Panama Papers

Panama Papers: Part 2. Law Review Article examines how US Trust Law enables people who had previously sought Panama Papers-like protection from offshore trusts.

As previously covered in this blog here and here, the Panama Papers is a collection of documents and emails from the Panamanian Law Firm, Mossak Fonseca, which specialized in creating offshore trusts and companies to help their clients in hiding money from government detection. 

Here’s a recap of the carnage of public officials caught in the wake of the Panama Papers (approximately 140 politicians, 29 billionaires and at least 33 blacklisted people to 214,000 offshore entities, according to Forbes):

Also interesting are these two articles about how the Panama Papers were leaked:

  • This Wired article discusses size of the data obtained from Mossak Fonseca (2.6 Terabytes)
  • This Forbes article discuss the leak and the data sharing between the journalists, often using open sourced encryption methods to secure the data while the journalists were preparing their articles. 

Since the Panama Papers leaked, Reid K. Weisbord, law professor at Rutgers, has published an article in the Columbia Law Review entitled, “A Catharsis for U.S. Trust Law: American Reflections on the Panama Papers.”  Professor Weisbord’s article summarizes the Panama Papers scandal and the public reaction to the uncovered offshore trust abuses.  He then outlines three trust practices that are permitted in the U.S. that offer similar protections that only offshore trusts were previously able to offer.  He concludes his paper with possible reforms to prevent on shore trust abuses.

In his paper, Professor Weisbord discusses the following trust tools which provide nearly the same protections once found in offshore trusts:

  • Self-Settled Asset Protection Trusts;
  • Tax Breaks through Dynasty Trusts; and
  • Minimal Reporting requirements.
  • Self-Settled Asset Protection Trusts

As explained by Professor Weisbord, traditional trust law allows the trust to be a separate entity from the donor (settlor or creator of the trust) and/or donee (or beneficiary of the trust), so that when a gift is made to a trust, with a spendthrift provision, the trust is not obligated to pay to a donee’s creditors.  The creditors can only reach the assets if the trust pays out to the donee, because the spendthrift provision can limit or restrict payments to the donee if there are creditors present.  

Also as explained by Professor Weisbord, a self-settled asset protection trust would allow the settlor to transfer his assets to the trust, and if there is a spendthrift provision, the settlor’s creditors could not reach the settlor’s assets.  This novel creation by state legislatures has minimized the need to use offshore trusts. 

See this pdf outlining the 17 states with some version of the self-settled asset protection trusts laws.

Tax Breaks through Dynasty Trusts

As most estate planners can tell you, one key outcome of an estate plan is to defer taxes.  While the tax code allows for certain kinds of deferral with respect to estate plans (and as explained by Professor Weisbord) the code changed over time to include a generation skipping tax so that transfers to a donor’s grandchildren and future generations were taxable.  The so called generation skipping tax (“GST”) imposes a transfer tax for gifts to future generations.  However, the GST tax also includes an exemption (approximately $5,000,000).

One other barrier to gifting to future generations through a trust is the rule against perpetuities (or simply put, the law that prohibits a trust from existing beyond a certain period, usually 21 years, following the death of the last named living beneficiary at the time the trust was drafted).  As Professor Weisbord has pointed out, several states have abolished or limited the rule against perpetuities to permit trusts to exist well beyond the death of the last named beneficiary’s lifetime. 

These so called dynasty trusts have enabled creative estate planners to obtain advantages in creating estate plans that were previously limited to using offshore trust.  For a summary of dynasty trusts and the rule against perpetuities, see this law firm’s website.  For a chart of states that have abolished/limited the rule against perpetuities, see this chart.

Minimal Reporting requirements

As stated by Professor Weisbord, states have reduced the reporting requirements of trusts, so that the trust reporting requirements are minimal or non-existent.  This change coupled with the Organization for Economic Cooperation and Development (“OECD”) increased reporting requirements for foreign jurisdictions has spurred moving former offshore trusts back to U.S. trusts.

