“Nothing is illegal if a hundred businessmen decide to do it, and that’s true anywhere in the world.”
Imagine you could own a company, a subsidiary, a hedge fund, real estate, or even trade stock, and not ever have your identity revealed. Advantages could be had in a number of ways ranging from tax evasion to insider trading to skirting an embargo, or even hiding one’s relations to a company’s earnings. In a nutshell: who controls foreign assets, makes a trade, sells a building or to a country under embargo, or benefits from a government contract, is important information. When that information can be legally dismissed from public record, then you can take advantage and seize the opportunity.
What is essential for such schemes to function as intended, is the circumvention of transparency. The use of hidden trusts referred to as hidden ‘Treuhand’ in the German language has been identified as a means of operating without transparency because beneficial ownership and control of any asset, located anywhere in the world, operates in anonymity.
Hidden Treuhand created in tax havens operate under very different rules. A hidden Treuhand is completely non-transparent and operates covertly by owning the asset through a corporate structure or foundation, where real shareholder identity remains anonymous in all business dealings. What’s more, it is legal! And after making lots of money, hidden Treuhand doubles to hide account identity.
What can be accomplished is perhaps best understood by examining some of the discovered uses for Treuhand. What uses these hidden Treuhand contracts have in common, is that while perhaps the uses may not always be legal, the making of the Treuhand is and remains so.
What if American icon Martha Stewart went on to sell her shares of ImClone stock the day after receiving an insider tip and avoided potential losses, dumping her stock without a trace linking her to the sale? This is not to say such an actions would be legal, but if the economic right to own or dispose of an asset was veiled in secrecy, how could you distinguish legal from illegal transactions? The SEC took a strong stance in this particular case and prosecuted vigorously; but the SEC is not a global institution.
In a global economy, insider trading is more easily accomplished and perhaps occurs more often than is realized. In fact, in Austria, it was not even a criminal offense to be engaged in insider trading until October 1, 1993. Hidden Treuhand easily facilitates insider-trading activities. Therefore, we can reasonably suspect this possibility is put into practice. Hidden Treuhand certainly affords the ability to hide one’s identity. In fact, legal commentary states:
The key strength Treuhand is in the ability to hand over all the rights to a trustee to act on behalf and in the interest of his client, but property rights remain in the hands of the client, while business actions appear to be in the name of the trustee. This includes commerce of stocks and bonds.
All companies doing business in the United States, foreign or domestic, must obey U.S. laws concerning insider trading. But prosecuting insider trading is highly dependent on knowing just who the insiders are. Any lack of transparency would render the SEC powerless to maintain fairness in the market place. The impact on public confidence would be far from negligible if insider trading eroded profits that would otherwise have found their way into pension funds, or if hedge fund insiders had a secret backdoor for making trades against investors’ interest. In view of this possibility, a shadow economy mirroring and feeding off the legitimate economy could emerge. It may already have emerged if the shrinking economic power and security of the middle class is an indicator.
In an interview, it was revealed how an American CEO running the European subsidiary was charged with ridding the company of an unprofitable subsidiary. He concealed his identity in a hidden Treuhand and together with a European business partner, bought the subsidiary from his home office, profiting handsomely without their knowledge.
Without the knowledge of the home office, the CEO was both the seller and the buyer. Needless to say, he was in a position to improve the sales terms in his favor. Relieved of his job, he advised the company he would stay in Europe as a consultant where he turned the fortunes of the company around and sold his stake profitably and without the unnecessary burden of revealing his windfall to anyone including U.S. tax authorities. There is little need when no one is aware of your ownership in the first place.
This example illustrates how even an employee can craftily profit without his home office’s knowledge. But the business sector need not be the unprofitable one. It can equally be a profitable sector and sold off with the home office’s knowledge and involvement. This can easily be done with the joint agreement of CEOs both onshore and offshore. There is little doubt that such a practice is against stockholders’ interest. In the age of globalization, potent forms of business practice are evolving.
Certainly, not all CEOs are profiting without their employers or stockholders knowledge, but in a globalized economy, where subsidiaries are numerous, geographical distances are large, and an understanding of foreign legal practices is uncertain, opportunities are present for abuse. Many remain ignorant of what possibilities and opportunities are to some extent legally attainable.
