You're reading: Secret files expose offshore’s global impact

Editor’s Note: The following investigative report is by the International Consortium of Investigative Journalists, based on millions of leaked records involving offshore secrecy. ­The International Consortium of Investigative Journalists is an independent network of reporters in more than 60 countries who collaborate on cross-border investigations. It is a project of the Washington-based Center for Public Integrity.

Here is a link to the related sidebar: 'Who Uses the Offshore World'

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 UK, 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. The Stolen Asset Recovery Initiative, a program of the World Bank and
the United Nations, has 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 Sergei Magnitsky Affair, a tax fraud scandal that
has strained U.S.-Russia relations and led to a ban on Americans adopting
Russian orphans.

· A U.S. hedge fund
manager accused of using offshore entities to operate an international Ponzi
scheme and funnel $30 million in bribes to Venezuelan government officials.

· 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 Muhammad 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

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 a Cook 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.

Research by the CBC found
no evidence that his wife, Pana Merchant, a Canadian senator, declared her
personal interest in the trust on annual financial disclosure forms. It is unclear whether she was required to do
so.

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.

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 U.S.
President Bill Clinton left office.

A Congressional
investigation found that Rich, who raised millions of dollars for Democratic
politicians, played a key role[i] 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.

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.

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.

Blacklisted

The records
obtained by ICIJ expose how offshore operatives help their customers weave
elaborate financial structures that span countries, continents and hemispheres.

A Thai
government official with links to an infamous African dictator used
Singapore-based TrustNet to set up a secret company for herself in the BVI, the
records show.

The Thai official, Nalinee “Joy” Taveesin, is
currently Thailand’s international trade representative. She served as a
cabinet minister for Prime Minister Yingluck
Shinawatra before stepping
down last year.

Taveesin acquired her BVI company in August 2008.
That was seven months after she’d been appointed an advisor to Thailand’s
commerce minister
– and three months before the U.S. Department of
Treasury blacklisted her as a “crony” of Zimbabwean dictator Robert Mugabe.

The
Treasury Department froze her U.S. assets, accusing her of “secretly supporting
the kleptocratic practices of one of Africa’s most corrupt regimes” through gem
trafficking and other deals made on behalf of Mugabe’s wife, Grace, and other
powerful Zimbabweans.

Taveesin
has said her relationship with the Mugabes is “strictly social” and that the
U.S. blacklisting is a case of guilt by association. Through her secretary,
Taveesin flatly denied that she owns the BVI company. ICIJ verified her
ownership using TrustNet records that listed her and her brother as
shareholders of the company and include the main address in Bangkok for her
onshore business ventures.

Records
obtained by ICIJ also reveal a secret company belonging to Muller Conrad
“Billy” Rautenbach, a Zimbabwean businessman who was blacklisted by the U.S.
for his ties to the Mugabe regime at the same time as Taveesin. The Treasury
Department said Rautenbach has helped organize huge mining
projects in Zimbabwe that “benefit a small number of corrupt senior officials.”

When CTL set
Rautenbach up with a BVI company in 2006 he was a fugitive, fleeing fraud
allegations in South Africa. The charges lodged personally against him were
dismissed, but a South African company he controlled pleaded guilty to criminal
charges and paid a fine of roughly $4 million.

Rautenbach
denies U.S. authorities’ allegations, contending that they made “significant
factual and legal errors” in their blacklisting decision, his attorney, Ian
Small Smith, said. Smith said Rautenbach’s BVI company was set up as “special
purpose vehicle for investment in Moscow” and that it complied with all
disclosure regulations. The company is no longer active.

 ‘One stop shop’

Offshore’s
customers are served by a well-paid industry of middlemen, accountants, lawyers
and banks that provide cover, set up financial structures and shuffle assets on
their clients’ behalf.

Documents
obtained by ICIJ show how two top Swiss banks, UBS and Clariden, worked with
TrustNet to provide their customers with secrecy-shielded companies in the BVI
and other offshore centers.

