Financial Privacy: New strategies for confidential offshore banking

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Yesterday's offshore services:
Stale but still for sale

Safeguarding financial privacy has been made difficult, but some have reasons to pretend it's still business as usual. Learn what they tell you, why you might buy it, and what you might not know.

OFFSHORE-FOX.COM
with Peter Widder

What they tell you, and
why you might buy it

Answer one of the many ads offering to lower your tax burden, increase your assets and protect your financial privacy and you are likely to get a format reply.

The format reply will detail a format solution -- and it will be based around a simple combination of an offshore company with an offshore bank account.

It might not look a simple combination to you. It might come with more options than you care for:

Choice of jurisdictions,
choice of companies,
choice of banks,
choice of add-on services,
choice of corporate bits and pieces,
choice, choice, choice...

But however large the menu of options, the underlying strategy has been the same for years: offshore company, offshore bank account.

The same strategy, the same jurisdictions. The same as last year, the same as the year before that, the same as five years ago.

The offshore world is changing? No problem. Offshore company, offshore bank account. Offshore is offshore.

You have individual needs, priorities, concerns? Of course you have. All clients have. No problem! Offshore company, offshore bank account. One size fits all.

Buy now.

• • •

This kind of attitude has served the needs of a profitable paper-shuffling offshore industry for years. Even today, it is business as usual for most offshore incorporators as they continue delivering nothing but piles of expensive paper and easy administrative services.

Unwilling to change their traditional business model, most chose to ignore the dramatic changes in the sector and are failing to provide what today's offshore climate demands most: honest, unbiased, relevant and up-to-date advice.

This kind of attitude does not serve well the interests of today's privacy seeker.

What they tell you

At its most basic, you will be offered an International Business Company (IBC) or a similar corporate entity, often from a shelf list of corporations in those jurisdictions where your incorporator has a cosy relationship. Bulk discounts and profit margins often dictate what is "best" for you. You should note that the actual cost of registering an offshore company can be as little as $75 locally even though you will pay much more as the end user.

Ignoring the dramatic changes in the offshore sector, it is business as usual for most offshore incorporators as they continue delivering nothing but piles of expensive paper and easy administration services.

In addition to the offshore company formation, your offshore provider will sell you registered office services (usually a legal requirement) for your new company, as well as an offshore bank introduction (bank account opening).

The choice of offshore banks on offer will be based around the same cosy relationships, and not necessarily in response to your privacy-related or other concerns. In addition, being "introduced" will not get you an easier ride when it comes to the account opening as you might think -- in this case, introduction means no more than being given the bank's name, account opening forms and possibly a few tips on how to complete them.

You may also end up paying for various notarisation / certification charges, corporate seals, useless "de luxe" corporate kits, shipping and other "essentials". The total bill, depending on which end of the market you choose, will range from around $1,000 through to $5,000 and upwards.

Why you might buy it

Most clients will be sold on the flexible nature of the offshore company, the associated tax benefits and perhaps the deceptively simple processes of re-invoicing and other business mechanisms available through the offshore jurisdiction.

Additionally, you might be told, a range of further benefits will be enjoyed by moving offshore: complete financial privacy, shelter from confiscatory lawsuits and inspection by revenue authorities.

But this is all yesterday's news.

What you might not know:
Transferring funds offshore

Financial surveillance, the merging of the definitions of tax avoidance and evasion and the reverse burden of proof has created an obstacle course that will defeat the ill-informed.

To start with, asking your local bank to transfer money to the account of Palm Tree Holdings Inc. at a bank in Nassau -- even though a simple and legal procedure -- may be enough to arouse suspicion and begin a chain of events which can lead to your onshore funds being confiscated or worse.

The unfounded suspicions of your local bank aside, a direct money transfer from your onshore bank to your "super-secret" offshore bank account always somewhat negates the privacy benefit of banking offshore anyway.

A responsible offshore provider will not stop at making a sale and leave the client on his own once the company incorporation and account opening has been completed. Where appropriate, assistance and advice with the transfer of onshore funds to an offshore bank must follow.

It is interesting to note the existence of grey-area "transfer pricing" schemes, specifically serving those who seek to transfer funds offshore in silence. While this is an area that has grown rapidly in response to client demand, it is one of those territories that's best kept fenced off from the unscrupulous. Consequently, entrance will usually require a discreet introduction.

