The Overlooked Weakness Of Offshore Corporations, Foundations & Trusts

Forget everything you think you know about keeping your holdings anonymous using offshore banking, limited liability companies (LLCs), international business corporations (IBCs), trusts, foundations or non-profit companies.

That’s a bold statement. But it’s a very different world today than when most of these constructs were developed. Or when the books were written that popularized their use for privacy-seekers.

There was a time when a holding company or well-formed trust in an offshore jurisdiction, perhaps set up by a trusted intermediary, could assure you and your finances a good degree of privacy. But those days are over. New know-your-customer rules are making the use of traditional anonymous companies and trusts almost impossible. And improved information sharing now allows financial authorities to authenticate beneficiaries of LLCs or IBCs more effectively than ever before, and obtain their details with relatively simple requests.

What are trusts, IBCs and foundations?
An IBC is a corporation, a legal entity entitled to do business around the world in a given name. The names of the board of directors and beneficiaries of the business may not be publicized, but there is at least a cursory public record from the incorporation documents. Common to all IBCs are the dedication to business use outside the incorporating jurisdiction, rapid formation, secrecy, broad powers, low cost, low to zero taxation and minimal filing and reporting requirements. An increasing number of offshore jurisdictions are permitting the use of nominee shareholders, directors and officers.

A trust is a legal entity that can hold property or assets for the benefit of a specific person, group of people or organization known as the beneficiary (beneficiaries). When a trust is established, an individual or corporate entity is designated to oversee or manage the assets in the trust. This individual or entity is called a trustee. A trustee can be a professional with financial knowledge, a relative or loyal friend or a corporation. There are pluses and minuses to each type of trustee. An individual trustee may provide a more personal touch, but may die or move away. A corporate trustee may be less personal but provides experience, investment skills, permanence and impartiality. More than one trustee can be named by the grantor if he or she wishes.

A foundation, and many non-profits, are formed as a sort of a private trust. A popular type is a so-called Liechtenstein Anstalt, which has been traditionally used primarily to conceal the true owner’s name from tax authorities. All instructions regarding asset management and withdrawals must come from the Anstalt’s board of directors, often a firm of lawyers. These lawyers, usually with two signatures, are the only ones empowered by power of attorney to give orders to a bank that controls the trust’s account(s).

The problem in a nutshell: identification of beneficiary
No matter how oblique and discreet the provider of your front company or trust, a name, and often a passport now, always needs to be associated with the structure; at some point, someone – perhaps you, perhaps a nominee director, perhaps the secretary, perhaps even your registered agent – needs to identify themselves as the beneficiary of any bank account associated with the company or trust. Unless you’re willing to offer identification that is not legitimately yours, it's highly likely that you, or someone else who actually knows your real identity, will be connected to the account if someone sufficiently motivated were to seek the beneficiary of your corporate or trust holdings. And that's bad, even if the person who is exposed is a lawyer, supposedly protected from having to identify their clients.

What do we mean? Say your favored privacy consultant refers you to their lawyer colleague, described as “extremely discreet; I’d trust him with my life.” This colleague is to set up an IBC on your behalf in the Cayman Islands. The lawyer offers to act as your registered agent and/or power of attorney. He requires a copy of your passport (usually notarized, if not apostilled – see our article What’s an apostille, and why is it important?) and promises to retain it in confidentiality. And he does, until, two years later, he gets a knock on his door from authorities interested in your account. A lawyer’s client privilege is easily violated if a matter is criminal, or even perceived to be criminal.

What’s the alternative? If you still opt to create an LLC, IBC or trust and name the beneficiary in another name than yours, you could technically use identification that isn’t legitimately yours. Your picture would need to appear on the ID, so as to be able to authenticate your image if you needed to show up at a bank to claim your funds. Now, in the best case, and things go well, you run the risk of not being able to access your holdings at some point in the future when your camouflage identification expires if you’re unable to produce a new set when required to identify yourself by the bank. In the worst case, the bank may learn your identification is falsified and flag your accounts to be frozen once they’ve amassed generous balances. The bank, and therefore any agency pursuing you, also then has a picture of you of file from your ID, a picture that is likely your true likeness. Not to mention other identifying data which could incriminate you, such as the IP addresses, and therefore the locations, of computers you’ve used to access their online banking systems.

How could a bank learn your identification is false? Financial institutions, even overseas, are becoming increasingly connected via technology, and many are now able to do realtime database validation of passport and drivers’ license numbers from many countries. Read our article What you need to know about camouflage identification for details.

Who needs to worry about this?
Always remember that magnitude of investigative resources that will be brought to bear in a pursuit will be directly proportional to the magnitude of the perceived offense. Would authorities really go through a complicated multinational effort, chasing down the beneficiary of a given company, trust or foundation for someone secreting away only a relatively small amount of money, perhaps to minimize taxes? Probably not.

Would they expend more effort in tracking down and stopping the beneficiary of criminal activity? If the sums were in the low millions of dollars and the chances of success high enough, perhaps.

Would they pull out all the stops if they believed significant criminal activity were involved, with proceeds in the tens of millions of dollars, or if they remotely suspected a connection with terrorism? Most definitely.

Why are IBCs and LLCs still being promoted?
Why do many offshore service providers and asset management advisors still advocate the use of companies and trusts for securing assets? Because there’s an immense industry around the world that makes a huge amount of money processing the paperwork to set them up. And they have dozens of years or more of momentum in the marketing of their services. Their effectiveness at truly assuring you anonymity is not really the concern of the clerk or legal professional involved. When you’re pursued and their records are subpoenaed, they will oblige, and they know it. And now you know it, too.