piggy bank and to keep the Swiss landscapes from getting sullied by concrete. All that is needed are simplistic slogans using emotion-laden language that caters to  base fears in the population. But it is much harder to make a reasoned argument that demonstrates the extreme dangers these ballet issues will pose if passed. While the ramifications for Switzerland and Europe would be extremely serious, it is unclear if Swiss voters have the capacity to understand them. Of course, this could be decried as an elitist viewpoint–an argument often used by populists to defend their brand of direct democracy.

Direct democracy is a good indicator for popular sentiment and allows for a more nuanced expression of popular will than parliamentary elections and therefore is a very important political institution. But it also is prone to falling prey to populist seduction and deception. Many in Europe believe that some form of direct democracy could help address the perceived democratic deficit within the European Union. But recent Swiss votes raise doubt whether direct democracy really offers a viable alternative. The vote this coming Sunday will go a long way to answer that question. In a sense, the two ballot issues also will be referendum on the viability of Swiss direct democracy.

So Why is Walgreens Moving to Switzerland? (And What Can We Do about It?)

The other day, a petition from Campaign for America’s Future ended up in my in-box. Its subject line read: “Why is Walgreens Moving to Switzerland?” Of course, Walgreens is not moving to Switzerland. My Walgreens still will by around the corner from my house. And most corporate jobs will remain in Chicago.  The first line of the e-mail reads: “Walgreens is an American success story.  Or, at least, they used to be.” Wrong again: it still is, and will remain so even after Walgreens moves its corporate headquarters to Switzerland. It just will not pay taxes in the US anymore. But that, too, is very American. Ever since Ronald Reagan declared the government the enemy of the people, paying taxes no longer is a civic virtue. Avoiding taxation altogether is considered smart because the money would only serve to bloat the government.

The planned move by Walgreens was precipitated by its merger with Alliance Boots, a British drugstore chain. Alliance Boots moved its corporate headquarters to Zug, Switzerland, in 2008 which caused the very same discussion about corporate citizenship in Britain. Alliance Boots never had more than a mailbox in Zug. According to The Guardian, the move comes at a cost of £100 million to the British taxpayer every year. In 2013, the company headquarters were moved to Bern as Alliance Boots already had operations there. While Zug is the quintessential corporate tax haven, the move to Bern, which was missed by Bloomberg News, does little to change the story. A move to Switzerland by the Walgreen Corporation would have similar benefits. A few weeks ago, analysts from UBS, a global bank based in Switzerland, claimed that stocks in the Walgreen Corporation would rise 75 per cent if corporate headquarters were to be moved to Switzerland.

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Modest multi-party office building at Baarerstrasse 94 in Zug. Alliance Boots was based here until 2013.

Clearly, Walgreens does not want you to read this. In 1904, Charles Walgreen traveled from his small-town home in Dixon, Illinois, to Chicago and opened a pharmacy and soda fountain. It is the quintessential American success story, but today’s corporation has little to do with its humble beginnings. Walgreens want you to believe that they are an American company that pays their taxes, that they are being a good corporate American citizen, and that they live up to their iconic status as a quintessential American corporation. In a wicked way, of course, they are: like so many other American corporations, they are moving their corporate headquarters offshore.

Large corporations are de-nationalized entities which nimbly navigate the global financial and fiscal system while maintaining the fiction of national citizenship for public consumption. Two years ago, Gregory D. Wasson, the chief executive of Walgreen Corporation, sought tax breaks from the state of Illinois the company is still based. At that point, he stated: “We are proud of our Illinois heritage. Just as our stores and pharmacies are health and daily living anchors for the communities we serve, we as a company are now recommitted to serving as an economic anchor for northeastern Illinois.” At the time Wasson made this statement, the merger with Alliance Boots was essentially a done deal.

Walgreens is not the first and probably not the last US corporation to move their headquarters overseas for tax reasons. But Walgreens is different in that it is part of daily life in the US. My Walgreens is not just a pharmacy, I go there as well when I am out of dish detergent or beer. When Transocean, the owner of the Deepwater Horizon platform which caused the huge oil spill in the Gulf of Mexico in 2010, moved its corporate mailbox from Houston to Zug in 2008, nobody took notice. But Walgreens lives off he daily contact with American consumers, and in that it is seen as a quintessentially American brand that cannot be relocated so easily. And herein lies the chance to create public pressure not just to prevent Walgreens from moving to Switzlerland but to expose the fraudulent global scheme of corporate taxation.

