tax haven abuses: the enablers, the tools and secrecy

401 Pages·2006·2.08 MB·English

United States Senate
PERMANENT SUBCOMMITTEE ON INVESTIGATIONS
Committee on Homeland Security and Governmental Affairs
Norm Coleman, Chairman
Carl Levin, Ranking Minority Member
TAX HAVEN ABUSES:
THE ENABLERS, THE TOOLS
AND SECRECY
MINORITY & MAJORITY STAFF
REPORT
PERMANENT SUBCOMMITTEE
ON INVESTIGATIONS
RELEASED IN CONJUNCTION WITH THE
PERMANENT SUBCOMMITTEE ON INVESTIGATIONS
AUGUST 1, 2006 HEARING
SENATOR NORM COLEMAN
Chairman
SENATOR CARL LEVIN
Ranking Minority Member
PERMANENT SUBCOMMITTEE ON INVESTIGATIONS
ELISE J. BEAN
Staff Director & Chief Counsel to the Minority
ROBERT L. ROACH
Counsel & Chief Investigator to the Minority
LAURA E. STUBER
Counsel to the Minority
ZACHARY I. SCHRAM
Professional Staff Member to the Minority
ERIC J. DIAMANT
Detailee to the Minority
JOHN C. McDOUGAL
Detailee to the Minority
RAYMOND V. SHEPHERD, III
Staff Director & Chief Counsel
LELAND B. ERICKSON
Senior Counsel
MARK D. NELSON
Senior Counsel
Permanent Subcommittee on Investigations
199 Russell Senate Office Building – Washington, D.C. 20510
Main Number: 202/224-3721; 202/224-7042 (fax) (cid:112) Minority Office: 202/224-9505; 202/224-1972 (fax)
Web Address: www.hsgac.senate.gov [Follow Link to “Subcommittees,” to “Investigations”]
TAX HAVEN ABUSES:
THE ENABLERS, THE TOOLS, AND SECRECY
TABLE OF CONTENTS
I. EXECUTIVE SUMMARY ................................................. 4
A. Subcommittee Investigation ............................................... 4
B. Overview of Case Histories ............................................... 4
C. Findings and Recommendations ............................................ 8
Report Findings ........................................................ 9
1. Control of Offshore Assets ............................................. 9
2. Tax Haven Secrecy ................................................... 9
3. Ascertaining Control and Beneficial Ownership ............................ 9
4. Offshore Tax Haven Abuses ............................................ 9
5. Anti-Money Laundering Abuses ......................................... 9
6. Securities Abuses .................................................... 9
7. Stock Option Abuses.................................................. 9
8. Hedge Fund Transfers ................................................. 9
Report Recommendations ................................................. 10
1. Presumption of Control ................................................ 10
2. Disclosure of U.S. Stock Holdings ....................................... 10
3. Offshore Entities as Affiliates ........................................... 10
4. 1099 Reporting ...................................................... 10
5. Real Estate and Personal Property ....................................... 10
6. Hedge Fund AML Duties .............................................. 10
7. Stock Option-Annuity Swaps ........................................... 10
8. Sanctions on Uncooperative Tax Havens .................................. 10
II. THE OFFSHORE INDUSTRY .............................................. 11
III. EDG CASE HISTORY: AN INTERNET-BASED OFFSHORE PROMOTER....... 17
IV. TURPEN-HOLLIDAY CASE HISTORY: A HOW-TO MANUAL ............... 29
V. GREAVES-NEAL CASE HISTORY: DIVERTING U.S. BUSINESS INCOME
OFFSHORE.............................................................. 42
VI. ANDERSON CASE HISTORY: HIDING OFFSHORE OWNERSHIP ....... 49
VII. POINT CASE HISTORY: OFFSHORE SECURITIES PORTFOLIO ............. 55
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VIII. THE WYLY CASE HISTORY ........................................... 113
A. Introduction ............................................................ 113
B. Case History Summary ................................................... 116
C. Wyly Business Background ............................................... 119
D. Going Offshore ......................................................... 120
E. The Facilitators ......................................................... 123
1. Domestic Facilitators ................................................. 123
2. Offshore Facilitators .................................................. 127
F. Overview of Wyly Offshore Operations ...................................... 131
G. Detailed Examination of Wyly Offshore Operations ............................ 135
1. Directing Trust Assets ............................................... 135
Background on Trusts ................................................. 136
b. Wyly Trust Agreements ............................................ 139
