The Paradise Papers: How Ridiculously Easy It Is For The Rich To Avoid Taxes

A little too easy…
Grand Cayman, Cayman Islands

Grand Cayman, Cayman Islands

The revelations in the Paradise Papers followed quickly on the release of the Panama Papers (English majors please note the allusion to the Pentagon Papers).

Both of these Papers were revealed by an organization with the cumbersome name of The International Consortium of Independent Journals (ICIJ) — a group in need of a new name and a publicity agent. That name gives the impression of some mining cartel intent on keeping up the price of gold and diamonds.

To the contrary, it is a group of dedicated journalists who recognized that they could not honestly report on tax evasion when they were working for mainstream media. The media barons and major advertisers are prime users of the tax evasion system. So these journalists gave up successful and lucrative careers to dedicate themselves to exposing offshore tax fraud. The Panama and Paradise Papers are a tribute to their courage, sacrifice, and dedication.

However, the mainstream media uses the press tactic of ‘burying the lede’ by focusing on political leaders or corporate use of loopholes to the exclusion of a more serious underlying problem: the billions of dollars that the 1% do not pay in taxes so that we bear the burden of maintaining the upkeep of the country and its growing debt. Of course, everybody hates paying taxes. The super wealthy are no different in attitude, only in means. They can afford the ways to avoid paying taxes. In 2012, the Tax Justice Network estimated that between $21 trillion and $32 trillion — the size of the U.S. and Japanese economies combined — was hidden in secrecy jurisdictions. If the tax evaded by wealthy individuals was collected, it would likely cover most of the annual deficit in each of the G7 countries.

However, most reporting has obscured the tax fraud aspect, the most outrageous aspect of the disclosure. There are two types of these schemes: one is evasion, i.e. tax fraud, by which individuals do not pay taxes. At least 31,000 of the individual and corporate clients included in the Paradise Paper records are U.S. citizens or have U.S. addresses, more than from any other country.

The other scheme is tax avoidance, by which large corporations use government-provided loopholes and willful blindness to reduce their taxes paid by pretending to have made sales or expenses in low tax jurisdictions and reduce tax liability in the US. Apple and Amazon are examples that have been in the news for the avoidance type.

In this article, I’m going to focus just on how wealthy individuals elude the tax man, how easy it is to do, and how easy it would be to stop it if the politicians of either party had the will to do it. That would mean, of course going against the wishes of their wealthy campaign donors. The corporate avoidance schemes will come in a later article.

You, the average taxpayer, probably pay about 20% to 30% of your annual income to your government in the form of income taxes. So, as you drive down an upscale street, lined with sixteen-room mansions set back on professionally landscaped lawns, you might be forgiven for thinking that they must be paying a whopping load of taxes. But that is not the case. That guy may be paying little or no taxes — they could be paying less than you.

While you and I might think that paying taxes is the price of living in a wonderful country, the 1% thinks differently. To them, dodging taxes is essential to wealth preservation. Taxation is tyranny.

As flamboyant New York business tycoon Leona Helmsley famously said to her maid:

“We don’t pay taxes. Only the little people pay taxes.”

During the First World War, when the governments introduced income taxes, the intent was to tax the wealthy more than lower-income residents. Today, however, the reverse is true. Thanks to complexity and loopholes in the tax rules, combined with a double standard in enforcement, the middle class pays far more taxes than some in the moneyed class. As well, the Income Tax Act has perfected the technique of appearing to do one thing while doing the opposite.

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Do-It-Yourself Tax Evasion

Say you have a million or two to hide from the greedy Taxman. No problem: it’s a one-stop-shop process. The components will fall into place with the efficiency of a high-tech assembly line.

First off, you have to find an offshore service provider. If you can flash sufficient cash, your local banker will put you in touch with such a provider. Or your lawyer or accountant might make a recommendation. There are many websites that blatantly offer thinly disguised tax evasion, but why take a risk of a public source when there are so many local advisers nearby operating in the shadows. Regardless, you will have at least eighty tried and thoroughly tested secrecy jurisdictions around the globe from which to choose.

Let’s say you choose the Cayman Islands for your bank account. This British Overseas Territory encompasses three islands in the Western Caribbean, the largest of which is Grand Cayman.

BTW: the United Kingdom — because of overseas territories like the Cayman Islands, the British Virgin Islands and so on — is a much larger secrecy jurisdiction than Switzerland.

