January / February 2001 (Vol. 1 / No. 3)

In this issue:

• Welcome

• Big Changes in Store for Many Foreign Investment Funds

• With Profits Bonds: Useful Tools for Sophisticated Investors

• Asset Protection Committee Program at ABA RPPT Spring Meeting

• A Tale of Two Tax Havens

• OECD Makes Two Major Moves in January

• Briefly Noted

  • Here Today, Guam Tomorrow...

  • SEC Says Enenkio Not OK

  • Did Your HYIP Pay Off for Your Local Drug Dealer Too?

  • Bahamas Achieves Qualified Jurisdiction Status

• Book Review: The Laundrymen

The Riser Report is a bimonthly publication with articles and opinions on asset protection and estate and tax planning topics authored by Christopher M. Riser, M.A., J.D., LL.M., of Mayer & Riser, PLLC, in Highlands, North Carolina.   Mr. Riser is a North Carolina Attorney and an English Solicitor (as of February 1, 2001). The Riser Report is available for free and is posted on this Web site in HTML format with e-mail notice sent every other month to its own subscribers, of course, and to subscribers of The Adkisson Analysis.

The Riser Report also is available in the convenient (and easy-to-print) Adobe Acrobat Portable Document File (.pdf) format as well.  If you don't have the free Adobe Acrobat Reader installed on your computer, you can download it from the Adobe Web site.  To subscribe to The Riser Report, simply send email to subscribe@riserreport.com.  All back issues will be archived here.  Be sure to check out The Adkisson Analysis for in-depth critical analysis of risk management and asset protection issues and Quatloos! for comprehensive coverage of financial scams and frauds.

Welcome

Welcome to the January / February 2001 edition of The Riser Report. The Riser Report is a bimonthly publication covering issues and opinions related to asset protection and estate planning. The Riser Report is written by Attorney Christopher M. Riser, of Mayer & Riser, PLLC (www.mayer-riser.com) in Highlands, North Carolina and published by Axius Publishing, LLC.

The Riser Report is sent by electronic mail to subscribers of our companion publication, The Adkisson Analysis, and vice versa. If you aren’t already a subscriber to The Riser Report, you can subscribe at www.riserreport.com. Subscribe to The Adkisson Analysis at www.falc.com. If you have yet to enter the age of e-mail and Web publications and are reading this issue from a friend’s printed copy, you can subscribe by regular postal mail by writing to the address at the end of this issue.

In this issue, I give an overview of the U.S. tax withholding rules for foreign investment funds, particularly those taxed as partnerships. This is sort of an extension of the last issue’s article on qualified intermediaries. I also look at with profits bonds offered outside the U.S. which provide equity upside with reduced risk. Next, I examine some more tax issues in light of recent OECD initiatives. Briefly Noted contains tidbits of information on various topics. Finally, I review a fascinating book about money laundering, Jeffrey Robinson’s The Laundrymen.

Comments and suggestions are always welcome. Email them to comments@riserreport.com or use the feedback form on The Riser Report Web site at www.riserreport.com/feedback.htm

Big Changes in Store for Many Foreign Investment Funds

As reported in the November / December 2000 issue of The Riser Report in connection with the new qualified intermediary rules, new IRS regulations went into effect on January 1, 2001 regarding withholding on payments from U.S. payors to foreign payees, including foreign investment funds. Judging from the number of email and phone inquiries I’ve received asking for assistance, there seems to be a good bit of confusion about the new rules. The most drastic changes affect investment funds taxed as foreign partnerships, concerning the responsibilities for withholding and backup withholding by U.S. payors and by the foreign funds themselves when they accrue income allocable to the funds’ investors. The latter issue also will be of concern to U.S. partnerships with foreign partners as U.S. partnerships are responsible for withholding tax on its foreign partners’ distributive shares of partnership income.

