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Beware of risks incurred

For decades, offshore companies have traditionally been used for various reasons. Amongst the advantages offshore arrangements may provide  tax benefits and high levels of privacy and confidentiality. These are the aspects of the offshore world that have recently been put under attack by governments and tax administrators around the globe, among other reasons the authorities cited the abusive use of offshore companies and similar arrangements facilitated tax evasion and money laundering.


We by no means suggest that offshore arrangements are per se illegal even when some of them are. Furthermore, anti-avoidance legislation in taxation, anti-money laundering rules, and measures aiming at transparency in the corporate world, tax and banking matters are rapidly changing. What might have been seen as generally accepted practice a couple of years ago can no longer be considered compliant these days.


Below we briefly outline the risks ultimate beneficial owners (‘UBOs’) and promoters of an offshore company may face. The ultimate beneficial ownership term is used in anti-money laundering context to refer to the person who ultimately controls or is entitled to funds or entities, acknowledging that this person may differ from a person in whose name an account is opened or shares and interests in companies and other legal arrangements are registered and held.  We refer to all kinds of service providers related to the offshore industry, such as corporate service providers (providing the nominee directors also), registration agents, attorneys, bank account managers and compliance officers, consultants and private bankers collectively as promoters.


The tax and legal system of your country of residence as well as vast cultural differences among various territories imply that perhaps not all the risks, measures or events listed below could affect you.  The points below shall be seen as worst case scenarios applying to non-compliant offshore structures only,  real life cases however suggest that the followings  are not only theoretical. We recommend considering whether these could affect you and if so taking actions before authorities do.


 1. If you are an UBO your identity may be revealed through ‘data leakage’ from corporate service providers or by whistleblowers.  (See the Portcullis-Singapore and Trustnet-BVI cases );


 2. If you are an UBO your ex-spouse, competitors, former business partners, foes or  investigative journalists  may send information about your offshore investments/accounts to authorities in your home jurisdiction;


 3. If you are an UBO and you have ever traded with third parties through an offshore company you control, you inevitably run the following risk. Let’s assume your counterpart is subject to a tax audit in his home country. The tax inspector challenges your counterpart’s offshore transactions, claiming the offshore entity is a simple re-invoicing center and was used for tax evasion by him, and requests your counterpart to declare if he is the ultimate beneficial owner of the offshore vehicle. Your counterpart would at this stage likely tell the inspector it is not him but rather yourself. The inspector may then cross-check this information with the tax authority in your home jurisdiction, which may in turn initiate a tax review and use this information against you;


 4. If you are an UBO lucky enough not fall prey to the above unfortunate events, and can surely(!) avoid those, your identity as an UBO and an offshore account holder can still become known within the statute of limitation period to the tax authority of your home jurisdiction as a result of various transparency initiatives around the globe. The following two are the most remarkable ones. Firstly, under the automatic exchange of information system, which is to become the new global standard after the end of 2015, your home tax authority will automatically(!) receive the bank account details of your offshore company. As you know, anti-money laundering rules require banks to identify you during their client acceptance procedures and therefore already have the data to be exchanged ready in their files;


 5. If you are an UBO or a promoter you need to be aware of the other recent transparency initiative started by the European Union, to make data on ultimate beneficial owners publicly available in company registers. The legislation is expected to be rolled out to trusts and foundations also, however, it is worth nothing that at present many of these entities are not subject to registration at all. Anyway, member states of the EU are requested to implement the legislation as part of an update of the fourth anti-money-laundering directive. In order not to lose business to traditional offshore locations, EU countries with significant offshore industries (such as the Netherlands, Luxembourg, Cyprus and Malta) will likely take all measures possible through other forums, such as the G20 or the OECD to extend this concept to other territories, including traditional offshore jurisdictions;


 6. If you are an UBO or a promoter:  authorities may commence investigation and seize files, records and e-mails kept on the computers of registration agents, consultants, attorneys or any other kinds of promoters fallen under suspicion of aiding large-scale tax evasion – as it happened in the case of the largest French and Romanian company registration agents. Promoters were taken into custody in these cases, as well as clients of the latter company, 6 private individuals of the management of the largest Romanian oil company who had allegedly been involved in shady financial manoeuvres with fake consultancy agreements of Delaware offshore companies. );


