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Abusive Offshore Trusts in Divorce Cases
Matrimonial lawyers should keep in mind that it is estimated that from one to five trillion dollars deposited by individuals and businesses are in offshore accounts. Currently more than 33,000 references to "Asset Protection Trusts" will come up in a single Web search. Legitimate and not so legitimate entrepreneurs are exploiting the rush to sequester assets off shore by protection trusts, credit cards with automatic debiting of offshore accounts, assistance in obtaining second passports, and phone cards to hide phone contacts with offshore banks.
Many companies are relocating offshore or creating offshore subsidiaries. Offshore corporations are not required to pay U.S. corporate taxes. Moreover, the sites where those corporations have relocated do not usually tax the corporations either. Rather, those sites receive revenue from the fees charged for establishing the corporation and the services provided in their jurisdiction. Corporations also seek to relocate offshore to avoid the regulation of U.S. laws. For instance, many companies have offshore, self-insurance subsidiaries, where they do not have to pay taxes on profits and do not have to comply with U.S. laws regulating their insurance reserves.
Corporate shell entities or trusts are the primary vehicles criminals use for money laundering. Big accounting firms charge a percentage of the tax savings when they create sophisticated transactions utilizing offshore shell entities to save U.S. businesses hundreds of millions of dollars in U.S. taxes. These various money laundering and tax sheltering schemes have become the concern of the United Nations, the World Bank, and our Senate Foreign Relations Committee, not to mention the Internal Revenue Services.
There are a number of abusive trust practices that have been identified by the Internal Revenue Service. [See Notice 97-24, 16 IRB 6, April 21, 1997.] One scheme to look out for, in the divorce situation, is the creation of a mortgage, for little or no consideration, on U.S. real estate in favor of an offshore trust and the subsequent payment of rental or other income directly to that trust. These practices permit the diversion of money paid by third parties to depositories offshore. Thus, one cannot find cash or a bank transfer directly out of the other spouse's domestic account.
It should be noted that the Internal Revenue Service is cracking down on abusive trust arrangements and has created special penalties for those who attempt to utilize such schemes. For instance, the person transferring money offshore may be charged with a penalty equal to 35 percent of the dollars transferred, not to mention taxes and penalties on income not declared.
THE OBSTACLES TO DISCOVER
The problem for the person seeking to discover offshore assets derives from the presumptive dishonesty of the sequesterer. The purpose for many in hiding assets is to perpetrate a fraudulent conveyance to avoid judicial process or the payment of taxes. Thus, those who hide assets to avoid income tax or to "divorce proof" themselves may not be counted on to report offshore income, as required by the IRS on Schedule B of the individual tax return.
Once offshore, discovery is very difficult, if not impossible, to obtain because of the protective legislation enacted in the various sites that provide offshore banking centers. These jurisdictions include:
• Antigua & Barbuda
• Cook Islands
• Hong Kong
• Isle of Man
• Turks & Caicos
• United Kingdom
The situation is not made easier by the fact that some family courts are inefficient and demonstrate little convict when it comes to assisting the dependent spouse. It is obvious that the person who creates an asset protection trust offshore must necessarily be sophisticated, crafty, and resourceful. The whole concept requires study, research, and access to sophisticated professionals. The type of person most likely to create an asset protection trust is, by his or her very nature, most likely to be smooth and capable of lying to the court and others.
PRACTICE TIPS ON DISCOVERY
Whatever they do, divorce practitioners should keep their client notified and use the client's help in all efforts to obtain information. This will meet the client's need to believe that all steps available and affordable have been taken, and, further, this enables the client to make the informed decision to abandon the search, if necessary.
Consider taking the following steps:
1. Obtain a court order to perform Web asset and liability searches, and then retain a legitimate firm to do this search. Court orders will be required by legitimate search services.
2. Once identified, subpoena bank and brokerage account records. Be sure to look for clues on deposit slips and the copies of the backs of cancelled checks for evidence of deposits to offshore accounts.
3. If an individual has a crash business, hire a licensed private detective to observe the business, analyze its activities, develop information on industry practices, and testify to the probability of cash income. Private detectives hired to help evaluate a restaurant can testify to cash registers left open and the number of patrons per hour.
4. Keep in mind that corporations may have separate entities, joint ventures, subsidiaries, or partnerships offshore.
5. Private detectives who operate in other countries may not be hampered by the Internet privacy laws that exist in the United States, so contact a domestic private detective with foreign contacts.
