A New York hedge fund manager allegedly swindles US$12 million from a prominent Baltimore family. A couple in the state of Indiana is accused of cheating hundreds of customers by charging for free trials of cosmetic products. A financial manager in Texas promises 23 per cent returns but absconds with US$33.5 million of investors' money.
All three American cases have one thing in common: money ending up in offshore accounts and trusts set up in tax havens.
The existence of the trusts surfaced during an examination of the offshore world by The Washington Post and the International Consortium of Investigative Journalists, a non-profit news organisation. ICIJ obtained 2.5 million records of more than 120,000 companies and trusts created by two offshore companies, Commonwealth Trust (CTL) in the British Virgin Islands and Portcullis TrustNet, which operates mostly in Asia and the Cook Islands. The records were obtained by Gerard Ryle, ICIJ's director, in an investigation he conducted in Australia.
Many people use the offshore world for legitimate purposes, for legal tax shelters or to smooth the way for international trade.
But the records expose how havens in the South Pacific and Caribbean in some cases have become sanctuaries for individuals seeking to conceal their activities from investigators and investors.
Among the 4,000 American individuals listed in the records, at least 30 have been accused in lawsuits or criminal cases of fraud, money laundering or other serious financial misconduct.
They include billionaire hedge fund manager Raj Rajaratnam, convicted in 2011 in one of the biggest insider trading scandals in American history, and Paul Bilzerian, one of the most famed corporate raiders of the 1980s, who was convicted of securities fraud.
A lawyer for TrustNet, which helped create the companies and trusts for the clients, declined to comment, referring questions to senior TrustNet officials who did not respond to requests to discuss their firm.
Fraud experts say offshore bank accounts and companies are vital to the operation of complex financial crimes. Allen Stanford, who ran a US$7 billion Ponzi scheme, used a bank he controlled in Antigua.
Bernard Madoff, who ran the largest Ponzi scheme in US history, used a series of offshore "feeder funds" to fuel the growth of his multibillion-dollar house of cards.
"People were trying to hide their money from the IRS [Internal Revenue Service], or they were trying to hide their money from law enforcement, or they were trying to hide their money from regulators," said Paul Pelletier, who, as principal deputy chief of the US Justice Department's fraud section, prosecuted Stanford before entering private practice in 2011.
"As a prosecutor, it was very difficult pursuing these people."
Michael Goldberg, a Florida lawyer who often testifies as an expert on Ponzi schemes, said it was rare to see one that did not make use of the offshore world.
"If you don't, it's usually a very parochial … type of Ponzi," he said. "But the more sophisticated ones almost always do."
The offshore world makes it hard for prosecutors pursuing complex financial crimes to follow the money, because many jurisdictions refuse to recognise subpoenas and account information is hidden under layers of corporate shells.
The records reviewed by The Post and ICIJ include tax filings, internal memorandums and e-mails kept by CTL and TrustNet. The CTL records contain information on at least 23 companies linked to an alleged US$230 million tax fraud in Russia, a case that was being investigated by Moscow-based lawyer Sergei Magnitsky, who died in prison under suspicious circumstances. One of the companies was used to set up Swiss bank accounts into which the husband of a Russian tax official deposited millions in cash, according to legal filings in Switzerland.
There is no evidence that CTL participated in fraud or other crimes. Internal records suggest, however, that the firm often did little to make sure clients were not involved in illicit activities.
CTL co-founder Thomas Ward blamed many of the firm's problems on "the law of large numbers". Any time you formed thousands of companies for thousands of people, he said, it was likely a few of them were going to be up to no good.
Ward added that the firm's client-screening procedures were consistent with standard practices in the offshore industry. But he said such measures could not always protect firms from "being duped by dishonest clients" or signing on "someone who appears, to all historical examination, to be honest" but "later turns to something dishonest".
"I regard myself as an ethical person. I don't think I intentionally did anything wrong," said Ward, an entrepreneur from Canada who has worked as a consultant for CTL since selling it to new owners in 2009. "I certainly didn't aid and abet anybody doing anything illegal."
