A New York hedge fund manager allegedly swindles $12 million from a prominent Baltimore family. An Indiana couple is accused of bilking hundreds of customers by charging for free trials of cosmetic products. A financial manager in Texas promises 23-percent returns but absconds with $33.5 million of his investors’ money in a classic Ponzi scheme.
All three cases have one thing in common: money that ended up in offshore accounts and trusts set up in tax havens around the world.
The existence of the trusts surfaced during a joint examination of the offshore world by The Washington Post and the International Consortium of Investigative Journalists, a D.C-based nonprofit news organization. ICIJ obtained 2.5 million records of more than 120,000 companies and trusts created by two offshore companies, Commonwealth Trust Ltd. (CTL) in the British Virgin Islands and Portcullis TrustNet, which operates mostly in Asia and the Cook Islands, a South Pacific nation. The records were obtained by Gerard Ryle, ICIJ’s director, as a result of an investigation he conducted in Australia.
Many people use the offshore world for legitimate purposes, for legal tax shelters or to smooth the way for international trade. Overseas havens vaulted into public consciousness last year with stories about Republican presidential nominee Mitt Romney’s accounts in the Cayman Islands. Recent coverage of the Cyprus banking crisis has thrust the issue back into the spotlight.
U.S. citizens are permitted to move money offshore as long as they report their account information to the Internal Revenue Service. But there have long been concerns that much of the money is not reported and bleeds tax revenue from governments worldwide. Recently, aspects of the offshore world came under assault after whistleblowers alerted the IRS to thousands of unreported U.S. accounts in Swiss banks, resulting in an amnesty offer to violators who paid billions in fines to the U.S. government.
The records reviewed by The Post and ICIJ expose how havens in the South Pacific and Caribbean in some cases have become sanctuaries for individuals seeking to conceal their activities from investigators and investors.
Among the 4,000 U.S. individuals listed in the records, at least 30 are American citizens accused in lawsuits or criminal cases of fraud, money laundering or other serious financial misconduct.
They include billionaire hedge fund manager Raj Rajaratnam, who was convicted in 2011 in one of the biggest insider trading scandals in U.S. history, and Paul A. Bilzerian, one of the most famed corporate raiders of the 1980s, who was convicted of securities fraud.
An attorney for TrustNet, which helped create the companies and trusts for the clients, declined to comment, referring questions to senior TrustNet officials who did not respond to requests to discuss their firm.
Fraud experts say offshore bank accounts and companies are vital to the operation of complex financial crimes. Allen Stanford, who ran a $7 billion Ponzi scheme, used a bank he controlled in Antigua. Bernard Madoff, who ran the largest Ponzi scheme in U.S. history, used a series of offshore “feeder funds” to fuel the growth of his multibillion-dollar house of cards.
Michael I. Goldberg, a Fort Lauderdale, Fla., attorney who often testifies as an expert on Ponzi schemes, said it is rare to see one that does not make use of the offshore world.
“If you don’t, it’s usually a very parochial, Podunk type of Ponzi,” he said. “But the more sophisticated ones almost always do.”
The offshore world makes it hard for prosecutors pursuing complex financial crimes to follow the money, because many offshore jurisdictions refuse to recognize U.S. subpoenas and account information is hidden under layers of corporate shells.
“People were trying to hide their money from the IRS, or they were trying to hide their money from law enforcement, or they were trying to hide their money from regulators,” said Paul E. Pelletier, the principal deputy chief of the Justice Department’s fraud section who prosecuted Stanford before entering private practice in 2011. “As a prosecutor, it was very difficult pursuing these people.”
The records reviewed by The Post and ICIJ include tax filings, internal memoranda and e-mails kept by CTL and TrustNet.
The CTL records contain information on at least 23 companies linked to an alleged $230 million tax fraud in Russia, a case that was being investigated by a Moscow-based lawyer named Sergei Magnitsky, who died in prison under suspicious circumstances. One of the companies was used to set up Swiss bank accounts into which the husband of a Russian tax official deposited millions in cash, according to legal filings in Switzerland.