Tax Haven Abuses: the Enablers, the Tools and Secrecy
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United States Senate PERMANENT SUBCOMMITTEE ON INVESTIGATIONS Committee on Homeland Security and Governmental Affairs Norm Coleman, Chairman Carl Levin, Ranking Minority Member TAX HAVEN ABUSES: THE ENABLERS, THE TOOLS AND SECRECY MINORITY & MAJORITY STAFF REPORT PERMANENT SUBCOMMITTEE ON INVESTIGATIONS RELEASED IN CONJUNCTION WITH THE PERMANENT SUBCOMMITTEE ON INVESTIGATIONS AUGUST 1, 2006 HEARING SENATOR NORM COLEMAN Chairman SENATOR CARL LEVIN Ranking Minority Member PERMANENT SUBCOMMITTEE ON INVESTIGATIONS ELISE J. BEAN Staff Director & Chief Counsel to the Minority ROBERT L. ROACH Counsel & Chief Investigator to the Minority LAURA E. STUBER Counsel to the Minority ZACHARY I. SCHRAM Professional Staff Member to the Minority ERIC J. DIAMANT Detailee to the Minority JOHN C. McDOUGAL Detailee to the Minority RAYMOND V. SHEPHERD, III Staff Director & Chief Counsel LELAND B. ERICKSON Senior Counsel MARK D. NELSON Senior Counsel Permanent Subcommittee on Investigations 199 Russell Senate Office Building – Washington, D.C. 20510 Main Number: 202/224-3721; 202/224-7042 (fax) p Minority Office: 202/224-9505; 202/224-1972 (fax) Web Address: www.hsgac.senate.gov [Follow Link to “Subcommittees,” to “Investigations”] TAX HAVEN ABUSES: THE ENABLERS, THE TOOLS, AND SECRECY TABLE OF CONTENTS I. EXECUTIVE SUMMARY ................................................. 4 A. Subcommittee Investigation ............................................... 4 B. Overview of Case Histories ............................................... 4 C. Findings and Recommendations ............................................ 8 Report Findings ........................................................ 9 1. Control of Offshore Assets ............................................. 9 2. Tax Haven Secrecy ................................................... 9 3. Ascertaining Control and Beneficial Ownership ............................ 9 4. Offshore Tax Haven Abuses ............................................ 9 5. Anti-Money Laundering Abuses ......................................... 9 6. Securities Abuses .................................................... 9 7. Stock Option Abuses .................................................. 9 8. Hedge Fund Transfers ................................................. 9 Report Recommendations ................................................. 10 1. Presumption of Control ................................................ 10 2. Disclosure of U.S. Stock Holdings ....................................... 10 3. Offshore Entities as Affiliates ........................................... 10 4. 1099 Reporting ...................................................... 10 5. Real Estate and Personal Property ....................................... 10 6. Hedge Fund AML Duties .............................................. 10 7. Stock Option-Annuity Swaps ........................................... 10 8. Sanctions on Uncooperative Tax Havens .................................. 10 II. THE OFFSHORE INDUSTRY .............................................. 11 III. EDG CASE HISTORY: AN INTERNET-BASED OFFSHORE PROMOTER ....... 17 IV. TURPEN-HOLLIDAY CASE HISTORY: A HOW-TO MANUAL ............... 29 V. GREAVES-NEAL CASE HISTORY: DIVERTING U.S. BUSINESS INCOME OFFSHORE .............................................................. 42 VI. ANDERSON CASE HISTORY: HIDING OFFSHORE OWNERSHIP ....... 49 VII. POINT CASE HISTORY: OFFSHORE SECURITIES PORTFOLIO ............. 55 -i- VIII. THE WYLY CASE HISTORY ........................................... 113 A. Introduction ............................................................ 113 B. Case History Summary ................................................... 116 C. Wyly Business Background ............................................... 119 D. Going Offshore ......................................................... 120 E. The Facilitators ......................................................... 123 1. Domestic Facilitators ................................................. 123 2. Offshore Facilitators .................................................. 127 F. Overview of Wyly Offshore Operations ...................................... 131 G. Detailed Examination of Wyly Offshore Operations ............................ 135 1. Directing Trust Assets ............................................... 135 Background on Trusts ................................................. 136 b. Wyly Trust Agreements ............................................ 139 c. Wyly Trust Protectors .............................................. 140 d. Communicating Wyly Decisions on Trust Assets ........................ 145 e. Trustee Compliance with Wyly Decisions .............................. 