Wednesday, August 02, 2006

Tax Sham Update

The statement of Senator Carl Levin at the Permanent Subcommittee on Investigations Hearing: Tax Haven Abuses: The Enablers, The Tools & Secrecy succinctly summarizes the case studies in sham detailed in the report, the Wyly case study and the POINT case study. According to Levin's summary, "[E]ach scheme relied on a key deception made possible by tax haven secrecy."

In the Wyly case:
The key deception . . . is the Wyly claim that the 58 offshore trusts and corporations were independent. Under U.S. law, the tax on the income of a truly independent trust is paid by the trustees. But if a U.S. person controls the trust's assets and investments, then the trust's income is generally taxable to that person.

The claim that the offshore trusts were independent of the Wylys is contradicted by overwhelming evidence. This is not a case where the Wylys handed over their stock options and awaited the annuity payments, while independent trustees operated the trusts. Instead, for thirteen years, the Wylys and their representatives continually told the trusts what to do – when to exercise the stock options, when to sell the shares, and what to do with the money. The Wylys conveyed their directions through so-called "trust protectors," individuals selected by the Wylys, who worked for the Wylys, and who were empowered to fire any offshore trustee. The protectors transmitted the Wyly directions to the offshore trustees who consistently carried them out.
* * * * *
When the offshore entities opened securities accounts at Bank of America and were asked to name their beneficial owners as required by new U.S. anti-money laundering laws, they refused to do so, claiming again they were independent. Bank of America allowed the accounts to operate without getting the information required by law.
In the POINT case:
[A] phony Isle of Man corporation sold stock it didn't own to another phony Isle of Man corporation for money it didn't have. The fake stock was lent back with fake cash as security for repayment of the loan, and the fake loss on the stock price was transferred out to offset real gains. No real economic activity took place, but one critical thing happened – a $9 billion paper portfolio was created. This paper portfolio originated with Jackstones and Barnville, shell operations with no employees, no offices, and paid-in capital of £2 – that’s about $5 each.

The final step in the POINT scheme was for Barnville to sell the paper losses to wealthy individuals, including Haim Saban and Robert Wood Johnson IV. These clients used the paper losses to offset real capital gains. Mr. Saban used POINT to offset about $1.5 billion in capital gains; Mr. Johnson offset about $143 million. Together, the fees they paid to Quellos, the lawyers, the bankers, and others totaled about $75 million. One more proof that this sordid tale was used to concoct tax losses is the fact that the greater the paper loss generated for a client, the greater the fees charged by Quellos.

The POINT tax shelter included transactions to create the appearance of a complex investment with real economic substance. In reality, the transactions were expertly designed to remove all risk, using circular transactions that cancelled out or were unwound. A 5-year warrant, for example, which was included in the transactions to produce the illusion of a profit potential, was always terminated before any profits were realized. In a transaction involving Mr. Saban, an $800 million loan and stock purchase were added to provide a patina of economic substance, but the way the transaction was structured, it could not realize a profit in comparison to the transaction's fees and other costs. For example, the cost of a collar that capped possible profits at 8% of the total investment reduced a $130 million profit to $13 million, which was then dwarfed by fees totaling $53 million.
* * * * *
The key deception in POINT was the fake offshore portfolio that generated fake stock losses sold to partnerships with a false business purpose. The end result was $2 billion in real and taxable capital gains that were supposedly erased.
Senator Levin was particularly incensed at the lawyers, accountants, and bankers who participated in the frauds:
Each participant essentially told the Subcommittee: "I was only responsible for my little piece of this. I didn't know the other parts. It's not my fault."
* * * * *
Could it be true that the banks and brokers and lawyers who participated in POINT didn't know what they were involved with? Or is it that they didn't want to know?
Hmmm. Did Senator Levin question this lawyer for the taxpayers?

1 comment:

Jérôme Turquey said...

I have created a Blog about financial havens in Europe where I analyse and compare legislation and what is actually implemented.
Only official public information (legal, parliamentary, judiciary, administrative…) is used to tighten up the ship on management and governance issues.
This blog is in the framework of a course I have been asked to provide about financial havens in Europe (Master of Criminal Sciences) and is intended to provide investors, companies head offices and international regulatory bodies with information on what’s actually going on.