Many people want to set up a secret company, or think their company is secret, and many use offshore structures to do this. But does it actually work?
When it comes to secrecy there are three questions that matter:
- Whose secrecy?
- From who?
- Under what conditions?
Start researching it and the first thing you’ll likely hear about are secret offshore companies. What does this mean? Does it mean there is no registry of the companies? No. There’s always some sort of a registry to ensure there is actually a company. However, that registry isn’t necessarily easily accessible so not just anyone can easily verify the existence of the company (a fact that has pros and cons later).
There are two common pieces of disclosure (or lack thereof):
It’s pretty common not to have the names of shareholders disclosed, less common but still relatively common not to have the names of directors disclosed.
In both cases if the information is disclosed there are two common ways that can sometimes be used to provide an element of secrecy regardless:
- Nominees – essentially a person who gets paid once a year to put their name on companies instead of having your name on it
- Corporations – instead of having an individual as a shareholder or director there might be a corporation. In many places corporate directors aren’t allowed and regardless this brings us back to the issue of secrecy at the level of the corporation
It’s fairly common to have jurisdictions where the names of shareholders and directors aren’t available in public records, less common for them not to be available in private records but that happens sometimes as well. However, most of the time the registered agent will have this information (frequently a nominee might not as they’ll be sourced by the registered agent). If they don’t have this information they’ll have the information in the vast majority of cases of who set up the company (in theory you could hide this behind a layer of secrecy with cryptocurrencies, rerouted IP addresses and anonymous emails but in practice there’s usually a link from the company to the registered agent to the person who set the company up.
Of course the person who set the company up isn’t necessarily the owner/shareholder/director but this person will lead to whoever that ultimate person is though getting the information at this stage could be extremely challenging and not worthwhile.
But wait, couldn’t you have bearer shares and eliminate even that connection?
Technically yes, there are a number of jurisdictions that still allow bearer shares though in most cases the shares need to be secured somewhere so they are effectively eliminated. That being said it is theoretically possible but it raises the next question and next problem “what can you do with this company?”
Before we answer the above question though let’s note that most information sharing agreements aren’t really directed towards getting information at the corporate level. This is simply too challenging and so maintaining the secrecy here isn’t too terribly challenging.
Secret Bank Accounts
All of the above starts to fall apart when you look at how banking works.
In order to open a bank account the bank is required to do KYC (know your client) on the UBO (ultimate beneficial owner). This involves discovering who the directors and shareholders of the company are typically by way of getting a certificate of incumbency and certificate of good standing for the company from the registered agent or registry and frequently it needs to be certified (standards vary but often apostille).
What’s the first problem here?
If you managed to keep everything secret at the company level you’re now in a position where you’ve got to give all the information you were keeping confidential to the registered agent so they can draft and certify the documents in question (the information on the documents has to match the information the bank is using to open the account). This will involve providing the bank with copies of passports, utility bills, previous bank statements, etc.
Let’s take a look at the gaps that have opened up. Previously someone could have the name of the company and maybe follow it to a nominee (or registered address), which could lead to the registered agent, which could lead to the person who formed the company (maybe), which could lead (maybe) to the UBO. Suddenly, this process can receive a shortcut by going simply to the registered agent or the bank.
This is where we start to get into our three questions from earlier. Just because someone has this information (whether they definitively need the information or not we’ll get to in a minute) doesn’t mean it’s accessible to anyone else. Both banks and registered agents tend to by default keep information confidential, it’s part of their mandate. In other words it’s not like just anyone can call up and ask “do you have a bank account under the name of Mr. Joe Forte?” Nor can they call up and say “I received a payment from xyz corp. can you kindly tell me who the UBO is on that account I’d like to send them a letter”.
Mostly, the power to get this information is restricted to either:
- People who are willing to hack into or use some other means to illicitly get the information
- The government – sometimes domestic and sometimes foreign – of course in practice domestic governments almost always have the physical power to compel those under their jurisdiction to hand over information while foreign governments would need to work through domestic ones or get compliance from the registered agents or banks
But wait, what about bank secrecy? What about numbered accounts and all that?
Again this comes down to our three questions. Bank secrecy for who, from who, and under what circumstances. In cases of serious crime bank secrecy almost always evaporates (usually bank secrecy laws don’t cover crimes so if Osama Bin Laden has an account somewhere there’s a good chance they’ll give him up). Depending on the jurisdiction less serious issues may or may not result in information being disclosed. One the big issues historically was while tax evasion is a crime in the US it wasn’t in Switzerland and consequently tax evasion didn’t meet the Swiss standard of giving up their famed bank secrecy when tax evasion was involved.
This brings us to “for who?” Today, US persons as defined under FATCA have lost virtually all their former secrecy in most of the world and most foreign jurisdictions proactively hand over information to the IRS. How did this happen? Can’t these foreign banks control what they want to do?
It’s a nice theory but you need to understand how the banking system works. All US dollar transactions go through the US Federal Reserve System to clear as a result if any bank wanted to deal in US dollars (and pretty much all of them do since it’s by far the largest currency in the world and not dealing with US dollars would virtually cripple any bank) they needed to comply with FATCA. Technically, if a Swiss bank was willing to deal only in CHF and so were the depositors they could have tried to fight against it but that would signal death for a bank. The same kind of power could be exerted on any major currency such as the Euro the others simply tend not to be significant so for example banks aren’t concerned about not dealing with Canada or Pakistan in their local currencies.