So what does Campaign for America’s Future want you to do about this? They want you to send them ten bucks so they can “expose this scam, pressure Walgreens to do the right thing, and shut down the tax loophole that allows this to happen.” You can also sign their “Tell Walgreens: Don’t Desert America” petition. While I cannot argue against closing tax loopholes, this approach is merely cosmetic.

In 1998, the OECD published a report entitled Harmful Tax Competition: An Emerging Global Issue which arrives at the stunningly simple analysis: “Where activities are not in some way proportional to the investment undertaken or income generated, this may indicate a harmful tax practice.” Ultimately, the OECD had to abandon its efforts to develop non-abusive global taxation standards due to resistance from the wealthiest countries. The OECD report makes it clear that it is unethical for Swiss cantons (and other entities) to allow foreign corporations to incorporate and that it is harmful for tax jurisdictions where the actual economic activity of these corporations takes place. This practice particularly hurts developing countries, as Nicholas Shaxson argues in Treasure Islands (2012), that as a consequence become more dependent on foreign aid. Yet, fighting individual predatory jurisdictions, like many Swiss cantons, would only be marginally productive as corporations easily can move their mailbox to a different, equally beneficial jurisdiction.

One of the OECD recommendations was that a global standard should be established by which corporations should be taxed where their economic activity is taking place. We need to vigorously push for this standard, and we need to seek a fundamental change in how corporations are taxed globally. Corporations need to be taxed where they are producing goods and services and where they are using the infrastructure, not where they are having their corporate headquarters, i.e. their mailboxes. Such mailbox headquarters create a windfall for the host tax jurisdictions which in turn allows them to drop the corporate tax rates even more to attract even more corporate mailboxes. The Swiss canton of Zug is a textbook example for that.

The only real solution, ultimately, is to end tax competition between jurisdictions. In competitive tax environments, corporations win and taxpayers lose. Corporations and their lawyers always can move more nimbly than politicians and the polities they represent. Corporations can move their mailboxes as they please, pick where they pay taxes, and play tax jurisdictions against each other. Tax jurisdictions cannot move their citizens or their infrastructures. Unless we change the very system of how corporations are taxed, the Walgreens of this world will always have their way and citizens will lose out.

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One of many mailboxes at Baarerstrasse 94 in Zug: Künzi Treuhand AG. About 50 corporations and business groups receive their mail here–meaning that this is where they are legally incorporated. One of their advertised specialties: helping foreign corporations set up and manage corporate headquarters here. This is big business, and there are many such companies in Zug.

 

Small-State Reaction to Crisis: Let’s Hoard Food

Ever since I read the two volumes of the graphic novel Maus by Art Spiegelman two decades ago, I have been thinking how the historical context that marked our parents’ formative years impacts our lives today. My parents are not Holocaust survivors–they spent their teenage years during WW II in northern Switzerland, about 20 miles from the German border. Switzerland was completely surrounded by the Axis powers, food and other daily commodities were scarce, and practically everything was rationed. Not to speak of the daily routine of going to bed with the fear of waking up to German tanks rumbling through town.

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My father operated this artillery gun at the underground Fürigen fortress which was tunneled into the rocky cliffs overlooking Lake Lucerne in 1941-42. The fortress is a museum now.

My father was a soldier in the Swiss Army starting in 1943. He never fired a shot. I cannot possibly compare the history of my family with the tragic fate of the Spiegelman family. Yet what happened to my parents marked an entire generation in Switzerland and has been passed on to my generation. I grew up in a house of food hoarders. An entire pantry was dedicated to the storage of non-perishables, such as flour, sugar, rice, canned food and of course soap. My mother stored potatoes and apples in our cool, dark cellar, and we ate home-made jam that was always about three years old. Yes, my mother had a sophisticated labeling and rotation system.  It was clear that my parents were not ever going to suffer food shortages again.

I had a dinner party at my house a week ago, and one of my sons made fun of the extraordinary amount of pasta in my pantry. This was one of these Maus moments in my life. We all laughed, including myself, because it is funny. And we had laughed about this before, and will again. Yet I know I always will store ample food supplies. I would not feel comfortable without a full pantry. And freezer. When in 2005 Hurricane Rita hit the Gulf Coast and even threatened my home in Austin, my house was ready for six additional people who had been displaced by the storm while everybody else was at the stores clearing shelves of anything that was edible.

