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Sharks in Offshore Waters, Part Three

Two things are certain about moving money overseas: First, it’s necessary if you want to shield at least some of your savings from the capital controls, wealth taxes and confiscations that will (not might) be imposed by over-indebted governments in coming years. Second, there’s a whole ecosystem of predators waiting to exploit the first-time offshore investor’s inexperience. So knowing the risks and how to avoid them is crucial. Parts One and Two of this series — excerpted from a January 2010 article I wrote for CFA Magazine — covered the pitfalls of offshore bank accounts, insurance, trusts, gold storage and real estate. Part Three concludes the series with profiles of some predators that have been caught. Remember, con artists are like cockroaches: when you catch one that means there are twenty more nearby.

Tax evaders are easy prey
Handing money to an offshore banker or lawyer for the purpose of defrauding tax authorities leaves the perpetrator vulnerable to his offshore associates. If they simply steal the money, its original owner has no recourse that doesn’t involve admitting to tax evasion. Adding insult to injury, the thieves frequently extort more money from their victims, most of whom pay up in order to avoid prosecution.

This happens all the time, writes Jay Adkisson, California-based attorney and co-author of Asset Protection: Concepts and Strategies for Protecting Your Wealth. “Every day some sucker gets off his or her cruise liner at some offshore centre, walks over to the nearest offshore service provider and says ‘I want a trust and a secret bank account’ and then hands them the money. And, about once a month, a publication such as Offshore Alert or a scam site somewhere will run a story about how an offshore service provider disappeared with their clients’ money.”

Dot every “i”, cross every “t”
Legitimate players in the field are unanimous in advising clients to be more rather than less diligent with overseas accounts. Dot every “i” and cross every “t”, and hire competent help for negotiations and contracts. Get recommendations and check references. Trust only a well-regulated bank or trust company — i.e. a major institution in a country with a serious regulatory regime and a stable political system — with offshore accounts. And pay whatever this costs, because mistakes will cost far more.

For providers of offshore services, note that educated customers will become the norm, as word of the above dangers spreads across the Internet. Enraged victims and regulators will be seeking out predators and lobbying to eliminate them, making a reputation for honesty both a selling point and a survival strategy.

And forget about evading taxes. The risks vastly outweigh the rewards — even with high-priced help (see KPMG below). “It’s almost impossible to vet tax shelters because some of [the failed shelters] were sold with tax opinions from what should have been the most reputable firms in the world,” says Chris Riser, Jay Adkisson’s law partner.  “The lesson is that if it sounds too good to be true it probably is.”

SIDEBAR: A Cavalcade of Con Artists

Offshore predators come in a variety of forms. Some are best-selling authors or brand-name accounting firms. Others, well, let’s just say their victims deserve what they get. Here’s a representative list from the past decade:

Merrill Scott. The Utah law firm billed itself as “Advisors to the Affluent” while aggressively marketing its services through high-profile advertisements in the Robb Report and elsewhere. Among its products was “loss of income insurance” from Gibraltar Permanente, an offshore insurance company owned and controlled by Merrill Scott. A client would pay, say, $2 million in deductible premiums for policies to protect his business from a loss of income. Gibraltar Permanente would segregate the premiums, pay at least 5% on the balance, and promise to refund the premiums plus interest after 20 years.

This was in reality a pyramid scheme where the funds of later investors were used to pay off earlier investors. Merrill Scott and its associated entities were seized by the government, but most of its assets were by that time lost. One would-be tax evader who borrowed on his Gibraltar account ended up losing the premiums and having to pay back the loans.

Van Brink. The veteran con artist created and licensed Fidelity International Bank and First International Bank of Grenada, complete with fictitious deposit insurance from “International Deposit Insurance Corporation (IDIC)”. The eventual take exceeded $200 million, much of which was spent on luxury homes and college tuition for the children of Brink and his associates.

Jerome Schneider. The “world’s leading authority on offshore banking and investing” organized a series of “Offshore Wealth Summits” in places such as Vancouver, Cancun, and Hawaii featuring congressmen and bankers as keynote speakers. He then offered attendees the chance to buy $60,000 stakes in Nauru (a Pacific island) banks, promising to conceal clients’ ownership so they could avoid paying taxes on the banks’ profits. Schneider was convicted of fraud in 2002.

Robert Allen Stanford. “Sir Robert” ran Antigua- and Barbuda-based Stanford International Bank, which sold offshore certificates of deposit promising returns well above those of competing banks. Stanford took in billions this way, while periodically appearing on CNBC and other media outlets to field questions like “Is it fun being a billionaire?”  The fun ended in 2009, and Stanford now resides in a U.S. prison.

Dominion of Melchizedek. Father and son con men David and Mark Pedley created this fictitious country — which periodically received glowing audit reports by “International Auditors” — and spent years selling offshore bank accounts, loan commitments, insurance, and passports. The scam eventually produced numerous indictments, including an Austrian banker who tried to cash checks totaling $500,000 drawn on Asia Pacific Bank of Melchizedek while in Hong Kong.

Terry Neal. The author of the popular book “Offshore Advantage”, Neal advertised the services of his Nevis American Trust company in in-flight magazines, eventually convincing several high-profile financial planners to send clients his way. Once he found willing accomplices, he helped them create shell corporations and fabricated documents to support fictitious tax deductions, including phony mortgage and insurance policies. In 2004, Neal was convicted of federal tax violations.

KPMG. For years, the Netherlands-based accounting giant peddled aggressive (and as it turns out,
illegal) tax shelters to wealthy clients. One popular shelter, called BLIPS — “Bond Linked Issue Premium Structures” — required a client to borrow from an offshore bank to buy foreign currency from the same bank. Then the client would sell the currency back to the lender, creating a phony tax loss that the client would then deduct. The creative folks at KPMG came up with many variations on the theme of using offshore accounts to create a total of about $12 billion of phony losses for clients. In 2006 KPMG pled guilty to criminal tax fraud and agreed to pay $456 million in penalties.

Okay, that’s enough negativity. You get the point — it’s risky out there — so now we can move on to the fun stuff: actually finding some safe, maybe even profitable, offshore investments. Next week: offshore gold storage.

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