Summary: Public funds looters are running amok. Looting may be easy, but it requires some sophistication to conceal looted funds. This easy offers an advisory on mechanisms within realm of international public finance looters may explore to conceal their loot and evade taxes.
You’ve just looted Eurobond. Or Covid-19 funds. Where would you hide the money? Would you put it in the bank? Maybe stash it under your mattress? Please. That’s amateur thinking, for small-time looters such as county governors. This is a legal guide to public finance thieves on how to hold looted money and not have it seized by asset recovery agencies like fool’s property.
The tricks and tactics to conceal a heist are broad. They touch not just on financial regulations, but also on global corruption, crime, and even assassination. This essay is a guide to looters on how to conceal looted funds.
From Eurodollars to Eurobonds: Ungodly pact of the Allies
Prior to World War II, global finance was relatively unregulated. Money flowed rapidly among nations; it destabilized currencies and caused poverty and widespread social unrest, both factors in the outbreak of the war.
Years later, with victory in sight, the Allied powers turned their attention to preventing this situation from arising again. To this end, they decided that the value of national currencies would no longer be determined by market fluctuations. Instead, they would be tied to the US dollar, the value of which was pegged to US gold reserves, a stabilizing force.
The Allies also agreed that in the future, money would only be allowed to travel overseas in the form of long-term investments. Risky, short-term international investments were strictly prohibited. It was a bold and effective move – but it wasn’t to last.
These new international financial regulations worked well for a time. But before long, bankers started exploiting loopholes in the new laws. For example, although the US government oversaw American banks and regulated their loans to ensure stability, it couldn’t interfere with dollars that were stored overseas. As a result, London bankers could do what they liked with the dollars they controlled – the British government simply didn’t care.
This uprooted currency became known as eurodollars, and it could flow among countries just like in the old days. This was the first blow to the stable postwar framework.
Not long afterward, eurodollars were joined by an even more daring financial innovation, known as Eurobonds. These new bonds were different from investments of the past. Through clever planning and artful negotiation with European authorities, bankers gave this new type of investment a whole host of attractive features. For a start, the profits earned on Eurobonds were tax-free – but that’s not all.
In the past, institutions that issued bonds had to record the personal details of those buying them. Eurobonds did away with this restriction. In fact, Eurobonds weren’t tied to individuals at all; issuing institutions simply gave buyers a coupon to be redeemed when the loan’s term had elapsed. This made them enormously appealing to individuals seeking to hide wealth.
This situation was a far cry from the ideals that the Allies had advanced at the end of World War II. Instead of reining in the world of global finance, their new regulations inadvertently ushered in a new, more aggressive market – and money went global as never before.
Advice to looters: Use the loot proceeds to invest in Eurobonds.
The haven of the offshores and the allure of Nevis
Offshore havens are perfect hubs for financial crimes and corruption. As any embezzler knows, the best place to stash ill-gotten gains is offshore, in a jurisdiction with favorable laws and financial discretion. Offshore havens are perfect hubs for financial crimes and corruption.
However, haven like British Virgin Islands or Cayman’s highlands are no longer very safe. Explore somewhere, a country like Nevis, a small Caribbean island with a population of just 11,000. Why Nevis?
When Nevis gained independence from Britain in the 1980s, a group of American lawyers led by a man named Bill Barnard had the ear of the island’s leader, Simeon Daniel. In just a few years, Daniel and these lawyers transformed Nevis into the ideal place to stash secret assets.
How did they do this? Well, Nevis no longer recognizes the judgments of foreign courts, so any attempt to get at someone’s assets has to be conducted within the island’s own legal system. That means posting a $100,000 bond just to begin your case. And if more than a year has elapsed between the offense and the day you file the papers, the court will dismiss your claim.
Before you get that far, though, you need to figure out whether or not the assets you’re after are in Nevis. But the island has a “confidentiality ordinance” that prohibits sharing financial information with anyone who can’t prove their right to hear it.
Intimidate, kill, when necessary
Nevis isn’t an anomaly, either. Around the year 2000, the British island of Jersey made headlines when Financial Management Company Ltd (FIMACO), a mysterious company based on the island, attracted the attention of Russian Prosecutor General Yuri Skuratov.
FIMACO was a Jersey company founded in 1990. The Company has gained fame as a result of a series of scandals related to the IMF loan funds, operations on the Russian debt market and the issue of obtaining commission income from operations with the state currency reserve. Skuratov noticed that FIMACO had received tens of billions of dollars from his country’s central bank. But as far as he could ascertain, the company served no purpose whatsoever. It was a shell.
Skuratov suspected that the funds sent to FIMACO were being funneled back to central bank officials through other channels. This suggested widespread corruption in the central bank, with officials using the hidden funds to finance lavish lifestyles.
Skuratov went public about FIMACO, and not long after he did, state-controlled TV broadcast footage of a man resembling him cavorting happily with a pair of prostitutes. The pushback seemed to confirm his suspicions. Skuratov was fired not long after, and his successor abandoned the investigation. Corrupt rulers enrich themselves in some of the world’s poorest places.
One of the remarkable things about kleptocracy, the rule of the corrupt, is that it has an irritating knack for overcoming national borders.
Corruption doesn’t respect national borders. Want an example of corruption reaching across borders? Well, it would be hard to find a clearer one than the 2006 murder of UK resident Edwin Carter, also known as Alexander Litvinenko. Litvinenko, a former KGB agent, died of polonium poisoning in London in November 2006.
