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Why Do Investors Go "Offshore
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| Why Do Investors Go "Offshore | | |||||||||||||
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Date: | | 05/15/2000 | | ||||||||||||
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WHY OFFSHORE? HOW IT BEGINS A GROWTH BUSINESS WHY ENGLAND COMPETITION HALF THE WORLD'S FINANCIAL TRANSACTIONS BY VALUE! PRIVACY & CONFIDENTIALITY INTRODUCTION TO ENTITIES AND COPRPORATIONS LITIGATION EXPLOSION FLEXIBLE PERSONALIZED STRUCTURE BUSINESSES NEED SPECIAL REVIEW REVIEW OF ASSET PROTECTION DEVICES JURISDICTIONS OFFSHORE BANKING WHY OFFSHORE? As long as there has been money, people have wondered how to keep it. And the more money, the more urgent the question. The concept of offshore banking is as old as commerce. The Island of Delos off the coast of Greece was one of the places the wealthy of ancient times stored their treasures. Protected by water, with few natural resources other than a harbor, the leaders of the island learned that the rich of the mainland would pay handsomely to know their valuables were safe and protected. Delos set the pattern for financial havens. For the most part, they are tiny island nations with limited natural resources located near a major, thriving economic center. But there is more to it than that today. A tax haven is often within a country -- such as the state of Nevada within the USA. Paradoxically, countries that are insensitive to their own citizens' need for protection and tax shelter sometimes become havens for the over-taxed and under protected of other countries. The United States is a prime example of this oddity. HOW IT BEGINS A good example of how and why a tax haven nation is developed is the Bahama Islands. In the early 1960s this string of sandy atolls near Florida still flew the British Union Jack. Centuries ago, many ships plying her waters sported the Jolly Roger -- the coves and sheltered beaches were a paradise for pirates, who creamed the flow of wealth from the galleons of the Spanish Main. For centuries the islands have been a sleepy backwater -- beautiful to be sure, but primitive and undeveloped. Despite its beauty and comfort, the islands repelled would-be investors with its high-tax philosophy. The result was a net outflow of capital from the islands. Was it the ancients spirit of the bold and daring pirates or was the fledgling country merely trying to survive? In either event, the leaders realized the Bahamas would never reach their potential unless they reversed the flow of wealth out of the islands. They looked at their options and decided that if their own laws drove money from their country, could they tap into the out-flow of wealth from other, more prosperous nations? They instituted a two-tier tax system. The leaders decided there would be one set of laws for the citizens of their country, and another for foreigners. At the same time, the Bahamas clamped the lid on any information leaking out about the financial dealings of those with money in the country. They introduced banking privacy laws. The response was almost immediate. Americans and Canadians seized the opportunity to shield their assets from prying eyes -- and groping hands. The fact that the islands are a beautiful vacation getaway made investing there all the more attractive. Progressive banking laws coupled with a penchant for confidentiality has earned the Bahamas an excellent reputation as an offshore financial center. Total Euro-dollars handled by Bahamian banks in 1996 exceeded 250 Billions. The second largest source of income for this island nation has become bank service fees! A GROWTH BUSINESS Jealousy is a powerful motivator. Other nations -- more than 50 of them altogether -- saw the prosperity the Bahamas had earned as an offshore banking center and wanted their share. Like the ancient island-banking center of Delos, these havens tend to be near large economies where citizens' rights are on the decrease and government spending is on the increase. Near the U.S. and Canada, for example, are Antigua, the Bahamas, Belize, Bermuda, British Virgin Islands, the Cayman Islands, St. Kitts & Nevis, the Turks and Caicos, and others. All of these so-called "tax havens" are of rather recent date. Typically, bank accounts are held in the name of a trust or an International Business Corporation, ("IBC") that has been formed in a tax haven nation. The IBC designation in a tax haven jurisdiction indicates that the ownership of the corporation is foreign to that country and generally speaking has been granted government guarantees that it may operate tax free so long as it's business revenue does not come from within that country. More about this later. U.S. government estimates indicate the formation of 130,000 new IBC's during 1996 in the Caribbean alone. These numbers continue to rise. Near Great Britain are the Channel Islands -- Jersey, Guernsey and Sark along with the Isle of Man. Some of the largest financial institutions in the world are located in these smallish, out-of-the-way islands. Within Europe are the long-time havens of Austria, Switzerland, Liechtenstein, and Luxembourg. And in more recent years Europe has gained Bulgaria, Ireland, and Hungary as new havens for wealth. In the Mediterranean are Gibraltar, (also part of Europe), and Malta. Not to be outdone, the