Under U.S. foreign withholding rules, U.S. payors who pay to foreign payees U.S.-source fixed or determinable annual or periodic income not effectively connected to a U.S. trade or business generally must withhold tax at a 30% rate, unless an exemption or a lower treaty rate applies and the exemption or treaty applicability has been properly certified to the payor by the foreign payee. Also, under U.S. backup withholding rules, U.S. payors who pay interest, dividends, and gross proceeds from the sale of securities or other property must withhold tax at a 31% rate unless the payee has certified its taxpayer identification number (“TIN”) or has otherwise properly established its exemption from backup withholding.

So, U.S. payors who pay income to foreign investment funds, such as custodians, must either withhold tax or obtain the proper certification from the payee to show that withholding is not required. Also, the foreign investment funds themselves must either withhold or obtain the proper certification of exemption lest it find itself liable to the IRS for income paid to or allocable to its investors.

Under the old withholding rules, a fund organized as a foreign partnership could file certifications of exemptions without identifying the underlying investors. Under the new rules, the fund will have to obtain certifications from each investor in addition to filing its own certifications, and must explain how allocations of income will be made among the investors. Alternatively, the fund can enter into an agreement with the IRS to become a “withholding foreign partnership” which will allow it to file a much simpler blanket certification with U.S. payors, but will also require the fund to assume responsibility for withholding compliance.

All old Form W-8 certifications (certification of foreign status for the portfolio debt exemption) and Form 1001 certifications (certification of exemption from withholding under a treat) certifications expired on December 31, 2000. New certifications are required on new Forms W-8BEN (for foreign corporations and foreign individuals) and W-8IMY (for foreign partnerships). The new forms are more complex than the old forms, and in some cases, a foreign payee may need to obtain a U.S. TIN.

While funds taxed as foreign corporations should not find the new rules too problematic since not much has changed for them, funds taxed as foreign partnerships will be dealing with some complex issues this year. As noted above, generally a fund taxed as a foreign partnership must obtain certifications from each investor and attach those certifications to its own certification along with an explanation of the allocation of income among its investors. Essentially, the U.S. payor will look through the fund and treat each investor as a separate payee.

At first glance, this may not seem like such a big deal, but in practice there will be a number of complex issues to address. For example, whereas a fund’s custodian once dealt with one withholding issue for the entire fund, it will now deal with as many withholding issues as there are investors. Surely fees will increase. If a fund is open-ended, every time an investor is admitted or redeemed, certification and allocation information must be updated with the custodian. Disproportionate allocations will also cause complexity, especially in those not-so-uncommon cases where special allocations are not determinable until the end of a particular accounting period. Foreign investors must be identified by name to the U.S. payor must in turn identify them on Form 1042 to the IRS, which then may share this information to other countries with which the U.S. has tax treaties. Clearly, there are a number of issues which if not already addressed must be addressed immediately.

Some smaller or simpler investment funds may not find the new rules too difficult. Neither will, most likely, master partnerships in master-feeder structures where the foreign payee is a foreign feeder fund taxed as a corporation. Others might reconsider restructuring the fund to allow for simplicity. Alternatively, the fund could apply to become a withholding foreign partnership (WFP) which essentially serves the same function as a qualified intermediary, as discussed in the November/December 2000 issue of The Riser Report. Essentially, a WFP is treated the same as a domestic partnership. It is the partnership’s responsibility to withhold tax on allocations to its foreign partners.

Because the WFP regime is new, it is difficult to predict the costs involved in applying for WFP status or the ease with which WFP status can be achieved. However, it may be preferable where economically feasible, certainly from the perspective of U.S. payors and, in certain circumstances, from the perspective of foreign funds taxed as partnerships, where WFP status would appeal to a fund’s customers. In Rev. Proc. 2000-12 dealing with applications for QI status, the IRS stated that while Rev. Proc. 2000-12 does not apply to a foreign partnership seeking to qualify as a WFP, it will, however, consider applying the principles of the QI withholding agreement provided in Rev. Proc 2000-12 to a foreign partnership acting on behalf of its partners in appropriate circumstances.