6. Subpoena and depose third parties who can testify for income reconstruction purposes. They may provide important leads or testify to relevant circumstantial evidence such as regular travel to offshore locations or expenses incurred for which there is no evidence of payment and, thus, there may be a credit card debiting an offshore account.
7. Get the court to require the sequesterer, on the spot, in the courtroom, if necessary, to sign authorization and release forms so that you can deal directly with banks and brokerage account managers, credit card companies, credit reporting bureaus, and the like.
8. Subpoena telephone records. If credit cards reveal purchase of a phone card, then there are calls not on the phone bills.
9. Subpoena and examine passport records and calendars to determine if the opposing party has gone to an offshore banking location, vacationed with a paramour, or has secret business locations or activities. Some individuals obtain two passports, one for offshore banking purposes and the other for personal travel.
10. Identify professionals with whom the opposing party has consulted and fees that have been paid through traditional means or over the Internet for services such as the purchase of the preparation of trust documents.
11. Obtain injunctive relief, ex parte if justified, to gain emergency access to the party's computer, palm pilot, and e-mail records. The "cookie" for the sequesterer's computer may provide essential leads.
12. All records of monies that have been wired should be pursued in detail.
13. Make sure that requests for information include both on and offshore assets, as well as all trust information relating to the opposing party, in any capacity, but specifically as settlor, trustee, beneficiary, or protector.
14. Do title searches for relevant real estate holdings.
15. Subpoena the following specific documents if you suspect an offshore trust: Department of the Treasury Form TD F 90-22.1- Report of Asset Protection International Banks and Financial Accounts.
• Form 56-Notice concerning Fiduciary Relationship
• Form 709-United States Gift (and Generation Skipping Transfer) Tax Return
• Form 926-return by a transfer of property to an Asset Protection International Corporation, Asset Protection International Estate or Trust, or Asset Protection International Partnership
• Form 3520-Creation of or Transfer to Certain asset Protection International Trusts
• Form 3520-A-Annual Return of Asset Protection International Trust with United States Beneficiaries
• Customs Form 4790-Report of International Transportation of Currency or Monetary Instruments
• Form 1040, Schedule B which has a box, which should always be examined, provides that the taxpayer check the box in response to the following question:
▪ "At any time during the tax year, did you have an interest in or a signature or other authority over a financial account in a foreign country, such as a bank account, securities account or other financial accounts?"
▪ "Were you the grantor of or transferor to a foreign trust that existed during the current tax year, whether or not you have any beneficial interest in it?"
16. Consider subpoenaing the file of the opposing attorney. With evidence of the opposing attorney's participation in the conspiracy to commit a fraud, an attorney seeking discovery can challenge the anticipated attorney/client privilege defense to a subpoena for the opposing attorney's file, there being a conspiracy to defraud exception to the attorney/client privilege.
If an attorney is sure the money is there, they should investigate entering into a contingency fee agreement for the recovery of offshore assets. Arnold D Levine, an attorney from Tampa, Florida accomplished miracles in a case involving offshore assets in which the extraordinary efforts he made to gain access to sequestered funds was accomplished pursuant to a contingency fee agreement.
UNIFORM FRAUDULENT TRANSFER ACT (UFTA)
Thoroughly investigate the laws relating to fraudulent conveyances. Intent is the defining factor in fraudulent conveyance analysis. The factors to consider in determining intent are:
• Was the transfer or obligation to an insider?
• Did the debtor retain possession or control of the transferred property after the conveyance?
• Was the transfer or obligation disclosed or concealed?
• Was the debtor sued or threatened with suit before the conveyance?
• Was the debtor insolvent at the time of conveyance?
Absent a showing that a transfer was actually intended to defraud, hinder, or delay creditors, a creditor may set aside a transaction under the doctrine of constructive fraud. The UFTA classifies as constructive fraud schemes by which an insolvent transfer or a complete transaction is made "without receiving a reasonably equivalent value in exchange for the transfer."
The statute of limitations for international fraudulent transfers is the later of four years from the transfer or one year from reasonable discovery of it. The statute of limitations for constructive fraud is four years from the transfer.
PROPOSED INTERVENTIONS BY ATTORNEYS TO LEVEL THE PLAYING FIELD
As attorneys, we have a duty to promote fairness in our courts. As citizens in a civil society, we have moral obligations to promote respect for the law and take actions that will preserve the legitimacy, and effectiveness of our courts. "Economic justice" is the widely stated statutory purpose underlying many state equitable distribution laws. The rush to sequester assets is in direct derogation of that statutory goal. This author believes that we have both a personal and professional obligation, as members of the Bar, to support legislation that will promote economic justice among family members.
