Andres Knobel ■ US half-shuts door to financial secrecy, opens new window

A single open window in a grid of closed glass windows mirroring the sky

The US is the world’s second greatest contributor to global financial secrecy, according to the Tax Justice Network’s Financial Secrecy Index, only faring better than Switzerland in complicity in enabling financial secrecy schemes that foster tax abuse, money laundering and the financing of terrorism.  With all of the US’s major transparency shortcomings – eg no participation in global automatic exchange of banking information and lack of registered ownership information for legal vehicles – the US’s saving grace  was that it didn’t permit private foundations to be created – this in part gave the US a lower secrecy score on the Financial Secrecy Index than Switzerland.. However, thanks to New Hampshire, private foundations can now be set up without needing to disclose the identity of their founders and beneficiaries, let alone their beneficial owners. But won’t the primary reason for setting up a private foundation be to make the world a better place, the way most people use trusts in places like the UK? No. This blog will show why trusts (and private foundations) should equally be required to disclose their beneficial owners in public registries.

If you want to prevent mosquitoes or a cold draft from entering your house, then shut your door and your windows. If instead you only half-shut the door, leave your windows open and decide to break a hole in the wall, you won’t achieve much…

Likewise, if the world’s largest financial centre allows secretive companies, trusts and partnerships to be created, illicit financial flows will smoothly enter its financial system and economy (with horrible consequences for the rest of the world). Being in the process to (hopefully) enact a law requiring companies to disclose their beneficial owners in non-public registries is, let’s say, a first step. It’s huge from the perspective of US American transparency activists given the challenges they have to face, but quite meager compared to countries like the UK that have already had a public register of beneficial owners online and in open data for years. If the (hopefully soon to be approved) US beneficial ownership transparency requirements for companies won’t apply to other types of legal vehicles like trusts and partnerships, the positive effects will be reduced because criminals, tax abusers and other unscrupulous individuals will simply shift to those less transparent structures. If on top of this, the US is now to allow a new type of legal vehicle, private foundations, to be created, then one could wonder whether there’s any intention at all to help in the fight against illicit financial flows.

The new New Hampshire Foundation

At the end of 2017 (after the cut off date for assessing jurisdictions under the 2018 edition of the Financial Secrecy Index), New Hampshire enacted Chapter 564-F – The New Hampshire Foundation Act to “benefit” New Hampshire’s economy at the expense of the rest of the world, like any typical secrecy jurisdiction:

The fiduciary services sector is an important and growing part of this state’s economy.  The sector provides well-paying jobs for trust, investment, legal, accounting, and other professionals. Through the development of thoughtful, innovative laws, New Hampshire has become one of the best legal environments for trusts, trust companies, and fiduciary services. This legal environment attracts individuals and families to this state for purposes of creating new trusts or administering existing trusts, thereby supporting and encouraging the growth of this state’s fiduciary services sector. Continuing New Hampshire’s firm commitment to being one of the best legal environments for trusts, trust companies, and fiduciary services, this act further enhances modern trust design, further facilitates the efficient administration of trusts, promotes the formation of family trust companies within the state, and allows the formation and domestication of civil-law foundations. (emphasis added)

If the term “foundation” evokes thoughts of charity, philanthropy or other public interest goals, this Bloomberg article should evaporate them:

Thanks to New Hampshire legislators, advisors now have the option to use a New Hampshire-based foundation… Based on ease of use in the international arena and likely favorable tax treatment and asset protection potential, foundations are a wealth management game-changer in the U.S. and potentially internationally…

For example, take the case of a wealthy surgeon in Louisiana who would like to leave his assets to his wife, for her lifetime, but also wants to benefit their children. Ideally, he wants to allow the assets to benefit as many future generations as possible. Because of the risk associated with his career, he has concerns about creditors reaching these assets…he could protect assets from creditors by contributing them to a New Hampshire foundation because the foundation is a separate legal entity… his children and wife could be the foundation directors…the powers of the surgeon as the founder could be limited to prevent his creditors from being able to attach any assets of the foundation, much like an irrevocable trust. (emphasis added)

From the perspective of the Financial Secrecy Index, while the US secrecy score and ranking may improve in relation to companies (depending on whether the beneficial ownership requirements will actually become law and be loophole-free), the existence of private foundations without registration of their owners or controllers will push the secrecy score back up again.

