Monday, December 16, 2013

Cook Islands trusts: a poster child for offshore abuses

We at TJN have painstakingly built up a coherent critique of the offshore business model over the years, using example after example to demonstrate how pernicious the offshore system has become. The issues are, of course, complex: part of our critique, after all, is that these places are no longer exotic sideshows to the world economy but have moved to centre stage. Offshore is now all around us. And it's bad news.

Every now and then an example comes along that distils some of the essential principles of offshore secrecy jurisdictions into a single story. It's the New York Times this time around, with a story about Cook Islands trusts - some of the most reprehensible structures that are out there. (hat tip: Stephanie Ostfeld.) The story relies heavily on the leaks provided by the International Consortium of Investigative Journalists (ICIJ).

The opening paragraph and an early sentence sum up the essential core principles of offshore:
"Picture a paradise where you can be lawsuit-proof. A place to hide your hard-earned assets far from the grasp of former or soon-to-be-former spouses, angry business partners or, if you happen to be a doctor, patients who might sue you.
. . .
The long arm of United States law does not reach there."
And the law of many other countries, we should add. Two words that best define offshore are 'escape' and 'elsewhere': you take your money elsewhere to escape the responsibilities of society, leaving others to pick up the risks, taxes and other costs. The article points to an appalling video in which two gentlemen discuss how to beat the forces of law and order, laughing as they describe the abuses that can be perpetrated. For instance:
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Back in 1984 the Cook Islands, which used to be part of New Zealand till 1965, needed to generate some revenue (ha ha ha) and they passed the first comprehensive asset protection trust law, and since then maybe 35 other countries have jumped on that bandwagon and have enacted various degrees of protective legislation. But in our opinion – and I think you share the opinion – the Cook Islands is the only jurisdiction that has a track record of throwing the United States Government out of court twice. The Cook Islands purposefully has no treaty with the United States; it gets no financial aid from the United States.
Though some might be impressed with a small jurisdiction standing up to mighty Uncle Sam: that's to mistake what the battleground is. The battleground isn't a geographical one: it's an economic one - between wealthy Americans and ordinary taxpayers. That's the problem here.  That word 'protective' is one of those common offshore weasel words: 'protective' refers to, among other things, 'protection' from the rules and responsibilities of society. They discuss the so-called 'self-settled spendthrift trust' which are particularly abusive mechanisms, particularly in the Cook Islands context. All this is summed up one way:
“You can have your cake and eat it too,” says Howard D. Rosen, a lawyer in Coral Gables, Fla., who has set up Cook trusts for more than 20 years, in a video on his website. Anyone with more than $1 million in assets, his firm’s site suggests, should consider Cook trusts for self-preservation, but especially real estate developers, health care providers, accountants, architects, corporate directors and parents of teenage drivers.
You can have your cake and eat it too. Or, to put it more accurately, you can have your cake, have someone else's cake, and eat them both too.

Fortunately, the ICIJ unearthed some information on these Cook Islands trusts, among many others, and found acres of skulduggery:
"The trust owners include people who have been convicted of Medicaid fraud, Ponzi schemes and bilking employee pension funds. Many others are simply rich.
. . . 
The documents described a Cook trust held by Denise Rich, former wife of the disgraced trader Marc Rich, who was pardoned on the last day of the Clinton presidency. Her trust contained more than $100 million in assets, including her yacht, the 157-foot Lady Joy; a Learjet 60; and a Swiss bank account. In addition, more than $116 million in assets of the Cordish family of Baltimore, which owns one of the nation’s largest privately held real estate conglomerates, were held in Cook trusts.
. . .
Another Cook trust holder is Dr. Richard Edison, a Fort Lauderdale, Fla., plastic surgeon, called “Dr. Dread,” who was sued after five patients at his Florida plastic surgery clinic died and he left a medical sponge in a woman’s breast. After the 2004 death of a patient, the Florida health department restricted his medical license."
And much more.
"Critics of Cook trusts say they undermine the basic premise of the American legal system, which is to hold people accountable for the consequences of their actions.
. . .
“The whole purpose of the legal system is accountability,” said Jack A. Blum, chairman of Tax Justice Network USA, a nonprofit that campaigns against tax havens. “It’s the idea of being outside the rule of law: that you can put money into a trust, do something wrong and not have to worry about answering in court for your actions. It’s a way of making that money disappear. It’s not nice and it’s not right.”
We'd be inclined to agree with our senior adviser.

Update 2014: Read on The Mechanics of Secrecy here


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