Set forth below is a list of suggestions that I believe could help provide a remedy for the threat to our courts and our clients posed by the rush to sequester assets offshore and to hide income.
Publicizing the Problem
1. Create task forces to discuss and investigate the extent of the problem and possible solutions.
2. Cooperate with the press and media to program and develop issues relating to asset sequestration problems.
3. Suggest congressional hearings and propose legislation to promote easier discovery practices.
1. Amend the Fair Credit Reporting Act to provide that either party can obtain the other party's credit report until the filing of a Complaint in Divorce.
2. Amend the Internal Revenue Code to require that the Internal Revenue Service automatically and promptly provide copies of a spouse's separate tax returns, filed for the years they were married, to the other spouse following proof of the filing of a Complaint in Divorce.
3. Amend the Internal Revenue Code to expand the types of disclosure required on tax returns. Currently, the language requesting disclosure on Schedule B of the individual tax return has been circumvented because the language of Schedule B is too narrow.
4. Amend Section IV-D of the Social Security Act (child support legislation) to provide greater penalties for failure to disclose income from sources other than W-2 income and provide support court plaintiffs with more attorneys and private investigators to assist in identifying non w-2 income.
5. Propose state and federal laws to require banks to provide copies of cancelled checks and account records within two weeks of service of a subpoena and at a reasonable cost.
6. Those who sequester assets in divorces should be subject to specific additional criminal sanctions for perjury and fraud.
Members of the Bar can educate judges on the problem of offshore assets and obtain their assistance in developing local rules, procedures, and policies which give more teeth to the discovery process.
Finally, if a lawyer is representing a suspected sequesterer, or is asked to participate in an asset protection scheme, he or she should be aware of the numerous relevant ethical considerations.
It is a violation of Rule 1.2(d) of the Model Code of Professional Conduct for a lawyer to counsel a client to engage or assist in a course of conduct that the attorney knows is fraudulent or criminal. Thus, in order to protect oneself, a lawyer should receive information on all existing and potential creditors and obtain a list of assets from the client to preclude the possibility that the attorney assisted in the perpetration of a fraud.
Is not avoiding the judgment of US courts "prejudicial to the administration of justice," unless it is pursuant to a constitutionally adopted domestic law which has a legitimate public purpose as found in the creation of protected classes of assets under bankruptcy law?
Generally, consider the following prohibitions from this author's state, Pennsylvania Rules of Professional Conduct:
Rule 8.4. Misconduct
It is professional misconduct for a lawyer to:
(c) engage in conduct involving dishonest, fraud, deceit, or misrepresentation
(d) engage in conduct which is prejudicial to the administration of justice. [Emphasis added]
The use of offshore banking locations is not a passing fad. If reflects an unabating trend toward globalization of financial and banking activities. Both the divorce bar and courts are seriously at risk of failing to adequately keep up with the times. Zealous advocacy in this area must include conquering foreign territory literally and figuratively.
1. Diane P. Kempe, "The Role of Offshore Jurisdiction in International Finances," The American Bar Association Center for Continuing Legal Education, Doing Business Worldwide, Section of the International Law and Practice Corporation Counsel Committee (1998).
2. David Cay Johnston, "Sham Shelters for Business Flourish as Scrutiny Fades," New York Times, Vol. CL No. 51, 607.
3. Debra Baker, "Island Castaway," 84 ABAJ 54 (Oct. 1998).
4. Jonathan L. Mezrich," It's Better in the Bahamas: Asset Protection Trusts For The Pennsylvania Lawyer," 98 Dickinson Law Rev. 657 (Summer 1994).
5. American Bar Association Formal Ethics Opinion 98-412 and American Bar Association Informal Opinion 1470.
I conveniently represent clients in the Bucks, Chester, Delaware, Montgomery, and Philadelphia Counties, the towns of Wayne, Radnor, Philadelphia, King of Prussia, Paoli, Devon, Berwyn, Newtown Square, Villanova, Bryn Mawr, Haverford, Ardmore, Lower Merion, Media, Wallingford, and Swarthmore, and throughout Pennsylvania.
© 2015 by Elizabeth L. Bennett, Esquire. All rights reserved.
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