The Truth About the Panama Papers and Offshore Strategies

If you’ve been keeping up with the stories about the Panama Papers in the mainstream media recently, you’d be forgiven for equating the word “offshore” with tax evasion, money laundering, and other criminal behavior.

But there’s one small detail the media isn’t disclosing: The vast majority of the individuals whose confidential financial data was stolen weren’t doing anything illegal. According to the International Consortium of Investigative Journalists (ICIJ), which coordinated the review of the documents, more than 320,000 offshore entities appear in the leak.

Yet only a handful of them are tied to any wrongdoing. And in many cases, that wrongdoing occurred decades ago, when offshore due diligence standards were considerably more lax than they are today.

Indeed, as the ICIJ grudgingly admits, “We do not intend to suggest or imply that any persons, companies or other entities included in the ICIJ Offshore Leaks Database have broken the law or otherwise acted improperly. There are legitimate uses for offshore companies and trusts.”

Here are a few of the perfectly valid reasons to use offshore accounts, companies and trusts:

  • Buying real estate in another country. Many nations, such as Mexico, prohibit foreigners from holding property in their own name in certain areas of the country. Using a Mexican trust (called a fideicomiso) overcomes this obstacle.

  • International tax planning. While it’s true many people think it’s morally wrong, it’s perfectly legal to use offshore entities to reduce taxes. Companies like Apple and Google have this strategy down to an art and have dramatically reduced the taxes they pay as a result. Indeed, all companies have a fiduciary duty to their shareholders to not pay a dollar more in tax than is legally required.

  • Asset protection planning. Multi-million dollar judgments are commonplace in the U.S. It’s only prudent for American doctors, entrepreneurs, and others who have accumulated wealth for retirement to place a portion of their “nest-egg” assets offshore. In many cases, these arrangements involve international companies and/or trusts.

  • Avoid foreign exchange controls. Throughout history, dozens of governments have imposed restrictions on the free movement of money across their borders. The common motivation in almost every case is to prevent the international erosion of value of the national currency. Once these controls are imposed, it’s often too late to protect yourself. Your savings, along with those of everyone else in the country, are trapped and losing value. Creating a “nest-egg” outside your country, before your government imposes such controls, is a perfectly legal, and ethical, strategy.

  • Avoiding probate formalities. Many countries, especially those with a “civil law” tradition (e.g. Spanish-speaking countries), require assets held in your own name to go through a time-consuming and expensive probate process. In certain countries probate formalities can go on for months or years and often eat up the value of the property being transferred to the next generation. Using a foundation legally avoids this nightmare.

The bottom line is that numerous legitimate reasons exist to invest and do business internationally. And in many cases, an offshore bank account, company, or trust can make it easier and more efficient to do so.

It’s also quite clear that the vast majority of individuals and companies dealing offshore aren’t violating any law.

You can read more offshore articles here.