Another interview revealed how hidden Treuhand is used by CEOs to purchase companies the company does business with or to which they outsource. The CEOs of a U.S. drug company secretly own the Austrian company they do business with, thereby putting themselves on both sides of business deals. They work for their firm and secretly for themselves, pocketing profits without paying personal income tax. They use Treuhand to hide their identities and the public is unaware the CEOs actually own the firm. By means of this arrangement, the American company appears to be doing business with an Austrian company, but in fact, the American company is doing business with its own executives.
The source for this story is unwilling to go on the record, but claims that drug companies are not alone in this practice and these incidences should not be considered limited to U.S. companies alone. European companies have a far easier time using the hidden Treuhand throughout the business cycle.
In yet another example: Halliburton has a subsidiary in Austria called Halliburton International GmbH that is created with a hidden Treuhand that hides the identity of the beneficiaries. The subsidiary is a letterbox firm, but it is fully owned by the stockholders of Halliburton USA. It has no income, no employees, and no business licence. It receives income from other subsidiaries where the tax rate is 15% because by law, money sent to this subsidiary is not further taxed when previously taxed 15% from its source. The tax rate in Iraq is 15%! Think about this, and furthermore, the subsidiary has controlling interest in 2 Russian corporations and 1 oil services firm in Kazakhstan. Halliburton zeros out the book value and tears up the paper trail, paving the way for insiders to own the firm in a hidden Treuhand.
Corporations are flocking to European tax havens set up these kinds of constructs, which are completely non-transparent. Many US publically traded corporations set-up subsidiaries in Europe and channel money to them turning stockholder wealth into private wealth allocated exclusively to insiders. They may channel wealth to Caribbean banks as well, but they use European based subsidiaries to initialize the scam because such locations offer more clout than a subsidiary based in the Cayman Islands.
Tax havens are also facilitating the creation of hedge funds with hidden Treuhand to hide the beneficiary’s identity while bank secrecy hides the profits. Investors profit in secret. Adding to the mystery, many dark pools of trading are also executed with hidden Treuhand.
While many continue to blame the sub-prime mortgage crisis in the US for the financial crisis, it is becoming increasingly obvious that tax havens play a contributing role because these havens, especially in Austria, Liechtenstein, Luxemburg, and Switzerland foster the availability of hidden ‘Treuhand’ and particularly their protection. According to Prof. Picciotto, a Tax Justice Network senior advisor, there is a close link between tax avoidance dealings in offshore tax havens and the speculation that has fuelled the current financial crisis. He claims: “Large multinationals are as much financial as business entities, they have freedom to devise complex financial structures, and financial institutions such as banks, even more so: in recent surveys by the US Government Accountability Office and the Tax Justice network, the largest user of tax havens in every country was a bank.”
Globalization is an often tossed about term used to describe the expansion of companies in pursuit of larger and newer markets and a cheaper labor force, but this description of globalization has ignored another compelling reason for creating an offshore presence: namely the legal environment. The primary driver of globalization has been the multinational corporation, where expanding operations are less and less defined within the confines of the company’s originating country. With regularity, the receding barriers to trade and investment have encouraged corporate mammoths to seek new markets where new strategies are often augmented by what is legally permissible. The hidden Treuhand is an example of this phenomenon.
Quite simply, some jurisdictions create a legal environment that allows an individual or a company to exercise complete economic rights in all commercial markets worldwide and do so anonymously. Parties to a Treuhand cannot be legally exposed because it is in fact extremely difficult to even detect whether a corporation has been created with a Treuhand contract or not. For that reason, the FATF Mutual Evaluation Report of Austria - cites Treuhand as a means of funding terrorism and has concerns over its impenetrability. http://www.fatf-gafi.org/dataoecd/22/50/44146250.pdf
Clearly, globalization means more than the pursuit of a foreign market presence, it also means having access to a more amiable legal system from which to extend a global reach. It means having opportunities not otherwise offered in the United States.
Liberal hard-core capitalists will be happy to know that there are plenty of like-minded CEOs out there, but they are beating you to the trough, because whatever they do has at least a 30% head start in profit due to the fact, they don’t pay taxes - you do.
A thrilling read: ‘Hidden Treuhand: How Corporations and Individuals Hide Assets and Money’ is the first and only book ever written in the English language about hidden Treuhand and how to make them.
Shelley Stark is the author of Hidden Treuhand: How Corporations and Individuals Hide Assets and Money, published by Universal-Publishers. Available direct from Universal -Publishers or through Amazon and Barnes & Noble.
Disclosure: None, abandoning ship