This morning I read this headline in the online version of the German news magazine Der Spiegel : “Swiss Army chief hoards emergency supplies.” Of course, I knew right away that General André Blattmann was a kindred spirit. Apparently, he is storing about 80 gallons of mineral water (non-carbonated, in case you were wondering), wood for heating, and all kinds of food supplies. The title of the interview General Blattmann gave to the Swiss Sunday paper Schweiz am Sonntag, on which the Spiegel report was based, makes it plain that he would like all Swiss to do the same: “The Army chief advises the population to store emergency supplies.”

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General Blattmann (in uniform), food hoarder, at a political event in 2010. (Wikipedia, Creative Commons)

Blattmann points out that contemporary society has become very vulnerable to a number of threats: the crisis in Ukraine with the potential for armed conflict, the growing risk of cyber-attacks, and the possibility of accidents in nuclear power stations in or near Switzerland, all of which could cause a systemic loss of electric power and disrupt the supply of food, water, and other necessities of life. And he paints a bleak picture for the role of the army: “We need the army to prevent looting when ATM machines don’t work anymore and there is nothing to buy.” Here is the lesson Blattmann takes away from this: “If you cannot defend yourself, history will tell you what you will have to do.”

This is the essence of small-state thinking. Small states do not have the resources to shape international politics. But small states can prepare for worst-case scenarios to ensure their own survival. Switzerland always has taken the concept of Zivilverteidigung (civil defense) very seriously, and after 1945 enormous resources were spent to create nuclear shelters and underground hospitals for the general population, culminating in the publication of the Zivilverteidigungsbuch (Civil Defense Book) in 1969 which was distributed to all Swiss households. Storing food supplies and asking citizens to do the same was part of that effort. But my parents did not need that reminder.

This kind of preparedness has been the essence of the long-standing Swiss policy of neutrality which has been practiced successfully since the 16th century: keeping out of conflicts between other countries to ensure survival, and being prepared militarily to create a deterrent. The lesson of WW II clearly has been that Switzerland as a nation, but also individual Swiss citizens have to prepare the resources to be self-reliant in times of crisis as the country cannot control the outcomes of international conflicts and cannot count on being bailed out by a larger power. According to Blattmann, the conflict in Ukraine and the threat of future asymmetrical conflicts have shown that we are entering a renewed period of uncertainty that requires a higher degree of preparedness.

Blattmann’s response to this new sense of insecurity clearly is a small-state response. Just imagine General Dempsey requesting that all Americans do the same. It also is anchored in this hoarding reflex the generation that came of age during the last war has instilled in their children and grandchildren. Just check the general’s basement–or my pantry. But then, I sleep better that way, even in Texas.

Francis Drake’s Sack of Santo Domingo: A Case of Terrorism?

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Santo Domingo, sacked by Francis Drake in 1586. Note the small harbor protecting only a handful of ships.

We believe that we live in an age of terrorism. But terror is as old as humankind. Just ask the unsuspecting population of Santo Domingo on the island of Hispaniola which on January 1, 1586, woke up to Francis Drake (c. 1540 – 1596) and his marauding mercenaries ransacking their city. Santo Domingo, founded in 1496, is the oldest colonial city in the New World and at that time as the seat of a real audiencia still was a Spanish administrative center for the Caribbean. But it long had lost the political and strategic centrality it enjoyed during the years of the Conquest, and its pivotal role in the Transatlantic trade had been passed on to nearby San Juan, Puerto Rico, as I have discussed in a different post. When Francis Drake arrived, Santo Domingo was well past its prime.

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The Fortaleza Ozama, built 1502-1505, with its modest size was no match for Drake’s forces.

Drake’s men took the city by surprise, both by shelling the Fortaleza Ozama and by entering the city through the poorly defended gates on the land side. The pirates plundered and vandalized the city, burned down parts of it, and started to destroy stone buildings and monasteries to extort a ransom. He set up his headquarters in the cathedral where he looted the altars, destroyed all religious art, plundered the tombs, taking anything that was of value, and quite literally defecating on all things Catholic. Finally, a ransom of  25,000 ducats was negotiated–an extraordinary sum that only could be amassed by forcing citizens to surrender gold and jewels. At the nearby Casa del Cordón Drake installed a scale to weigh the exact amount of gold and jewels that were turned in by citizens.  Drake and his men left again a month later, turning their attention to Cartagena which was sacked and plundered in a similar fashion.

