Undaunted, Lawrence decided to move most of his liquid assets, estimated at more than $7 million, into a foreign asset protection trust on the Isle of Jersey. Bear Stearns pursued his assets for several more years, but when the firm got close, Lawrence moved them again, this time to the tiny island nation of Mauritius in the Indian Ocean. There he appointed a new trustee to oversee the money—someone he claimed was a complete stranger—and told Bear Stearns that he had relinquished control of the trust entirely.

Lawrence then filed for personal bankruptcy. He was certain this would leave Bear Stearns with no recourse to his assets. He claimed, during 11 hours of depositions held as part of the bankruptcy proceedings, that he had no idea what had happened to the trust, nor who was in charge of it. He said he could not recall whether he had received any disbursements from it, and claimed that he was no longer in communication with the trustee. At one point he even claimed that the trust had been set up as a charity.

Judge A. Jay Christol of the U.S. Bankruptcy Court for the Southern District of Florida was not amused. He wrote in his judgment: “A bankruptcy discharge for this type of debtor should be as rare as the dodo bird which once graced the shores of Mauritius.” In the court’s opinion, no one would give away the bulk of his assets to a stranger in a foreign country. In September 1999, Christol found Lawrence in contempt and ordered him to repatriate his assets and settle the bankruptcy. In the meantime, Lawrence was racking up $10,000 a day in court-imposed contempt charges. When Lawrence failed to show up for his next court date, Christol lost patience and ordered him held in civil contempt.

As Worth went to press, Lawrence sits in a Miami jail cell. He continues to appeal the judge’s order, and is trying to have his case designated a criminal matter in the hope that this will limit his time in jail.

you can run . . .
This is the new face of offshore asset protection. Leveraging powers it has garnered over the past two decades, the U.S. government is working with other nations and banks around the world to sharply limit the ability of its citizens to shelter assets anonymously offshore. While legal options for depositing assets in foreign countries still offer some protection from an aggressive plaintiff’s attorneys and relentless ex-spouses (see “Safe Harbors,” page 68), the IRS requires that U.S. citizens report these transactions thoroughly. “Because of the Patriot Act, it seems that most wealthy clients are bringing their money back to the U.S. because of the onerous reporting requirements,” says Jay Adkisson, a lawyer and coauthor of Asset Protection, a guide to legal offshore strategies. “Indeed, I have many wealthy clients and only a scant few have any significant assets offshore. To the extent that they had offshore accounts, most have since closed their accounts and now just keep their money in the United States.”

TOP VIEW Swiss bank accounts, multiple passports and Cayman Islands trusts once placed individual wealth safely beyond the reach of creditors, trial lawyers and even tax authorities. But those days are gone. The federal government, working with other nations and foreign banks, has put an end to many popular offshore shelters. Yet, for investors seeking various degrees of protection from creditors and lawsuits, legal options remain.

Despite the current legal and political climate, investors persist in embracing various options offshore. The increasing litigiousness of American society and the ballooning punitive judgments awarded to plaintiffs in court cases motivate some. Others react to what they perceive to be a dangerous, unchecked expansion of government power. As part of its highly publicized war on drugs during the 1980s, the Reagan administration expanded the Bank Secrecy Act, giving broad powers to prosecutors to seize the assets of defendants and paw through their financial records during the course of an investigation. Today those powers continue to grow. “It now covers 130 specific crimes that can be linked to money laundering and result in seizure of assets,” says Robert Bauman, a former congressman from Maryland who is now a member of the executive committee of the Sovereign Society, an online clearinghouse where people discuss and protest the financial transparency demanded by U.S. law. “If you pollute a wetland and make a profit from it, you can be convicted of money laundering. In fact, according to the Supreme Court, the crime of money laundering doesn’t even require an overt act.”

Moving money out of nations considered politically or financially undesirable is as old as capital itself. For centuries, both American and global investors have found the United States a safe harbor for their wealth. In the 1980s and 1990s, however, a number of libertarian-minded investors, disenchanted with changes in the landscape of U.S. regulations, began to move some of their money to accounts in Switzerland, Panama, Liechtenstein and other nations. Sensing an opportunity, the governments of some small island nations rewrote their laws to attract offshore investors. Timothy Scrantom, a senior partner of Ten State Street, a Charleston, S.C., law firm specializing in asset protection, helped countries such as Grenada, the Seychelles, Iceland, Fiji, the Dominican Republic and St. Vincent write investor-friendly banking laws. “It was a race to the bottom,” admits Scrantom, who now advises some of these same governments on how to avoid money-laundering schemes.

