On Tax Havens

The best tax havens from the perspective of offshore providers have similar qualities: They feature a business-friendly political culture, functioning legal systems, and limited economic competition.

He creatively employed one such treaty between the United States and the Netherlands Antilles on behalf of his clients. Under the double tax treaty, the United States did not tax companies based in the Antilles. In turn, the Antilles did not tax foreign investments. U.S. companies with subsidiaries in the Antilles could thus avoid being taxed by either government. Authority sanctions as appropriate, usually after a corporation, lawyer, or accountant pushes the boundaries of what’s acceptable. Tax evasion occurs when the activity violates the law, either blatantly or after a ruling by a court or governmental entity. The United States rescinded the tax treaty in 1982.

As with Delaware, the BVI did not collect information on who owned the companies. Its public registry featured the company name and the name of the firm that registered it. The BVI company had to issue shares and have at least one company director, as in Panama. However, unlike Panama, there was no public registry of directors, making the identity of the company owners even more secret.

Tax havens are remarkably cohesive communities. The financial services industry dominates. Local elites follow the cash, joining the industry or servicing it in other ways. Business interests and the political establishment become intertwined. Once the industry is established, the social controls that already exist in small, isolated communities activate on behalf of the industry.

The BVI forms part of a system of British tax havens. These vestiges of the British Empire include the BVI, the Cayman Islands, Bermuda, the Channel Islands, and Turks and Caicos. Farther afield but part of the same tax haven family are former English possessions like the Bahamas, Belize, Cyprus, Singapore, and the Seychelles.

Companies based in a tax haven allowed for the efficient operation of a business that crossed multiple jurisdictions, reducing levies and liabilities.

The offshore business accounted for almost half of the BVI government’s revenue, making it one of the most prosperous small island nations in the developing world.

On Tax Vehicles

As an added layer of secrecy, many jurisdictions, including Panama and the BVI, allowed companies to issue “bearer shares.” These share certificates were pieces of paper and whoever physically possessed them owned the company. Bearer shares could be used to transfer assets completely anonymously. They were favorite tools of money launderers and one of Mossfon’s more popular offerings.

For an extra $100, Mossfon provided another layer of secrecy by arranging for the services of a company director. These stand-ins, known in the trade as “nominees,” appeared on paper as corporate officers who controlled the company. In reality, they served only to hide the identity of the beneficial owner, who often covertly controlled the company through a secret power-of-attorney agreement. Nominee directors are a corporate compliance charade commonly practiced throughout the offshore industry.

ANONYMOUS COMPANIES SOON surpassed the more traditional secrecy vehicle, the trust.

A legal deed spelled out the relationship between the steward, called the trustee, and the person relinquishing the assets, known as the “settlor.”

By entrusting the assets to a trustee, one could have the benefits of ownership without the duties and liabilities. Officially, the assets of the trust no longer belonged to the settlor but to the trustee. Taxes were levied where the trust was based, which helped British-formed tax havens flourish. However, for the sales force at Mossfon, trusts had a major flaw: Their customers did not trust the trustee. In Britain and America, well-placed trustee firms went back generations. When it came to safeguarding assets, they had sterling reputations. The idea of turning their hard-won cash over to a third party to place in an unregistered financial structure, protected only by a legal system in which they had little faith, was naturally unappealing.

The original inspiration for using foundations to hide money came from Europe. The Liechtenstein foundation had similarities to companies and trusts. Like a company, it was a stand-alone legal entity that was registered with the government. Yet unlike a company, it didn’t have members, shares, or technically even owners. As with a trust, the creator, often called a “founder,” moved assets to a separate entity, the foundation. Yet instead of a trustee, there was a foundation council that acted on written guidelines from the founder. A Panamanian foundation was prohibited from engaging in commercial activities “on a regular basis,” but it could collect dividends, rents, and royalties, and it could hold shares and own properties. Most important, Panama allowed for a new role, that of a “protector.” According to Mossfon, this person was “usually the client himself or someone he trusts.” The protector essentially oversaw the foundation council, which functioned as the public face of the foundation, and had the power to remove its members. In this way, the founder never relinquished control.

Sometimes, even a foundation did not provide enough secrecy. In those cases, Owens recommended adding a charity to the mix. Mossfon did not invent this idea. For decades, trust operators used charities as fake beneficiaries to avoid government scrutiny and further hide the identity of actual owners. With Mossfon foundations, the firm suggested the client name the Red Cross or the World Wildlife Fund as a beneficiary. These charities were ideal. They had high profiles and local chapters in nearly every country. Seeing the named beneficiary, tax authorities might give the foundation a pass, believing it to be a charitable enterprise. The nonprofits themselves had no inkling they were beneficiaries. The “protector” of the foundation would then replace the fake beneficiary with another name, sending Mossfon the real instructions in a sealed envelope. The final instructions would be opened only upon the client’s death. At that point, the true beneficiary would be revealed. “In this manner officially and truthfully we know only the name of the first beneficiary,” Owens explained to a client. “Nevertheless, the Protector will always be able to replace such envelope or the name of the substitute.”

