Diversification Offshore Isn’t About Being Creative

Moving some of your money offshore doesn’t have to be as complicated as many think. It is still possible, for example, to open a bank account in many jurisdictions without leaving the comfort of your own home. And, as long as you’re not trying to evade taxes or participating in some other illegal activity, you don’t need to worry (at least not yet) about restrictions on moving money in or out of most Western countries, including the United States.

If you’re a U.S. person–a U.S. citizen or Green Card holder–you do, however, as I’ll continue to remind you, have important reporting requirements. Ignore them at your peril. My point is that, as of this writing, you still have many good options for diversifying and protecting your assets. Legally.

Why is it, therefore, that many people still try to “get creative” when moving money overseas? Typically it’s because they’re trying to hide something. Maybe trying to hide income from some government to evade taxes (evading taxes is illegal…avoiding taxes is not). Maybe trying to hide wealth from spouses, ex-spouses, girlfriends, ex-girlfriends, even offspring. Maybe trying to hide assets from potential litigants in a litigious society.

Whatever the reason (some legitimate, others not), getting creative when it comes to moving money offshore can end up being far more costly than investing the time and effort in devising a compliant strategy. Maybe devastatingly more costly.

Over the years, international bankers I’ve known have told me stories of clients who have asked about and even followed through with some crazy ideas related to moving wealth from one country to another without leaving a trail.

The banker from UBS who blew the whistle on the bank and its account-holders, for example, once carried diamonds back from Switzerland for one of his clients. Why would someone like him, in the position he was in, do something like that?

On the surface, it may seem like a good idea–buying diamonds and physically carrying them to the country where you’d like to park wealth for a while. In fact, though, I’d say that, whether you’re considering diamonds, jewelry, art, or some other easily transportable valuable, moving your wealth around the world in this manner is just plain stupid unless you’re an expert on the valuable in question.

Say you want to move money to an offshore bank account. You’ve paid your taxes on the money, but you don’t want your soon-to-be ex-wife to know the money exists. You go to the jeweler and buy a US$100,000 necklace. Then you fly to Amsterdam to sell it, and you have the buyer send the proceeds to your bank account in Andorra.

Seems simple enough. Might even seem brilliant…on the surface. The trouble is, what in the world do you know about jewelry?

Let’s think this through. Buying a retail necklace from a jeweler in the States probably means paying sales tax, say 5%. For a necklace of US$100,000, that’s US$5,000. Then you have to buy the plane ticket for the trip to Amsterdam. Then you have to find a buyer, and I’m guessing you aren’t going to find one who’ll be willing to pay retail (plus sales tax). The real risk, though, is knowing what you’ve bought. Unless you’re an expert, how could you be sure what you’re buying is worth what you’re paying?

Your US$105,000 plus travel expenses is now maybe US$50,000. Maybe you’re happy. Your wife doesn’t know where the US$50K is. Of course, maybe you would have ended up with that US$50,000 anyway, after the divorce, but you did get a trip to Europe out of it.

Maybe you’ve got bigger assets to hide. Scale up the operation to US$1 million, and maybe it’d be worth hiring an expert to counsel you on the purchase. But then you’d have US$1 million worth of jewelry or diamonds to sell. Who would your buyer be? Maybe some shady character who’d as likely steal as buy from you.

You don’t have to go through all that trouble…at least not until the U.S. government puts currency controls in place to keep money from leaving the country. With a little planning and much less effort than the jewelry scenario, you could open a bank account offshore and move some of your money into it. The IRS will know because you’ll tell them. Show and tell is the name of the game in the current climate.

Put a structure like a trust or a corporation between you and the money, and the guys who might someday sue you won’t have a shot at getting to your money even if they know where it is. That’s the point of asset protection structures.

Okay, your wife will still get half in the divorce. But you won’t risk losing everything by unwittingly buying cubic zirconia instead of diamonds. Or paying for an original Picasso but getting stuck with a color-by-the-numbers print.

Lief Simon