At the time, the laws Scrantom wrote were consistent in tone: strict on privacy and lax on the documentation needed to establish a trust or corporation. More importantly, though, they were universally antagonistic to foreign jurisdictions. Some laws permitted the creation of trusts that were nothing more than pieces of paper, while investors could house and manage the money in another bank in another country under another name.

Capital, both above-board and otherwise, flooded into these havens from around the world. Financial planners in the United States began selling the idea of hiding money in these countries to avoid taxes or to conceal it from creditors and former spouses. Some sold cookie-cutter trusts for $10,000 each. These one-size-fits-all trust structures, of dubious legal merit, could be set up in a few days. Other pundits, such as Terry Neal, author of The Offshore Advantage, held expensive seminars to teach customers how to hide their money in offshore trusts. (According to his own website, in April 2004 Neal pled guilty to trying to defraud the U.S. government of taxes.) Jerome Schneider was perhaps the most brazen of these gurus. He bought full-page, full-color ads in magazines touting his system for avoiding U.S. taxes. For $100, customers could buy a set of books and tapes called “Finding Your Own Offshore Wealth Haven.” Last December, a San Francisco judge sentenced Schneider to six months in prison for conspiracy to defraud the IRS.

The offshoring frenzy hit a wall in November 1994 when Forbes published an article that described how high-profile American billionaires had surrendered their U.S. citizenship and departed for more tax-friendly nations (see “The Perpetual Traveler,” page 76). Congress reacted with outrage. In 1995, the House Ways and Means Committee proposed legislation to punish U.S. citizens who renounced their citizenship for tax purposes. Larry Heller, partner in the Los Angeles office of the international law firm of Bryan Cave, testified at those hearings, challenging several of the proposed laws, including a hefty exit tax for expatriates. “There was a lot of misinformation about people expatriating for tax purposes. Really, only a handful of people do that,” Heller claims.

Over the protests of people such as Heller, Congress passed the Illegal Immigration Reform & Immigrant Responsibility Act in 1996. Although the law has proven to have more bluster than bite, something substantive did emerge from congressional hearings on expatriation. Heller recalls that one lawyer in particular boasted of having set up hundreds of trusts for his clients who were considering giving up their citizenship. “Someone in the IRS took note of that number and found that there was no paperwork filed on any of those trusts,” he says. Consequently, the 1996 legislation included a new reporting regulation for grantors of foreign trusts. People who opened offshore trusts were required to file Form 3520 with their income taxes each year, listing the name of any foreign trust, any co-owners and the estimated value of the trust. “So people thought, ‘Well, I won’t file the form and if I get caught, I’ll just pay the fine,’” says Michael Chatzky, a partner in the La Jolla, Calif., firm of Chatzky and Associates, which specializes in asset protection services. He represents many clients who have—or had—offshore trusts. Prior to the 1996 legislation, failing to report an offshore trust carried a fine of $1,000 per offense. The new law imposed a much heftier penalty—35 percent of the assets in the offshore account. “Now I’m emphatic that my clients fill this form out in a timely manner,” Chatzky says. “It’s no longer a game of hide and seek; it’s a game of show and tell.”

Altering the rules of that one game changed the entire landscape of foreign asset protection. Perhaps the most important reason individuals had for protecting money in offshore trusts was to hide it from creditors—often either plaintiffs in multimillion dollar lawsuits or ex-spouses bearing court orders. Once the IRS could theoretically compel people to list their worldwide holdings for tax purposes, lawyers began to use this information as a tool in their litigation. “One of the first things a creditor will do is subpoena your tax records, and that’s a road map to your assets worldwide,” Adkisson says. That does not guarantee a creditor will get your tax records, but if he does, he can ask a judge for a repatriation order. Debtors who ignore this order could face a contempt of court charge and jail. In several precedent-setting cases, including the one involving Lawrence, judges have shown that they will cheerfully send individuals to prison until they repatriate their assets—no matter how long it takes.

. . . but you can’t hide
This assumes that tax evaders or those who owe money actually report their foreign assets to the IRS. If they never admit they have money stashed away in an offshore trust, catching them becomes difficult. Many offshoring nations pride themselves on their privacy regulations.

Despite pressure from the Treasury Department and governments around the world, many offshoring nations refused to cooperate with international efforts to track down tax evaders and money launderers during the late 1990s. Scrantom, who helped these nations write the privacy laws governing foreign-held assets, was not surprised that his former clients refused to bend to U.S. pressure. “For many of these places it’s their only industry. What else are they going to do to make money?”