With Profits Bonds: Useful Tools for Sophisticated Investors

Financial markets often are more volatile than some investors can stomach. Furthermore, the trend of the last 50 years towards low dividend returns coupled with the reluctance of investors to mentally account for capital appreciation as realizable, spendable income has many investors looking for investment assets that produce more income than equities. With profits bonds (WPBs) may fit the bill for some sophisticated investors.

With profits bonds (sometimes called “guaranteed growth funds”) are investment contracts for a stated term issued by foreign life insurance companies, typically in the UK, Ireland, the Channel Islands, or the Isle of Man. Under the law of the issuing jurisdiction, a WPB is a life insurance contracts; a death benefit (usually the greater of the cash value of the policy investment or 101% of the surrender value) is payable on the death of the insured. The underlying investment funds of WPBs are structured to give investors exposure to the medium-term and long-term upside of equities markets while reducing the typical downside exposure associated with short-term volatility.

A WPB is purchased with a single premium, which is invested by the insurance company in a with profits fund associated with that WPB offering. The funds contain a mixture of assets typically including equities, bonds, real estate, and cash. WPBs are designed to smooth out fluctuations inherent in equity investments. Although a WPB typically will not outperform a market index over a long period of time, the issuing insurance company can ensure that there will be reserves to bolster payouts and appreciation for WPB investors during market downturns which can be very comforting to the typical investor who has no idea when he may need to liquidate a position.

While general long-term stock market trends are upward, those upward trends are riddled with short-term peaks and troughs. Were an investor to liquidate a position in a trough period, the overall return might not reflect the overall upward trend of the market. WPBs are designed so that the peaks and troughs are much less pronounced, so that even if an investor liquidated in a trough period, the negative impact on investment return would be minimized.

Because of the investment practices of WPB funds and because they are backed by large insurance company reserves, WPBs generally guarantee the return of all (or most - at least 95%) of the investor’s originally invested principal, less any applicable charges, provided the WPB is held until maturity. Irrevocable annual bonuses are awarded which increase the value of the WPB by a stated percentage of the value of the WPB investment. These annual bonuses are also guaranteed along with the original principal. WPBs also typically award terminal bonuses at the end of the stated term which can be substantial. As with any life insurance policy, there are initial charges and surrender charges which make WPBs a medium-term to long-term investment vehicle so that such charges can be minimized or avoided. However, if the WPB is held to maturity, generally there are no charges; rather, they are internal and are amortized over the life of the WPB.

Because of the limited downside, some investors may find WPBs suitable for leveraging (also called ‘gearing’) by borrowing funds to purchase the WPB, which borrowed funds are secured by the WPB. Of course, if the net return on the investment in the WPB exceeds the interest rate on the borrowed funds, overall net returns on the investor’s original principal can be greatly increased. Because of the security factor and the inapplicability of margin calls, some investors may find this sort of leveraged investing significantly less risky than typical margin investing.

For UK taxpayers, WPBs can provide certain tax benefits. Up to 5% of the initial investment may be withdrawn annually as income without being taxable. This feature can be particularly attractive for someone wanting to increase on-hand income without having that income subject to the higher rate tax. However, if capital gains tax (CGT) is paid, it is paid within the with profits fund, so UK taxpayers cannot use their personal CGT allowance on a WPB investment. Thus, although UK taxpayers first might consider other investments to use up the CGT allowance, WPBs can be useful tools in a well-designed investment portfolio.

Foreign WPBs are investment products and are not registered with the U.S. Securities and Exchange Commission (SEC). Therefore, they may not be marketed nor sold in the U.S. However, WPBs are indirectly available to U.S. investors who, for example (1) are outside the U.S.; (2) have settled a foreign trust with a foreign trustee; or (3) own an interest in a foreign entity.

For U.S. taxpayers, investment in a WPB should provide some tax deferral with regard to the terminal bonus, although there will be some tax payable annually on annual bonuses. However, because WPBs provide security along with a significant upside potential, they may be good investment vehicles for some U.S. investors despite being subject to US taxation on an annual basis.