149 f. Analysis of Issues ................................................. 162 2. Transferring Assets Offshore ........................................... 163 a. Stock Options in General ........................................... 164 b. Private Annuities in General ......................................... 167 c. 1992 Stock Option-Annuity Swaps .................................... 169 d. 1996 Stock Option-Annuity Swaps .................................... 175 e. 1999 and 2002 Stock Option Transfers For Cash ......................... 180 f. Current Status of Private Annuities ................................... 189 g. Analysis of Issues ................................................. 194 3. Converting U.S. Securities into Offshore Cash ............................. 196 a. Trading Offshore .................................................. 197 b. U.S. Securities Law ................................................ 205 i. Background on U.S. Securities Law ................................ 206 ii. Disclosure of Offshore Stock Holdings ............................. 211 iii. Restrictions on Private Stock Sales ................................. 219 iv. Restrictions on Insider Trading .................................... 228 4. Bringing Offshore Dollars Back with Pass-Through Loans .................... 230 a. Security Capital Formation and Operations ............................. 231 b. Security Capital Transactions In General ............................... 232 c. Three Security Capital Transactions ................................... 235 d. Analysis of Issues ................................................. 239 5. Supplying Offshore Dollars to Wyly Business Ventures ...................... 240 a. Supplying Offshore Dollars to Hedge Funds ............................ 242 i. Hedge Funds Generally .......................................... 242 ii. Maverick Hedge Fund ........................................... 243 iii. Ranger Hedge Fund ............................................ 249 b. Investing Offshore Dollars in a Private Investment Fund ................... 251 -ii- c. Investing Offshore Dollars in Offshore Insurance ........................ 255 d. Investing Offshore Dollars in An Energy Company ....................... 264 e. Analysis of Issues ................................................. 272 6. Funneling Offshore Dollars Through Real Estate ............................ 272 a. Real Estate Transactions in General ................................... 273 b. Rosemary’s Circle R Ranch ......................................... 276 c. LL Ranch ........................................................ 282 d. Analysis of Issues ................................................. 287 7. Spending Offshore Dollars on Artwork, Furnishings, and Jewelry .............. 287 8. Hiding Beneficial Ownership ........................................... 296 a. Background on Beneficial Ownership ................................. 297 b. CSFB, Lehman Brothers, and Bank of America .......................... 304 c. NFS Requests for Beneficial Ownership Information ..................... 311 d. Analysis of Issues ................................................. 330 APPENDIX 1: Wyly-Related Offshore Entities ............................... 332 APPENDIX 2: Isle of Man Offshore Service Providers ......................... 337 APPENDIX 3: Wyly Offshore Trusts and Their Trustees ........................ 339 APPENDIX 4: Additional Security Capital Loans ............................. 341 APPENDIX 5: Additional Real Estate Transactions ............................ 348 IX. LAW FIRMS AND TAX HAVEN ABUSES ................................... 361 # # # -iii- TAX HAVEN ABUSES: THE ENABLERS, THE TOOLS AND SECRECY August 1, 2006 Offshore tax havens and secrecy jurisdictions today hold trillions of dollars in assets.1 While these jurisdictions claim to offer clients financial privacy, limited regulation, and low or no taxes, too often these jurisdictions have instead become havens for tax evasion, financial fraud, and money laundering. A sophisticated offshore industry, composed of a cadre of international professionals including tax attorneys, accountants, bankers, brokers, corporate service providers, and trust administrators, aggressively promotes offshore jurisdictions to U.S. citizens as a means to avoid taxes and creditors in their home jurisdictions. These professionals, many of whom are located or do business in the United States, advise and assist U.S. citizens on opening offshore accounts, establishing sham trusts and shell corporations, hiding assets offshore, and making secret use of their offshore assets here at home. Experts estimate that Americans now have more than $1 trillion in assets offshore2 and illegally evade between $40 and $70 billion in U.S. taxes each year through the use of