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UNCOVERING THE

MYSTERY OF OFF-

SHORE CENTERS: The dynamics of tax havens and ensuing

investigative dilemmas.

APRIL 2019

VECTOR INSIGHTS

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Introduction

Offshore jurisdictions, also known as Offshore Financial Centers (OFCs), pose a tremendous

dilemma to government auditors and private investigators. As defined by the International

Monetary Fund (IMF), OFCs meet three criteria: low or zero taxation, loose financial regula-

tion, and banking secrecy.

The common public hears about OFCs from scandals that have rocked international busi-

nessmen and unseated political leaders. And for good cause: historically, OFCs have been

used to register companies by nefarious individuals who engage in corruption or commit

some horrendous crimes: child pornography, terrorism, and narcotics trafficking.

These companies, given names such as “Magellan Global” or “Blackstone Investments”, are

shrouded in secrecy, masking the name of its ultimate beneficial owner (UBO) behind walls

of superficial directors and paperwork. This secrecy allows high net worth individuals to

avoid taxation in their home countries by setting up administrative shop in exotic places

such as Panama and the Cayman Islands.

Indeed, many OFCs are parked in sunny Caribbean islands, while some find their homes in

Singapore or more surprising places such as the U.S. state of Delaware.

Most commonly, offshore companies are used to evade taxation, to avoid naming owner-

ship, and to escape legal confines in countries that would otherwise punish the company’s

existence.

A web showing an offshore company, Blackstone Associates Corporation, registered in

Panama but ultimately linked to Switzerland. Source: ICIJ database.

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The Offshore Process

Offshore companies are registered through a complex process of asset managers, nominee

owners, nominee shareholders, registrants, and paperwork.

When a high net worth individual wants to park their funds offshore, they oftentimes rely on

an asset manager—someone whose sole job is to assist with administrative and financial oper-

ations of a certain portfolio. Oftentimes, the asset manager has a background in finance or pri-

or directorship experience.

The asset manager makes contact with a registering firm—a company that has a license to reg-

ister offshore firms in the home country. Sometimes registrant companies are prestigious law

firms, while other times they take on names such as “Offshore BVI” and solely exist as a licens-

ing practice.

The most notorious registrant firm in offshore history was Mossack Fonseca—a Panamanian

law firm and the subject of the ICIJ Panama Papers leak. Also known as “Mossfon”, this firm

helped Syrian terrorists and Russian mafiosos park their money in Panama and other offshore

locales such as Nevada.

Once the asset manager meets the registrant firm, they specify the requirements regarding

their desired company. These requirements then influence which jurisdiction the company will

be licensed in. For instance, the Bahamas and Cayman Islands are favorable to yachting com-

panies, the Isle of Man is a good location for aviation assets, while Abu Dhabi works well with

crypto funds.

The unique legal and regulatory attributes of each offshore jurisdiction gives it a set of pros

and cons based on the characteristics of the corporation, LLC, trust, or foundation in mind.

Once the asset manager and registrant decide on a jurisdiction, they appoint nominee direc-

tors and, in some cases, nominee shareholders. Nominee individuals are the crux of the off-

shore process: they are oftentimes ordinary people who live in the jurisdiction in question and

go about their daily lives without any connection to the high net worth individual or asset

manager. They are paid a small salary by the registrant firm to act as superficial directors to

hundreds of companies, without any prior connection to the firm or its assets.

The point of nominee directors and shareholders is to maintain a cloak of secrecy surrounding

the company—to avoid disclosing the real name of the ultimate beneficial owner (UBO).

The registrant firm will then broker a Power of Attorney (PoA) contract between the nominees

and the ultimate beneficial owner (the high net worth individual). The PoA gives the ultimate

beneficial owner total control over the company, its assets, and its operations.

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The offshore process is complete with asset managers, registrant

companies, nominee directors, nominee shareholders, and Power of

Attorneys.

A map of some offshore jurisdictions, spanning six continents. Source: http://

uaeibc.blogspot.com/

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Jurisdiction Entity Offshore tax

Corporate tax Legal basis

Abu Dhabi Global Mar-ket

LTD 0% 0% Common law for corpo-rate matters

Antigua and Barbuda IBC 0% 25% Common law

Anguilla LLC 0% 0% Common law

Anguilla IBC 0% 0% Common law

Australia PTY LTD 30% 30% Common law

Bahamas IBC 0% 0% Common law

Barbados LTD 5.5% 5.5% Common law

Belize IBC 0% 3% Common law

Belize LLC - - Common law

Bermuda EXEMPTED COMPANY

0% 0% Common law

Bermuda LLC 0% 0% Common law

British Virgin Islands BC 0% 0% Common law

Bulgaria OOC 10% 10% Civil law (German)

Cayman Islands EXEMPTED COMPANY

0% 0% Common law

Cayman Islands LLC 0% 0% Common law

China WFOE 25% 25% Civil law

Cook Islands LLC 0% - Common law

Cook Islands IC 0% - Common law

Curacao BV 22% 22% Civil law (Dutch)