Furthermore, if a WPB is purchased inside a U.S. tax-compliant private placement variable life insurance policy, significant tax deferral can be achieved. However, investing in a WPB through a U.S. compliant variable life policy would have several drawbacks including: (1) the payment of two sets of initial and annual charges (for the WPB and for the U.S.-compliant life policy), though initial costs of the U.S-compliant policy generally can be minimized with sophisticated private placement life insurance policies, and initial costs of the WPB can be avoided by holding the WPB to maturity; (2) exposing the investor to two potential surrender charges for at least a certain number of years; (3) requiring the maintenance of a certain level of ever more expensive life insurance in the variable life policy to maintain the U.S. tax compliant nature, which may not be needed as part of the investor’s financial plan; and (4) requiring other underlying policy investments to meet the diversification requirements of Internal Revenue Code § 7702 (the value of the WPB could be no more than 55% of the total value of the variable life policy’s investments), which investments might not otherwise be wanted within the policy, although several different WPBs could be used to avoid this problem.

So, the decision to invest in a WPB within a U.S.-compliant variable life policy must be carefully considered with the drawbacks weighed against the advantages. For substantial investments, the advantages will often outweigh the drawbacks due to the potentially tremendous income tax and estate and gift tax advantages offered by a well-designed private placement life insurance policy.

A WPB held outside a U.S.-compliant life insurance policy, such as by a foreign company or in a foreign grantor trust, will most likely be taxed as a non-compliant life insurance policy.* The U.S. owner of a WPB will pay tax at ordinary income rates (not long-term capital gains rates) on the annual net increase in the surrender value of the WPB. Because surrender charges typically apply for the first several years of the policy, there will be some income tax deferral due to the inclusion of the surrender charge in the calculation of the WPB’s surrender value. Also, because terminal bonuses are either not paid at all upon early surrender or are only partially paid upon early surrender, there may be some income tax deferral on the terminal bonus as well.

The annual increase in the surrender value of a WPB that is included in income (including the more significant amount included in income at the end of the WPB’s stated term when the terminal bonus is declared) is taxable at ordinary income rates. Thus, viewed from a purely economic perspective, the limited income tax deferral may not make up for the fact that the appreciation of an index-fund investment held for a similar term would be taxed as long term capital gains at perhaps half the ordinary income rate.**

However, an investment in a WPB has the benefit of a smoother rate of return. This may outweigh the possibility that another more volatile, risky investment may produce a greater return. Furthermore, a leveraged WPB investment, particularly where borrowing is done in a favorable currency, may outperform an index fund, even on a net after tax basis, although of course, an additional element of risk is added with the leveraging and yet others are added if borrowing and investing are in currencies other than the investor’s home currency.

U.S. investors may have heard features similar to those of the WPB touted with regard to U.S. products called “equity indexed annuities” (EIAs). The EIA is a relatively new form of U.S. tax-deferred annuity first offered by U.S. insurance companies in 1995. An EIA is an annuity product which guarantees a certain percentage of the upside of a particular stock or bond index, while also guaranteeing the return of the owner’s principal, plus some minimal return usually in the range of 3-4% per year, at the end of a stated term. The terms are usually for 5 to 10 years and methods for calculating the owner’s participation in the upside vary greatly among EIA providers. The principal guarantee and minimum return is achieved by investing a portion of the investor’s funds in government bonds; the index upside is provided by investing a portion of the investor’s funds in index options.

For U.S. persons, some of the key differences between EIAs and WPBs include:

• All of the cash value increase of an EIA is tax-deferred prior to annuitization, while only part of the cash value increase of a WPB is tax-deferred.

• Withdrawals from an EIA before age 59½ may be subject to a penalty tax equal to 10% of the ordinary income tax payable on the withdrawal, while withdrawals from a WPB are not subject to the 10% penalty tax.