 7. If you are an UBO or a promoter you will understand that the era of cheap off-the-shelf offshore arrangements has come to an end.  Offshore structures are no longer a commodity. Routinely done bulk registration of offshore companies and operating these letter box companies with nominee directors, even if cost efficient, will no longer deliver whatever these companies were established for. Tax administrators around the globe are more and more likely to challenge these offshore arrangements. Operating offshore structures with real economic substance is the only way going forward. However, this comes at a cost. Where stakes and volumes are high enough to cover these costs, implementing compliant offshore structures is still a sensible and legitimate option. Otherwise, the best one can do to avoid unnecessary exposure is to close down these structures. The sooner the better. Considering statute of limitation rules you might have wanted to act yesterday;


 8. If you are an UBO or a promoter you need to know that local directors and management of the offshore company need to have and habitually exercise the powers over the business of the offshore company, something that nominee directors in fact rarely do. The legal framework needs to be tested against actual practice in this respect, as they can indeed deviate. There shall be commercial reason, a so-called business case of the offshore scheme other than achieving tax benefits, which needs to be well justified and documented, to be ready for being reviewed by a tax inspector or even a tax court. An offshore arrangement that does not serve any non-tax related purpose will be seen as abuse of law, and authorities that, as a consequence of the points above, will have extensive information about the scheme would likely challenge it;


 9. If you are an UBO not following the above, you may soon expect serious debates or conflicts with your promoter. As a result of automatic exchange of information and publicly available information in company registers your identity as beneficial owner that is currently hidden behind nominees will be revealed. Your offshore arrangement or accounts may then become subject to scrutiny by your home country tax authorities. In order to avoid tax charges or even prosecution, your defense strategy will likely involve emphasizing your promoter’s role, and claim you have been advised by professionals to use an offshore scheme and have not been made aware of the potential legal offenses you may commit when setting up and operating the scheme. You may want to justify you acted with good faith by marketing materials of the promoters or records of meetings, it is however yet to be seen if these arguments will prevail. This is a point when your promoter may interpret his role differently than you do. Promoters and clients pointing fingers at each other and expose all details of each other’s roles in the entire structure in order to reduce the extent of their responsibility is not unheard of;


 10. If you are a promoter and you were actively marketing offshore schemes as part of selling your own services, such as company registration, providing nominee directors and other maintenance services, depending on the legal system and criminal law applying you might be found liable of soliciting, facilitating, conniving or assisting tax evasion, or even be considered as co-perpetrator of tax crimes. Even if you did not actively market offshore schemes, and have never publicly advertised offshore schemes you may assume that your clients facing serious charges may be willing to present your role as an active and recurring one throughout the cycle, from preliminary advisory to the setting up, maintenance and operation of offshore schemes, which might in fact have been the case. Even if there is no direct evidence against you, your clients’ testimony may verify charges against you. US and European cases suggest that your clients who were found guilty of tax evasion may file claims against you, on the grounds that you, a professional service provider, did not act with due care and diligence when advising them;


 11. If you are an UBO, you may expect that in the course of an investigation your service provider will in turn disclose details about your active involvement in and knowledge about operating the offshore scheme. He will claim you had been informed and understood why and what kind of rules and practices to follow in order to be able to exploit the often illegal advantages the offshore arrangement offered. Understanding and accepting the role of nominees, the practice of withdrawing funds from offshore accounts with offshore corporate bank cards, preferably outside your home country may imply that you must have been aware of the various tax and legal implications and illegal nature of the scheme and well informed to take decisions on it on your own;


 12. If you are an UBO or a promoter, you may expect that details of offshore schemes will become entirely known to the authorities and that offshore arrangements that might have been considered compliant when set up may fail the latest standards. It is time for all stakeholders, beneficial owners and service providers alike to reconsider their role in offshore schemes, revisit such structures and, if sensible, change them and implement new solutions in order to be compliant, or otherwise close them down. Discontinued offshore arrangements can, however, still be subject to review subject to statute of limitation rules;


 13. If you are an UBO or a promoter, you may conclude that restructuring and maintaining offshore structures in accordance with the latest standards of the offshore industry would only be sensible for just a handful of those using offshore arrangements, as they would need to comply with a long set of rules. We have written a book on this topic that is accessible via the following link


 14. If you are an UBO or a promoter and you believe you are amongst those who can sensibly stay in the offshore scene you may want to consult us.




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