In the spring of 2006, New York financial planner Brian Callahan and a TrustNet lawyer toured the United States with a sales pitch that urged wealthy Americans to invest their money through trusts set up in the Cook Islands. Among the clients they approached was a family that runs a large commercial real estate and casino development company in Baltimore known as the Cordish Cos.
At the time, the Cordishes were already in the process of creating four trusts in the Cook Islands through TrustNet and the family eventually placed US$116 million worth of assets in them, a transfer they disclosed to the US tax authorities. They invested some of the money with Callahan, but instead of protecting their investment, he allegedly swindled the Cordishes out of nearly US$12 million, according to previously confidential documents and a civil lawsuit brought by the Securities and Exchange Commission.
The SEC sued Callahan in May, alleging that he diverted investor money to help pay for his home in Long Island and to underwrite his brother's oceanfront real estate project in Montauk, New York.
Callahan's lawyer declined to comment, citing the SEC case and a criminal investigation. The Cordishes also declined to comment.
Callahan raised US$90 million from at least 45 investors who reported losing nearly US$68 million, according to a recent filing by Steven Weinberg, a court-appointed receiver in the case.
There are between 50 and 60 offshore financial centres around the world holding untold billions of dollars. Groups that monitor tax issues estimate that between US$8 trillion and US$32 trillion in private global wealth is parked offshore.
For most investors in the US, the first step to opening an offshore account is to contact one of the hundreds of law firms specialising in "asset protection". These firms then call on a sprawling industry of offshore-based middlemen, such as CTL and TrustNet. They set up companies and arrange trusts and hard-to-trace bank accounts.
US Senator Carl Levin has been investigating the offshore world for nearly three decades. In 2010, the US Congress passed the Foreign Account Tax Compliance Act, requiring that US taxpayers report foreign assets to the government and that foreign institutions alert the IRS when Americans open accounts.
In February, Levin introduced legislation that would permit the Treasury Department to penalise offshore financial institutions that "significantly" impede US tax enforcement and put an end to accounting practices that enable corporations to evade billions in taxes.
"We can't afford to lose tens of billions of dollars a year to tax-avoidance schemes," Levin said. "And many of these schemes involve the shift of US corporate tax revenues earned here in the US to offshore tax havens."
The efforts by Levin and other lawmakers have been opposed by powerful lobbying interests, including a little-known non-profit group, the Centre for Freedom and Prosperity. CF&P was founded by Daniel Mitchell, a tax expert for the Cato Institute, and Andrew Quinlan, who was a senior economic analyst for the Republican National Committee before helping start the centre.
The centre says it has "met with more than 175 Capitol Hill offices on benefits of tax competition". It argues that unfettered access to offshore havens leads to lower taxes and more prosperity.
According to records reviewed by The Post and ICIJ, the organisation's fundraising pleas have been circulated to offshore entities that make millions by providing anonymity for wealthy clients.
In May 2007, one director of a Hong Kong company that creates offshore trusts sent a CF&P solicitation to contacts in the Cook Islands, pointing out that CF&P was trying to raise US$250,000 for a lobbying campaign to "stop the bleeding, build allies and go on the offensive" against efforts in Washington to regulate the industry.
"I personally think the efforts of CF&P should be supported by the Cook Islands given the impact [that] passage of current bills being considered in the USA Congress would have on the jurisdiction and industry," the director said.
Attached to the e-mail was the proposal from CF&P to "work with Congress and the White House" and explain the "legitimate role that low-tax countries play in protecting financial privacy".
Quinlan, the president of CF&P, declined to disclose his donors or say how much of the US$200,000 his organisation raises each year comes from the offshore world. "I don't think it matters what percentage of the money comes from which donor," Quinlan said.
"There are huge offices on K Street that lobby on behalf of interests that are outside the United States. We're just trying to be as effective as we can be."
