More reasons not to trust tax havens with your money

Tax havens sell themselves as havens of stability and probity, where your money is safe: not just safe from theft, but also 'safe' from tax authorities, from disclosure, from criminal rules and so on. As a new story from the ICIJ notes:

“People were trying to hide their money from the IRS, or they were trying to hide their money from law enforcement, or they were trying to hide their money from regulators,” said Paul E. Pelletier, the principal deputy chief of the Justice Department’s fraud section."

But the Cyprus disaster - where large depositors in this captured haven of financial secrecy recently discovered that they will lose a big chunk of their deposits in a bailout - has reminded people that money in tax havens isn't always safe.

A while ago I (Nicholas Shaxson, today's blogger) wrote a blog noting that there are various other reasons why your money might not be as safe in tax havens as they had thought. Quoting an Australian expert on the issues, Michael Inglis, the blog said:

"As he explains it (lower down in this blog) offshore arrangements often involve a devious side agreement based on a pretence that the individual(s) concerned does not control or enjoy the assets and income in question – and hence escape taxes or the long arm of the law – while in reality they do retain that control. But they are often discovering that when push comes to shove – notably when the courts or the Tax Authorities get involved – that the offshore promoters who had hitherto been so diligent in maintaining the real control, alongside that pretence of non-control, suddenly find themselves reinterpreting the arrangement, and the individual actually loses control of the asset. (If you want to read more about the devious arrangements involved in offshore trusts, take a look at this blog I wrote a while back: In Trusts We Trust.)

This untrustworthiness Inglis describes chimes with what I heard a couple of weeks ago at the Offshore Alert conference in Miami, where a seasoned investigator described in detail to me how players in all the different offshore jurisdictions frequently cannot be trusted to honour devious offshore agreements, and how those stashing their money offshore risked losing it. Inglis notes:

“The catastrophe to be avoided, at all costs, is being detected by the Tax Office (or other local or overseas agency), losing the benefit of the “hidden” assets or structures, and then being left stranded with substantial liabilities for tax, penalties and interest, with insufficient available funds to call on.”

The whole blog ought to be hair-raising for anyone considering stashing their money offshore, particularly using slippery structures such as trusts, and particularly using very mucky places such as the Cook Islands. The latest ICIJ story provides just the latest example of shaky offshore trustworthiness:

". . . At the time, the Cordishes were already in the process of creating four trusts in the Cook Islands through TrustNet and the family eventually placed $116 million worth of assets in them, a transfer they disclosed to the IRS. They invested some of the money with Callahan, but instead of protecting their investment, he allegedly swindled the Cordishes out of nearly $12 million, according to previously confidential documents and a civil lawsuit brought by the Securities and Exchange Commission."

And we have plenty of other examples of that. Fraud exists everywhere, but offshore ownership manipulation does seem to be a particularly fruitful avenue for it.

There is another reason for those using offshore secrecy structures to be concerned about the safety of their schemes. As I wrote for the EU Observer:

"In the past few years we've seen a real sea change in the world's understanding of and tolerance for the offshore system of tax havens, and many offshore practitioners who previously wouldn't have questioned what they were doing will now be realising that they may well have been doing the world a dis-service. As a result, I expect more penitent offshore insiders to become whistleblowers, and more information of this kind to emerge."

 Time will tell, of course, but these are hopes grounded in some profound changes now underway in the world, in which TJN has played an important role.