c. Wyly Trust Protectors .............................................. 140
d. Communicating Wyly Decisions on Trust Assets ........................ 145
e. Trustee Compliance with Wyly Decisions .............................. 149
f. Analysis of Issues ................................................. 162
2. Transferring Assets Offshore ........................................... 163
a. Stock Options in General ........................................... 164
b. Private Annuities in General ......................................... 167
c. 1992 Stock Option-Annuity Swaps.................................... 169
d. 1996 Stock Option-Annuity Swaps.................................... 175
e. 1999 and 2002 Stock Option Transfers For Cash ......................... 180
f. Current Status of Private Annuities ................................... 189
g. Analysis of Issues ................................................. 194
3. Converting U.S. Securities into Offshore Cash ............................. 196
a. Trading Offshore .................................................. 197
b. U.S. Securities Law ................................................ 205
i. Background on U.S. Securities Law ................................ 206
ii. Disclosure of Offshore Stock Holdings ............................. 211
iii. Restrictions on Private Stock Sales................................. 219
iv. Restrictions on Insider Trading .................................... 228
4. Bringing Offshore Dollars Back with Pass-Through Loans .................... 230
a. Security Capital Formation and Operations ............................. 231
b. Security Capital Transactions In General ............................... 232
c. Three Security Capital Transactions ................................... 235
d. Analysis of Issues ................................................. 239
5. Supplying Offshore Dollars to Wyly Business Ventures ...................... 240
a. Supplying Offshore Dollars to Hedge Funds ............................ 242
i. Hedge Funds Generally .......................................... 242
ii. Maverick Hedge Fund ........................................... 243
iii. Ranger Hedge Fund ............................................ 249
b. Investing Offshore Dollars in a Private Investment Fund ................... 251
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c. Investing Offshore Dollars in Offshore Insurance ........................ 255
d. Investing Offshore Dollars in An Energy Company ....................... 264
e. Analysis of Issues ................................................. 272
6. Funneling Offshore Dollars Through Real Estate............................ 272
a. Real Estate Transactions in General ................................... 273
b. Rosemary’s Circle R Ranch ......................................... 276
c. LL Ranch ........................................................ 282
d. Analysis of Issues ................................................. 287
7. Spending Offshore Dollars on Artwork, Furnishings, and Jewelry .............. 287
8. Hiding Beneficial Ownership ........................................... 296
a. Background on Beneficial Ownership ................................. 297
b. CSFB, Lehman Brothers, and Bank of America .......................... 304
c. NFS Requests for Beneficial Ownership Information ..................... 311
d. Analysis of Issues ................................................. 330
APPENDIX 1: Wyly-Related Offshore Entities ............................... 332
APPENDIX 2: Isle of Man Offshore Service Providers ......................... 337
APPENDIX 3: Wyly Offshore Trusts and Their Trustees ........................ 339
APPENDIX 4: Additional Security Capital Loans ............................. 341
APPENDIX 5: Additional Real Estate Transactions ............................ 348
IX. LAW FIRMS AND TAX HAVEN ABUSES ................................... 361
# # #
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TAX HAVEN ABUSES:
THE ENABLERS, THE TOOLS AND SECRECY
August 1, 2006
Offshore tax havens and secrecy jurisdictions today hold trillions of dollars in assets.1
While these jurisdictions claim to offer clients financial privacy, limited regulation, and low or
no taxes, too often these jurisdictions have instead become havens for tax evasion, financial
fraud, and money laundering. A sophisticated offshore industry, composed of a cadre of
international professionals including tax attorneys, accountants, bankers, brokers, corporate
service providers, and trust administrators, aggressively promotes offshore jurisdictions to U.S.