Mitchell added that nations should not be telling other countries how to conduct their affairs and noted that the United States was one of the worst offenders in the world when it came to corporate secrecy.
"The United States is one of the biggest tax havens in the world," Mitchell said.
"In general, the United States is impervious to fishing expeditions here, and then the United States turns around and says, 'Allow us to do fishing expeditions in your country'."
In 2003, hundreds of US consumers complained that they had been cheated by an online health and beauty supply company operating from the home of Wayne and Anita Phillips in Evansville, Indiana. The Indiana attorney general's office stepped in, accusing the couple of civil fraud and demanding refunds in excess of US$1 million.
The attorney general's office alleged that companies controlled by the couple had promised "free trial" offers for their products, but customers ended up paying for the products without receiving their free trials.
When requests for refunds began to mount, the couple filed for bankruptcy protection in October 2003. A month later, they opened a company on the Caribbean island of Nevis, records show. The next month, Fifth Third Bank, which had sustained heavy losses, filed a lawsuit in the case against the Phillipses.
Two weeks later, the Phillipses opened a trust in the Cook Islands. The couple transferred millions in assets into the offshore accounts. Within three years, one offshore company formed by the couple held US$3 million beyond the reach of the American judge overseeing the bankruptcy case.
"They were moving funds offshore and there was nothing we could do," said Andrew Ozete, a lawyer hired by Fifth Third Bank, which claimed it lost more than US$1 million in the case. "The judge was not happy. Judges don't want to hear that people have moved millions of dollars offshore so they don't have to pay settlements."
The couple eventually settled the lawsuit without admitting wrongdoing and repaid some of the money to the bank, but Ozete said his client was not able to recover much. The Indiana attorney general's office also settled with the couple, dropping its lawsuit in return for their promise to refund US$130,000 to customers and pay a US$20,000 fine.
"It was stunning to see how the laws are written in these places to create these havens," said Justin Hazlett, the deputy attorney general in Indiana who investigated the case. "It presents a significant uphill battle to pierce through these accounts."
In 2005, the president of a Houston-based oil company, Dennis Kittler, thought he had found a sound investment opportunity after hearing an impressive sales pitch by a businessman named Robert Watson, who told clients he was a former military intelligence officer and a professor of finance at Texas A&M University.
Watson said he had developed an algorithm for trading in foreign currencies. He promised returns as high as 23 per cent.
"He went to my daughter's graduation. He always seemed to remember everyone's birthday. I thought he was one of the greatest guys in the world," Kittler recalled.
The first sign of trouble came in 2008, when Kittler received a monthly report that was identical to the one he had received the month before. Kittler called Watson, who apologised for what he called an oversight.
"He said he was sorry and he said, 'I guess I owe you another US$50,000'."
The following summer, Kittler received a call from his lawyer. "He said, 'You know that guy you've been investing with? He's been arrested.'"
Kittler soon learned that Watson was a fraud. When investors withdrew money, Watson simply transferred funds from other investors, using two British Virgin Islands companies set up by CTL, court records and internal documents show.
"He should have won an Academy Award," Kittler said.
According to previously confidential documents, the nominal directors of Watson's companies were a husband-and-wife team in the Caribbean who had served as directors of other companies with thousands of wealthy clients seeking to shield their assets.
Watson used his investors' money to pay for a high-flying lifestyle, including a US$500,000 annual salary for himself. In February last year, a US federal judge sentenced him to 20 years in prison and ordered him to pay restitution and a US$10 million fine.
Kittler lost nearly US$2 million from his experience with Watson, just one of 132 investors who lost an estimated US$33.5 million.
"Once your investment ends up in a place that bills itself as a secrecy haven, your money is offshore and you have no legal standing to go get it," said David Peavler, an associate regional SEC director in Texas who worked on the Watson case.
"You're basically putting your faith in another country's process and there's a high degree of risk. You have to ask yourself, why in the world would you send your money there?"