• Facilities are available through some offshore advisors for leveraging WPB investments in one or more of several currencies, using the WPB to secure the loan. Similar facilities generally are not available for EIAs.

• Surrender charges for EIAs are generally higher than for WPBs.

• As annuities under state law, EIAs may be protected from creditors’ claims under state law (if applicable state law protects annuities). WPBs may not be treated as life insurance or annuities under state law and may not be protected per se. On the other hand, depending on the jurisdiction from which a WPB is issued, a WPB may be protected from creditors’ claims under foreign law, and customized policies with asset protection features may be available from “boutique” insurers.

With profits bonds can be useful tools for sophisticated investors, including U.S. investors, as long as the investor has the advice of a qualified investment advisor who can explain the benefits and limitations and as long as the investor has the advice of a qualified tax advisor who can explain the U.S. tax implications.

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* Some tax advisors believe that IRC § 7702(g)(3) will cause a life insurance policy that is considered to be a life insurance policy under applicable law (e.g., under Irish law or under Guernsey law) that does not otherwise qualify under § 7702 to be treated nonetheless as life insurance under § 7702 and other provisions of the Code granting favorable treatment to life insurance. I disagree. The text of § 7702(g)(3) reads:

If any contract which is a life insurance contract under the applicable law does not meet the definition of life insurance contract under subsection (a), such contract shall, notwithstanding such failure, be treated as an insurance contract for purposes of this title.

While § 7702(g)(3) will cause a non-7702-compliant life insurance policy that is considered to be a life insurance policy under applicable law to be an insurance policy for purposes of the Code (such as the income tax treatment of premiums paid to an insurance company, etc.), it will not cause otherwise unqualified life insurance to become qualified life insurance under § 7702. Note however that despite the fact that non-qualifying life insurance policies will not receive favorable tax deferral on cash value accumulations, § 7702(g)(2) provides that the death benefit payable under such policies will be tax-free under § 101. It may also be possible to argue that a WPB is taxable as a contingent payment debt instrument (CPDI) under the original issue discount rules of § 1274 and the associated regulations. However, calculating the annual taxable income of a CPDI is considerably more complicated than calculating the annual increase in the net surrender value of a WPB, so the treatment of a WPB as a non-qualified life insurance contract is used for purposes of this article.

** In certain circumstances of limited application, it may be possible to structure the ownership of the policy (e.g., owned by a non-CFC, non-PFIC, non-FPHC foreign corporation or held within a U.S.-compliant life policy owned by a foreign corporation) so that the ownership interests of the entity owning the policy may be sold to an unrelated party with the gains taxed as long term capital gains.

Asset Protection Committee Program at ABA RPPT Spring CLE Meeting

I am pleased to announce that I’ll be a presenter at the 12th Annual Real Property & Estate Planning Symposia of the American Bar Association’s Real Property Probate and Trust Section, April 26-28, 2001 at the Ritz Carlton Pentagon City in Arlington, Virginia. I’ll be speaking on the topic of asset protection planning with limited liability companies. My presentation will be a part of what should be an interesting 3-hour Basic Track presentation of the RPPT Section’s Committee on Asset Protection Planning scheduled to run from 2:30 P.M. to 5:30 P.M. on Thursday April 26^th. The speakers and topics will be:

• Jay D. Adkisson: Asset Protection Theory

• Alexander Bove, Jr.: Domestic Planning

• Christopher M. Riser: Planning with LLC Structures

• Gideon Rothschild: Foreign Trusts

• Barry Engel: Litigation and Contempt of Court

• J. Ben Vernazza: The Use of Trust Protectors

I encourage all ABA RPPT Section members to attend the Annual Meeting. Attorneys who are not RPPT Section members are missing out on fantastic opportunities for continuing education and publications. For more information on the Spring CLE meeting or the RPPT Section in general, visit the Section’s Web site at www.abanet.org/rppt.