citizens as a means to avoid taxes and creditors in their home jurisdictions. These professionals,
many of whom are located or do business in the United States, advise and assist U.S. citizens on
opening offshore accounts, establishing sham trusts and shell corporations, hiding assets
offshore, and making secret use of their offshore assets here at home. Experts estimate that
Americans now have more than $1 trillion in assets offshore2 and illegally evade between $40
and $70 billion in U.S. taxes each year through the use of offshore tax schemes.3
Utilizing tax haven secrecy laws and practices that limit corporate, bank, and financial
disclosures, financial professionals often use offshore tax haven jurisdictions as a “black box” to
hide assets and transactions from the Internal Revenue Service (“IRS”), other U.S. regulators,
and law enforcement. This Report is an attempt to open that black box and expose how offshore
and U.S. financial professionals are helping U.S. citizens conceal and secretly utilize offshore
assets, while undermining, circumventing, or violating U.S. tax, securities, and anti-money
laundering laws.
Offshore abuses are not a new story. In 1983, this Subcommittee investigated some of
the same problems going on today.4 News accounts regularly describe U.S. persons and
1 See, e.g., “The Price of Offshore,” Tax Justice Network briefing paper (3/05)(estimating that offshore
assets of high net worth individuals now total $11.5 trillion); “International Narcotics Control Strategy Report,” U.S.
Department of State Bureau for International Narcotics and Law Enforcement Affairs (3/00), at 565-66 (identifying
more than 50 offshore jurisdictions with assets totaling $4.8 trillion). The Cayman Islands alone are now the fifth
largest financial center in world.
2 “The Price of Offshore,” Tax Justice Network briefing paper (3/05)(estimating that offshore assets of
high net worth individuals from North America total about $1.6 trillion).
3 See, e.g., Joe Guttentag and Reuven Avi-Yonah, “Closing the International Tax Gap,” in Max B.
Sawicky, ed., Bridging the Tax Gap: Addressing the Crisis in Federal Tax Administration (2006). The $40 to $70
billion figure is intended to describe illegal tax evasion by mostly individual U.S. taxpayers using offshore tax
schemes; illegal tax evasion by corporations using offshore tax schemes such as transfer pricing and offshore tax
shelters would increase the total still further. Id. The IRS has estimated that corporate offshore tax evasion in 2001
totaled about $30 billion. Id.
4 See “Crime and Secrecy: the Use of Offshore Banks and Companies,” hearing before the U.S. Senate
Permanent Subcommittee on Investigations, S.Hrg. 98-151 (March 15, 16 and May 24, 1983).
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businesses using offshore entities to commit tax evasion, financial fraud, and money laundering.
In 2001, this Subcommittee took testimony from a U.S. owner of a Cayman Island offshore bank
who estimated that 100% of his clients were engaged in tax evasion, and 95% were U.S.
citizens.5
The evidence is overwhelming that inaction in combating offshore abuses has resulted in
their growing more widespread and reaching new levels of sophistication. In 2000, Enron
Corporation established over 441 offshore entities in the Cayman Islands.6 In 2003, the IRS
estimated that 500,000 U.S. taxpayers had offshore bank accounts and were accessing the funds
with offshore credit cards.7 A 2004 report found that U.S. multinational corporations are
increasingly attributing their profits to offshore jurisdictions, allocating $150 billion in 2002
profits to 18 offshore jurisdictions, for example, up from $88 billion just three years earlier.8 A
2005 study of high net worth individuals worldwide estimated that their offshore assets now total
$11.5 trillion.9
This Report examines the offshore industry behind these statistics, including the role of
offshore service providers, the interactions between offshore and U.S. professionals who help to
establish and manage offshore entities, and the range of sophisticated schemes being used today
to enable U.S. citizens to hide and secretly utilize offshore assets.
