Offshore - Are You Sure?
Charles Carreon
If you have good reasons to, you can incorporate in a foreign country and do business in the United States. Some people think this is an attractive alternative, because they are able to keep their involvement in the company secret. They will use what most lawyers would call a “straw man” director or trustee of a corporation in a jurisdiction like Panama, that allows for the true owners of the company to keep their ownership secret. However, unless you are engaged in operating a gambling website, if you are a U.S. resident, it is hard to think of a good reason to incorporate offshore, and easy to think of many reasons for avoiding it.
For starters, the vaunted secrecy of offshore corporations has been greatly perforated under the rubric of anti-terrorism initiatives, at least with respect to the national government. My informal discussions with offshore authorities indicate that for government agencies and persons who know how to utilize the legal systems of foreign nations, secrecy is anything but airtight. I also understand that our own federal government law enforcement agencies can quickly obtain the information as a result of international agreements brokered in the wake of the 9-11 disaster. Leaving those issues aside, however, I think I can point you to some even more important disincentives.
First of all, it can look bad. If you are sued in an American court, for business activities occurring inside the United States, and you yourself are a United States citizen, the court will very likely think from the very inception that you may be up to no good. Offshore corporations have now been involved in the Enron scam, in tax avoidance schemes that are being attacked by State Attorneys General (not always successfully), and have been repeatedly associated with trademark and copyright infringement schemes perpetrated by unscrupulous people who ball up the court system by hiring attorneys who litigate very zealously, but who then disappear back to their offshore haven when the verdict comes in against them.
Second, the offshore asset protection schemes that have been widely marketed can actually blow up in your face. In FTC v. Anderson, the district court expressed total skepticism that ripened into absolute disbelief when confronted with the mechanics of a Cook Islands offshore protection scheme. The defendants, who had acquired several million dollars through a pyramid scheme, deposited them into a Cook Islands bank account that was ostensibly under the sole control of a straw man trustee, tried to explain to the court that their legal agreements made them “helpless” to repatriate the money in the account. In its opinion, the district court tore this contention to pieces, arguing that it was absurd, unbelievable, and ultimately indefensible. Losing patience with the recalcitrant defendants, it ordered them to repatriate the funds or be arrested for contempt of court. As a practical matter, this meant “send back the money, or don't come back yourself.” In the Sex.Com case, I followed the strategy that had been outlined in FTC v. Anderson, exposing the defendant's connection to several phony offshore corporations, which ultimately resulted in the issuance of a warrant for his arrest, which he ignored; as a result, his appeal was dismissed in August, 2002, on grounds that he was a fugitive, and was not even entitled to pursue an appeal.
Third, in this day and age, you are likely to attract unwelcome IRS attention. Since so many offshore corporations have been used to further tax-avoidance schemes that the IRS has now found unlawful, merely listing an offshore corporation as a source of revenue on your tax returns may very well draw IRS attention. Let's face it, aside from rich people trying to avoid their taxes, and criminals trying to hide ill-gotten gains, who can afford to devote several thousand dollars of precious capital to creating a corporation in Panama?
Fourth, you could get scammed. At the request of a client, I started working on setting up an offshore corporation. For various reasons, we decided not to proceed with the plan; however, it seemed to me likely I was dealing with a fly-by-night company when they sent me a letter on stationery that gave their address as the “World Trade Center,” and this in Spring, 2002. If you saw the movie “Blow” starring Johnny Depp, you'll remember that scene where he goes to Panama to pick up his $3 Million, and finds that the money is simply not there. Faced with a problem like that, which could obviously manifest under a wide range circumstances, who are you going to call? Ghostbusters?
If you have good reasons to, you can incorporate in a foreign country and do business in the United States. Some people think this is an attractive alternative, because they are able to keep their involvement in the company secret. They will use what most lawyers would call a “straw man” director or trustee of a corporation in a jurisdiction like Panama, that allows for the true owners of the company to keep their ownership secret. However, unless you are engaged in operating a gambling website, if you are a U.S. resident, it is hard to think of a good reason to incorporate offshore, and easy to think of many reasons for avoiding it.
For starters, the vaunted secrecy of offshore corporations has been greatly perforated under the rubric of anti-terrorism initiatives, at least with respect to the national government. My informal discussions with offshore authorities indicate that for government agencies and persons who know how to utilize the legal systems of foreign nations, secrecy is anything but airtight. I also understand that our own federal government law enforcement agencies can quickly obtain the information as a result of international agreements brokered in the wake of the 9-11 disaster. Leaving those issues aside, however, I think I can point you to some even more important disincentives.
First of all, it can look bad. If you are sued in an American court, for business activities occurring inside the United States, and you yourself are a United States citizen, the court will very likely think from the very inception that you may be up to no good. Offshore corporations have now been involved in the Enron scam, in tax avoidance schemes that are being attacked by State Attorneys General (not always successfully), and have been repeatedly associated with trademark and copyright infringement schemes perpetrated by unscrupulous people who ball up the court system by hiring attorneys who litigate very zealously, but who then disappear back to their offshore haven when the verdict comes in against them.
Second, the offshore asset protection schemes that have been widely marketed can actually blow up in your face. In FTC v. Anderson, the district court expressed total skepticism that ripened into absolute disbelief when confronted with the mechanics of a Cook Islands offshore protection scheme. The defendants, who had acquired several million dollars through a pyramid scheme, deposited them into a Cook Islands bank account that was ostensibly under the sole control of a straw man trustee, tried to explain to the court that their legal agreements made them “helpless” to repatriate the money in the account. In its opinion, the district court tore this contention to pieces, arguing that it was absurd, unbelievable, and ultimately indefensible. Losing patience with the recalcitrant defendants, it ordered them to repatriate the funds or be arrested for contempt of court. As a practical matter, this meant “send back the money, or don't come back yourself.” In the Sex.Com case, I followed the strategy that had been outlined in FTC v. Anderson, exposing the defendant's connection to several phony offshore corporations, which ultimately resulted in the issuance of a warrant for his arrest, which he ignored; as a result, his appeal was dismissed in August, 2002, on grounds that he was a fugitive, and was not even entitled to pursue an appeal.
Third, in this day and age, you are likely to attract unwelcome IRS attention. Since so many offshore corporations have been used to further tax-avoidance schemes that the IRS has now found unlawful, merely listing an offshore corporation as a source of revenue on your tax returns may very well draw IRS attention. Let's face it, aside from rich people trying to avoid their taxes, and criminals trying to hide ill-gotten gains, who can afford to devote several thousand dollars of precious capital to creating a corporation in Panama?
Fourth, you could get scammed. At the request of a client, I started working on setting up an offshore corporation. For various reasons, we decided not to proceed with the plan; however, it seemed to me likely I was dealing with a fly-by-night company when they sent me a letter on stationery that gave their address as the “World Trade Center,” and this in Spring, 2002. If you saw the movie “Blow” starring Johnny Depp, you'll remember that scene where he goes to Panama to pick up his $3 Million, and finds that the money is simply not there. Faced with a problem like that, which could obviously manifest under a wide range circumstances, who are you going to call? Ghostbusters?