See this Bloomberg article about the U.S. being the newest/latest tax haven because of its lax reporting and refusal to sign off on the OECD reporting requirements

Weisbord’s Recommendations

Weisbord summarizes his paper with recommendations that he acknowledges are implausible because states that have enacted changes to its laws are highly unlikely to amend them again to prevent the abuses he raises in his paper.  Weisbord does suggest the possibility that the trusts may be invalidated by the bankruptcy code and fraudulent conveyance laws, but, in reality if done right, even these federal laws may not invalidate a trust to prevent people from using the trusts in the US as a tax shelter.

Weisbord’s conclusions/recommendations place at a premium specific and credible information a whistleblower has on a donor/settlor establishing a trust and avoiding taxes (in the U.S. and possibly in other jurisdictions).  With this insider information the IRS may properly assess the tax liabilities of the donor/settlor. 

The IRS will pay a whistleblower for specific and credible information about persons and trusts violating U.S. tax laws.  The IRS pays between 15-30% of the total collected proceeds (tax, interest, penalties, and additional amounts) for specific and credible information that leads to the successful prosecution and collection of collected proceeds from the tax violators.  Contact us to discuss whether you should file a tax whistleblower award claim with the IRS.

Why the Panama Papers matter

As a primer, this blog discussed the release of documents from the Panamanian law firm Mossack Fonseca, known as the Panama Papers, which disclose a network of shell corporations and entities established by the Panamanian law firm to assist clients in hiding funds and avoiding taxes.

In the news today, as found in this NY times article, the U.S. Justice Department (“DOJ”), through its Kleptocracy Asset Recovery Initiative (for more information about this unit see this NY times article), has begun a forfeiture action against properties in the U.S. acquired by Malaysian individuals whom allegedly embezzled funds from the 1 Malaysia Development Berhad (“1MDB”, Malaysia’s sovereign wealth fund, designed to be used for investment that would return profits to support the Malaysian people).  

The DOJ is trying to seize $1 billion in assets including the $30.6 million penthouse at the Time Warner Center in Manhattan, a $39 million mansion in the Los Angeles hills, and a $17.6 million tear down home in Beverly Hills.  The DOJ is alleging that the individuals diverted over $3 billion funds from 1MDB for their own use.  The key individuals referenced are the stepson, close friends and associates of the prime minister of Malaysia.  There are even allegations that some of the funds diverted were used to fund the film “The Wolf of Wall Street” and also to purchase paintings from Picasso and Monet. 

The DOJ’s seizure action raises two questions:

  1. Why isn’t the government getting tough in preventing US Multinational Corporations (US MNCs) from shifting their profits offshore to avoid U.S. taxes; and
  2. Why are US banks allowing individuals to hide money in the U.S.

As previously discussed in this Blog, US MNCs have utilized transfer pricing, earnings stripping and inversions to shift profits from the U.S. to low tax jurisdictions to lower the effective tax rates paid by the US MNCs.  This recent news story (DOJ seizure) raises the question why isn’t the government utilizing more aggressive techniques to stop the US MNCs from shifting this income when the government is seizing asset allegedly begotten from embezzled funds of other nations.  Shouldn’t we first stop US tax income from flowing to low tax jurisdictions, then worry about US assets acquired by other nations’ stolen funds?

The Second question goes to the nature of the Panama papers and the uses of shell corporations to mask the identity of the owners of the shell corporations.  There is now an effort by the government to require banks to know the owners of the shell corporations.  See this NY Times article.  According to the article, the US Treasury is requiring US branches of foreign banks to know whom the beneficial owners of the shell corporations.  While the US Treasury’s plans have not actually translated to actual rules requiring banks to obtain the identities of the owners of the shell corporations it appears as if it is likely to get legislation passed through Congress to enact the more stringent requirements on banks. 

