Offshore Asset Protection Trusts: Tax Planning or Tax Fraud?
| Date | 01 March 2001 |
| DOI | https://doi.org/10.1108/eb027289 |
| Pages | 9-15 |
| Published date | 01 March 2001 |
| Author | Harvey M. Silets,Michael C. Drew |
| Subject Matter | Accounting & finance |
Journal of Money Laundering Control — Vol. 5 No. 1
Offshore Asset Protection Trusts:
Tax Planning or Tax Fraud?
Harvey M. Silets and Michael C. Drew
For someone seeking to place his assets out of the
reach of creditors, Offshore Asset Protection Trusts
(OAPTs) offer the potential settlor secrecy, control,
choice of law and jurisdiction, and favourable taxa-
tion. While many legitimate entities make use of
the benefits of OAPTs, criminal entities have also
seized upon them as a means of furthering their
crimes.
Criminals can use OAPTs in two ways: (1) hiding
legitimate assets for the purpose of avoiding paying
taxes and (2) channelling illegitimate assets for the
purpose of laundering them. Both tax evasion and
money laundering schemes can possess multiple
layers. The basic premise, however, is always the
same: take the criminal assets and place them into
one trust and then have the assets returned to the
criminal through an entirely different trust.
The keys to all criminal use of OAPTs are layering
and misdirection. The best schemes insulate the
criminal through layer upon layer of nominal trusts
and non-existent trustees. They also incorporate
misdirection by creating the appearance that the
criminal has no control of the trusts and that their
sole administrator is exclusively located in a foreign
country that may not recognise US laws or extra-
dition treaties. In combating these criminals, law
enforcement must learn to look for signals of
OAPT use, and they must be able to follow the
often convoluted paper trail that is necessary for
any OAPT scheme.
OAPTS AND THE CRIMINAL MIND
Tax evasion
The crime of tax evasion is accomplished as defined in
26 USC s.
7201
by '[a]ny person who wilfully
attempts to evade or defeat any tax imposed by this
title or the payment
thereof.
The Supreme Court
held 'wilfulness' in the context of criminal income
tax cases to mean 'an intentional violation of a
known legal duty'.1 Thus, in order to be criminally
liable for tax evasion, the individual must show a
voluntary affirmative act completed with intent.
The courts do not recognise tax avoidance without
criminal intent as a crime.
Those committing tax evasion include individuals
who choose to utilise OAPTs to conceal unreported
income or use OAPTs to generate the income. Some
hide their money in OAPTs knowing that such an
act
is
tax
evasion.2
Others fall prey to schemes that sug-
gest they do not have to pay federal income
tax.3
These individuals use OAPTs as insurance against
the United States trying to recover their taxable
assets despite their claim that they do not have to pay.
Tax evaders choose to use OAPTs primarily for
their secrecy. OAPTs are usually in jurisdictions
with bank secrecy laws that 'make it nearly impossi-
ble for the IRS to obtain accurate data on income dis-
tributions to US beneficiaries'.4 Without access to
information that resides in uncooperative venues,
the possibility of proof sufficient for conviction is
difficult indeed.
While these secrecy provisions are an enticing
feature of OAPTs, they are not
foolproof.
In United
States v Payner,5 the Supreme Court rejected the
defendant's claim to suppress evidence obtained in
an illegal seizure of Cayman Island bank records.
The seizure was set up as part of 'Operation Trade
Winds', an IRS investigation into American activities
in the Bahamas. Castle Bank, a Cayman Islands trust
company, was investigated because of its ties to sus-
pected narcotics traffickers. To obtain records from
this bank, the IRS had one of its private investigators
set up a plan to seize documents carried by Castle
Bank's vice president. The investigator, Norman
Casper, cultivated a relationship with the vice
president and introduced him to another operative,
Sybol Kennedy. When the vice president came to
Miami for a weekend, Casper had Kennedy arrange
to have the vice president meet Kennedy for dinner
at her Miami apartment. When the two left for
dinner the vice president left his briefcase behind.
Casper entered the apartment using a spare key and
seized all the documents in this briefcase, some of
which identified Payner as an account holder, thus
leading to a tax investigation of him and the ultimate
discovery of his tax violations.
Journal of Money Laundering Control
Vol
5 No
1,
2001,
pp
9-15
Henry Stewart Publications
ISSN 1368-5201
Page 9
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