Middle East now have a collection of tax haven jurisdictions of their own. The island nation of Mauritius in the Indian Ocean, along with the Seychelles, serve as havens for Africa and the Indian subcontinent. In the Far East, Hong Kong built itself into a financial center with its liberal corporate and banking laws. In 1996, over 15,000 new IBC's were formed in Hong Kong alone. With the change of sovereignty in 1997, the future of this haven is unclear but business is usual at the time of this writing in late 1998. The Philippines and Singapore have passed new laws to attract offshore money. These centers serve the citizens of such countries as Japan and Korea. Australia and New Zealand citizens use the Cook Islands, Marshall Islands, Vanuatu, Nauru, Western Samoa, and the Marianas, as their havens. And, oddly enough, as mentioned above, some of the very countries whose citizens place their wealth offshore are themselves tax havens for citizens of other countries. Both England and the United States draw vast sums of money from foreigners. Why is that? Simply because they offer tax advantages to foreigners that are not available to their own citizens. WHY ENGLAND England has become the mother country to a host of tax havens, and for very good reasons. Remember the Falklands War? Argentina invaded and occupied a barren and practically worthless string of British islands off its own coast in 1982. Many other countries might have decided it was not worth fighting over and negotiated some face-saving way to exit the scene. But not the Brits. They dispatched an entire fleet -- complete with nuclear weapons -- and were prepared to obliterate Argentina if need be to defend their sovereignty. Why is that important? Because it demonstrates that any British possession or protectorate is going to remain British until hell freezes over. And that determination breeds a great deal of confidence. That's why many of the countries offering the best asset protection are former British colonies. These Commonwealth countries have enough independence to form their own business and tax laws, yet retain an aura of security through their affiliation with Great Britain. COMPETITION The offshore business is so lucrative that countries compete with each other for it. Like any other competition, newcomers must offer advantages the old guard does not. New IBC, privacy, trust, and banking laws, are being passed in nation states all around the globe, as jurisdictions line up to serve the citizenry of those disgusted with the bloat of bureaucracy evidenced particularly in the U.S., Canada, Italy, and other European countries. Some twenty years ago there were few offshore financial centers and their use was surrounded by myths of drug money and other illicit activities. There were few professionals specialized in offshore practice and these were generally focused on only one or two jurisdictions. Today the offshore industry has developed into a major global business, spanning all quarters of the world, involving, in one way or another, approximately half of the world's financial transactions by value. Yes, that's right, HALF THE WORLD'S FINANCIAL TRANSACTIONS BY VALUE! The International Financial Center, (the new professional name increasingly used to identify a tax haven), is considered a safe and reasonable way to conduct business. IFC's frequently operate 24 hours a day, and have become an integral and important part of the world's financial system. Although the concepts of private banking go back to the dawn of civilization, the Swiss are generally accredited with developing the process into an art form. The strategic location of Switzerland, at the center of Europe, found its citizens in constant contact with their larger neighbors on all sides. Being pragmatic, the intelligent option was for them to stay neutral when their neighbors were in conflict. While most of Europe's borders were constantly changing Switzerland's remained firm. In Switzerland, government was not allowed to force disclosure of business secrets, or the existence of trust property, nor could private property be expropriated. Due to inalienable personal property rights, the rights to privacy, and the encouragement of free enterprise, the concepts of private banking matured. Private banking services for the well to do is not new. Most large banks throughout the world have a system for providing the affluent with special service. However, private banking means something quite different in the U.S. and Canada than it may in the Bahamas, Cayman Islands, or Nevis. For starters, American and Canadian banks operate in an environment where personal privacy is no longer regarded as a "right" and therefore the very name "private banking" is a misnomer. The U.S. form of "private" banking is in reality "personal" banking, or traditional commercial banking with added personal service. There is absolutely NO privacy to private banking in the States. The term private banking is on the increase in North America. Most of the larger financial institutions have someone officially assigned to provide their version of "private banking." True private banking services rarely provide such things as checkbooks, ATM access, and drive-through tellers, what most people think of as a traditional banking service. Instead private bankers control such things as Private Demand Deposit Accounts, Private Savings or