To illustrate the issues, this Report presents six case histories showing how U.S. citizens,
with the backing of an armada of professionals, hide assets, shift income offshore, or use
offshore entities to circumvent U.S. laws. The first case history examines an offshore promoter
located in the United States who recruited clients through the internet and helped them create
offshore structures. The second case history examines an offshore promoter who developed a
how-to manual for going offshore and one of his U.S. clients who used that manual to move his
assets to multiple tax havens. The third case history examines a U.S. businessman who, with the
guidance of a prominent offshore promoter, moved between $400,000 and $500,000 in untaxed
business income offshore. These cases demonstrate the use of phony loans, billing schemes,
5 “Role of U.S. Correspondent Banking in International Money Laundering,” hearing before the U.S.
Senate Permanent Subcommittee on Investigations, S.Hrg. 107-84, (March 1, 2 and 6, 2001), testimony of John M.
Mathewson, at 12-13.
6 See 2000 Form 10-k filed with the SEC by Enron, Exhibit 21; “Report of Investigation of Enron
Corporation and Related Entities Regarding Federal Tax and Compensation Issues, and Policy Recommendations,”
prepared by Joint Committee on Taxation staff (2/03), at 375.
7 “Challenges Remain in Combating Abusive Tax Schemes,” report by the Government Accountability
Office to U.S. Senate Finance Committee, No. GAO-04-50 (11/03) at 1.
8 “Data Show Dramatic Shift of Profits to Tax Havens,” Tax Notes (9/13/04). See also “Governments and
Multinational Corporations in the Race to the Bottom,” Tax Notes (2/27/06)
9 “The Price of Offshore,” Tax Justice Network briefing paper (3/05).
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offshore credit cards, and other methods to take funds offshore to avoid taxes and creditors, and
bring them back into the United States.
The fourth case history examines actions taken by a wealthy American to hide about
$450 million in stock and cash offshore by disguising his ownership of the corporations that held
those assets. The fifth case history examines a complex securities transaction, known as POINT,
which was aimed at sheltering over $2 billion in capital gains from U.S. taxes, relying in part on
offshore secrecy to shield its workings from U.S. law enforcement. The sixth, and final, case
history examines two U.S. citizens who moved about $190 million in stock option compensation
offshore using a complex array of 58 offshore trusts and corporations, and utilized a wide range
of offshore mechanisms to exercise direction over these assets and over $600 million in
investment gains. Together, these case histories raise a wide range of U.S. tax avoidance,
securities laws, and anti-money laundering concerns.
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I. EXECUTIVE SUMMARY
A. Subcommittee Investigation
The Subcommittee began this investigation into offshore abuses over one year ago. Over
that time period, the Subcommittee has consulted with numerous experts in the areas of tax,
securities, trust, anti-money laundering, and international law. The Subcommittee issued 74
subpoenas and conducted more than 80 interviews with a range of parties related to the issues
and case histories examined in this Report. The Subcommittee reviewed over two million pages
of documents, including memoranda, trust agreements, internal financial records,
correspondence, and electronic communications, as well as materials in the public domain, such
as legal pleadings, court documents, and SEC filings.
B. Overview of Case Histories
This Report sets forth several case histories to lend insight into the operation of the
offshore industry, its service providers and clients, and the impact of offshore abuses on U.S.
tax, security, and anti-money laundering laws.
EDG: An Internet-Based Offshore Promoter. This case history examines an offshore
promoter located in the United States who recruited clients through the internet and helped them
create offshore structures. Equity Development Group (“EDG”) is a company based in Dallas,
Texas; its president, Samuel Congdon, is a U.S. citizen. Over the past six years, EDG utilized
the internet to provide about 900 mainly American clients, many of relatively modest wealth,
with the type of offshore services previously available primarily to high-net-worth individuals.
With few resources, no employees, and only nine months prior experience in the industry, Mr.
Congdon was able to quickly create and promote an online offshore facilitation business that
provided a one-stop-shop for persons looking to establish an offshore structure. Mr. Congdon
rarely met his clients, did not work with their lawyers or accountants, and seldom inquired into
their intent. EDG told prospective clients that regardless of the offshore structures established
for them, the client would retain full control of their offshore funds. Mr. Congdon told the
Subcommittee that, in six years of operation, he could recall only one instance in which an
offshore service provider declined to comply with a client instruction, in that case refusing to
supply a sworn affidavit attesting to facts for a lawsuit. By connecting his clients with offshore
banks and companies that establish and manage offshore trusts and corporations, and by acting
as a liaison between his clients and the offshore service providers, Mr. Congdon enabled his
clients to move assets offshore, maintain control of them, obscure their ownership, and conceal
their existence from family, courts, creditors, the IRS, and other government agencies.