Ultimately, though, the offshoring nations did back down. The United States, working in tandem with a coalition of European tax authorities, established several treaties with the governments of tax havens that soften privacy rules and force banks in these nations to give up tax evaders or freeze accounts when faced with a court order from the U.S. Justice Department. The IRS also signed qualified intermediary, or QI, agreements directly with banks doing business in offshore havens. In return for collecting and filing information on their U.S.-based customers with the IRS, QI banks gain several regulatory advantages in their dealings with the IRS and the Treasury Department. QI banks also have access to the U.S. financial markets.

By December 2000, almost every financial institution in some four dozen tax refuges—including the Caymans, the British Virgin Islands, Switzerland and Liechtenstein—had signed on. Between the tax treaties and the QI agreements, the Treasury Department has effectively extended the know-your-customers provisions of the Bank Secrecy Act into the world’s erstwhile tax havens. With a court order or a money laundering conviction in hand, a U.S. government official can freeze virtually any account almost anywhere in the world. “Of course, we try to resist these things,” says Robert Vrijhof, senior partner of the investment firm Weber Hartmann Vrijhof & Partners in Zurich. “It has to be a crime in Switzerland before we seize any accounts. You have to deliver a verdict from a [Swiss] judge for money laundering,” he says. Scrantom finds this assertion amusing: “For years I’ve told people that it’s easier to freeze accounts in Switzerland than it is in Delaware.”

Meanwhile, in 2000, the IRS asked Visa and American Express to release information on U.S. citizens who hold credit cards issued by offshore banks. After a token squabble in the courts, the card companies complied and allowed the IRS to search transactions of those cardholders suspected of evading taxes or of living beyond their means.

Capital Intentions
Today an investor who, for example, inquires about the best way to form an offshore trust will likely face intense scrutiny. Heller’s firm screens potential clients to ensure that they have complied with IRS reporting standards in the past and insists that they do so in the future. “We want to make sure that they aren’t removing assets away from creditors. We have to know that what they’re doing is legal.”

External Revenue Service All U.S. citizens must pay taxes on their worldwide income, and that specifically includes income from offshore investments. “The law says that no matter where you live in the world or where your income is sourced, you are liable every year to file your 1040 form,” the Sovereign Society’s Robert Bauman says. “That means the IRS at least has to know about your offshore investments.” If you have an offshore bank account that has had more than $10,000 in it at any time over the tax year, you must declare it on Schedule B of your income tax return. You also need to fill out a more detailed form—TDF 90-22.1—and file it with the Treasury by June 30 of the year after your reporting. “If you do not comply with either of those reporting requirements, the penalties are extremely serious, including, in certain cases, criminal penalties,” advises attorney Michael Chatzky, an asset protection specialist in La Jolla, Calif. —John Ferry

“People are amazed when trying to open a bank account here in Panama,” says Derek Sambrook, a financial advisor with Trust Services in Panama. “In many cases it’s easier to open an account in Miami than it is here. In some cases they’ve tightened the screws too much.” According to Heller, the Cayman Islands is no better. “It’s a different world today than it was 10 years ago,” he says. “They want references from you and letters of recommendation from your bank. They want to know how you made your money.”

The 9/11 terrorist attacks delivered perhaps the final blow to Americans who want to hide assets offshore. The Bush administration quickly connected clandestine worldwide banking activities of any kind with terrorism. It was easy to link terrorism to money laundering; the step from money laundering to offshore tax havens was a small one. The new emphasis on security set the stage for the Patriot Act, which requires financial institutions, now broadly defined, to file a Suspicious Activity Report whenever anyone makes a transfer of more than $10,000 to or from certain banks in certain countries. These institutions must provide information on these transfers but cannot tell any customer that he or she is under investigation.

While challenges to the offshore asset protection industry abound, no one feels that it is entirely finished. “Offshoring has been around for 500 years, and it has a place in the global economy,” Scrantom says. It will continue to thrive, he adds, but without the sums of American money it has seen in the past 15 years, and, at least temporarily, without as much U.S. corporate money. The American Jobs Creation Act of 2004 offers tax breaks to corporations that move their offshore investments back to the United States. As a result, companies are planning to repatriate tens of billions of dollars. “That exodus will probably be offset by the Chinese, who are aggressively moving their money into these havens to avoid taxes,” Adkisson says. Offshoring will always exist, unless other countries follow the U.S. model of taxing assets worldwide and changing their laws to seek out tax evaders, he argues.

Americans still legally utilize offshore investment tools sanctioned by the IRS, such as bank accounts, trusts and offshore companies. However, the anonymity that these options offer is now limited and the price for noncompliance with current asset protection laws can be steep. “No one is going to cheat on their taxes if there’s a chance the foreign bank is going to turn them in,” Adkisson observes. “The heck with that.”

Michelle Seaton is a senior correspondent for Worth. dseaton@hotmail.com