Cyprus LTD 12.5% 12.5% Mixed (civil and com-mon)

Dominica IBC 0% 25% Common law

Dubai (Jebel Ali) NRDC 0% - Common law for corpo-rate matters

Estonia OU 20% 20% Civil law (German)

Georgia LLC 15% 15% Civil law

Germany GMBH 33% 33% Civil law

Gibraltar LTD 0% 10% Common law

Guernsey LTD 0% 0% Mixed (customary, French civil and com-mon)

Hong Kong LTD 0% 16.5% Common law

Hungary KFT 9% 9% Civil law (Roman)

Hungary ZRT 9% 9% Common law

CHARACTERISTICS OF CORPORATIONS AND LLC’S IN OFCs

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Jurisdiction Entity Offshore tax

Corporate tax Legal basis

Ireland LTD 12.5% 12.5% Common law

Isle of Man LTD 0% 0% Common law

Isle of Man LLC 0% 0% Common law

Japan GK 34.6% 34.6% Civil law

Jersey LTD 0% 0% Mixed (Customary, French civil and com-mon)

Labuan LTD 3% 3% Common law

Liechtenstein AG 12.5% 12.5% Civil law (Swiss)

Liechtenstein GMBH 12.5% 12.5% Civil law (Swiss)

Luxembourg SA 18% 18% Civil law (Napoleonic code)

Luxembourg SARL 18% 18% Civil law

Malaysia SDN BHD 0% 24% Mixed (Common and Sharia law)

Malta LTD 35% 35% Mixed (Civil and Com-mon)

Marshall Islands NRDC 0% - Common law

Marshall Islands LLC 0% - Common law

Mauritius AUTHORIZED COMPANY

0% - Mixed (Civil and Com-mon)

Mauritius GBL COMPANY 15% 15% Mixed (Civil and Com-mon)

Netherlands BV 25% 25% Civil law (Napoleonic code)

Nevis IBC 33% 33% Common law

Nevis LLC 33% 33% Common law

Panama SA 0% 25% Civil law

Panama SRL 0% 25% Common law

Philippines CORP 30% 30% Common law

Ras Al Kaimah IC 0% - Common law for corpo-rate matters

Saint Lucia IBC 0% 30% Common law

Saint Vincent and the Grenadines

BC 0% 30% Common law

Saint Vincent and the Grenadines

LLC - - Common law

Seychelles IBC 0% 33% Mixed (civil and com-mon)

Singapore PTE LTD 0% 17% Common law

South Korea YUHAN HOESA 27.5% 27.5% Civil law

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Jurisdiction Entity Offshore tax

Corporate tax Legal basis

Spain SA 25% 25% Civil law

Switzerland GMBH, SARL 7.83% 7.83% Civil law (Swiss)

Thailand CO LTD 20% 20% Mixed (civil and com-mon)

Thailand BOI PROMOT-ED COMPANY

0% 0% Mixed (civil and com-mon)

United Kingdom LLP - - Common law

United Kingdom LTD 19% 19% Common law

Vanuatu IC 0% - Mixed (Customary, French civil and Com-mon)

Vanuatu LTD 0% 0% Mixed (Customary, French civil and com-mon)

Delaware Corp 21% 21% Common law

Delaware LLC - - Common law

Wyoming LLC - - Common law

Why the Caribbean?

Why are so many OFCs situated in the Caribbean? The answer lies in the home economies

of Caribbean islands. Oftentimes, countries such as the BVI and Cayman Islands have very

small economies that rely on tourist dollars and financial fees to survive. Lacking natural

resources or robust infrastructure to facilitate trade, they succumb to lax regulations on

offshore companies to draw in millions of dollars.

For instance, company incorporation fees in the British Virgin Islands now generate 51.4%

of government revenue.

A yachting marina in the British Virgin Islands.

Source: Google Images

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Jurisdiction Type Choice of Law Binding

Ignore Foreign Judge-ments?

Specific Exclu-sion of Foreign Law

Antigua and Barbuda Trust Yes Yes Yes

Bahamas Trust Yes Yes Yes

Belize Trust Yes Yes Yes

Bermuda Trust Yes No Limited

British Virgin Islands VISTA Trust Yes No Limited

British Virgin Islands Trust Yes No Limited

Cayman Islands STAR Trust Yes No Limited

Cayman Islands Trust Yes No Limited

Cook Islands Trust Yes No Limited

Gibraltar Trust Yes No Yes

Guernsey Trust Yes No Limited

Hong Kong Trust No No No

Isle of Man Trust Yes Yes Yes

Jersey Trust Yes No No

Nevis Trust Yes Yes Yes

New Zealand Trust Yes No No

Singapore Trust No No No

Turks and Caicos Island Trust Yes No Limited

CHARACTERISTICS OF TRUSTS IN OFFSHORE HAVENS

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Jurisdiction Entity Min Assets Offshore tax Tax Legal basis

Austria Private Foundation EUR 70,000 25% 25% Civil law (German)