Across the EU there is the EU savings directive, which shares information proactively on EU residents between qualifying EU financial institutions and the respective governments. Currently evolving in Automatic Exchange of Information (AEOI), which will further expand these kinds of policies.
What does this mean for the secrecy?
It suddenly means governments can’t just access the information, they’ve got it proactively, creating another leak in the secrecy bucket. How come this is significant?
Just because the government has access to records concerning where you bank and how much money you’ve got there doesn’t mean a creditor or angry spouse etc. can get access to that information… but it’s certainly much more accessible or at least there’s another interception point.
At the moment there are still some holdouts on the bank secrecy front but most of them offer very poor banking (small backwater jurisdictions). Only two good ones have stood out. Andorra was one of the final holdouts but they have signed up for AEOI. The other is Lebanon, which hasn’t signed up for AEOI and has arguably the strongest bank secrecy in the world at the moment with all kinds of fancy tricks available along with high quality banking. (Please note FATCA affects Lebanon so the strong bank secrecy doesn’t apply to Americans).
Before we address how secrecy is taken deeper let’s ask the question few people seem to ask, which is “is it so bad that a government or two have your information?”
Visa and MasterCard, Facebook, Google, Apple, Microsoft, who knows how many other companies likely have incredible amounts of data about you is it a problem? What are you trying to protect against? Is it something practical or just theoretical or just a general sense?
The important point I’d like to draw your attention to here is for the most part at least at this point simply because the information is disclosed to a government tax department doesn’t mean it is accessible in any meaningful way to anyone else. Even other government departments have questionable if any access. In other words this is an issue if you’re evading taxes, so don’t evade taxes, practice legitimate tax planning so you can disclose everything without an issue.
Culture of Secrecy
This raises a deeper issue, which is how much can that information slip out? I’ll read on forums and hear people make comments about someplace like Belize, how secret it is and that might be true in terms of the laws or the standards on paper. The problem is Belize doesn’t have a strong culture of secrecy. It’s a culture where everyone knows everyone’s business and everyone talks. What’s the risk here? Your information might be private but someone might wander into the back of the bank and see your name on an account and might be talking to someone at the bar saying “my god this guy Joe Forte has an 8 figure balance at the bank!” Suddenly, all that secrecy is for nothing. Is it going to happen? Maybe not, probably not, but it’s a risk I rarely see accounted for in the assessments made of real secrecy as opposed to theoretical secrecy.
Contrast this to jurisdictions like Switzerland and Andorra with a long tradition of secrecy. Places where you don’t talk about money it’s not polite. Here, the bank secrecy rules might not be as tight on paper but might be more tight in practice where prying eyes and private investigators are concerned. People are also better paid and infrastructure means you’re more likely to have more robust electronic systems protecting your information.
Secret Trusts, Foundations, and Frauds
All of the above should have convinced you by now from average people and companies regardless of anything else your information can be fairly secret while from major western governments or at least their tax departments it isn’t… so long as you’re one of their residents. Keep this in mind, it’s not as though FATCA means the US gets access to everyone’s information, only the information of US persons. The same applies for any jurisdiction under AEOI.
But obviously, the desire for secrecy hasn’t gone anywhere so it’s still being pursued it might just require more guile.
The way this is achieved is by giving up ownership.
Remember what we said earlier? Banks and registered agents tend to get the information of the directors and shareholders with a particular focus on the UBO. So if someone doesn’t want their information on a company, a bank account, etc. the way it is achieved is by not being the UBO. This goes beyond a nominee, nominees don’t provide their info to a bank. It is achieved through foundations, trusts, and fraud.
Foundations and trusts fall into one category the important note being that in many jurisdictions trusts are private documents that don’t require disclosure so some trustees might be willing to go on a bank account without disclosing the details contained therein to the bank. Foundations sometimes have specific privacy provisions that achieve the same thing.
Fraud is when criminals and others will do something like paying a homeless person to get a passport, etc. and use the homeless person’s info on the company and account rather than going on personally. They’ll also use the information of dead people or probably numerous other schemes.
For those determined to maintain secrecy this goes a long way towards achieving it.
There are still potential gaps. Data left on computers, bank statements, foolish conversation, financial transactions traceable to a given person, etc. The challenge with these if someone is willing to go all the way regarding secrecy is even if you could trace the bank statements, etc. the person in question isn’t the legal owner so it’s difficult to enforce on them. If there is evidence they have power over the accounts and companies and trusts they could be held in contempt for failing to take action but it’s a challenging thing to enforce especially if all the pieces are in other countries.
Still, the paper trails are worth noting because for many people it is them and not some government or bank leak that results in exposure.
Two bottom line points I hope you take away. First, there’s a big difference between the theory and practice of secrecy. Real secrecy has a lot of holes in it. It’s all too often that someone will try to keep their offshore debit card secret but use it at the same time as their rewards card at the grocery store tying the two together. Real secrecy takes a lot of vigilance, which brings us to the second point. Do you really need secrecy? If so what kind of secrecy? What are you protecting yourself from and is that real? Often, secrecy is overrated it. It might be possible but at what price and for what benefit? I prefer to be pragmatic and focus on what will make a difference in the lives of real people rather than wage some secret war to remain a ghost. Confidentiality does matter but usually not confidentiality at all costs but rather confidentiality from the general public or certain individuals or entities and all of this is fairly easy to do compared with the absolute secrecy people sometimes pursue by going international.
Source by Michael Rosmer