If you choose to visit the Caymans while you attend to the paperwork, it’s not a bad vacation stay. A day of deep-sea fishing is a common perk for opening an account. If it’s your first time, I suggest you make a pilgrimage stop at the Ugland House in George Town on Grand Cayman Island, the registered office for thousands of global companies. It is said to be the base for launching the Cayman Islands into one of the most famous offshore banking centers.

In the Caymans, your service provider, a local law firm, will offer a choice of cookie cutter plans with layers of trusts and corporations in other secrecy jurisdictions, which will make it impossible for the tax man to pin down who actually owns the account. An economy option is adequate for most purposes.

Your service provider will engage a frontman. They do a high volume so their charges may be as low as $100. Their name — and their name alone — will appear on any documents related to the account. These guys do this for a living. They will not reside in the same country as you so as not to be subject to your country’s taxman.

The Paradise Papers disclosed some new examples of this practice. An out-of-the-way small Utah bank acted as such a frontman so Russians and other foreigners could register their private jets appearing to be Americans.

The next step is to establish a trust.

The Three Secret Documents

A trust is essential because it is never publically registered. They can be created just like a contract, even on the back of a napkin. Most trusts in tax plans are drafted by lawyers and are kept on encrypted computer files.

The trust gives rise to a split in ownership. A mother may create a trust by putting $1 million savings bonds in trust for her two minor children appointing her lawyer as trustee with directions to pay the income to the children until they reach 25 and then pay the principal (corpus) to them then.

The trustee is the legal owner. He has the sole right to deal with the trust asset such as receive the interest and pay it out according to the terms of the trust and has sole control of the trust. The children are the beneficial owners. On these terms, the mother no longer has any control in law over the funds. Thus we have two classes of people who can legally claim the title owner: trustee and beneficial owner.

In tax evasion schemes, the trustee is the nominee noted above, you are the beneficial owner. The nominee then signs a power of attorney giving sole rights over the trust back to you. The power of attorney need not be registered either — secret document number two.

The trust as yet has no assets. The asset will eventually be shares in a corporation to be incorporated.

Next, we have the very helpful rule that corporate registrations in the US (and other G20 countries) only require disclosure of directors but never shareholders. The nominee’s name will appear on the corporate registration as director. As a double-blind, the shares are issued by the lawyer in the nominee’s name and subject to the secret power of attorney.

Tax Plan Continued

To establish your trust, I recommend you use the Seychelles Islands, way in the middle of the Indian Ocean. And, yes, experienced island lawyers are included in your package. Another plus, the Seychelles refuse to enforce foreign court orders. They don’t depend on foreign trade, but are economically self-sufficient from tourism — and selling tax relief. Your taxman cannot get a court order for disclosure enforced in the Seychelles. You have an impenetrable second firewall.

Another perk, if you visit: the Seychelles are a favorite playground of celebrities of all types, movie, sports what have you. They combine holidaying with tax evading.You might get to share a beach with your favorite popstar.

You must now select a jurisdiction for the corporation that will apparently own the trust — be its “legal” owner. I suggest returning to the Caribbean and the lovely British Virgin Islands. Like the Caymans, this archipelago of four main islands and numerous small ones is a British Overseas Territory. The BVI contains as much as 40% of all offshore corporations worldwide and financial services — along with tourism — drive its economy.

The Chinese respectfully call it the “New Forbidden City.”

Your BVI lawyers will assign you an ocean-blue, four-inch by four-inch mailbox in one of the many long rows found in the centre of Tortola, the main island, for the bargain rate of $22 a month. The BVI creed declares the islands are the true defenders of democracy. They provide the ultimate freedom of choice: the freedom not to pay taxes.

As an extra precaution, your lawyer will use another law firm to register the corporation. Only its name will be shown on public record as the owner’s lawyer.

Now you have an impenetrable package. An account in the Caymans, owned by a secret trust that resides in the Sechelles, holding shares in a corporation incorporated in the British Virgin Islands by your nominee who has executed a secret power of attorney giving you full control. Your name as beneficial owner never appears on public records but is kept safe in the files of your service provider, which is often a global bank, and your offshore lawyer.

All are in secrecy jurisdictions. The only public document is the corporate registration. If the government does get an order to disclose the director’s name publicly, that registration would be by your frontman in some foreign country who is not a taxpayer of your country. The trust and power of attorney remain in the lawyer’s file. You, the beneficial owner, are never exposed.

Only a bank employee whistleblower or a hacker could pierce this plan.

