As in any industry there are key terms with specific meaning unique to its participants. The following list of terms is not meant to be all-inclusive. It is meant to provide the reader with basic understanding of offshore terminology. Offshore
This term, when used in this context, and when referring to a country, means a jurisdiction that offers financial secrecy laws in an effort to attract investment from outside its borders. When referring to a financial institution, "offshore" refers to a financial institution that primarily offers its services to persons domiciled outside the jurisdiction of the country in which the financial institution is organized. Financial Secrecy
This term refers to the confidentiality afforded to financial transactions either by enactment of law or by other means. There are many forms of financial secrecy. Financial secrecy can be a part of an agreement between the institution and the client. Law can impose it with either criminal or civil sanctions. Financial secrecy can be operationally given by the financial institution whereby the institutional practices call for only top management to know who owns the account or no bank official knows who owns the account, such as a numbered account. It can also be obtained by the imposition of an attorney, nominee, or entity between the bank and its client. Tax Haven
A tax haven is a country, which provides a no-tax or low-tax environment. The U.S. is considered a tax haven by some countries. In some offshore jurisdictions the reduced tax regime is aimed towards entities organized in the country with all operations occurring outside the country. These countries seek to encourage investment and make up revenue losses by charging a variety of fees for the start up of the entity and on an annual basis. Beneficial Ownership
This term refers to the true owner of an entity, asset, or transaction as opposed to any stated ownership provided in documents or oral representations. The beneficial owner is the one that receives or has the right to receive proceeds or other advantages as a result of the ownership. It is common practice in offshore financial secrecy jurisdictions to interpose entities, individuals, or both as stated owners. The beneficial or true owner is contractually acknowledged in side agreements, statements or by other devises. Nominee
A nominee is an individual or entity, which acts on behalf of a beneficial owner. Most often the nominee pretends to be the owner of an entity, asset, or transaction to provide a veil of secrecy as to the beneficial owner's involvement. Many offshore entities provide nominee services whereby they will provide a nominee to act as owner of your arrangement but generally will not act unless instructed to by the beneficial owner. International Business Corporation (IBC)
The term international business corporation or IBC refers to a corporation formed in an offshore financial secrecy jurisdiction which is afforded certain tax advantages and protection as to the disclosure of its beneficial owner. Depending on the offshore financial secrecy jurisdiction, shareholders of the IBC may remain confidential through the use of bearer shares.Just as with U.S. corporations, the same person may act as a shareholder, director, president, agent, or as any other officer within the company. Generally, however, the beneficial owner(s) will appoint resident officers and directors for the IBC. Typically an IBC is authorized to do business anywhere in the world except in its home country where it was incorporated (i.e. an IBC formed in The Bahamas may do business anywhere in the world except The Bahamas). The IBC may purchase real estate, cars, businesses, etc. The beneficial owner may act as an agent of the IBC to purchase assets on its behalf. By this means, assets are held under a corporate name, thereby helping to protect the beneficial owner's privacy. It has been reported that there are over one million IBCs formed in offshore jurisdictions worldwide. Personal Investment Corporation (PIC)
A PIC is a term used in the banking industry to refer to an IBC. PICs are generally created for the private bank's client in order to hold the client's investment assets. A PIC and an IBC are analogous. Private Banking
Offshore banking services are most commonly handled by the private banking departments of commercial banks or by private banks that cater solely to private banking clientele. Private banking is a relatively recent term that refers to a higher level of financial services afforded to a bank's wealthiest clients. The private banking department of a commercial bank has been described as functioning as a bank within a bank, maintaining its own separate books and records, and subject to separate operating procedures. Private banking activities are conducted through relationship managers and marketing officers who have access to a team of specialists around the world in order to provide personal money management, financial advice, and investment services to their high net worth clients. Private bankers are in a unique position of having knowledge and understanding of their client's personal and business backgrounds, sources of wealth, and uses of private banking accounts. Our use of this term doesn't imply that private banking is a term usually associated with abusive tax schemes. It is a commonly used term to describe many of the services discussed above. Offshore Trustee
A trustee has a fiduciary duty to manage and conserve the assets of a trust over which he or she has control. The offshore trustee has an additional duty to maintain the financial privacy of the beneficial owner of the trust assets. Custodian Services
This is a service whereby a person or entity agrees to hold and manage assets on behalf of another person or entity. Letter of Wishes
A letter of wishes is a document that purportedly has no legal status. In fact the document is used to transmit the wishes of the creator or the alleged owner of the trust to the trustee. A letter of wishes is a separate document and not a part of the trust instrument. Letters of wishes are generally used by the beneficial owner of the trust assets to retain some control over the trust assets. Trustees normally welcome this tool. It enables them to exercise their discretion having in mind the wishes of the grantor. The trustee may consider the letter but is not bound or otherwise accountable by its terms. In reality the letter of wishes will be honored as if it were a binding legal document. Although a letter of wishes is frequently associated with abusive trusts, both domestic and offshore, it is also used as a part of normal estate planning and in other contexts for legitimate purposes. Fictitious Invoices
It is common practice in the offshore industry to issue false invoices as a means to transfer money to an offshore jurisdiction, while at the same time achieving a tax deduction for the paying entity. Commonly an entity associated with an offshore promoter will issue the invoice. Red Cross Scheme