Bahamas Foundation USD 10,000 0% 0% Common law

Barbados Foundation BBD 10,000 0% 0% Common law

Cayman Islands Foundation Company - 0% 0% Common law

Estonia Foundation OU - - - Civil law

Gibraltar Foundation - 0% 10% Common law

Guernsey Foundation - 0% 0% Mixed (Customary, French civil and com-mon)

Isle of Man Foundation - 0% 0% Common law

Jersey Foundation - 0% 0% Mixed (Customary, French civil and com-mon)

Labuan Foundation - 0% 24% Mixed (Common and Sharia)

Liechtenstein Sitffung/Foundation CHF 30,000 12.5% 12.5% Civil law

Mauritius Foundation - 0% - Mixed (Civil and Com-mon)

Nevis Multiform Founda-tion

- 0% - Common law

Panama Private Interest Foundation

USD 10,000 0% 25% Civil law

Switzerland Stiffung/Foundation CHF 50,000 7.83% 7.83% Civil law (Swiss)

Vanuatu Foundation - 0% 0% Mixed (Customary, French civil and com-mon)

CHARACTERISTICS OF FOUNDATIONS IN OFCs

The Caribbean jurisdictions of the

Bahamas, Cayman Islands, Panama,

Nevis, and Barbados where offshore

foundations are common. Source:

Google Maps

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Geographic Patterns:

In July 2017, four researchers (Bernardo, Fichtner, Takes, and Heemskerk) pooled together a

dataset on approximately 98.3 million offshore companies. The researchers subsequently

found patterns between the locations that were storing offshore funds.

The researchers made a distinction between sink OFCs and conduit OFCs.

Sink OFC= the ultimate offshore destination of money, one that is at the “retrieving end” of

the transfer process. A common sink OFC is Luxembourg.

Conduit OFC= an offshore jurisdiction that acts as a transfer point between original source

and sink OFC. A common conduit OFC is the Netherlands.

The pattern would then go as follows:

ORIGINAL SOURCE OF FUNDS —> CONDUIT OFC —> SINK OFC

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Conduit OFCs:

The Netherlands, United Kingdom, Switzerland, Singapore, Ireland

Sink OFCs:

British Virgin Islands, Marshall Islands, Belize, Taiwan, Malta, Gibraltar, Jersey, Mauritius, An-

guilla, Bermuda, Luxembourg, Liberia, the Cayman Islands, Nauru, St. Vincent and the Grena-

dines, Samoa, Cyprus, Guyana, Lichtenstein, Seychelles, Hong Kong, Curacao, the Bahamas,

and Monaco

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Case study: Apple diverts billions offshore

By the end of fiscal year 2017, the U.S. tech giant Apple had more than $250 billion in cash

stored offshore. Most of the money was parked in Ireland, where it created several subsidiar-

ies and attributed billions of dollars in profits made outside of the U.S. to them. It then avoid-

ed paying mammoth tax bills by making it look like the Irish subsidiaries were being run from

California.

In 2013, the U.S. Senate investigated Apple’s offshore activities, and in 2014 the tech giant

was fined $14.5 billion by the European Union for its evasion practices. $14.5 billion is a tiny

fraction of Apple’s net worth—approximately $1 trillion. That means that Apple only had to

pay a fine worth 1.4% of its net assets for nefarious activity.

In 2014, the Irish government allowed Apple to pay a tax rate of just 0.005%, far lower than

America’s then corporate tax rate of 35%. If Apple was storing $250 billion offshore at this

time, it would have saved $86.25 billion in one year. That’s roughly the amount that the U.S.

Congress set aside for Medicare ($66.03 billion) and food and agriculture ($26.28 billion)

funding in 2015. In other words, Apple’s offshore tax savings could instead be spent to sustain

key sectors of the U.S. population.

After the EU cracked down on Ireland, Apple moved the $250 billion in assets to Jersey, a

small island off the coast of France known for being a tax haven.

In our table “Characteristics of Corporations and LLCs in OFCs”, you can see that Jersey’s off-

shore and corporate tax rates are both 0%.

Apple’s logo. Source: Google Images

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CONCLUSIONS AND INVESTIGATIVE SOLUTIONS

Private investigators are often asked by a client to determine the ultimate beneficia owner-

ship of an offshore company in order to trace the origin of suspect or illicit money. Finding

the UBO and more identifying details on the company can be crucial in “winning” an investi-

gative case, or at least unlocking pivotal information and proving the investigator as extreme-

ly capable to the client. Given the heavy protection surrounding OFCs, investigators must rely

on a few methods to try to unlock UBOs:

• Developing discrete sources who work inside the registry office of a home nation. These

sources provide paperwork available within the registries.

• Relying on journalists to leak troves of data provided by whistleblowers inside registrant

companies (i.e. the Panama Papers leak vis a vis Mossack Fonseca)

• Alerting law enforcement in the United States or another country of the highly illegal ac-

tivity behind an offshore account, thereby effecting seizure of the suspect high net worth

individual’s assets and gaining information on its content

In the meantime, the general public at large must continue to lobby OFC countries to publi-

cize their company databases as part a greater international movement.