To make it simple lets say guy in the USA wants to hide money from the IRS, so he creates a foreign bank account in a tax haven.
But unless he is flying to the Cayman islands with suitcases full of cash, how does he get the money into these accounts without creating a paper trail(wire transfers)? Unless he uses layers of banks, which again creates a paper trail and again must have a point where the money is entering the system?
I take it you’re referring to money earned illegally since it’s not a crime to fly out with one’s honestly earned money. Nor is money taxed per se. It’s interest earnings that get taxed. Or, when money is transferred. There are different kinds of tax havens. In the case of the Cayman islands, it’s exemption from income taxes, capital gains and estate taxes, among others. So its advantages are in business transactions, not banking. It’s a good place for tax avoidance. So (I’m now guessing from this point on) your money won’t find itself more comfortable than in the US, except that CI has better secrecy laws and stricter rules on disclosure.
And there is a difference between tax avoidance and tax evasion (meaning usage of the terms.) Avoidance is legal. Evasion is not.
Your offshore would include a bank account, a numbered company that buys and sells things such as stocks, etc. You carry on business just like in the USA except that the profits etc. are not taxed. (And the interest, back when that was significant; once upon a time accounts used to pay more than half a percent.) Once in a while, you pay yourself a dividend which makes its way through legitimate accounts in other countries where the IRS (supposedly) can’t ask for all the details, but you’ve told them you have an account. Or you get “paid a consulting fee” by your Cayman lawyers, or any of a hundred tricks. Money makes its own money, and it helps if that money is growing tax-free.
The real value for such acounts in the good old days was that less democratic governments would tax or confiscate whatever they could find. When Hitler came to power, it was convenient that Jews and others could have money in Swiss accounts that the government would not know about or take. When the Nazis saw the handwriting on the wall, they too used the secrecy to their advantage; as have the oppressed and the kleptocrats in the third world.
Some countries like France (IIRC) still have a “wealth tax” where a proportion of your assets (not income) are taxable, so it is in the interest of the wealthy to hide their money.
What you need to evade tax is a shell company set up without information on the beneficial owners. Set up multiple shell companies in locations where the records of the benefical owner is unknown and then route the money from company to company until it reaches overseas. Yes there is a paper trail, but the key is that no one has documentary proof as to who is the beneficiary.
So where to set up those shell companies? Might I suggest the United States? Or Britain? Companies offering incorporation services there had some of the lowest compliance rates for securing notarized documentatary proof of the beneficial ownership of a corporation. Professor Jason Sharman of Griffith University in Australia conducted the study and only two jurisdictions had perfect compliance records - Cayman and the Isle of Man.
The person seeking to move money offshore wires money into an account of XYZ Investment Trust, LLC, a Nevada corporation. The XYZ Investment Trust then wires money to Acme Agency, Inc, a shell company set up in London. Acme Agency, Inc can run money through another layer or two if you want with the final handler then making investments in the FTSE, NASDAQ, NYSE, hedge funds, private equity or whatever. Profits get reinvested or withdrawn. Withdrawls could be disguised to look like a legitimate business payment.
Cayman does have tax reporting requirements and Cayman banks will turn over details of the accounts to governments with which Cayman has a Tax Information Exchange Agreement. But just like Citibank in the US would demand a subpeona, the Cayman bank will demand the relevant legal paperwork. An IRS agent can’t simply walk into a Cayman bank and start going through the records without relevant authorization from a court.
So to connect a person to a Caymans company, you would ahve to show the trail from th suspect in the USA to that company. If the trail ends in a private law firm in Luxembourg, who deals with another private law firm in, say, Switzerland or Lichenstein, then it would be difficult for the IRS to get a court supoena on them. Depends where the quiet intermediary players intersect.
Yes. The IRS investigator would need to follow the paper trail to identify the beneficial owner of the account in question. If the name on the account is a corporation then the question becomes who owns that corporation. If the corporation is owned by another corporation then the question becomes who owns that corporation. And so on.
It is not particularly hard to get a subpeona. Many offshore jurisdictions have Tax Information Exchange Agreements which the OECD documents on its white list. (PDF link)
The problem for the IRS investigator is what happens if the first corporation in the chain was able to incorporate with no information on the benefical owner? Then there is just a chain of lawyers, accountants, and so on, all pointing at each other and none of whom actually own the assets in question.
Suppose you set up a Nevada corporation, WELL HIDDEN INVESTMENTS, Inc. You appoint Joe Slick, Esq as the trustee. You appoint Ms. Ima Cheeter and Mr. D. Plee Berried, accountants with the firm Dewey, Cheatham, and Howe, as the corporate officers.
Mr Slick flies to Grand Cayman with a suitcase full of cash and tries to open a bank account. The Cayman bank refuses to accept a deposit from a foreign individual without proof of identity and from a foreign corporation without proof of identity for the benefical owner.
So Mr. Slick offers up the identity details for the corporation officers, Ms. Cheeter and Mr. Berried. The bank contacts Ms. Cheeter and Mr. Berried to confirm that they are personally liable for the taxes on this account. They, of course, deny it - not wanting to be stuck with a huge tax bill and not have the benefit of the use of the assets. So the Cayman bank refuses to open the account.
So Mr. Slick has an idea. He tries to set up a Cayman limited liability company, MONEY IN THE TROPICAL SUN, LLC, (MITTS) with the idea of using it to open an account.
This was essentially the experiment that Professor Jason Sharman ran. (Except he didn’t fly around with suitcases full of cash.) He made 3,500 inquiries in both offshore and onshore jurisdictions and asked what information was needed to form a corporation, LLC, etc…
He found many jurisdictions where he could set up a corporation without providing certified or notarized information identifying the beneficial owner of the account. He succeeded in every jurisdiction he tried, except Cayman and the Isle of Man.
And who was particularly bad according to Prof Sharman?