This is a scheme that uses a charitable entity to disguise a transfer of funds offshore. For example, $1,000,000 is donated to a charitable organization. The charitable organization then remits a portion of the "donation" to an account offshore and retains a portion of the initial donation. The orchestrator takes a $1,000,000 donation and also has the benefit of transferring a portion of the "donation" to the orchestrator's offshore account. Offshore Promoter
An offshore promoter is a person or entity who markets offshore arrangements to the public. The promoter can be a financial institution, lawyer, accountant, broker, financial planner, or other individual. Nominee Director
Every IBC must have a Board of Directors. The Board may consist of one person or many people. For instance, the beneficial owner of the IBC may appoint himself/herself as the director and sole officer of the corporation. However, most IBCs are formed with a nominee director. The nominee may be, but does not have to be, an individual who works and/or resides in the country where the IBC was formed. The nominee may be used to sign (contracts, loans, etc.) for the IBC should the beneficial owner not want his/her signature to be connected with the corporation. Typically, the nominee director will have no knowledge of the IBC's affairs or accounts, cannot control or influence the IBC, and will not act unless instructed to by the beneficial owner. Bearer Shares
Many offshore financial secrecy jurisdictions permit the issuance of bearer shares by corporations chartered in their jurisdiction. The bearer (the holder, or the one with possession of) the share certificate(s) is the owner of the share(s). Only the bearer knows that he/she owns stock in the offshore corporation. Therefore, the ownership of this offshore corporation (IBC) remains private. Bearer shares may be bought, sold, or exchanged in complete privacy. Offshore Mail Forwarding Address
Often an IBC's offshore address is nothing more than a mail drop (P.O. Box) assigned to the IBC. Bank and brokerage statements and any other type of company mail may be sent to this address. The mail will typically be picked up twice monthly by the offshore facilitator. The IBC's mail will be put into a plain, brown envelope and mailed to the address of the beneficial owner's choice. Only the domestic return address and the recipient's address appear on the envelope. Thus, the discrete envelope arrives with the offshore IBC's mail inside. Using offshore mail forwarding insures that the wrong eyes will never view sensitive offshore mail. | | Some Identified Schemes
| - Limited Liability Companies (LLCs)
In response to efforts by the Organization for Economic Cooperation and Development (OECD) to eliminate harmful tax competition, some nations labeled as tax havens have accused OECD members of carrying on the very practices the members seek to stop. One example put forth is the ease with which nonresident aliens may do business through limited liability companies (LLCs) domiciled in the United States, in comparative anonymity. An October 2000 report by the General Accounting Office gives insight into the use of corporations as conduits for illicit funds. Abuse of anonymous corporations in the U.S. by foreigners mirrors the abuse of tax haven entities by U.S. persons. - Offshore Deferred Compensation Arrangements
Many highly compensated professional persons and business owners in the U.S. have been solicited to participate in "offshore deferred compensation plans". The U.S. taxpayer is encouraged to sever an existing employment relationship and substitute an arrangement in which the nominal employer is a foreign "employee leasing" company. The supposed result of this abusive arrangement is that the taxation of a large portion of the professional's or business owner's salary is deferred while he/she gains immediate access to the funds through loans or offshore-based credit cards. An improper deduction for employee leasing expenses is also created on the corporate tax return. - Fictitious or Overstated Invoicing
Some U.S. taxpayers have entered into schemes in which the taxpayer's U.S. business is billed by a purportedly unrelated offshore entity for goods or services (e.g., "consulting services") that are either nonexistent or overvalued. - Factoring of Accounts Receivable
A U.S. taxpayer's business may discount or "factor" its receivables to a purportedly unrelated foreign business entity. The discount or factoring fee significantly reduces U.S. tax liability, and is moved to an offshore entity where it can either be invested free of U.S. tax or repatriated for the taxpayer's use and enjoyment. - Abusive Insurance Arrangements
Some promoters have devised arrangements that are characterized as insurance arrangements, giving rise to a deduction for the U.S. taxpayer for "premiums" paid to a purportedly unrelated offshore insurance company. Often these arrangements are merely self-insurance, lacking in real transfer of risk. - Shifting of Income Using Offshore Private Annuities
Some promoters suggest that U.S. taxpayers may avoid or substantially defer tax on income streams or capital gains by exchanging property for an unsecured private annuity. In another abusive scheme an offshore private annuity is used in conjunction with an offshore variable life insurance policy as a devise to "decontrol" a foreign corporation or other entity used in an abusive sequence of transactions. As a result the promoter claims that the foreign corporation or entity is owned by the insurance policy and is not a, controlled foreign corporation, passive foreign investment company, or any entity controlled by a U.S. person whose income could be taxed in the United States to its owner. - Offshore Internet Business
For businesses conducted primarily through the internet, promoters offer "kits" which give the appearance that the business is foreign owned and operated. Transactions may be routed through offshore servers, and business receipts may be collected through offshore bank accounts or credit card merchant accounts. These schemes particularly target businesses that offer delivery of computer software and other digital products such as music, pictures, or video. They may also provide a means of operating offshore gaming activities. - Offshore Wagering
Over the last few years, gambling websites have proliferated on the Internet. Many of these virtual casinos are organized and operated from offshore locations, where the operators feel free from State and Federal interference. The operators of these activities may suggest that players in the U.S. are not subject to tax on their winnings, and may handle collections and disbursements in ways designed to facilitate avoidance of U.S. taxes. - Repatriation of Offshore Funds Using Credit Cards
Credit cards (such as MasterCard and VISA) issued by tax haven domiciled banks are a preferred method used by U.S. taxpayers to anonymously and covertly repatriate offshore funds that may or may not have been previously taxed. American Express cards are used in the same way but differ in that these cards are issued directly by American Express rather than by member banks.
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