Bonus track: trusts and their so-called private family matters to protect vulnerable people

While the European Union is at the vanguard of beneficial ownership transparency, it does allow trusts to benefit from more secrecy compared to companies and other legal vehicles, very likely because of the UK’s initial opposition to register trusts’ beneficial owners based on the claims that trusts are mainly private family matters. These claims were were repeated by New Zealand.

We have written a briefing paper and follow up paper on how trusts are abused for tax evasion, corruption and money laundering as well as to concentrate wealth and defraud legitimate creditors. There are more than enough reasons why trusts should be subject to at least the same transparency requirements applied to companies.

The following extracts should convince any remaining doubters., a website that (as its name suggests) promotes tax haven facilities, published an article titled “US Trusts For US And Non-US Clients”  that give its readers the following advice:

For clients who are US persons, we will be recommending the establishment of US domestic trusts, as there can be adverse tax consequences for US persons who establish foreign trusts. The only exception to this rule is when a US person is more concerned with asset protection issues, than tax, as US courts are known to be creditor friendly. In such cases, we will assist the client to establish a foreign trust in a jurisdiction with strong creditor protection provisions such as Belize, Nevis, the Bahamas, the Cook Islands and a couple of others…

[For non-US persons] we will usually recommend that they form US Hybrid Trusts, because … they will usually only have reporting requirements if a US person is the Settlor… The advantage of the Hybrid Trust is that there could be no direct reporting to the IRS even if the financial assets of the trust fund are managed within the US… Nevertheless, there is the added benefit that there is likely to be no CRS or FATCA reporting, in such circumstances, as a US financial institution is not currently subject to CRS reporting and FATCA rules apply to foreign bank/investment accounts and not to bank/investment accounts that are held with US broker/dealers, banks and other financial institutions.

Nevertheless, we do not recommend that US trusts are established, for the sole purpose of CRS avoidance, because US Trusts have many advantages… Thus, a US Trust should be established to meet the Settlor’s estate and wealth planning needs and not for CRS minimization alone.

US Trusts can offer the following benefits:

– Settlor directives to the trustee do not invalidate a US Trust and it is even possible to establish “Settlor Directed” trusts, in certain US states, where the US Trustee is obligated to follow the directions of the Settlor

-Most US states have very long perpetuity periods if they exist at all..

-Several US states also have asset protection provisions that provide a statute of limitations for creditors to attack the gifting of assets to the trust…

-A US Hybrid trust with a foreign grantor and no US source income may have no US reporting requirements; (emphasis added).

Similarly, a recent law case from Bermuda shows that these abusive goals aren’t only how trusts are promoted, but why they are actually used by wealthy individuals who want trusts to last forever and not to distribute its assets to beneficiaries to avoid both taxation and access to the trust assets by creditors (including spouses):

In addition to the preservation of existing and future tax benefits, important family wishes and objectives will also be attained. The family looks upon its wealth as dynastic in nature and wish the Trusts to continue in perpetuity, or at least so long as the family line continues…

Secondly, with the trust assets being held by the recipient generation, absolutely, the assets will not only be subject to the rigours of taxation noted above, but will also be exposed to claims of the recipient’s creditors, spouses and others. (emphasis added)

In conclusion, requiring companies to register their beneficial owners is a very important step, but forgetting to extend those same requirements to other legal vehicles like trusts and private foundations is a big mistake, especially when these legal structures are being promoted and used precisely for illegitimate goals such as tax avoidance, secrecy and shielding assets from legitimate creditors. The Financial Secrecy Index will continue to assess the transparency framework of each type of legal vehicle, so closing one loophole while opening another will do little to improve a country’s secrecy score and ranking.

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