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Catedral de Santa María la Menor: Drake housed in a chapel to the right of the main altar.

Drake left behind not just a city that was a smoldering ruin, he also left behind a humiliated and traumatized city. To be sure, most of the churches and houses were restored, but the Spanish did not update the defense installations as they did in San Juan, Cartagena and other strategic points in the Caribbean. Simply put, the Spanish stopped investing into Santo Domingo. Very little of importance happened here after 1586, and the Spanish colonial Baroque architecture and culture of the 17th and 18th centuries which flourished in Mexico and South America completely bypassed Santo Domingo.

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The Puerta de la Misericordia, built in 1543 and expanded in 1568, could not stop Drake’s attack on land.

In a modern definition, terrorism involves non-state actors fighting enemy states, their representatives, institutions, and populations in asymmetrical warfare. In that sense, Robespierre‘s Reign of Terror in post-revolutionary France in 1793-94 does not qualify: this is just a case of a despot savagely abusing his own people. We have seen many since: from Stalin and Hitler to native sons “El Jefe” Trujillo and “Papa Doc” Duvalier who more recently traumatized the two nations that now share the island of Hispaniola.

Obviously, we have to see Francis Drake’s savage pillaging in the geopolitical context of the time: England challenging the Habsburg hegemony (the Habsburgs ruled Spain, Austria, and the Low Lands and controlled the Empire), supporting the Dutch in their wars of liberation against the Spanish, taking an active role in fighting Catholicism, and striving to become a maritime and colonial power in its own right.

In fact, Francis Drake, Sir Francis Drake if you are British, was sailing to the West Indies in something of an official mission. His acts of piracy in the Caribbean clearly were part of an English strategy to weaken the Spanish control over the Caribbean and the Transatlantic trade. But his fleet of 30 ships was financed by merchants who clearly had an interest in developing a trade network in the Caribbean, and his mission was not to take land and plant the English flag. His mission was to plunder and destroy, to take ransom, in short to inflict terror. Drake may have been the original of the “Pirates of the Caribbean.” He ushered in a century of piracy that left the Caribbean an unsafe, violence-filled space.

Like most explorers and navigators of the time, Drake also was a privateer, entrepreneur and free agent who worked for himself first and foremost. This agency is also an attribute of modern terrorists. Like many terrorists today, Drake had the implicit support by a state actor, the English crown, and had the financial backing of his own commercial network. Most importantly, the trauma of this humiliation he inflicted on Santo Domingo more than four centuries ago lives on today.* That is the very definition of terror.

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Iglesia de San Francisco, constructed 1544-1556. The Franciscan convent in Santo Domingo was mostly destroyed by Drake, then partly restored, damaged again in earthquakes in 1673 and 1751, abandoned in 1795.

* Note added 5/22/14: Gabriel García Márquez in his novel Chronicle of a Death Foretold (NY: Vintage Books, 1983, p. 98) describes the Palace of Justice in Riohacha on Colombia’s Caribbean coast with this apparently random phrase: “decrepit colonial building that had been Sir Francis Drake’s headquarters for two days.” This is the only overt historical reference in the book and indicates how Drake’s terror lives on in the collective memory in the areas he affected.

Switzerland Discovers the Ugliness of Offshore

In recent days, Johann Schneider-Ammann, the Swiss Minister of Economic Affairs, has become the target of criticism for the tax dealings of the Ammann Group in Langenthal, the company he led between 1987 and 2010. From 1999 to 2010, Schneider-Ammann served in the National Council, the lower chamber of the Swiss parliament. He only gave up control of the Ammann Group when he became a member of the Swiss Federal Council, the federal cabinet, as Minister of Economic Affairs in 2010.

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Official 2014 picture of the Swiss Federal Council. Schneider-Ammann is on the left.

The Ammann group was founded in 1869 by an ancestor of Schneider-Ammann’s wife and has been specializing in the production of construction machines. Since 1931, Ammann has been the exclusive importer of Caterpillar products to Switzerland. Today, the company has a worldwide employment of about 3,700–2,500 of them abroad.