If you have specific and credible information about a U.S. MNC shifting its profits offshore using transfer pricing, inversions or earning stripping, or anyone not paying their taxes by using shell corporations through banks, contact our firm to discuss filling a tax whistleblower claim.  As a reminder, the IRS pays between 15-30% of the collected proceeds (tax, penalties, interest, and other amounts collected) based on the information provided and used by the IRS to stop tax violators.

Panama Papers: Where are the disclosure of documents of the U.S. wealthiest individuals and their use of offshore trusts and companies to conceal their wealth?

As you may or may not know, on Sunday April 3, 2016, a disclosure of a Panamanian law firm’s records, dubbed the Panama Papers, exposed world leaders and wealthy businessmen/women and their associates that utilized offshore trusts and companies to hide assets from taxation in their respective foreign countries.  (See International Consortium of Investigative Journalists (“ICIJ”) article about the Panama Papers; USA Today article; the Guardian article explaining the Panama Papers; and the German newspaper, Süddeutsche Zeitung (SZ) (which allegedly initially exposed the Panama Papers), article explaining the Panama Papers.  See also an infographic about the world leaders allegedly exposed for their use of offshore entities created/maintained by the Panamanian law firm.  Note: a person “exposed” or “implicated” in the Panama Papers does not automatically mean they are or have done any wrongdoing.  See the Huffpost article with a simple reddit user’s explanation of the Panama Papers through the use of a piggy bank, showing that the use of offshore trusts and companies does not necessarily implicate wrong doing.

As part of the “fallout” from these disclosures, at least one world leader (Iceland’s Prime Minister) has already resigned from his position due to his connection with entities exposed as part of the “Panama Papers". See the Huffpost article about Prime Minister Sigmundur Davíð Gunnlaugsson’s resignation.

The Panama Papers and the exposure it is receiving, raises a serious question, namely: Where is the information about the U.S.’ wealthiest individuals and corporations that might have undertaken similar or same offshore trust and company creation schemes to hide/shield their wealth?  See Craig Murray’s blog post raising the same inquiry. Mr. Murray states that one reason the exposure focuses on Russia and other UN sanctioned countries, is because the ICIJ is funded by the U.S. Center for Public Integrity which is further funded by various U.S. private foundations.  Mr. Murray posits that these entities would never expose the western world’s use of such entities. 

The IRS has estimated that U.S. corporations and wealthiest individuals have been avoiding the payment of taxes in the amount of $385 billion for 2016. Therefore, it begs the question, Are U.S. corporations and individuals utilizing structures implemented by the Panamanian law firm or similar entities in tax haven jurisdictions to generate the Tax Gap as estimated by the IRS?  This inquiry, as stated by Mr. Murray, suggests that the people behind the release of the Panama Papers may be hiding the exposure of “western” corporations and individuals, which may have undertaken the use of the same offshore strategies.

Perhaps the Senate Permanent Subcommittee on Investigations which has begun the process of exposing the U.S. corporations through its investigations of the largest U.S. corporations with offshore profit shifting, including: Microsoft and Hewlett Packard; Apple; and Caterpillar.  PSI also held a hearing on the offshore banks that have assisted individuals in hiding their assets in offshore jurisdictions and evading taxes. 

With the release of the Panama Papers, it would be interesting to see if the other documents by the Panamanian law firm would implicate the entities and individuals investigated by PSI or other prominent U.S. corporations or individuals who have utilized offshore structures to undertake the same tax avoidance schemes identified by PSI and IRS.  Since we do not have access to the source material and can’t search the documents which were recovered, we may never find out if there are other U.S. corporations or individuals.

Another reason for determining whether the Panama Papers expose U.S. entities or individuals is apparently the U.S. is now considered the number 3 tax haven because of its banking secrecy practices.  See the AP article regarding the U.S. as a tax haven for other countries’ tax dodgers.  Therefore, the exposure of U.S. entities or individuals would help IRS and other countries’ tax governing bodies limit/prevent tax avoidance/evasion. 

If you have specific and credible information of individuals and/or corporations utilizing structures described in the “Panama Papers” and would like to file a claim for an award with the IRS tax whistleblower program, please contact us.