I am available for speaking engagements and continuing professional education seminars for law firms, accounting firms, estate planning councils, financial planning organizations, professional meetings, etc. Please contact my office at (828) 526-3731 or e-mail me at criser@mayer-riser.com.

A Tale of Two Tax Havens

This is a true tale of two tax haven countries; I’ll call them Potland and The Kettle Republic. Let’s look at the ways that Potland fits the following criteria for classification as a tax haven, as defined by the Organization for Economic Cooperation and Development (OECD):

• “ring-fenced” tax incentives, i.e., low or no tax on certain categories of income which tax advantages are restricted to non-residents with no substantial domestic business activities;

• no effective exchange of tax information; and

• lack of transparency, i.e., lack of regulation and lack of adequate due diligence requirements for banks and company formation agents.

Bank depositors in Potland claiming to be non-resident individuals and corporations enjoy tax-free interest payments on hundreds of billions of dollars of bank deposits. Banks in Potland do not report these interest payments to the government nor do the banks report these interest payments to the governments of their non-resident depositors. Neither is the information on these interest payments disclosed to foreign governments under tax treaties or tax information exchange agreements. These deposits are also not subject to Potland death taxes.

Potland’s national legislature considered changing these tax rules a few times many years ago, decided that taxing these deposits would drive too many billions of dollars out of the country. Despite the fact that not a penny of these deposits is ever taxed by Potland, each account enjoys substantial deposit insurance protection courtesy of the Potland government.

Although there are some reporting requirements, interest payments from government debt instruments and many corporate bonds are also tax-free for non-residents of Potland. Furthermore, all capital gains other than those derived from the sale of Potland real estate or a holding company owning Potland real estate are tax-free to non-residents. So while a Potland resident day trader will pay as tax on gains at a rate nearly as high as 50%, a non-resident day-trader will pay no tax at all on the same gains.

Gift taxes and death taxes at rates of up to 55% are imposed on gratuitous transfers of property owned by Potland residents, whether property is transferred directly or via domestic or foreign holding companies. Transfers of Potland bank accounts owned by non-resident donors and decedents are not subject to gift taxes or death taxes. Transfers of other types of Potland property can be made free of gift tax or death tax by non-residents via transfer of foreign holding company stock.

Very little information is required to open a Potland bank account or securities account and only bare-bones verification of identity or residence is required. Nominee accounts, trust accounts, and company accounts are ridiculously easy to open.

Potland offers some of the most advanced company laws in the world. Potland company formation can be accomplished online in a day for a few hundred dollars, including registered agent fees. If the company is not engaged in business in Potland, it need not file a Potland tax return and pays no Potland income taxes. Companies may have other companies as managers, and they need no resident directors. Furthermore, companies are not required to disclose the names of beneficial owners, company formation agents have no due diligence requirements or standards, and the companies generally have no mandatory record-keeping requirements.

Potland is a pretty great tax haven for non-residents, eh? It sure is. How about the Kettle Republic? The Kettle Republic is a much smaller and much poorer country than Potland. Seeing what great success Potland had in attracting foreign capital, it enacted similar tax laws, and has had some success in improving its economy.

Potland, seeing its superior position eroded (but really only slightly, since much of the capital flowing in and through the Kettle Republic ends up in Potland banks and investments), didn’t appreciate this competition. So, Potland whipped its powerful friends into a frenzy over the attempts of the Kettle Republic, and those of its small friends with similar laws, to get a piece of the tax haven action. They called the Kettle Republic black – literally, in a sense – by blacklisting it and a number of other small countries, threatening economic and tax sanctions if the Kettle Republic and its friends did not cease to compete with the large tax havens.

Is this story beginning to sound familiar? Before reading the immediately preceding paragraph, you may have thought that Potland’s true identity was Bermuda, the Bahamas, the Cayman Islands, Jersey or some other traditionally notorious tax haven. In fact, Potland is the United States, one of the greatest tax havens in the world for non-residents. Delaware and Nevada limited liability companies (LLCs) can be used by nonresidents for tax-free investing outside the U.S. as easily or more easily and more privately, perhaps, than any of the more infamous international business companies (IBCs) available under the company laws of the traditional tax haven jurisdictions.