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Ammann road construction machines (Pavel Ševela / Wikimedia Commons)

One of the allegations, first reported by Swiss TV in late January, is that the Amman Group sold Caterpillar equipment to Iran after the 1979 revolution, thus circumventing the US embargo. Two retired truck drivers, Werner Zwahlen and Robert Z’Rotz, claim to have delivered many truckloads of Caterpillar products to Teheran and Baghdad between 1975 and 1984: “We picked up the machines and spare parts in Belgium and the Netherlands and brought them to Ammann in Langenthal. There we got new papers and, without ever unloading, drove on to Teheran and Baghdad.” As Schneider-Ammann entered the company in a leading position in 1981, it stands to reason that he knew about this scheme–which to be sure was not illegal under Swiss law.

The more serious allegation is that the Ammann Group set up offshore schemes to evade–or avoid–taxation in Switzerland.  In 1976, the Ammann Group founded Manilux SA, a financial holding corporation, in Luxemburg. In 1996, they founded another financial subsidiary, Jerfin Ltd., on the Channel island of Jersey. Schneider-Ammann himself was listed as the chief of Manilux which had neither employees nor offices in Luxemburg, nor elsewhere, even though 250 million Swiss Francs were invested there. Manilux and Jerfin were dissolved in 2007 and 2009, respectively, and the funds transferred first to Jersey and then back to Switzerland.

In an interview with the Zurich daily Neue Zürcher Zeitung on February 8, Schneider-Ammann confirmed the basic facts but denied any wrongdoing: “This was about reserves which we optimized in terms of taxation. The funds were intended for the strategic development of the international Ammann Group and were used to protect jobs. Everything was legal, everything was transparent, the taxation authorities had complete insight at any time. They confirmed this to the company again on Friday.” Entrepreneurs today, according to Schneider-Ammann, have to resort to such offshore schemes because companies are part of a global competition where this is standard procedure: “If you want to secure domestic jobs in an international corporation, it is legitimate to optimize taxes. From an entrepreneurial perspective, it would be a mistake not to take advantage of all legal options.”

While many corporations set up much more sophisticated tax avoidance schemes with a more complex web of subsidiaries in numerous jurisdictions, this is a textbook example for how offshore works. “Optimizing” tax liabilities becomes part of what corporate leaders do in order to increase profits or just to remain competitive. At the other end of the bargain, jurisdictions compete to offer the most attractive conditions to get companies to incorporate there. This is the mechanism Schneider-Ammann described quite frankly: “The Ammann group has to compete in a brutal environment. Before the turn of the millennium, this type of a tax break did not exist in Switzerland. That is why it was recommended to us to invest money in offshore corporations to shelter it from taxation. In the last few years, similar tax shelters were created here [in Switzerland]. This is why we brought the money back to Switzerland.”

This is how the offshore race to the bottom works: corporations create shell companies to move their money to the jurisdiction that offers the most advantageous conditions–and ordinary citizens all over the world shoulder an ever-increasing percentage of the tax burden. Jurisdictions in turn adjust their tax schemes to make their location even more attractive to corporations. When Switzerland matched the conditions offered by Luxemburg and Jersey, repatriating the accounts made business sense for the Ammann Group.

So why did revelations about the business practices of their Minister of Economic Affairs create such a stir in Switzerland to the point that some demand his resignation? Switzerland is one of the pioneers of the offshore system and for well over 80 years has created offshore opportunities for corporations and individuals who are based elsewhere. Mr. Schneider-Ammann has delivered a high-profile example for how offshore looks from the point of view of the jurisdiction that gets cannibalized–a perspective the Swiss are not used to seeing. And all of a sudden, it is very easy to comprehend just how wrong and unjust this system is.

The question is not just whether Mr. Schneider-Ammann’s tax schemes were legal but whether a corporate leader who actively pursued offshore strategies to avoid paying corporate taxes in Switzerland can be a trusted guardian of the common good and more specifically is fit to be its Minister of Economic Affairs–who sits at the table when tax issues are discussed with foreign entities. And just perhaps the offshore system has become odious enough for even the Swiss to understand that the global offshore system they helped create–and from which they profited immensely–may be legal but is morally corrupt.

 

 

Eusébio, A Life in the Shadows of the Colonial Past

Eusébio was one of the heroes of my childhood. Watching the 1966 Soccer World Cup in England on our neighbor’s black and white TV set  in Switzerland, all we wanted to see is Eusébio. Eusébio was the dominant player of that tournament, Pelé notwithstanding, and led the Portuguese squad to the third place. We admired the elegance of his play, his speed, and his superb ball control. It is because of players like him that we call soccer the beautiful game. Eusébio died on January 5, 2014.