Clariden, owned
by Credit Suisse, sought such high levels of confidentiality for some clients,
the records show, that a TrustNet official described the
bank’s request as the “the Holy Grail” of offshore entities – a company so
anonymous that police and regulators would be “met with a blank wall” if they
tried to discover the owners’ identities.

Clariden declined to answer questions about its relationship with
TrustNet.

“Because of Swiss banking secrecy laws, we are not allowed to provide any
information about existing or supposed accountholders,” the bank said. “As a
general rule, Credit Suisse and its related companies respect all the laws and
regulations in the countries in which they are involved.”

A spokesperson
for UBS said the bank applies “the highest international standards” to fight
money laundering, and that TrustNet “is one of over 800 service providers globally which UBS clients choose
to work with to provide for their wealth and succession planning needs. These
service providers are also used by clients of other banks.” 

TrustNet
describes itself as a “one-stop shop” — its staff includes lawyers, accountants
and other experts who can shape secrecy packages to fit the needs and net
worths of its clients. These
packages can be simple and cheap, such as a company chartered in the BVI. Or
they can be sophisticated structures that weave together multiple layers of
trusts, companies, foundations, insurance products and so-called “nominee”
directors and shareholders.

When they create
companies for their clients, offshore services firms often appoint faux
directors and shareholders – proxies who serve as stand-ins when the real
owners of companies don’t want their identities known. Thanks to the proliferation of proxy directors and shareholders, investigators
tracking money laundering and other crimes often hit dead ends when they try to
uncover who is really behind offshore companies.

An analysis
by ICIJ, the BBC and The Guardian
identified a cluster of 28 “sham directors” who served as the on-paper
representatives of more than 21,000 companies between them, with individual
directors representing as many 4,000 companies each.

Among the front
men identified in the documents obtained by ICIJ is a UK-based operative who
served as a director for a BVI company, Tamalaris Consolidated
Limited, which the European Union has labeled as a front company for the
Islamic Republic of Iran Shipping Line. The E.U., the U.N. and the U.S. have
accused IRISL of aiding Iran’s nuclear-development program.

‘Zone
of impunity’

International groups have been working for decades to limit tax cheating
and corruption in the offshore world. nternational groups have been working for decades to limit tax cheating
and corruption in the offshore world.

In the 1990s, the Organization for Economic
Co-operation and Development began pushing offshore centers to reduce secrecy
and get tougher on money laundering, but the effort ebbed in the 2000s, as the
Bush administration withdrew American support, according to Robert Goulder, former editor in chief
of Tax Notes International.

A second “great crusade” against tax havens, Goulder writes, began when
U.S. authorities took on UBS, forcing the Swiss bank to pay $780 million in
2009 to settle allegations that it had helped Americans dodge taxes. U.S. and
German authorities are pressuring banks and governments to share information
about offshore clients and accounts. UK Prime Minister David Cameron has vowed
to use his leadership of the G8, a forum of the world’s richest nations, to
help crack down on tax evasion and money laundering.

Promises like those have been met with skepticism, given the role played
by key G8 members – the U.S., the UK and Russia – as sources and destinations
of dirty money. Despite the new efforts, offshore remains a “zone of impunity”
for anyone determined to commit financial crimes, said Jack
Blum, a former U.S. Senate investigator who is now a lawyer specializing in money laundering and tax fraud
cases.

“Periodically,
the stench gets so bad somebody has to get out there and clap the lid on the
garbage can and sit on it for a while,” Blum said. “There’s been some progress,
but there’s a bloody long way to go.”

Mar
Cabra, Kimberley Porteous, Frederic Zalac, Alex Shprintsen, Prangtip Daorueng,
Roel Landingin, Francois Pilet, Emilia Díaz-Struck, Roman Shleynov, Harry
Karanikas, Sebastian Mondial and Emily Menkes contributed reporting to this
story.