Before hastily marching your assets offshore, ask your offshore provider about any confidential funds transfer services (it is a sensitive area so tread with caution). You might be surprised by the number of options available.

What you might not know:
Offshore privacy and bank secrecy in practice

Provided you do manage to transfer your funds offshore in complete privacy, can you be sure that they will remain so?

Many offshore providers do not care too much about giving proper advice as to the suitability of offshore banks and jurisdictions. Rather, they will suggest opening accounts with whichever handful of banks they have relationships with, wherever these may be. St. Peter's Port, Guernsey and St. John's, Antigua are both "offshore", and that's all that apparently seems to matter.

Beware. Nowadays, "offshore" no longer always means private.

Beware. Nowadays, "offshore" no longer always means "private". Getting involved with the wrong jurisdiction -- or the wrong bank -- is not uncommon, and hasty choices based upon poor advice may be the source of long-term problems.

The choice of offshore banking jurisdiction deserves extreme care. From a privacy point of view, an ideal banking haven will provide the three following factors in equal measure:

1. Legally enshrined, and/or culture of, bank secrecy
2. Stability of the jurisdiction and your chosen bank
3. Low profile, so as not to raise undue suspicion

Finding such financial nirvanas has become more challenging than it once was.

Banks in the Bahamas, along with a whole raft of well-known, traditional offshore havens, will now willingly divulge information upon request. Others may be hooked by onshore authorities involved in so-called "fishing trips".

Most would agree a fishing trip sounds a rather agreeable activity -- but perhaps not so for the fish that get caught. In the context of offshore banking, a "fishing trip" refers to a deceitful information-gathering exercise by onshore authorities. The purpose of an "offshore fishing trip" is to deliver a broad spectrum of apparently immaterial and non-specific questions, all in the hope that one or two of the answers will be sufficient to mount a prosecution back home.

Credit cards linked to high-profile offshore banking havens have equally been used to track down people who supposedly spend more than might be reasonably expected from their income -- the conjecture being that anyone with money offshore must have something to hide.

In 2000, tax authorities in the United States (IRS) were granted access by a Miami court to thousands of MasterCard and American Express credit card accounts held by U.S. taxpayers in three offshore banking havens. The IRS claimed that they were looking for high-value purchases, airline tickets and so on, in order to establish who was living beyond their means.

Before committing yourself to a particular offshore jurisdiction, seek hard confirmations from your offshore provider regarding not only the existence of sufficient legislative provisions, but also if and how established business practices protect confidential information.

You should further question the record of the jurisdiction as regards its resistance to multi-lateral information exchange protocols. Put more simply, are they following the new wave of anti-privacy thinking or resisting it?

What you might not know:
Nominee services and privacy protection

The intensified efforts by onshore authorities to access offshore data and identify those citizens with offshore holdings have resulted in a run for cover. As the strength of traditional legislative barriers is being tested, it has become the norm to seek supplementary defences.

The appointment of nominee directors and nominee shareholders is so wide amongst clients of offshore services that virtually all offshore incorporators will offer this service, either themselves or through a third-party management company.

Nominee services
and offshore business

The concept of nominating professional directors and shareholders is as old as the offshore business itself.

Offshore companies involved in trading relationships with onshore entities, such as those participating in transfer-pricing schemes, rely on nominees to demonstrate that they are truly offshore -- that is being managed from an offshore jurisdiction, and not from the beneficial owner's domicile. This is important if any tax advantages are to be gained.

Some appoint professional directors in order to gain relief from the administrative headaches connected with their offshore company. A company administrator will ensure that all legislative requirements are adhered to and take care of the settlement of annual fees, maintaining registered office, filling annual returns and so on.

Professional nominee officers are prerequisite to those who seek to own a more complex offshore entity -- such as a regulated bank or an insurance company -- yet do not posses the prescribed qualifications to serve as board members themselves.

Nominees for privacy

But nominee services are not only used to overcome regulatory hurdles, simplify administration or facilitate tax mitigation.

Nominee services naturally play an important part in the protection of financial privacy.