Turpen-Holliday: A How-To Manual. This case history examines an offshore
promoter who developed a how-to manual for going offshore and one of his U.S. clients who
used that manual to move his assets to multiple tax havens. The promoter, Dr. Lawrence
Turpen, of Reno, Nevada, specialized in offshore transactions, publishing a book on the subject
in addition to his manual. He provided a wide range of services to his clients, facilitating their
creation of offshore entities and accounts. One of his clients, Robert F. Holliday, used the how-
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to manual and Dr. Turpen’s other services to establish shell corporations and trusts, both in
offshore tax havens and in Nevada. Dr. Turpen selected offshore service providers that supplied
nominee directors and trustees for Holliday’s new entities, promising Mr. Holliday that they
would comply with his directions. Mr. Holliday told the Subcommittee that he was the “puppet
master” who instructed the offshore personnel on how to handle his offshore assets. Mr.
Holliday did not include the offshore assets and income in his tax returns, even though under
U.S. tax law, if he controlled them, he was required to report them.
On Dr. Turpen’s suggestion, Mr. Holliday hid his ownership of the offshore assets by
owning no shares in the shell corporations. Instead, the nominee directors appointed him a
“management consultant” to the corporations, with authority to make business decisions and use
corporate funds. Mr. Holliday typically transferred funds offshore by paying bills for fictitious
services provided by the Nevada company which, in turn, paid fictitious bills presented by the
offshore company. For example, Mr. Holliday transferred about $450,000 in untaxed income to
an Isle of Man shell corporation he controlled in payment for non-existent feasibility studies. To
make use of the funds placed offshore, Mr. Holliday paid his bills using a credit card issued by
an offshore bank, directed the offshore companies to pay designated expenses, and instructed the
Nevada companies to borrow money from his offshore entities. These efforts allowed Mr.
Holiday to conceal his income from the IRS, while enjoying control and use of the money. In
2004, both Mr. Holliday and Dr. Turpen pled guilty to tax-related conspiracy charges.
Greaves-Neal: Moving U.S. Business Income Offshore. This case history examines a
U.S. businessman who, with the guidance of a prominent offshore promoter, moved between
$400,000 and $500,000 in untaxed business income offshore. Kurt Greaves, a Michigan
businessman, told the Subcommittee that he first contacted Terry Neal, an offshore promoter
based in Oregon, after seeing an advertisement for offshore services in an in-flight magazine.
Under Mr. Neal’s guidance, Mr. Greaves used a variety of sham transactions to transfer untaxed
business income offshore without giving up the ability to use and manage those funds. Mr.
Greaves told the Subcommittee that all of the offshore service providers who managed his
offshore corporations readily complied with his requests on how to handle his assets, even
though he did not technically own any shares in the offshore corporations. He said that the
offshore service providers even fabricated documents to support fictitious tax deductions,
including a phony mortgage and insurance policy. Like Mr. Holliday, Mr. Greaves established
shell corporations in Nevada as an additional layer of separation between him and his offshore
assets, and arranged for fictitious bills and loans to move funds between his Nevada and offshore
entities. On one occasion, Mr. Greaves tried to visit an offshore service provider he used in
Nevis. He told the Subcommittee that he found the office in a small stone building on the beach
near the docks. He said that when he knocked on the door, the woman who answered, whose
voice he recognized from telephone conversations, refused to let him inside, discouraging
personal contact. Though this offshore service provider would not allow Mr. Greaves into its
office, it provided the services he needed to evade U.S. taxes. In 2004, both Mr. Greaves and
Mr. Neal pled guilty to charges related to federal tax evasion.
Anderson: Hiding Offshore Ownership. This case history examines actions allegedly
taken by a wealthy American to hide hundreds of millions of dollars in stock and cash offshore