Penetrating the Offshore Sector

It illustrates the ways in which offshore havens have been used to divert significant capital from allegedly legal transactions across the globe.

A medium-sized European manufacturing company decides to expand its manufacturing facilities to Asia to improve its competitiveness. The CEO subsequently orchestrates the purchase of a facility for $9 million.

Move the clock ahead four years: the CEO has retired, there are serious issues with the Asian facility, and the company questions what exactly it bought. Enter Kroll, who is engaged by the company to investigate the matter and is able to determine that the actual purchase price for the Asian facility was $2.2 million and the balance of $6.8 million was diverted to a company domiciled in an offshore financial center (OFC). As is typical for an OFC, its public records indicate the date of incorporation, number, name of registered agent and status. So is this the end of the trail?

The moral of the story: The offshore sector can be penetrated. The key is to conduct a thorough investigation and utilize all the tools and resources available, including engaging experienced legal and risk management partners.

There are approximately 95 OFCs or tax havens located in the Caribbean, the United States (i.e., Delaware), Southeast Asia and the Pacific Ocean. Reports indicate that OFCs serve as domiciles for more than 2 million paper companies and thousands of banks, investment funds, insurance companies and most large registered vessels. OFCs range from developed jurisdictions, such as the Cayman Islands specializing in investment funds and Bermuda specializing in insurance, to the “aspirational havens” that have turned to finance to reduce their reliance on tourism and agriculture.

OFCs have been under tremendous pressure over the past decade or more to disclose information on assets they hold. To ease some of that pressure, the majority have agreed to the exchange of tax information on clients and their home countries. However, the pressure continues, with emphasis on curtailing tax avoidance/evasion, terrorist financing and proceeds of crime/money laundering. This does little to assist in the above scenario unless law enforcement can be convinced to investigate; however, this can be a tough sell when their priority is criminal prosecution versus trying to recover $6.8 million for a private company.

Obtaining information on the directors, officers and beneficial owner(s) of an offshore company means penetrating the records of the registered agent, who holds “the keys to the vault” and based on OFC secrecy laws, cannot disclose the information unless compelled by the courts. Fortunately, the courts have provided us with a tool, namely the Norwich Pharmacal or Discovery Order (Order). The Order places a duty on a third party to assist the aggrieved, even if the third party did nothing wrong.

The rules are reasonable and straightforward and include:

• An allegation of wrongdoing/fraud;
• A requirement for full disclosure of the facts both pro and con, as court proceedings are in camera;
• Stipulation as to the documents that are required and why these documents are necessary/crucial in furtherance of the fraud, pending or actual litigation;
• Reasonable to conclude that the documents are in possession of the third party; and
• Convincing the court that the information cannot be obtained from other sources or methods of investigation.

While rules and procedures for obtaining an Order can differ between OFCs, it is a requirement to engage legal counsel in the OFC and wiser still to engage counsel with experience in obtaining Orders. Counsel should be familiar with the latest approach of the presiding court in these matters, and can present the matter to the court and seek to obtain the Order.

Let’s go back to our case. After discussions and with the assistance of legal counsel, Kroll would be asked to prepare an affidavit telling the story of what it believed to have happened, the information required, the belief that the information was in possession of the registered agent, and all other avenues of investigation had been exhausted. In this hypothetical case, counsel presented the affidavit, the application for an Order and draft order to the court. The court agreed to issue the Order on the registered agent, which was subsequently served, and the information was provided within 10 days of the Order. To finish our story, the Order succeeded in producing crucial evidence that the CEO was the beneficial owner of the offshore company resulting in civil and criminal actions against the CEO.

The moral of the story: The offshore sector can be penetrated. The key is to conduct a thorough investigation and utilize all the tools and resources available, including engaging experienced legal and risk management partners.

Learn more about fraud statistics and trends in Kroll’s annual Global Fraud Report.