Now, who should be calling whom black? Who should be blacklisting whom?

Faced with a new unity and staunch opposition from offshore havens at a January 8-9 meeting in Barbados between OECD representatives and representatives of offshore financial centers, the OECD agreed to withdraw a proposed "Memorandum of Understanding" that called for punitive measures if blacklisted nations failed to reform “harmful” tax practices by OECD set deadlines.

The offshore jurisdictions complained that major OECD members, especially the US and UK, are guilty of behavior far worse than they, including tolerating money laundering and tax evasion. Prime Minister Owen Arthur of Barbados who approvingly described the tone of the offshore jurisdictions as “brutally frank,” forcefully led the anti-OECD opposition. In a surprisingly conciliatory move, the OECD agreed to withdraw its proposed Memorandum and instead agreed to a joint task force, an idea also supported by the World Bank. The new joint task force will meet in London in late January and again in advance of an OECD forum in February in Tokyo.

The OECD’s Committee on Fiscal Affairs reached a consensus on how to apply one of the conditions that, under tax treaties, determine a country’s right to tax profits from electronic commerce.

The consensus relates to the interpretation, as regards e-commerce, of the conditions under which business activities of an enterprise in a given country are or are not carried out through a permanent establishment, the basic criterion that determines the country’s right to tax. The main elements of the consensus are as follows:

• a web site cannot, in itself, constitute a permanent establishment;

• a web site-hosting arrangement typically does not result in a permanent establishment for the enterprise that carries on business through that web site;

• an Internet Service Provider will not, except in very unusual circumstances, constitute a dependent agent of another enterprise so as to constitute a permanent establishment of that enterprise;

• while a place where computer equipment, such as a server, is located may in certain circumstances constitute a permanent establishment, this requires that the functions performed at that place be significant as well as an essential or core part of the business activity of the enterprise.

The consensus is reflected in amendments to the Commentary on the OECD Model Tax Convention which were recently adopted by the Committee on Fiscal Affairs. These amendments are available on the OECD’s Web site at: http://www.oecd.org/daf/fa/material/mat_07.htm#material_final.

Briefly Noted

Here Today, Guam Tomorrow...

A certain U.S. accounting firm was advising its clients to establish Guam trusts and to claim exemption from filing a U.S. tax return based on I.R.C.§ 935, which provides that individuals who are residents or citizens of Guam are not required to file a U.S. income tax return. The combination of § 935 and Guam law which provides a 100% tax rebate to Guam trusts for a 20 years provided that 50% of the rebated tax is retained in Guam for 5 years. If the Guam trusts being promoted under this scheme were also eligible for relief from U.S. tax under § 935, the trusts would be subject to neither U.S. income tax nor Guam income tax.

Nice try. In Notice 2000-61, published in I.R.B. 2000-49 on 12/4/00 and available online at ftp://ftp.irs.ustreas.gov/pub/irs-drop/n-00-61.pdf, the IRS announced that it will not allow Guam trusts promoted in such schemes to claim exemption from filing federal income tax returns. The IRS noted that there is nothing in § 935 nor its legislative history to indicate that a trust is considered an individual for purposes of § 935 and determined that a trust may not use § 935 to avoid filing a U.S. tax return. The IRS also said that it may impose penalties on taxpayers and promoters involved in Guam trust schemes.

SEC Says EnenKio Not OK

The SEC has filed suit in Hawaii against Robert F. Moore of Honolulu alleging securities fraud in Moore’s offering of $1 billion of “war bonds” of the Kingdom of EnenKio. According to Moore, the “head of state” of the Kingdom, EnenKio asserts sovereignty over Wake Island and other islands in the Marshall Islands chain based on ancestral tribal rights. EnenKio Gold War Bonds purportedly are backed by gold reserves and will pay compound interest of 10 percent after five years. The SEC alleges that the bonds are not registered and that they are not backed by any assets, much less gold.

