The October 20 headline was a familiar one, at least to us here at The Nestmann Group: “Arrest warrants issued for founders of Panama Papers firm.”
As reported by Yahoo News and other outlets, late last month Germany issued international arrest warrants for the founders of the law firm at the center of the “Panama Papers” data leak, which we first discussed in 2016.
At the time, the headlines describing the Panama Papers leak looked like this:
“Giant Leak of Offshore Financial Records Exposes Global Array of Crime and Corruption“
“Massive Leak Reveals the Global Elite’s Secret Cash Havens“
“Inside the Firm that Helps the Super-Rich Hide Their Money“
We observed then that what this massive data leak really proved was than 99%, or more, of offshore investments were perfectly legal and logical under the unique circumstances of the clients who made them. Indeed, according to the International Consortium of Investigative Journalists (ICIJ), which coordinated the review of the leaked documents, more than 214,000 offshore entities appear in the leak. Yet only a handful of them were tied to any wrongdoing.
A better headline would have been, “Panama Papers Proves Most Offshore Investments Are Legal.” But of course, headlines like that don’t “sell” as effectively as more sensationalistic ones.
These facts are easily overlooked in the hyper-politicized posturing over anything even remotely connected to the offshore world. And you can expect further explosive rhetoric in the weeks and months ahead, as Congress debates what to do about the revelations made in yet another data leak, this one exposed by Buzzfeed News. “The FinCEN Files” consist of thousands of documents leaked by a whistleblower within the Financial Crimes Enforcement Network (FinCEN). This secretive Treasury bureau is responsible for processing “suspicious activities reports” from American banks and other financial institutions.
The leaked documents according to Buzzfeed, reveal how the “giants of Western banking move trillions of dollars in suspicious transactions, enriching themselves and their shareholders while facilitating the work of terrorists, kleptocrats, and drug kingpins.”
But again, this is nothing new. We’ve pointed out for years that the United States is, by far, the best place in the world to launder money. For instance, in 2012, the Department of Justice (DOJ) quietly announced that banking giant HSBC had agreed to pay a $1.9 billion fine and admit that it had inadequate compliance and anti-money laundering controls in place. This sum amounted to about a month’s worth of profits for the bank. No one at HSBC faced criminal prosecution for this activity. The bank was indeed, as some pundits remarked, “too big to jail.”
Another too big to jail bank is Standard Chartered Bank. In 2012, it entered into a deferred prosecution agreement with the DOJ. The agreement acknowledged a deliberate, widespread, and years-long conspiracy “to engage in transactions with entities associated with sanctioned countries, including Iran, Sudan, Libya, and Burma” involving at least $227 million. But neither Standard Chartered nor its executives faced criminal penalties. Instead, the bank agreed to forfeit $227 million, or about two weeks of profits for the bank.
More recently, in 2015, the FIFA (Fédération Internationale de Football Association) bribery scandal erupted. The DOJ indicted 14 current or former FIFA officials for wire fraud, racketeering, and money laundering. The DOJ claims that the accused relied on the use of “trusted intermediaries, bankers, financial advisors and currency dealers, to make and facilitate the making of illicit payments.” The banks involved are among the largest in the United States, including JPMorgan, Bank of America, HSBC, Citigroup, and Standard Chartered. But none of the banks, or their executives who presumably approved their misconduct, were ever indicted.
Indeed, the evidence suggests that the Uncle Sam has neither the intention nor the incentive to end money laundering. Rather, it seeks nothing less than a monopoly on it. It pursues this monopoly by forcing non-US financial institutions to impose much stricter rules than those that are enforced domestically. That’s especially true when it comes to the most profitable customers of US banks, such as rogue nations, drug cartels, and the like.
Still, it’s hard to overcome the stigma associated with offshore investment with headlines like the above dominating the airwaves and the Internet. But as the ICIJ admitted, there are perfectly valid reasons to use offshore companies and trusts. Here are a few of them:
Buying real estate in another country. Many nations, such as Mexico, prohibit foreigners from holding property in their own name in certain areas of the country. Using a Mexican trust (called a fideicomiso) overcomes this obstacle.
Avoiding probate formalities. Many countries, especially those with a “civil law” tradition (e.g., Spanish speaking countries), require assets held in your own name to go through a time-consuming and expensive probate process. Panama is a notorious example, with probate formalities extending for months or years and often eating up 10% or more of the value of the property being transferred to the next generation. Using a Panamanian foundation legally avoids this nightmare.
International tax planning. It’s true Bernie Sanders and a host of other do-gooders think it’s morally wrong, but it’s using offshore entities to reduce taxes is perfectly legal. Multinational corporations like Apple and Google have this strategy down to an art and have dramatically reduced the taxes they pay as a result. Indeed, all companies have a fiduciary duty to their shareholders to not pay a dollar more in tax than is legally required.
Asset protection planning. Multi-million-dollar judgments are commonplace in the “land of the free.” It’s only prudent for American doctors, entrepreneurs, and others who have accumulated wealth for retirement to place a portion of their nest-egg assets offshore. In many cases, these arrangements involve international companies and/or trusts.
To which we’d add our own reasons to internationalize:
Investment continuity. The attacks of September 11, 2001 demonstrated the vulnerability of the US financial infrastructure. US securities markets were closed for four days after the attack. During that time, US investors with only domestic bank or brokerage accounts couldn’t trade. But US investors with foreign accounts could trade foreign securities on foreign exchanges.
An investment lifeline for individuals and families threatened by persecution or totalitarian governments. Technological innovation and falling legal barriers have made it possible for governments to monitor citizens’ financial dealings to an unprecedented extent. The Nazis identified victims from paper records. How much more efficient would their extermination (and confiscation) efforts have been if they were equipped with modern technology? Offshore investments can be a lifesaver if the worst happens where you live.
Reduced portfolio risk. Globally diversified investment portfolios carry significantly less long-term risk than those concentrated in only one market. Investment risk is diversified across different securities markets, currencies, and legal systems. A study by the Federal Reserve Bank of Dallas demonstrates that a portfolio with 20% non-US stocks would have experienced both higher returns and lower volatility than a portfolio consisting of US stocks alone.
Of course, it’s important to conduct due diligence on any foreign investments you’re considering. If you’re interested in buying real estate, for instance, hire a lawyer to ensure that the seller actually owns the property and that no third party has made a legal challenge to it. If you’re buying precious metals, deal only with recognized dealers that can prove that you have legal title to the metals you’ve purchased. And if you’re opening an offshore bank account, review the annual report to ensure that the bank is well capitalized.
Also, be certain that you understand your tax and reporting obligations when you invest internationally. International real estate holdings and precious metals you have direct control over (e.g., in a safe deposit box) are non-reportable. But most international account relationships are reportable.
The bottom line is that despite the anti-offshore frenzy orchestrated by the media and government, it’s perfectly legal to invest and do business internationally. Moreover, in many cases, an offshore company or trust can make it easier and more efficient to do so.
If you’re looking for resources on how and where to invest internationally, we can help. Check out our website at www.nestmann.com, or sign up for one of our membership options to learn more about your options.
Finally: Don’t be paralyzed by fear of social disapproval when you start your offshore journey. The only money you stand to lose is your own.