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  • Writer's pictureJulia Cooper

The Opaque World of Offshore Jurisdictions

There is no universally agreed definition for offshore jurisdictions, or tax havens, and whereas the two are subtly different, they share many of the same characteristics and are often referred to as one and the same.



For the purpose of this article, we shall treat them as one, refer to them as offshore jurisdictions and simplify the definition by stating that they are jurisdictions which offer individuals and corporations little or no tax liability and a high degree of secrecy. Some international locations, such Wyoming in the United States are occasionally referred to as tax havens because they have special tax laws, however; these are very different and not generally regarded as locations within which criminal activity is conducted.


Offshore jurisdictions have been widely used since the 1930s and some of the most popular include: Andorra, the Bahamas, Belize, Bermuda, the British Virgin Islands, the Cayman Islands, the Channel Islands, Jersey, The Marshall Islands, Mauritius, Lichtenstein, Monaco, Panama, St. Kitts, and Nevis.


Not all offshore jurisdictions are identical and whereas some focus on financial services, others specialize in the provision of corporate and trust formation and management. Common characteristics are: minimal or no taxes, little or no sharing of financial information with foreign authorities, a lack of residency requirement or a physical business presence, a lack of transparency obligations and minimal requirements for reporting of information. Notably, according to the Tax Justice Network’s Tax Haven Index, the top three are all overseas British territories; the BVI, Bermuda and the Cayman Islands.



What are they used for and by whom ?


Offshore jurisdictions can be used for perfectly legally for activities such as tax avoidance, however; they are more synonymous with illegal activities such as tax evasion (non-residents evading tax in their actual country of residence) and money laundering (returning criminal/illegal money back into circulation). The prime reason they are attractive to criminals, is their inappropriately high level of client confidentiality and whereas there are several regulatory bodies that monitor tax havens, including the Organization of Economic Cooperation and Development (OECD), the international Financial Action Task Force (FATF – the global money laundering and terrorist financing watchdog) and the U.S. Government Accountability Office, criminals can still operate within them with relative impunity.


Individuals and companies alike exploit offshore jurisdictions and as a general rule, the wealthier they are, the more embedded they are; with some having hundreds of offshore subsidiaries. In 2017, it was estimated that individuals had hidden $8.7 trillion and American Fortune 500 companies alone, almost $2.6 trillion. Whereas the majority of this money is clean, a sizeable amount could be considered dirty and is doubtless being laundered by criminals who are exploiting the secrecy of offshore jurisdictions for illegal activities such as money laundering. In sophisticated cases, they do so by utilizing complex mechanisms, spanning several countries, with a chain of intermediaries and a network of shell companies, offshore structures and nominee arrangements to mask their activities and hide the identity of ultimate beneficial owners (the person/s who invest in, control, or otherwise benefit from an asset, such as a bank account, real estate property, company, or trust).


There are a range of estimates as to the cost of offshore jurisdictions to the world economy. It is estimated that legal corporate tax revenue avoidance cost governments between $500-600 billion and that between $1.5 – $2.8 trillion worldwide is lost annually to money laundering.



Changing Winds?


Although there are still many offshore jurisdictions with favorable conditions for criminal activity, the list is shrinking; albeit slowly. In recent years, some Swiss banks and financial institutions have cooperated with the U.S. to enter into deferred prosecution agreements. In 2016, several financial institutions in the Caymans held their hands up to being guilty of hiding client assets and tax evasion and also entered into deferred prosecution agreements. The attractiveness of Panama diminished with the leak of the Panama Papers (containing more than 11.5 million legal and financial records) and in 2020, Luxembourg brought in new reporting rules and agreed to cooperate with foreign governments.



Conducting Offshore Jurisdictions Investigation


Perhaps inevitably, most complex asset tracing investigations end up involving at least one offshore jurisdiction and sometimes multiple. Although their opacity makes it difficult to identify the UBO , it is not impossible; although it does require sensitivity (to avoid tipping off the criminals and enabling them to disperse their assets) and significant resource (time and money) to enable freezing orders and disclosure orders to be served. These tools can only be used if you have the correct information at the right time and crucially, if it’s admissible as evidence; the challenge of which varies between jurisdictions.


If you do need assistance tracing assets via offshore jurisdictions investigation, it is important to act with speed to locate and freeze assets, as tracing exercises rarely improve with age. If multiple offshore jurisdictions are involved, it is also crucial to assess the advantages and limitations of eac, so that the investigative effort can be prioritized.


Any investigation will inevitably require an element of Opens Source Intelligence (OSINT), however; this is unlikely to provide more than the basic information necessary to form an investigative strategy. To make any meaningful progress, Human Intelligence (HUMINT) and local source inquiries will be required. By employing a combined methodology, it is possible to uncover information on company structure, directors and ultimately, identify UBOs.

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