Where an offshore company serves as the first defence with which to shield asset ownership, nominee officers and shareholders provide a second layer of protection. Would-be asset seekers, be they governments or private litigants, intruding into offshore records and databases, will not be able to match their target's name against available data. This will not be because the sought information will be kept as confidential, or be hidden or obscured -- it will be because the information will simply not be there.

The desire to obtain complete privacy, often bordering on anonymity, is in fact a major reason why so many are happily paying extra for keeping their names out of the paperwork.

But some are just wasting their money.

What you don't realise

Offering nominee services is a profitable option for any offshore incorporator. In addition to the flat annual fee you pay for keeping your name off the records, they will charge a per-task fee for any transaction you request they execute on your offshore company's bank account. (Where most will bill a flat per-transaction fee of about $10 to $20, some are known to charge a percentage -- as if the difficulty or time spent preparing a transfer order somehow depended on the amount involved!)

Privacy then costs -- but what if you don't even get what you paid for?

Putting easy profits above principles, many incorporators fail to tell you that using their nominee services might provide no extra privacy at all: Ever greater number of offshore jurisdictions now require that the details of true beneficial ownership be disclosed to them. Quite naturally, employing nominees in such a case is all but useless.

When challenged on this point, some incorporators argue that the beneficial owner details are only held by the offshore government and are not made public -- as opposed to the directors' and shareholders' registry which might be open to public scrutiny, they might add.

Well:

1. First of all, jurisdictions that do place their corporations' officers and shareholders on public file should never even be considered "offshore" from a privacy point of view. What benefit do you derive from using an offshore corporation to shield assets if anybody can look up your name against the corporation's name?

2. Nominee services should provide a second layer of privacy protection, not first. Using nominee services to compensate for a jurisdiction's lack of privacy provisions (as per point 1) is bad advice -- it is rather like getting an alarm installed because the door to your house will not lock. Fix the door first -- incorporate elsewhere -- then employ nominees to provide the additional barrier of protection against would-be intruders.

3. Despite assurances regarding the confidentiality of any beneficial owners' register, experience has taught the author of this article to exercise caution with respect to all governments -- both onshore and offshore. A "if they don't know, they can't tell" is an appropriate line of thinking here.

Will your defences stand?

Before blithely accepting the logic of a nominee-administered structure, you would be well advised to question your offshore services provider as to the actual privacy benefits. You might be surprised to learn that it might be necessary to make a complete and total disclosure regarding beneficial ownership. Perhaps it's time to look elsewhere?

If you are serious about protecting your financial privacy, additional considerations need to be taken into account with respect to nominee-administered offshore structures.

The nominee's own domicile / jurisdiction needs to be considered, in particular what legal protections exist to confound any legal actions mounted to force the disclosure of beneficial ownership.

From an asset protection point of view, the strength of any offshore structure must always be judged in terms of how many legal manoeuvres (court orders) would be needed to arrive at the final destination and seize assets.

The level of protection increases in direct relation not only to the number of steps that need to be taken to reach the litigant's goal -- your assets -- but also the difficulty of each step. What is needed is a metaphorical mountain assent, and not a stroll in a meadow.

Of course, the same principle applies in cases where the primary concern is the effective preservation of confidentiality of beneficial ownership.

A handful of corporate administrators offer the option to appoint their corporate nominee -- that is another offshore entity existing solely for this purpose, constructed with the deliberate intention to frustrate any legal attempts to extract information from it. Such corporate nominees typically make use of multi-jurisdictional laws (regulatory arbitrage) to provide practically impenetrable defences for those who seek this level of protection.

But this approach is not at all usual -- the opposite is.

Getting what's right for you

Most offshore services providers are used to clients accepting formula solutions. They are not overly concerned about the structuring of their business services to meet your needs -- particularly where financial privacy is concerned.

Don't be afraid to ask direct questions. Enquire how your assets will be protected from intrusive scrutiny, and do not be brushed off with yesterday's sales pitch. If you have a particular scenario in mind -- for example a vengeful litigant conducting a global asset check on you -- examine your situation on a "what-if" basis. Will the proposed defences stand?

Bank secrecy and corporate confidentiality are a good foundation, but other steps usually need to be taken if your assets are to remain secure.

Remember that times have changed -- and if your offshore services provider hasn't changed too, perhaps it's time to change him.



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