Regular readers know we report on fraudulent activity in business and finance regularly, with articles ranging from Ponzi schemes to rogue trading. Another area we’ve highlighted is the use of offshore tax havens in exotic locales, often islands in the Caribbean. The primary purpose is to minimize tax liability since businesses operating in many of these locations pay no corporate taxes.
Using the right attorneys, affluent individuals (including rock stars, politicians, celebrities, professional athletes- essentially any ultra high net worth individual) can invest money offshore.
In addition to minimizing/avoiding taxes, the strategy conceals their identity as investors. Due to relaxed regulations in the host island (often a ‘territory’ of a developed nation) some criminals create complex business partnerships and shell companies to launder money or move cash out of a country where it’s restricted.
But these strategies are not just for individuals- they are utilized by institutional investors ranging from ‘blue chip’ American companies to private school endowment funds. With the recent leak of these ‘Paradise Papers’, we learned just how widespread this practice has become.
Management consulting firm Boston Consulting Group estimates that an astonishing $10 trillion in assets is harbored offshore.1
The reporting of the ‘Paradise Papers’ hasn’t received the same media attention as the last embarrassing law firm breach, the Panama Papers. This can be attributed to coincident timing with racier topics like bitcoin hitting $19,000 per coin or the latest sexual harassment scandal. Further, the majority of perpetrators appear to be Britons, so it has remained more of a U.K. story for now.
The Paradise Papers
In late 2017, over 13 million confidential documents from U.K. law firm, Appleby, were leaked to the German media outlet Suddeutsche Zeitung. The documents reveal covert financial transactions of many of the world’s most trusted public figures, specifically pertaining to the use of offshore tax havens (officially known as offshore financial centers, OFCs).
While the use of such tax havens is technically not illegal (unless there’s money laundering) the intention of such a strategy is fairly obvious. And when high-profile politicians are named as offshore investors, it can be quite embarrassing.
For example, the Queen of England reportedly invested roughly 10 million pounds of her private money offshore into Bermuda and the Cayman Islands by her money manager, the Duchy of Lancaster.2 The papers also revealed a small investment by the Queen into a British rent-to-own retailer called BrightHouse.3 The effective interest rates on such businesses are similar to payday lenders and exploit the poor, many contend.
Wilbur Ross, the U.S. Commerce Secretary appointed by the Trump Administration, had some explaining to do when the Paradise Papers revealed a financial interest (through Cayman Island companies) in an oil and gas shipping company connected to Russian oligarchs with close ties to President Putin.4 It was also Ross’ lack of disclosure when discussing the incident with Congress that was unsettling.
Of course, it is possible that some of these individuals didn’t realize this was occurring and the schemes were arranged by wealth advisors, private banks or family offices. But that doesn’t change the reputational damage they’ve incurred.
A Gray Area
While the practice feels unseemly to many, the important concern revolves around the actual legality. Often, the investments fall within acceptable boundaries by exploiting existing tax loopholes. In these cases, the transgression isn’t the actual investment it’s the lack of disclosure to certain stakeholders, including the public.
One particularly gray area revealed by the Paradise Papers is the use of offshore investments by university endowment funds. The use of so-called offshore ‘blocker corporations’ by some elite universities in the United States was uncovered.5
Remember, earnings by university endowments are already tax exempt, assuming normal, plain-vanilla investing.6 But their use of alternative investments like private equity and hedge funds subject the investment gains to taxation.7 Sometimes, the endowments must become limited partners in the funds.
But the university endowment itself can avoid federal taxes on these gains, since it’s the [blocker] corporations that owe the tax (located in no-tax or low-tax islands in the Caribbean off the British coast such as Jersey or Man).8 While unseemly, this practice is not illegal. But critics contend that Congress is essentially subsidizing non-profits like endowments at the expense of for-profit businesses.
Investment Advisor Scam
The Paradise Papers also uncovered some practices that appear quite dubious. One investment advisor scheme involves ‘giving your money away” to an offshore company.9 Since you no longer declare ownership of the assets, you incur no tax liability.
You might ask, “What good does this do if you’ve given away your money”? As you’ll see, you still basically control the money although it’s not technically ‘yours’.
These generous ‘donors’ concurrently become ‘investment advisers’ for this same company and help decide how these new assets are to be used.10
These new advisors direct the offshore company to purchase mansions or other luxuries such as sports cars and valuable art work, which the adviser uses personally. In essence, there’s no difference between the personal and corporate use.
The common sense question becomes, do these new investment advisors need the appropriate licensing to manage the assets or do they operate in name only?
In the United States, financial advisors are required to pass numerous examinations, depending on the type of business they advise on. The most common is the General Securities Representative Exam, commonly known as the Series 7. Many legitimate financial advisors also pursue challenging financial designations to increase their expertise such as the Certified Financial Planner, CFP or Chartered Financial Analyst, CFA programs. The question becomes, what government will enforce such requirements.
These are the types of schemes that these law firms like Appleby come up with. They then create the proper legal course for them to operate. Since the amount of tax avoided can be massive, these law firms charge exorbitant fees for their services.
Online MBA in Fraud Management
If you find the world of numbered Swiss bank accounts, shell corporations and offshore investing intriguing, consider pursuing a graduate degree focusing on combatting fraud and economic crime.
Utica College offers an online MBA in Fraud Management. The curriculum addresses the legal and regulatory concerns of fraud while teaching the latest tools to detect such activity. Later in the program, students build on this knowledge and can tackle real world cases.
The program’s faculty offers broad experience in criminal justice, law, risk management, accounting and finance. Utica College was also the first university in the U.S. to be named an education partnership with the Association of Certified Anti-Money Laundering Specialists, ACAMS. These resources prove quite valuable when pursuing employment opportunities.
The expertise learned is an asset to a number of industries such as insurance, financial services, accounting, technology, retail, construction and logistics. In finance, fraud identification is utilized by a number of professionals including forensic accountants and internal auditors.
These two particular options enjoy generous salaries with career paths that should experience strong demand. The average salary for a forensic accountant is $82,476 according to employment site, Indeed.11 And internal auditing managers’ report median salaries of over $93,000 on Payscale.12 Finally, the Bureau of Labor Statistics predicts anti-fraud positions should experience above average demand in the years to come.13
When pursuing a career in finance, an online MBA in Fraud Management degree helps graduates land competitive positions within compliance, audit or enterprise risk management. It also positions these professionals for leadership and managerial roles down the line.