In Your Face

The Hidden Dangers of Offshore Companies

As I noted in my article “Parmalat, Europe’s Enron”, I am highly suspicious of organisations that make use of offshore companies in their company structure.

During my years as an accountant, head of audit and head of fraud investigation (see my resume) I have come across numerous examples of offshore structures based in eg; the Caymans, Bermuda, Luxembourg and Jersey.

As far as I can see there are only five reasons why an organisation would wish to use an offshore company:

1. The “less than demanding” accounting rules, and reporting requirements, of the offshore base enable the company to “hide” transactions and relationships that it does not wish the outside world to see.

2. The tax regime of the offshore base enables the organisation to avoid tax that it would have to pay if it resided elsewhere. Note, tax avoidance is perfectly legal.

3. The tax regime, and the “less than demanding” accounting rules, of the offshore base enables the organisation to evade tax that it would have to pay if it resided elsewhere. Note, tax evasion is illegal.

4. Loading the organisation chart with numerous offshore companies, which have complex cross holdings in each other, leads to an unnecessarily complex and difficult to understand organisation. This enables the organisation to hide fraudulent transactions.

5. Offshore organisations, if the share holdings are engineered in a particular way, can be excluded from the organisation structure which is disclosed in the public accounts.

I have the following advice for investors, regulators, employees, auditors and tax investigators:

 Carefully study the structure of the companies that you are dealing with, ask if there are offshore companies.

 Where there are offshore companies, make sure you understand their role and their place in the organisation as a whole.

 If you do not understand the structure of the company, or the role/purpose of its offshore holdings then treat it with extreme caution.

I have the feeling that the regulatory environment will tighten over the next few years, making it increasingly difficult for companies to use these dubious structures.