Following the filing of the SEC’s complaint, the federal court for the District of Hawaii granted a temporary restraining order barring further sales of the bonds or any other securities. According to the SEC’s application for a civil contempt order, Moore is ignoring the order and continues to sell the bonds through the EnenKio Web site at www.enenkio.org.

Did Your HYIP Pay Off For Your Local Drug Dealer Too?

An informal survey taken on the Web site of Offshore Business News and Research (www.offshorebusiness.com) indicates that quite a few investors may believe that sky-high returns are achievable with private offshore investments. The surprise is that although the great majority of offshore high yield investment programs (HYIPs) are outright scams, a few may well pay such handsome returns. How? An investment in large quantities of heroin or cocaine can produce returns of 500% to 1000% in as short a period of time as it takes to wholesale a large drug shipment.

It is widely believed that during the war years of the early 1990s, a number of Yugoslavian private banks were funding their 10-15% monthly interest payments by using their several billion dollars worth of hard currency deposits to finance drug deals, which in turn financed weapons purchases. So, maybe you’ve hit upon the one deal in a thousand that actually does pay 100% a year – are you willing to provide financing to dealers of drugs and weapons to get it?

Bahamas Achieves Qualified Jurisdiction Status

The IRS announced in mid-January that the Bahamas has been approved as a Qualified Jurisdiction under the new withholding regime. As discussed in the Nov/Dec 2000 issue of The Riser Report, this status means that qualified financial institutions in the Bahamas can avoid the 30 per cent withholding tax on US-source income for properly identified and documented US clients and also can withhold at reduced treaty rates where applicable for non-US clients. Furthermore, Bahamas qualified intermediaries will not be required to identify their non-US clients to the IRS.

Approval of the Bahamas, one of the last major offshore financial jurisdictions to be approved, comes on the heels of sweeping legislative and other changes to “Know Your Customer” practices in the Bahamas.

Book Review: The Laundrymen

The Laundrymen By Jeffrey Robinson Paperback, 368 pages Arcade Publishing ISBN 1559703857 Publishers List Price $14.95

Jeffrey Robinson’s book, The Laundrymen, was first published in 1996 before the recent drastic anti-money laundering initiatives of the OECD and the G-8 nations were begun. It provides considerable perspective on these initiatives by taking the reader into the world of professional money launderers who legitimize the billions of dollars of “dirty” cash generated in illegal activities, mostly drug-related.

The book is a quick and very entertaining read, despite the fact that the subject matter might be tedious in less capable hands. The book reads like a series of in-depth magazine articles.

Robinson’s take is more than a little one-sided, with very little information on the legitimate uses of offshore banking. A reader who didn’t know otherwise might think that offshore banks exists solely to launder money, despite the fact that probably at least 90% of offshore deposits are legitimate. Robinson also leaves a bit to be desired in documenting his facts. Although there isn’t considerable doubt raised about the overall veracity of the book, there are some incorrect names, places and facts. It’s annoying that while there is a very extensive bibliography of books and articles, there are no specific citations to the sources of his information.

These drawbacks notwithstanding, the book is a must read for anyone interested in offshore finance and private banking.

Order The Laundrymen from The Riser Report online bookstore at www.riserreport.com/store.

© 2001 Axius Publishing, LLC.  All rights reserved. Limited permission is granted to readers to reproduce and forward this newsletter in electronic form for noncommercial purposes to individuals whom the reader reasonably believes have an interest in the content hereof.

View or download The Riser Report January / February 2001 issue in Adobe Acrobat Format

Author/Editor:
Christopher M. Riser, M.A., J.D., LL.M.
Mayer & Riser, PLLC
Attorneys at Law
511 Smallwood Avenue
Post Office Box 750
Highlands, NC 28741 USA
Tel. (828) 526-3731
Fax (828) 526-3734
criser@mayer-riser.com
www.mayer-riser.com