Now, polonium is not found in the natural world, meaning that Litvinenko had almost certainly been deliberately poisoned. Why? Well, before he emigrated to the UK, Litvinenko exposed a secret Russian government organization dedicated to assassinating troublesome politicians and businessmen.
When he arrived in London, Litvinenko continued to share information about kleptocrats with private investigators. The information he provided on one dangerous Russian magnate and politician led to the collapse of a multimillion-dollar deal the man was planning. And that, it seems, is what sealed his fate.
Within two months, Litvinenko was dead. All signs indicated that two acquaintances of his, who visited him in London just before he fell ill, were responsible for the murder. But the men had returned to Russia by the time Litvinenko died, and their government refused to cooperate with the British investigation.
In fact, one of the suspects, a man named Lugovoy, was soon awarded a medal for “services to the Fatherland,” and also won a place in the Russian parliament. As if this weren’t enough, he sent one of Litvinenko’s friends a T-shirt reading, in slightly awkward English, “Polonium-210 . . . nuclear death is knocking your door.”
It seemed clear that the the the order to murder Litvinenko had come from high up in the Russian government. This wasn’t an isolated incident, either – there have been many other murders in the UK with indications of Russian involvement. But while national borders have failed to stop these crimes, they do pose obstacles to investigations. So far, Russian authorities have refused to play ball.
Increasingly, it seems that there’s no such thing as a safe place to expose the crimes of kleptocrats.
Manipulating America’s obstinacy on FATCA
The era of Swiss financial secrecy is over, but new problems have emerged. In 2007, a banker named Bradley Birkenfeld earned himself a forty-month prison sentence and banked over $100 million in a single move.
What did Birkenfeld do? He told American authorities about his involvement in a huge Swiss tax evasion scheme that deprived the US Treasury of $100 billion in tax revenue every year. As a whistleblower, Birkenfeld was entitled to a portion of that money. But because he wasn’t fully honest about his own actions, he also wound up in jail.
In the past, Swiss banks had cooperated with their clients to hide assets from US authorities. But after Birkenfeld’s revelations, everything changed.
In light of Birkenfeld’s revelations, the United States drew up new and more stringent regulations for dealing with overseas banks. These banks would no longer be trusted to ensure that their clients paid taxes. Instead, Congress passed a law requiring all foreign financial institutions to reveal the names and assets of the US citizens on their books. If banks refused, they faced a tax of 30 percent on any investment income gained in the United States.
The Act came into operation in 2015, and it’s already eradicated some common types of tax evasion. But the new system is far from perfect.
Navigating the Common Reporting Standard
Take the Common Reporting Standard, or CRS, the crown jewel in the system that takes on hidden assets all over the world. In many ways, it’s a step in the right direction. In the past, governments swapped financial account details only on request. Now, countries participating in the CRS do so automatically. This makes it far easier to identify anyone trying to evade taxes.
But there’s a problem. As we’ve seen, ill-gotten gains flow out of some of the world’s poorest nations at an alarming speed. But even with a mountain of financial information at their disposal, many of these countries simply can’t scour databases in search of financial wrongdoing.
What’s more, one powerful country doesn’t release data in accordance with the CRS. And it’s not a typical tax haven: it’s the United States.
Nevada, here we come, with our loot!
Although foreign banks have to tell the United States about their American clients, American banks don’t have to return the favor. This makes the United States an increasingly attractive tax haven. Many US states are becoming international tax havens.
Some countries are notorious tax havens – Switzerland, obviously, and the Cayman Islands. But when looking for a place to stash ill-gotten billions, few looters would think of the US state of South Dakota.
But they should. Why? In a word: trusts. A trust involves passing your assets to a trustee, an individual or institution that follows the instructions you laid down when you made the agreement. Before the 2007 Swiss banking scandal, South Dakota’s trustees held $32.8 billion. Just a decade later, they held $226 billion – a sevenfold increase in ten years!
South Dakota isn’t the only state that’s abusing trusts. In fact, it’s another state that really pioneered the practice: Nevada.
Imagine you’re a billionaire and you’re trying to figure out how to pay as little tax as possible. You’ve heard good things about the laws in Nevada – but what exactly does the home of Las Vegas offer someone in your financial position?
Well, first of all, Nevada allows you to create trusts that last 365 years. In the United States, if you use a trust to pass assets to a descendant, you only pay taxes on those assets when the trust ends. When a trust lasts for three and a half centuries, so does your tax avoidance.
And it gets better. It’s common practice for island tax havens such as Nevis and Jersey to make it incredibly hard for creditors to go after assets, and Nevada is much the same. If two years have passed since you put your assets in a trust, they’re untouchable.
So if you go through a divorce and your ex-husband tries to claim a portion of the billions in your trust, wish him good luck! No creditor has ever managed to extract assets from a Nevada trust.
Finally, Nevada can keep your billions just as secret as Swiss banks used to. If you give a non-US citizen any formal power over the trust – for example, the power to change the trustee – then for tax purposes, it’s a foreign trust. This means that the United States legally can’t share information about it with foreign governments.
And if it’s registered with an American trustee, then it’s simultaneously American, according to the Common Reporting Standard. And the CRS, of course, is the one to which the United States doesn’t subscribe.
Advice to looters. In short, Nevada might just be the safest place in the world for your looted billions.
When money went global, the rich and dishonest saw an unprecedented opportunity to protect and conceal their wealth. Because laws stop at borders but money doesn’t, vast riches can be siphoned off into jurisdictions with financial secrecy and laws favorable to hiding cash. This leaves governments and regulatory bodies with little option but to chase money around the globe.
However, use these legal mechanism, you will have your billions safe.