Secret Files Expose Offshore’s Global Impact

ICIJ – by Gerard Ryle, Marina Walker Guevara, Michael Hudson, Nicky Hager, Duncan Campbell and Stefan Candea

Dozens of journalists sifted through millions of leaked records and thousands of names to produce ICIJ’s investigation into offshore secrecy ­

A cache of 2.5 million files has cracked open the secrets of more than 120,000 offshore companies and trusts, exposing hidden dealings of politicians, con men and the mega-rich the world over.  

The secret records obtained by the International Consortium of Investigative Journalists lay bare the names behind covert companies and private trusts in the British Virgin Islands, the Cook Islands and other offshore hideaways.

They include American doctors and dentists and middle-class Greek villagers as well as families and associates of long-time despots, Wall Street swindlers, Eastern European and Indonesian billionaires, Russian corporate executives, international arms dealers and a sham-director-fronted company that the European Union has labeled as a cog in Iran’s nuclear-development program.

The leaked files provide facts and figures — cash transfers, incorporation dates, links between companies and individuals — that illustrate how offshore financial secrecy has spread aggressively around the globe, allowing the wealthy and the well-connected to dodge taxes and fueling corruption and economic woes in rich and poor nations alike.

The records detail the offshore holdings of people and companies in more than 170 countries and territories.

The hoard of documents represents the biggest stockpile of inside information about the offshore system ever obtained by a media organization. The total size of the files, measured in gigabytes, is more than 160 times larger than the leak of U.S. State Department documents by Wikileaks in 2010.

To analyze the documents, ICIJ collaborated with reporters from The Guardian and the BBC in the U.K., Le Monde in France, Süddeutsche Zeitung and Norddeutscher Rundfunk in Germany, The Washington Post, the Canadian Broadcasting Corporation (CBC) and 31 other media partners around the world.

Eighty-six journalists from 46 countries used high-tech data crunching and shoe-leather reporting to sift through emails, account ledgers and other files covering nearly 30 years.

“I’ve never seen anything like this. This secret world has finally been revealed,” said Arthur Cockfield, a law professor and tax expert at Queen’s University in Canada, who reviewed some of the documents during an interview with the CBC. He said the documents remind him of the scene in the movie classic The Wizard of Oz in which “they pull back the curtain and you see the wizard operating this secret machine.”

Mobsters and Oligarchs

The vast flow of offshore money — legal and illegal, personal and corporate — can roil economies and pit nations against each other. Europe’s continuing financial crisis has been fueled by a Greek fiscal disaster exacerbated by offshore tax cheating and by a banking meltdown in the tiny tax haven of Cyprus, where local banks’ assets have been inflated by waves of cash from Russia.

Anti-corruption campaigners argue that offshore secrecy undermines law and order and forces average citizens to pay higher taxes to make up for revenues that vanish offshore. Studies have estimated that cross-border flows of global proceeds of financial crimes total between $1 trillion and $1.6 trillion a year.

ICIJ’s 15-month investigation found that, alongside perfectly legal transactions, the secrecy and lax oversight offered by the offshore world allows fraud, tax dodging and political corruption to thrive.

Offshore patrons identified in the documents include:

• Individuals and companies linked to Russia’s Magnitsky Affair, a tax fraud scandal that has strained U.S.-Russia relations and led to a ban on Americans adopting Russian orphans.
• A Venezuelan deal maker accused of using offshore entities to bankroll a U.S.-based Ponzi scheme and funneling millions of dollars in bribes to a Venezuelan government official.
• A corporate mogul who won billions of dollars in contracts amid Azerbaijani President Ilham Aliyev’s massive construction boom even as he served as a director of secrecy-shrouded offshore companies owned by the president’s daughters.
• Indonesian billionaires with ties to the late dictator Suharto, who enriched a circle of elites during his decades in power.

The documents also provide possible new clues to crimes and money trails that have gone cold.

After learning ICIJ had identified the eldest daughter of the late dictator Ferdinand Marcos, Maria Imelda Marcos Manotoc, as a beneficiary of a British Virgin Islands (BVI) trust, Philippine officials said they were eager to find out whether any assets in the trust are part of the estimated $5 billion her father amassed through corruption.