Eusébio, whose full name was Eusébio da Silva Ferreira, retired from soccer in Portugal in 1975 to play in North America, and I did not think about him much anymore after that. Until 2012, when I took a walking tour through Mafalala, a poor slum of Maputo, the capital city of Mozambique. As I walked across a gravel field, my guide told me that this is the place where Eusébio learned to play soccer and that Eusébio grew up in Mafalala. I was completely surprised–I always had thought of him as Portuguese, and the fact that he was black somehow went unnoticed during my childhood.

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Eusébio learned to play soccer on this field in Mafalala, Maputo.

Eusébio’s biography is marked by the de-facto Apartheid regime Portugal had implemented in Mozambique at the tail end of Portugal’s global empire. It lasted more than half a millennium and only ended in 1975 when Mozambique became independent from Portugal. The center of Maputo, then called Lourenço Marques, was reserved for whites only. In the 1950s and 1960s, the Portuguese built a large number of concrete highrises along stately avenues in the center of Maputo for a substantial Portuguese population–this is why it is referred to as Concrete City sometimes.

Blacks were not allowed to live there and were relegated to slums without any modern infrastructure. Mafalala was adjacent to the city center and became the focus of black intellectual life during the final decades of the colonial regime. It also was the center of resistance against white rule, and many leaders of FRELIMO, the Marxist liberation movement that seized power after independence, lived in shacks in Mafalala.

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Joaquim Chissano (b. 1939), the second president of Mozambique, used to live in the light blue house.

Eusébio moved to Lisbon in December 1960, at age 18, to play for Benfica. Sporting Lisbon, its cross-town rival, had first dibs on him as he played in their youth organization in Maputo. But Benfica outsmarted Sporting, and apparently they convinced Eusébio’s mother with a good bit of cash. Regardless the circumstances, for a kid from Mafalala to play for one of the major European clubs was a dream come true.

In Maputo, Eusébio was subjected to open racism imposed by the Portuguese colonial regime, but he was part of a majority community that gave him support. While the racism in Lisbon may have been less overt,  he had no community in Lisbon. So soccer became his community–which he worked for until the end of his life. He remained an untiring soccer ambassador for both Portugal and Benfica, his club, until his death. When Sepp Blatter, the FIFA boss, in 2011 stated that black soccer players just should shrug off racism, thus causing a scandal, Eusébio essentially agreed.

But we know that his 15 years at Benfica were tough, in spite of the huge sportive successes. Portugal then was a fascist state, ruled by António de Oliveira Salazar (1889-1970) and his successor Marcelo Caetano (1906-1980), until the Carnation Revolution of 1974 swept away the dictatorship–which led to the independence of all Portuguese colonies in the following year. The established society always saw Eusébio as an inferior African, and Eusébio also endured racist attitudes at Benfica. But he never talked publicly about his experience with racism–in spite of the fact that he agreed to be ambassador against racism for FIFPro, the global association of soccer players.

His pay at Benifica was far below of what top players elsewhere in Europe earned. Clubs like Inter Milan were interested in him, but Benfica demanded unreasonable amounts of money to release him. Apparently, Eusébio personally appealed to Salazar the dictator to get permission to leave. But Salazar denied the request with the justification that Eusébio belonged to the Portuguese people. Dictators are lousy at understanding irony. And by the time the regime fell, he was 35 and no longer of interest to top European teams.

Eusébio’s biography has a lot more layers of complexity than I possibly could have suspected as kid who admired him. As a victim of a brutal colonial regime, he moved to the racist “motherland” and sought his fortunes there. He never moved back to his native Mozambique where he was admired as a national hero, although he visited often.

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Street sign and informal portrait of Eusébio in Mafalala.

It appears that the issue of race was like a festering wound to him–a topic he never wanted to discuss publicly. Donald McRae in a 2006 piece in The Guardian describes Eusébio as a conflicted individual who was haunted by the ghosts of his past and struggled with issues of identity and belonging. Apartheid and the Portuguese colonial rule are gone, but their impacts on lives are real and ongoing. Eusébio is exhibit A. In its obituary, The Guardian writes: “Eusébio was the greatest African footballer in the history of the game.” While this is true, I would have never thought of it this way. The story is more complicated than that.