Investment Accounts, and Private Treasury and Certificate of Deposit accounts for their customers. A typical private banker, or trust officer, will wire funds upon request, sign contracts, handle virtually any kind of financial transaction, and generally do whatever their customer needs done, all without ever revealing the person whom they represent. Banks and trust companies are licensed by government. In the case of a British Commonwealth country, it will typically be the Minister of Finance that endorses approval for a bank formation or trust company appointment. A trust company charter, like a bank charter, is only granted after careful examination of the principals and their individual credentials, their business plan, and a review of the capital resources and other specific financial criterion. Once appointed, a licensed Trust Company is generally empowered with the rights to form International Business Companies (IBC's), Limited Liability Companies (LLC's), International Exempt Trusts, Asset Protection Trusts, (APT's), etc. They are also empowered to open and operate bank accounts for third parties, act as a registered agent, trustee, nominee shareholder, or director, and generally provide the various services of a private banker. Normally, and unless a trust company has been granted an international bank charter, a trust company officer is not permitted to hold third-party funds in their own accounts. On the other hand they may function as the officer of an IBC, for example, and be the nominee signer on that company's bank account. The power to handle third-party banking by a trust company is quite similar to the private banking services provided by the Swiss. In the case of Nevis American Trust Company, for example, it administers Exchange Bank & Trust Inc., an international private bank. Customer accounts issued by this institution are extended exclusively to clients of the trust company. For those unfamiliar with these kinds of services, the entire concept may seem unsafe. Nevertheless, according to the latest information on money handling, approximately one half of all the daily money transactions worldwide are handled through International Financial Centers. This amounts to about 2 trillion dollars in business that flows through offshore centers daily! The numbers are huge, and precisely because they are so incredibly large, no emerging financial jurisdiction can afford to let a scandal destroy it's reputation and interrupt this growth industry. Once level-headed legislation has been enacted, trust companies, registered agents, and private bankers, become the key ingredients to the success of every offshore financial center. The world of "offshore" is surrounded in its own mystique and language and for many, this aura can be disconcerting. It is worth remembering that the real differences between an offshore jurisdiction and an onshore jurisdiction are few. Any person with a reasonable grasp of their domestic business practices is equipped to begin navigating the world of international financial centers. A recent staff report commissioned by the United States Congress sums up the value in going offshore: "The offshore financial market has many advantages for rational economic operations. The reasonable expectation, when one learns that an entity is engaged offshore, is that it is there for honest economic reasons, buttressed by whatever advantages privacy holds. The major categories for offshore use are to profit from higher interest rates when lending, to enjoy lower interest rates when borrowing, to escape taxation, to enjoy greater business flexibility by avoiding regulation in an efficient market, to enjoy the protection of confidentiality when engaged in activities..." U.S. Congress Staff Report PRIVACY & CONFIDENTIALITY Keeping financial transactions private in some countries is against the law, in other countries it is a violation of law to reveal anything about anyone's banking or financial activities. Of those countries claiming its citizens are free, the largest and most recent source of personal privacy violation has become the United States. A pertinent example of their rapidly expanding citizen control laws is that financial institutions must now automatically report to government on the banking, bartering, and securities business of its private citizens. The alarming increase in citizen control laws has been achieved under the cover of fighting the "war on drugs." The assault on personal rights, including privacy, is always justified with convincing arguments about the common good and how the state is "improving" the quality of the protection it provides its citizens. On closer examination one may observe that the "common good" always coincidentally happens to benefit the political concepts of the politicians in power and that the individual's loss of personal power is transferred to the bureaucracy. In an increasingly hostile environment privacy is essential to risk planning. The clientele of offshore trust companies typically seek confidentiality in their affairs to protect assets from disasters, unwarranted third party interference, and to reduce an ever-growing burden of unnecessary disclosure. It is a trust company's business to provide legal structures and potentially private banking services to protect client assets, insure privacy, and reduce risk, taxes, and costs. A policy statement extract