RENO
THE BIGGEST LITTLE TAX HAVEN IN THE WORLD
Switzerland is so last century
Seven months ago, Rothschild & Co. paid an $11.5 million fine to the U.S. Department of Justice and avoided prosecution for helping Americans dodge taxes using undeclared offshore accounts. It’s among the more than 80 Swiss banks who’ve paid $5 billion to the U.S. in penalties, fines, interest, and restitution. Now, however, Rothschild—one of the largest investment banks in the world—is moving money in the reverse direction, helping rich foreigners shelter their wealth in the U.S. through a trust company in Reno, Nev.
Last September, in a bid to drum up business for the Reno office, Andrew Penney, a managing director at Rothschild, put together a presentation in San Francisco on how the world’s wealthy elite could avoid taxes as well as disclosures in their home countries. In one section he gave the hypothetical example of an Internet investor named “Wang, a Hong Kong resident,” originally from the People’s Republic of China, concerned that his account information could be shared with Chinese authorities. According to the presentation, putting Wang’s assets into a Nevada limited liability company, in turn owned by a Nevada trust, would not only shield him from the authorities in China but also generate no U.S. tax returns.
After years of lambasting other countries for helping rich Americans hide their money offshore, some tax experts and lawyers say the U.S. is becoming the new Switzerland. Scott Cripps, the managing director of Rothschild’s Nevada trust company, says moving money out of traditional offshore secrecy jurisdictions and into Nevada is a brisk line of business for Rothschild. “There’s a lot of people that are going to do it,” he says. “This added layer of privacy is kicking them over the hurdle to” move their assets into the U.S. For wealthy foreign clients, he adds, “privacy is huge, especially in countries where there is corruption.”
Rothschild is perhaps the most prominent bank chasing these kinds of clients. But it has plenty of competition from others opening up shop in states such as Nevada and South Dakota that promote low taxes and high levels of privacy through generous trust laws. Cisa Trust, based in Geneva and specializing in serving wealthy Latin Americans, is applying to open an operation in Pierre, S.D. Trident Trust, one of the world’s biggest providers of offshore trusts with sizable operations in the Cayman Islands, has opened a trust company in Sioux Falls, S.D. Says Trident President Alice Rokahr: “I was surprised at how many were coming across that were formerly Swiss bank accounts, but they want out of Switzerland.”
The flow of overseas wealth into the U.S. stems from a 2010 law, the Foreign Account Tax Compliance Act, or Fatca, which require banks to ferret out foreign accounts held by U.S. citizens and report them to the Internal Revenue Service or face steep penalties. Inspired by Fatca, t he Organisation f or Economic Co- operation and Development, a government-funded international policy group, drew up even stiffer standards in 2014. Of the nations asked by
the OECD to sign on, only a handful have declined: Bahrain, Nauru, Vanuatu—and the U.S.
The Obama administration is proposing standards similar to the OECD’s for foreign-held accounts in the U.S. Yet most global tax experts expect those to go nowhere. Similar proposals in the past have stalled in the face of opposition from the Republican-controlled Congress and the banking industry. “I have a lot of respect for the Obama administration, because without their first moves we would not have gotten these reporting standards,” says Sven Giegold, a member of the European Parliament from Germany’s Green Party. “On the other hand, now it’s time for the U.S. to deliver what Europeans are willing to deliver to the U.S.”
Rothschild’s Reno operation, Nevada Trust, isn’t easy to find. Its offices are on the 12th floor of Porsche’s former North American headquarters building, a few blocks from Harrah’s and the Eldorado. (The U.S. attorney’s office is on the sixth floor.) The lobby directory doesn’t list Rothschild. Instead, visitors must go to the 10th floor, the offices of McDonald Carano Wilson, a politically connected law firm. A tax lobbyist there, Robert Armstrong, is among the state’s top trusts and estates attorneys—and a manager of Rothschild Trust North America, which was set up in 2013.
One Turkish f amily i s using Rothschild’s trust company to move assets from the Bahamas into the U.S., says Cripps, the Nevada trust company managing director, and a family from Asia is moving assets from Bermuda. An amiable California tax attorney who used to run the trust services for Bank of the West, Cripps says foreign clients often have offspring in the U.S., and Rothschild makes sure it knows the true owners of the entities used by its clients. Clients must also show they’re tax compliant in their home countries. Rothschild’s Nevada trusts have “not been set up with a view to exploiting that the U.S. has not signed up to” international reporting standards, says spokeswoman Emma Rees. “We do not offer legal structures to clients unless we are absolutely certain that their tax affairs are in order; both clients themselves and independent tax lawyers must actively confirm to us that this is the case.”
Penney is a longtime attorney for the bank. He worked his way up from Rothschild’s trust operations on the isle of Guernsey in the Channel Islands. He’s now a managing director for Rothschild Wealth Management & Trust, which is based in London and manages $23 billion for clients around the globe. In a client newsletter from 2013, Penney explained that Nevada trusts can be structured to show up as foreign trusts to U.S. authorities—thus avoiding U.S. taxes—while simultaneously looking like U.S. trusts to foreign authorities. He gave the September presentation in San Francisco. An earlier draft given to Bloomberg said the U.S. lacks “the resources to enforce foreign tax laws and has little appetite to do so” and “is effectively the biggest tax haven in the world.” The firm said those statements were deleted before he delivered his talk.
“The presentation was drafted in response to a request by the organizers to be controversial and create a lively debate amongst the experienced, professional audience,” Rees says. “On reviewing the initial draft, these lines were not deemed to represent either Rothschild’s or Mr. Penney’s view. They were therefore removed.”
No one expects tax havens to disappear anytime soon. Swiss banks still hold about $1.9 trillion in assets not reported by account holders in their home countries, according to Gabriel Zucman, an economics professor at the University of California at Berkeley. At the same time, rule changes governing formerly secret accounts in the rest of the world are making the U.S. an increasingly popular place to shield global wealth from government regulators. “How ironic—no, how perverse—that the USA, which has been so sanctimonious in its condemnation of Swiss banks, has become the banking secrecy jurisdiction du jour,” says Peter Cotorceanu, of counsel at Anaford, a Zurich law firm. “That ‘giant sucking sound’ you hear? It is the sound of money rushing to the USA.” <BW>