Without a Trace: Locating Assets Hidden in Tax Havens

May 2009

IN THIS ISSUE

— Paper Trails in Unlikely Places: Following Hidden Assets
— Piercing the Veil: Tracing Assets and Recent Reform Efforts
— In the next issue

GREETINGS!

Welcome to the May 2009 edition of our newsletter! In this issue, we’ll look at how to locate “hidden” assets in disclosure-unfriendly (and often exotic) locales such as the Cayman Islands, Switzerland and elsewhere.

PAPER TRAILS IN UNLIKELY PLACES: FOLLOWING HIDDEN ASSETS

Entire countries, indeed entire industries, count on being able to make a client’s records unavailable – through perfectly legal means – for public inspection, whether by auditors, journalists, or curious citizens. While such circumstances exist in the United States (Hello, Delaware!), where only a registered agent (often an attorney) will be affiliated with a company’s records, the ability to mask true ownership and activity of a business is even greater overseas (even in Delaware, private companies have to list a business address separate from the registered agent’s address, which can allow researchers to potentially identify owners.)

So, what can be done against this backdrop? We have often followed the chain of ownership from various shell companies in places such as Belize and the Cayman Islands to find the ultimate owner of a chain of companies. The advantages to the scheme are many: by saying that XYZ Belize Ltd. is the true owner of ABC Ltd. in the United Kingdom, it may provide tax benefits and a layer of secrecy to the individual owners of XYZ Belize Ltd. (who, in this hypothetical instance, would likely be the same U.K.-based officers and directors operating ABC Ltd. from a London office.) By channeling the ownership chain through Belize (and, most likely, from Belize to another haven country), the cost and effort for regulators to determine who is ultimately culpable should something go awry becomes onerous.

PIERCING THE VEIL: TRACING ASSETS AND RECENT REFORM EFFORTS

Whether discussing the jungles of Belize or the tony chalets of Switzerland, for much of the last century the rules have been the same: pay government officials modest registration fees and an often significant corporate tax, and they’ll hide the details of your companies’ operations. While this is true much of the time, ultimately accountability can be discovered. Suppose an individual has a Delaware company that maintains bank accounts or real property in Turks and Caicos meant to be hidden from a business partner during litigation. The Turks and Caicos assets, meanwhile, are held by a Swiss company, whose partners in turn are three Isle of Jersey partnerships. Again, ultimately, by following the maze of shell companies to find addresses (if not individual identities) of the partner companies, a skilled investigator can link the individuals at the end of the chain to the assets at the beginning, making the case that the various entities are nothing more than dummies which, when knocked down, reveal who actually benefits from the assets involved.

As with many aspects of the financial world, offshore tax havens have been affected by the present credit crisis and its effects. Swiss financial services firm UBS was recently forced to disclose the names of 250 clients for whom it held secret Swiss bank accounts. UBS reached a $780 settlement when faced with allegations that it helped these clients evade U.S. taxes, but the clients have sued UBS in Swiss court alleging a breach of Swiss secrecy laws. The outcome of the case could have ramifications far beyond the Swiss financial community and, if Swiss bank secrecy laws are modified or weakened, could herald a sea change for disclosure laws worldwide.

IN THE NEXT ISSUE

In our June issue, we’ll look at how pension fraud at companies large and small can affect the fortunes of every employee, from the executive suite to the assembly line.