On Offshore Banking

For more than a century the gold standard for secrecy in banking was Switzerland, where bankers could be counted upon not to reveal an account holder’s identity or expose a customer’s transgressions.

But if Swiss account holders wanted to spend large sums while keeping their money secret, an anonymous company was the way to go.

In 1998, Mossfon began registering companies in the Seychelles. It would become one of the firm’s more popular jurisdictions, eventually accounting for more than fifteen thousand companies.

Organisation for Economic Co-operation and Development (OECD), an international body consisting of the world’s leading industrialized nations. The OECD identified four behaviors it said defined a country as a tax haven: if the nation had low or no taxation; if it ring-fenced its offshore industry by forbidding the use of its financial products domestically; if its activities lacked transparency; and if it resisted information exchanges with other nations.

The spread of offshore banks, ostensibly based on sparsely populated atolls, alarmed the major powers. These banks served as conduits for cleaning dirty money and funneling it into the global financial system.

A seemingly infinite number of ways existed for an offshore bank to facilitate money laundering. All it took was a basic understanding of the financial system and a flexible bank. The bank could move money between financial institutions and accounts, muddying its trail. Currency trades, particularly if backdated, allowed for large losses or gains. Account holders could place opposing bets on the stock market that canceled each other out. The bets produced no profits but provided a paper trail to legitimize the money.

The tiny Micronesian island of Nauru was one of the worst offenders.

In August 2009, UBS turned over an additional 4,450 names to the IRS. The age of absolute Swiss bank secrecy had come to an end—an achievement initiated by a stubborn Japanese African American IRS agent named Joe West.

BOWING TO INTERNATIONAL pressure, the BVI toughened its anti-money-laundering laws in 2008, adding new record-keeping and Know Your Customer requirements for offshore providers like Mossfon.

BVI’s approach to bearer shares. These certificates of ownership acted as a constant point of tension between tax havens and Western governments. Once the shares were issued, it was almost impossible to determine who owned the company, since it depended on whoever held the paper. Bearer shares made tracking assets a nightmare for taxation agencies or prosecutors. To those who wanted secrecy, for legitimate reasons of privacy or to engage in illicit activities, there was no better instrument than bearer shares. Their use was widespread. “Confidentiality is a client magnet and bearer shares provide much desired confidentiality.”

On Using Offshore Banks

West’s research pinpointed four questions to master in order to effectively prosecute offshore tax evasion. The first involved how the taxpayer entered the offshore world. Who was the intermediary who set up the structures and the sales pitch that brought the parties together? Second, how did the taxpayer move his money offshore? As with money laundering, an endless number of variations existed. Businessmen could route transactions via the Bahamas or other tax havens and skim profits into offshore bank accounts. They could falsify invoices to pay their offshore company or associates for services that never occurred. Another tactic involved selling assets to the offshore company at a loss, which not only transferred money but also provided a tax write-off. Third, West had to prove that the taxpayer covertly controlled the secret companies, trusts, and foundations. And finally, how did the taxpayer get the offshore money home? There is no benefit to having tax-free cash if it’s not accessible. West realized you did not need to own something to enjoy it. The title to any asset—a car, a yacht, real estate—could be held offshore and then leased back to the owner.

[The offshore] bank would issue credit cards to its customers. As long as they had sufficient cash in their account, they could draw down on the now tax-free money anywhere in the world simply by using the cards.

• The Money Laundering Abatement Act proposed forcing banks to change the way they had conducted business for two centuries. In the past, what customers did with their money was mostly their own concern. Financial institutions only had to report suspicious activities, large cash transactions, and cash purchases of negotiable instruments such as bearer bonds. Levin went farther by turning banks into agents of regulators and law enforcement. Under Levin’s bill, U.S. banks needed to create due diligence procedures to constantly monitor private banking customer accounts. They had to identify foreigners who owned accounts in banks in the United States and respond within forty-eight hours to requests for anti-money-laundering information from federal banking regulators.

• a politically exposed person, or PEP. The phrase, shorthand for a government official or a relative of one. The United Nations and the European Community demanded that banks and offshore providers review their customers to determine if they were PEPs. If the answer was yes, the banks and company providers needed to collect additional details about the source of the wealth.