A note to remember: The Cayman Islands were pirate headquarters in the early days of North American exploration. You’ve heard of its most famous resident, Captain Morgan. Makes you believe in reincarnation, doesn’t it?

My personal favorite plan of action for getting the money into your new secret piggy bank is the phony lawsuit. Your frontman sues you declaring you ran him down in the Caymans in a rented car. Because you were drinking and driving, your rental insurance was canceled. You, not your insurer, have to pay the victim. The phony plaintiff claims he is a 30-year-old banker with a promising future now rendered a quadriplegic. As luck would have it, just the day before the accident, he was accepted on full scholarship to Harvard Medical School where he planned to start a second career. It’s a multi-million dollar personal injury claim.

All the usual lawsuit documents are prepared so it appears legit. You write a check in full settlement of the lawsuit. For the cost of a courier, you move the money to the Caribbean. Your nominee deposits it in your Caymans account. You can now use the money without trace outside of the US.

Bringing It All Home

So, how do you get the money back home? You’ve seen the crude movie methods of cash in false-bottomed suitcases or taped to your body, or diamonds set in a cheap necklace. Such methods are not particularly effective, however.

Take the case of California rapper Snoop Dogg. In the summer of 2015, Snoop Dog tried to sneak $422,000 in cash through an Italian airport in his Louis Vuitton luggage. He was stopped by the police. In the European Union, and in many other jurisdictions carrying more than €10,000 in cash triggers anti-money laundering laws.

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Snoop Dogg’s agent explained that it was a minor administrative infraction in not declaring amounts more than €10,000 on leaving, a mere misunderstanding. But the leaving is not the issue. Snoop Dogg earned the funds legally.

The question is why did he take the risk of carrying so much cash when he could have transferred the amount through a bank with the click of a mouse? Did he not want a record of the cash? What would Snoop Dogg do with the cash earned in a foreign country for which there was no record? Would he declare it on his US tax return? None of the reporters who cover the celebrity beat asked those questions.

The truth is you don’t have to use these movie-cliché methods. Creative methods abound. Of the many artful ways there is a morbid one worthy of the evil genius of Sherlock Holmes’s nemesis, Moriarty. It’s the phony insurance policy issued by a mailbox foreign insurance company.

There are multitudes of banks and insurance in the Caribbean islands that are no more than an address on a mailbox. You can incorporate them with the same ease as incorporating a company in the US. The cost is a bit more. Last time I saw one, it was $75,000.

This scheme revolves around the fact that an insurance policy payout is not taxable in the hands of the named beneficiary. So, how do you put it to work?

You must know someone living in your home country who is dying; everyone does. Perhaps a relative. Say you take out an insurance policy on dear Uncle Joe’s life. This is illegal in most countries, but this is not with a real insurance company. This phony company exists only to facilitate this type of tax evasion.

When your Uncle Joe dies, the insurer pays. The cash goes into your bank account tax-free. How can the taxman prove otherwise? You have a policy and Uncle Joe’s valid death certificate issued by your own government. The money is home free.

If the phony insurance policy is too gruesome for you, you can find something more appealing in the summaries of the multitude of methods on the IRS website. A simple workaround would be to get a credit card from a foreign bank and pay it off through your secret bank account.

If you’re not the DIY type, there are service providers. In a report for the South China News, Peter Guy tells of one. For a modest 22% commission, the service will deliver suitcases of cash to New York or Vancouver. Guaranteed.

Offshore secrecy jurisdictions are no longer reserved for the 1%. The innovative wealth-management industry has brought offshore within the means of the upscale. Do an internet search. You can set up an offshore account in any of the eighty or so secrecy jurisdictions for as little as $1,500. Beware: this is trickle-up marketing — to get you in the door. To achieve true anonymity, you will need more of the service.

As increasing affordability will permit tax evasion to spread, our deficit will grow in parallel. It’s impossible to really estimate how much this tax evasion by the superrich costs a country. The Washington Post estimated that for 2016 the budget deficit was $590 billion and estimated tax evasion was $600 billion.

It’s easy to do and easy to stop. Just require that everyone who applies for incorporation discloses under oath who the ultimate beneficial owner of the shares is, and either that there is no trust anywhere in the ownership chain or a declaration revealing who the beneficiaries of the trust are. This could fit on one page.

Sounds like a motherhood issue for any politician. Curious how none are picking it up and no newspaper is waging a campaign against tax evasion by the super-rich.

Part Two Of This Series:

Tax Evaders Evade Criminal Consequences While Whistleblowers Suffer

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