from Nevis American Trust Company Limited pretty much sums up the offshore attitude: We believe firmly in each individual's right to pursue aggressive and unrestrained enterprise and that it may be best developed through a secure, reliable, confidential, and tax friendly jurisdiction. INTRODUCTION TO ENTITIES AND COPRPORATIONS Throughout recorded history people have sought ways to protect what they've worked hard to create and accumulate. Protection is sometimes required from those that would lull you into believing that they are in fact your protector, such as the tax collector, the bureaucracy, and your home legal system. Modern times require a multitude of strategies to deal with the current complexity of threats. Many asset protection tools have become common place. The corporation is one of the most common such strategies. A corporation is in reality a "legal fiction;" an entity constructed of paper documents, which has most of the rights and powers of a living person. A corporation can buy and sell, own and control assets of every description, sue or be sued. Even if a single individual is the sole owner of his or her own corporation, simply conducting business through a corporation (or limited liability company) can effect considerable asset protection. The corporate entity is now so commonplace that most people have forgotten that corporations were originally formed solely for asset protection reasons. Where the corporation was formed, what information is in the public record, and the corporation's legal home jurisdiction, can be extremely important. These simple facts frequently constitute the basis of a quality asset protection and tax planning strategy. If you are properly incorporated, it is absolutely imperative that you respect the corporate entity as if it were a separate individual. One must be careful to follow the formalities of the law to ensure that the corporate shield will not be pierced. A lawsuit against a corporation may succeed against corporate assets, but a creditor will not be able to consume your personal assets and bank accounts - even if you are the sole shareholder of the corporation, provided corporate formalities have been adequately maintained. Seeking out a well informed professional advisor is an integral part of developing a well-designed strategy. He or she will likely review with you some rather "esoteric" legal structures, in addition to domestic and offshore corporations, that are just as legal and ethical as those that are more commonly known. You will need to develop new privacy habits and be cautious with whom you discuss your overall strategy. Many people mistakenly believe that tax avoidance and asset protection tools that are not well known by the majority of people are somehow less effective or less legal. This is simply not true. Why is it we instantly believe it's perfectly legal for the Rockefeller's to use offshore structures but highly suspect if it's our next door neighbor? You may be familiar with a number of legal devices but are not familiar with their asset protection and privacy value. Some structures, such as offshore asset protection trusts, seem almost mystical and are generally assumed by most to be used only by the ultra wealthy. The fact that the very rich have been using these structures for centuries attests that they are superb and effective asset protection tools that preserve wealth. And, although widely used by the super-rich, these structures are as simple as the corporate form and can be used by the common citizen. Legal and financial planners have engaged in asset protection planning for many years. Lawyers regularly advise their clients to take advantage of limited liability vehicles. America, more than any other country has developed into an extremely litigious society, which in turn has given rise to asset protection planning for the general citizenry that was previously reserved for only the best informed of the world's society. Setting up an offshore structure can be the most practical and cost effective insurance you will ever acquire to protect your hard-earned estate. It will definitely provide you enhanced privacy and access to greater investment returns, and you may be able to enjoy the added benefit of significant tax deferral or even legal tax avoidance. LITIGATION EXPLOSION Dramatic journalism, radio and television, and a high concentration of government subsidized citizens who tend to comprise the jury system have given impetus to larger and larger awards. These awards are often comprised of actual reparations, with huge sums in punitive damages. Our society has grown to expect large punitive damage awards far outweighing the actual damage to the plaintiff. Litigation, and government at large, is spinning out of control. Plaintiffs and their attorneys target the wealthy, or at least those that have assets to seize, as well as professionals and business owners, who might not be considered wealthy, but are simply "better odds" for collection than other defendants. The bureaucracy targets the same group in an effort to increase revenues. FLEXIBLE PERSONALIZED STRUCTURE An experienced asset protection attorney or consultant will have dozens of domestic and offshore core-strategies that may be used in creating a personalized program to evoke high quality protection for client's assets and simultaneously achieve specific estate planning