On Freeport

At its center is the Geneva Freeport, more than 600,000 square feet of storage space in an industrial area west of the city. The Freeport will not ask for the identity of the owner behind the company. As long as the art resides within the Freeport, it is tax free. Sales are conducted within their walls as well. Sometimes, the art simply shifts from a seller’s vault to a buyer’s and cash is transferred between the bank accounts of shell companies.

Conceivably money launderers could create fictitious sales between separate offshore companies with the same owner. The companies would then buy and sell items within the freeport at an inflated cost to give the extra cash a clean provenance. Transactions could even involve items that do not actually exist, with the freeport providing a patina of legitimacy to the arrangement. Art has always been a convenient way to store and transport value. The freeport concept itself dates to the nineteenth century, when so-called bonded areas were utilized for temporary storage of commodities such as grain, tobacco, and industrial goods. They gradually transformed into tax-free treasure troves to house art, antiques, jewelry, watches, and vintage wine for the uberwealthy

On Offshore Business for China

It is no accident that the biggest offshore provider in the world today, Offshore Incorporations, began in Hong Kong.

Anonymous companies provided a way for China’s economy to bloom, because even though they circumvented government restrictions and helped people avoid taxes, they also minimized economic turbulence and allowed for foreign investment. Tax haven–based companies provided the vehicle for foreigners to invest in Chinese subsidiaries without the difficulty of bringing money directly into the country. In order to buy equipment or make other purchases, Chinese businessmen found it easier to park money offshore, buy the material, and then import it. Chinese entrepreneurs quickly learned that they could create offshore subsidiaries and then sell their goods to their own companies at low cost. The subsidiary company would then resell the product at a significant markup. This way, the Chinese-based firm reported low taxes in China and repatriated the profits from the resale by its subsidiary back to the country as nontaxable foreign investment. The process was known as “round-tripping.” To have a “BVI” became shorthand in China for any offshore company, regardless of where in the world it was located. To get the money out of the country, Gu Kailai employed foreign middlemen known in China as “white gloves” because they allow one to keep clean hands.

On Luxembourg

The Luxembourg rulings allowed some of the world’s biggest companies legally to avoid paying hundreds of billions of dollars in taxes in the countries where they did business. It was yet another example of how the biggest exploiters of the secrecy world were multinational corporations.

For more than three decades, Kohl had run Sociétés 6, the Luxembourg federal agency in charge of what the Wall Street Journal described as the country’s most valuable export: tax relief. Sporting a beard and a ponytail, Kohl looked more like a biker than a tax official. He was known as “Monsieur Ruling,” for the thousands of corporate tax deals he had sanctioned during his tenure.

There were hundreds of companies whose Luxembourg tax agreements were included in the leak. The agreements themselves were often quite complex, with diagrams in swirls of arrows and boxes that illustrated how money flowed between subsidiaries and countries. A tax deal for the Illinois-based pharmaceutical company Abbott Laboratories, for example, had seventy-nine steps to it. In another deal, PepsiCo used its Luxembourg subsidiary to reduce its tax bill on a $1.4 billion purchase of a controlling interest in Russia’s largest juice maker by sending money to Bermuda and back. Luxembourg tax agreements enabled the Australian division of the Swedish furniture giant IKEA to pay little tax on an estimated $1 billion in profits earned in that country. FedEx used two Luxembourg affiliates to move earnings from Mexico, France, and Brazil to a subsidiary in Hong Kong. This allowed the company to significantly reduce its tax burden in the places where it actually earned the profits.

What the majority of submissions had in common was that the corporation had no significant presence in Luxembourg. Many of these firms also took advantage of laws Luxembourg had passed to entice companies. For example, the country exempted tax on interest income, which is why many of the companies designed their businesses so that profits earned in other countries flowed into Luxembourg subsidiaries as interest. Luxembourg also exempted from taxation 80 percent of the income earned from intellectual property such as brand names, patents, and distribution rights.

On Nevada

The degree of secrecy Nevada allowed put many tax havens to shame. As long as a foreigner made his money outside the United States, there was no requirement to report any financial activity. Nevada had no information-sharing agreement with the Internal Revenue Service. An economic boom in the state guaranteed first-world infrastructure. Most important, the firm told potential customers, Nevada did not have a reputation as an offshore center.

In a typical company, the shareholders own the company. In the secrecy world revealed by the Mossfon data, many of the shareholders were either “bearer,” which meant they were owned by anonymous bearer shares, or were controlled by a second company, foundation, or trust. The most revealing information—such as who actually owned the company—was buried inside the documents themselves. For example, power-of-attorney agreements often gave the actual owner control of the company.