Manotoc, a provincial governor in the Philippines, declined to answer a series of questions about the trust.

Politically connected wealth

Maria Imelda Marcos Manotoc ->

The files obtained by ICIJ shine a light on the day-to-day tactics that offshore services firms and their clients use to keep offshore companies, trusts and their owners under cover.

Tony Merchant, one of Canada’s top class-action lawyers, took extra steps to maintain the privacy of aCook Islands trust that he’d stocked with more than $1 million in 1998, the documents show.

In a filing to Canadian tax authorities, Merchant checked “no” when asked if he had foreign assets of more than $100,000 in 1999, court records show.

Between 2002 and 2009, he often paid his fees to maintain the trust by sending thousands of dollars in cash and traveler’s checks stuffed into envelopes rather than using easier-to-trace bank checks or wire transfers, according to documents from the offshore services firm that oversaw the trust for him.

One file note warned the firm’s staffers that Merchant would “have a st[r]oke” if they tried to communicate with him by fax.

Tony Merchant. ->

It is unclear whether his wife, Pana Merchant, a Canadian senator, declared her personal interest in the trust on annual financial disclosure forms.

Under legislative rules, she had to disclose every year to the Senate’s ethics commissioner that she was a beneficiary of the trust, but the information was confidential.

The Merchants declined requests for comment.

Other high profile names identified in the offshore data include the wife of Russia’s deputy prime minister, Igor Shuvalov, and two top executives with Gazprom, the Russian government-owned corporate behemoth that is the world’s largest extractor of natural gas.

Shuvalov’s wife and the Gazprom officials had stakes in BVI companies, documents show. All three declined comment.

In a neighboring land, the deputy speaker of Mongolia’s Parliament said he was considering resigning from office after ICIJ questioned him about records showing he has an offshore company and a secret Swiss bank account.

“I shouldn’t have opened that account,” Bayartsogt Sangajav, who has also served as his country’s finance minister, said. “I probably should consider resigning from my position.”

Bayartsogt said his Swiss account at one point contained more than $1 million, but most of the money belonged to what he described as “business friends” he had joined in investing in international stocks.

He acknowledged that he hasn’t officially declared his BVI company or the Swiss account in Mongolia, but he said he didn’t avoid taxes because the investments didn’t produce income.

“I should have included the company in my declarations,” he said.

Wealthy Clients

The documents also show how the mega-rich use complex offshore structures to own mansions,  art and other assets, gaining tax advantages and anonymity not available to average people.

Baroness Carmen Thyssen-Bornemisza. ->

Spanish names include a baroness and famed art patron, Carmen Thyssen-Bornemisza, who is identified in the documents using a company in the Cook Islands to buy artwork through auction houses such as Sotheby’s and Christie’s, including Van Gogh’s Water Mill at Gennep.

Her attorney acknowledged that she gains tax benefits by holding ownership of her art offshore, but stressed that she uses tax havens primarily because they give her “maximum flexibility” when she moves art from country to country.

Among nearly 4,000 American names is Denise Rich, a Grammy-nominated songwriter whose ex-husband was at the center of an American pardon scandal that erupted as President Bill Clinton left office.

A Congressional investigation found that Rich, who raised millions of dollars for Democratic politicians, played a key role in the campaign that persuaded Clinton to pardon her ex-spouse, Marc Rich, an oil trader who had been wanted in the U.S. on tax evasion and racketeering charges.

Denise Rich. ->

Records obtained by ICIJ show she had $144 million in April 2006 in a trust in the Cook Islands, a chain of coral atolls and volcanic outcroppings nearly 7,000 miles from her home at the time in Manhattan.

The trust’s holdings included a yacht called the Lady Joy, where Rich often entertained celebrities and raised money for charity.

Rich, who gave up her U.S. citizenship in 2011 and now maintains citizenship in Austria, did not reply to questions about her offshore trust.

Another prominent American in the files who gave up his citizenship is a member of the Mellon dynasty, which started landmark companies such as Gulf Oil and Mellon Bank. James R. Mellon – an author of books about Abraham Lincoln and his family’s founding patriarch, Thomas Mellon – used four companies in the BVI and Lichtenstein to trade securities and transfer tens of millions of dollars among offshore bank accounts he controlled.

