Release of Names With Interests in Offshore Entities: Ramifications

Recently, the International Consortium of Investigative Journalists (ICIJ) released the names of more than 37,000 people from China, Taiwan and Hong Kong who have set up offshore entities and trusts in 10 tax haven jurisdictions, including the British Virgin Islands, the Cayman Islands, Cook Islands and Singapore.

The information was compiled by ICIJ from leaked data it received originating from two offshore services firms, Singapore-based Porticullis TrustNet and British Virgin Islands based Commonwealth Trust.  This information is now available to the public in an interactive web database called ICIJ Offshore Leaks Database (http://offshoreleaks.icij.org/).

This database permits anyone to search for and find information on individuals associated with these offshore entities, including their addresses.  Moreover, the ICIJ has provided an interactive graphic tool that uses this data to illustrate the connections between individuals and offshore entities.

Simply by entering a person’s name and with the click of a mouse anyone may discover the offshore entity(ies) affiliated with a particular person as well as other offshore entities.  Similarly, the individuals behind an offshore entity may sometimes be found by tracking the name of the person who set it up.

Consequently, this database and interactive tool make it much easier for regulators, journalists, and the public to quickly understand the relationships between individuals and offshore entities in a way that was not previously available to all but the most sophisticated law enforcement agencies.

While the current focus is on offshore clients from China, Taiwan and Hong Kong, the database will likely continue to grow as ICIJ releases more names from other regions of the world.  In fact, the current database already covers nearly 30 years until 2010, and it allows one to search three categories—i.e., “Officers & Master Clients,” “Offshore Entities,” and “Listed Addresses”—by Countries that include the United States, UK, China, Hong Kong, and Taiwan.  Individuals with or officers of offshore entities who were not aware of ICIJ and its Offshore Leaks Database should take notice, and it would be prudent for them to be proactive and start thinking about how best to respond to the disclosure of their information.

Regulators (And Others) May Use The Disclosed Names And Relationship Tool To Look For Possible Non-Compliance With The Law

Establishing and maintaining offshore entities is not illegal.  Many major corporations as well as individuals throughout the United States maintain such entities for perfectly legitimate reasons and in full compliance with the law.  Certain other countries require prior notice or approval before setting up offshore entities.  For example, Chinese residents may be required to register any offshore entities with the State Administration of Foreign Exchange.

Regardless of their legality, offshore entities are facing increasing scrutiny from regulators worldwide, including from the United States.  This is because regulators often view the setting up of these entities and related offshore bank accounts as tools to thwart the payment of taxes, hide assets and promote money laundering.

For example, United States law requires U.S. taxpayers to pay taxes on all income earned worldwide and report foreign financial accounts if the total value of the accounts exceeds $10,000 at any time during the calendar year.  Since 2008, the Internal Revenue Service (“IRS”) and the United States Department of Justice (“DOJ”) have expended significant resources in an effort to investigate offshore accounts and prosecute people who violated these laws.

In particular, this has led the IRS and federal criminal prosecutors to investigate Swiss banks and persons holding offshore accounts in these banks.  The investigations have led to one bank admitting guilt on charges of conspiring to defraud the United States by impeding the IRS, hundreds of millions of dollars in fines, and the disclosure by banks to the IRS and DOJ of the names of U.S. taxpayers who maintain secret Swiss bank accounts.

Armed with this information, the IRS and DOJ initiated investigations into individual U.S. taxpayers, resulting in the criminal prosecution of numerous individuals in the United States who failed to pay taxes or failed to disclose the existence of offshore accounts.

These aggressive investigations continue, with the IRS recently obtaining, for example, a court order authorizing the IRS to obtain from U.S.-based banks American taxpayer records in connection with The Bank of N.T. Butterfield & Son Limited and its affiliates in the Bahamas, Barbados, Cayman Islands, Guernsey, Hong Kong, Malta, Switzerland, and the United Kingdom.  There is no evidence that this government activity will abate.

According to a recent statement by IRS Acting Commissioner Werfel, “International issues remain a major focus for the IRS, and we are continuing our efforts to fight tax evaders who use offshore accounts to skirt the law . . . .”  The IRS, as part of its efforts, also developed voluntary disclosure programs to provide incentives for U.S. taxpayers to resolve their tax liabilities and minimize their chances of criminal prosecution by voluntarily disclosing previously undisclosed foreign accounts and income.  According to the IRS, more than 38,000 taxpayers have taken advantage of these programs.

The leaking of previously confidential ownership information and identifying relationships between individuals and entities cannot be undone, and appears likely to continue.  Regulators in and out of the U.S. may examine this information and subsequent disclosures to determine whether any of the identified individuals are taxpayers and, if so, whether these taxpayers have complied with the law.  Similarly, journalists and others may use this information to further investigate and publicize the names of well-known people with offshore accounts.

What to do:

These disclosures impact not only those on the list, but potentially others who created or are officers of offshore entities.  For persons who are unsure whether their offshore entities and accounts are in compliance with the law, it is recommended they contact a legal professional to discuss their individual situation.