Last month, confidential records of the Bermuda law firm Appleby were leaked, exposing the financial affairs of people and corporations around the world, including the use of offshore jurisdictions for tax minimization, asset protection and, in theory, financial privacy. This recent leak has been dubbed the “Paradise Papers”, and it follows the “Panama Papers” of 2016, another exposure of confidential documents from a Panamanian law firm which revealed the offshore activities of celebrities, politicians and wealthy people across the world. The recurring theme is that claims of “secrecy” in the offshore realm are not to be believed. Yet, effective offshore planning is still possible if one’s approach begins with an expectation of tax compliance, which negates the need for secrecy.
Many people around the world use offshore entities (such as trusts and corporations) and offshore banks for a variety of reasons, including cross-border business activities, foreign investments, financial diversification, asset protection and privacy. These are legitimate reasons, and there is nothing illegal or inherently wrong about them. To assume that because someone utilizes an offshore jurisdiction, then that person must be committing tax evasion, is hasty and unfounded. Yet that is what the media suggests in its coverage of the Paradise Papers. However, it is not a criminal act to form a business in the US as a Limited Liability Company (LLC) in order to limit personal liability and protect one’s personal assets from business liability. Rather, forming a business as an LLC (or even as a corporation) to limit one’s liability is a proper and wise utilization of one’s rights and is valid under the law. Likewise, it is not a crime to establish a foreign trust to protect one’s assets from future creditors. So long as one is complying with all governmental disclosure laws, then establishing foreign structures and engaging in offshore asset protection is not only legal and valid, it is prudent.
Of course, utilization of offshore structures for criminal purposes is illegal. Most of the people exposed in the Paradise Papers were not criminals, and their wealth was not derived from criminal activity. Rather, the law firm Appleby advised celebrities, political figures and many other people who legally had assets offshore. Honorable service providers, whether law firms, trustees or banks, engage in the proper due diligence, source of funds and “know your client” investigations.
In contrast, the Mossack Fonseca firm in the Panama Papers is alleged to have turned a blind eye to criminally derived deposits and is alleged to have assisted, among others, corrupt politicians. The clients of the Appleby firm of the Paradise Papers, in contrast, appear to be more benign clients, wealthy families (the Queen of England), celebrities (like Bono) and blue chip corporations (including Apple) who utilized the firm to protect legitimately derived assets. On the one hand, money laundering and tax evasion requires banking secrecy and the cooperation, or at least the “willful blindness”, of foreign bankers and other offshore service providers. On the other hand, offshore asset protection of legitimately earned and tax compliant money does not require banking secrecy.
A crucial lesson, underscored once again by the Paradise Papers, is that one cannot rely on secrecy in the offshore realm. In this age of FATCA (the Foreign Account Tax Compliance Act), the CRS (Common Reporting Standard), TIE (tax information exchange) agreements, MLATs (Mutual Legal Assistance Treaties) and other examples of information-sharing among governments, any offshore service provider who promises “secrecy” should immediately be suspect. Simply put, offshore secrecy does not exist any longer. Swiss banking secrecy has been decimated by the U.S. Department of Justice and every single Swiss bank offering “secret accounts” has been made to fall in line, pay penalties and reveal its clients (who were then investigated and prosecuted). All former tax havens, even the most secretive like Liechtenstein and Monaco, now tout their transparency, lest they appear on blacklists and subject to reprisals at the governmental level, including banking isolation (which happened recently to Belize) and punitive economic penalties such as automatic withholding of outflows of funds (30% under FATCA). “Confidentiality”, as distinct from “secrecy”, is also promised by offshore service providers, but these are merely semantics, and the prevalence of whistleblowers, leaks and hacks makes such promises dubious. The Panama Papers and Paradise Papers are merely the latest examples, although the most news worthy due to the sizes of these breaches and the fact that the victims (from government officials to international soccer stars) offered “sexy” media reporting.
There is a long chain of offshore breaches of confidentiality completely apart from government-to-government treaties, cooperation and information sharing. Before the ICIJ (the International Consortium of Investigative Journalists) released the Paradise Papers in 2017 and the Panama Papers in 2016, in 2013 it released a cache of offshore account details based on confidential documents obtained from the British Virgin Islands and Singapore. In 2008, an HSBC tech employee in France stole banking records and handed them over to the French government, which then shared the information with other Western governments. In 2006, an employee at LGT Bank in Liechtenstein sold confidential banking records to the German government for millions of Euros. The German government then shared that data with other governments, including the U.S. When foreign governments pay millions for stolen banking data (which they have done again and again), it creates an incentive for theft.
Legitimate asset protection clients are those who are not looking to launder money or cheat the IRS. They are not looking to hide behind sham entities, and they do not rely on banking secrecy, because they understand that sham entities are ineffective and, because disclosure to tax authorities is now routine, bank secrecy has been proven to be extinct.
Instead, one should utilize strong foreign laws for asset protection, rather than supposed “secrecy”. Effective offshore asset protection is still viable, because it does not rely on secrecy but instead, on the strength of local laws, the degree of difficulty for outsiders to challenge those laws and asset protection structures. Rather than relying on promises of “secrecy”, one should rely on full compliance with tax and disclosure laws, and achieve effective asset protection from civil creditors through the use of tested asset protection laws in safe and stable jurisdictions.
There are numerous threats to banking secrecy, including government-to-government cooperation and information sharing, weakened bank secrecy laws, hackers and renegade bank employees, but these threats are not material if the funds are legitimately earned and the offshore trust or bank account is tax-compliant. It is completely legal to have funds offshore, for many reasons (e.g., international business transactions, global investment and diversification, asset protection), as long as the foreign accounts are part of a tax compliant strategy. If the offshore accounts are tax-compliant, then the threat of information sharing – – from whatever source, governmental cooperation, hacks, leaks or otherwise – – is eliminated. When foreign assets are legitimately earned and tax compliant, there is no need to rely on dubious “secrecy” and one instead can rely on the strength of law.