Like many offshore players, Mellon appears to have taken steps to distance himself from his offshore interests, the documents show. He often used third parties’ names as directors and shareholders of his companies rather than his own, a legal tool that owners of offshore entities often use to preserve anonymity.

James R. Mellon. ->

Reached in Italy where lives part of the year, Mellon told ICIJ that, in fact, he used to own “a whole bunch” of offshore companies but has disposed of all of them.  He said he set up the firms for “tax advantage” and liability reasons, as advised by his lawyer. “But I have never broken the tax law.”

Of the use of nominees, Mellon said that “that’s the way these firms are set up,” and added that it’s useful for people like him who travel a lot to have somebody else in charge of his businesses. “I just heard of a presidential candidate who had a lot of money in the Cayman Islands,” Mellon, now a British national, said, alluding to former U.S. presidential candidate Mitt Romney.

“Not everyone who owns offshores is a crook.”

Offshore growth

The anonymity of the offshore world makes it difficult to track the flow of money. A study by James S. Henry, former chief economist at McKinsey & Company, estimates that wealthy individuals have $21 trillion to $32 trillion in private financial wealth tucked away in offshore havens — roughly equivalent to the size of the U.S. and Japanese economies combined.

Even as the world economy has stumbled, the offshore world has continued to grow, said Henry, who is a board member of the Tax Justice Network, an international research and advocacy group that is critical of offshore havens. His research shows, for example, that assets managed by the world’s 50 largest “private banks” — which often use offshore havens to serve their “high net worth” customers — grew from $5.4 trillion in 2005 to more than $12 trillion in 2010.

Henry and other critics argue that offshore secrecy has a corrosive effect on governments and legal systems, allowing crooked officials to loot national treasuries and providing cover to human smugglers, mobsters, animal poachers and other exploiters.

Offshore’s defenders counter that most offshore patrons are engaged in legitimate transactions. Offshore centers, they say, allow companies and individuals to diversify their investments, forge commercial alliances across national borders and do business in entrepreneur-friendly zones that eschew the heavy rules and red tape of the onshore world.

“Everything is much more geared toward business,” David Marchant, publisher of OffshoreAlert, an online news journal, said. “If you’re dishonest you can take advantage of that in a bad way. But if you’re honest you can take advantage of that in a good way.”

Much of ICIJ’s reporting focused on the work of two offshore firms, Singapore-based Portcullis TrustNet and BVI-based Commonwealth Trust Limited (CTL), which have helped tens of thousands of people set up offshore companies and trusts and hard-to-trace bank accounts.

Regulators in the BVI found that CTL repeatedly violated the islands’ anti-money-laundering laws between 2003 and 2008 by failing to verify and record its clients’ identities and backgrounds. “This particular firm had systemic money laundering issues within their organization,” an official with the BVI’s Financial Services Commission said last year.

The documents show, for example, that CTL set up 31 companies in 2006 and 2007 for an individual later identified in U.K. court claims as a front man for Mukhtar Ablyazov, a Kazakh banking tycoon who has been accused of stealing $5 billion from one of the former Russian republic’s largest banks. Ablyazov denies wrongdoing.

Thomas Ward, a Canadian who co-founded CTL in 1994 and continues to work as a consultant to the firm, said CTL’s client-vetting procedures have been consistent with industry standards in the BVI, but that no amount of screening can ensure that firms such as CTL won’t be “duped by dishonest clients” or sign on “someone who appears, to all historical examination, to be honest” but “later turns to something dishonest.”

“It is wrong, though perhaps convenient, to demonize CTL as by far the major problem area,” Ward said in a written response to questions. “Rather I believe that CTL’s problems were, by and large, directly proportional to its market share.”

ICIJ’s review of TrustNet documents identified 30 American clients accused in lawsuits or criminal cases of fraud, money laundering or other serious financial misconduct. They include ex-Wall Street titans Paul Bilzerian, a corporate raider who was convicted of tax fraud and securities violations in 1989, and Raj Rajaratnam, a billionaire hedge fund manager who was sent to prison in 2011 in one of the biggest insider trading scandals in U.S. history.

TrustNet declined to answer a series of questions for this article.

http://www.icij.org/offshore/secret-files-expose-offshores-global-impact