goals. There is no panacea for asset protection and tax deferral structuring. A mechanism that will give you superior asset protection may not provide privacy or have sufficient tax advantages. There is no one "perfect" structure. An experienced asset protection planner will therefore recommend a program or strategy that may incorporate several, or even many, different devices that meet the particular needs, circumstances, and desires of a client. To be successful, a plan will require that a specialist in this field review carefully all of your relevant circumstances and fully understand your particular goals. He or she must be thoroughly informed as to your potential or actual legal exposures at the time the strategies are to be implemented in order to avoid fraudulent conveyances. You must tell your asset protection attorney everything pertinent to possible claims outstanding. The number of structures necessary to accomplish your particular needs varies according to your particular circumstances. A cookie-cutter approach where one size fits all, is rarely a legitimate approach. BUSINESSES NEED SPECIAL REVIEW Your real property and business holdings require special attention in setting up a sound asset protection strategy. These type of holdings generate liabilities that potentially effect the company's operation, as well as effecting non business assets. In comparison, assets such as stocks, bonds, furniture, and artwork, do not generate liability that might allow judgement-seeking creditors to reach your other assets. The choice of the entity you use for your business operation may have subtle but profound effects on you, your assets, and your overall asset protection system. Your asset protection counselor will be principally concerned with (1) limiting the reach of business-generated liability, and (2) limiting your non-business creditors from attacking business assets or personal assets. Your strategic plan must also consider the tax ramifications of these asset protection choices. Remember that there is no cure-all. This requires a balancing and weighing of the benefits of any particular device, and its effect on the overall asset protection structure. REVIEW OF ASSET PROTECTION DEVICES The business form you use is an important aspect of your asset protection strategy. Trusts comprise another valuable asset protection device. Not only are trusts effective for asset protection in-and-of-themselves, they usually work well in conjunction with other devices in comprising the entire strategy. As an example, you may decide that the most appropriate business form for you is a corporation. Thus protecting your personal assets from business creditors. However, the corporation's stock is a valuable asset that a personal creditor could take to satisfy a judgment. Therefore, the stock of your corporation could be placed within a trust to protect business's assets from your personal creditors. There are various types of trusts, such as: revocable trusts, irrevocable trusts, discretionary trusts, spendthrift trusts, support trusts, charitable remainder trusts, capital gains by-pass trusts, real estate privacy trusts, living trusts, Rabbi trusts, and an interesting domestic trust developed by a U.S. attorney friend of mine named Paul Young, which he calls a "Complex Trust." Various trust types, both domestic and international, may be used as devices to invoke asset protection, privacy, and tax timing strategies. Offshore Asset Protection Trusts are as "bullet proof" a device as you will find, but recent legislation has interfered with their use as an effective tax avoidance mechanism. JURISDICTIONS There are a considerable number of tax haven and asset protection jurisdictions, and each of them has their pros and cons. For example, some jurisdictions do not have treaties with the United States. Others have express laws not recognizing foreign (U.S.) civil judgements. Some jurisdictions have shorter statutes of limitations than others, less expensive set-up or maintenance costs, better business infrastructures, etc. Your counselor will evaluate your personal circumstances in determining which jurisdiction might be the best for you. While costs may be slightly higher for offshore corporate structures and trusts than their domestic counterparts, when properly employed and established, they provide, by far, the best asset protection and tax deferral opportunities available to U.S. citizens. OFFSHORE BANKING Offshore banking is often employed for privacy and asset protection reasons and there are a variety of issues and concerns regarding this course of action, but on the whole offshore banks are at least as secure as U.S. banks. The United States, in its drive to curb the drug trade and other criminal activities, has also curbed personal and financial privacy right out of existence. The way you hold your money, your accounts and your assets, will determine whether the "Bank Secrecy Act" or the "Money Laundering Control Act" will apply to your overall strategy. There are many legal and ethical devices that can and should be used to protect the assets of those in every income bracket. If you have a home, a bank account, investments, corporate securities, valuable family heirlooms, or you feel that you just cannot afford to start all over again, then your assets are at risk in today's litigious and over taxed society and should be protected. | | |
