Tax Cheats Look Offshore

Every year, the federal government loses about $1 trillion to various tax evasion schemes. Frank Cummings, head of the Financial Crimes Research Center, discusses the mechanics of illegal offshore tax shelters.

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ANDREA SEABROOK, host:

From NPR News, this is ALL THINGS CONSIDERED. I'm Andrea Seabrook.

This is it, your last weekend before the dreaded day. Tuesday, April 15, Tax Day. And while many of you are satisfying your civic duty, thousands of others are bilking the federal government out of about a trillion dollars a year. Frank Cummings runs a company called the Financial Crimes Research Center. It tracks suspicious activity in banking and finance. He's in our New York bureau. Hi there.

Mr. FRANK CUMMINGS (Financial Crimes Research Center): Hi.

SEABROOK: So, how do tax cheats do it?

Mr. CUMMINGS: We've put them in kind of three different groups. There's the red group, we'll say, that individuals like Walter Anderson who used shell companies and used foreign drop boxes and tax shelters to evade paying tax on a little over $350 million. And for his reward he was given nine years last year in federal prison.

And then there's that gray area - we call it the yellow area - where there's estimated to be about $5 to $7 trillion in over 40 offshore finance centers where a little bit more than wealthy people hide their money and they don't pay tax on the investments.

And then there's the totally legal one. The Netherlands, who has a great corporate tax structure. Companies like Coca-Cola set up over there so they wouldn't have to pay U.S. tax on their foreign earnings. So there's a whole bunch of different ways that they do it and we kind of look for them, other than the green ones, of course, because they're legal.

(Soundbite of laughter)

SEABROOK: So who are these tax cheats? Are we talking about the super-rich who just do anything they can to shelter their money?

Mr. CUMMINGS: Well, that's one set but it could be as low as what we call the off-the-books employee. But most of them, most of the evasions is happening in the 40-plus countries and territories that put up these tax havens for the wealthy and extremely wealthy.

SEABROOK: So, this sort of offshore Cayman Islands kind of thing. I've always heard that the Cayman Islands are the place that there's just tons of money there, and tons of companies that have nothing but one little office.

Mr. CUMMINGS: Well, there's a bunch of them that do it at different levels. Some legally, some of them not so legally. So depending upon their bank secrecy laws it's very difficult for the government to go and look at the data that's there. We're looking at an estimate between $5 and $7 trillion stored in these tax havens.

So if you take the five to seven trillion, and then you add the trillion dollars in absolutely legal stuff, if you put that all together, worldwide it's $2,600,000,000,000 in taxes that aren't collected.

SEABROOK: So, let's say I, Andrea Seabrook, go out and buy a Powerball ticket and I strike it. Be the evil tax advisor and tell me how to shelter the money.

Mr. CUMMINGS: First you pay tax on it…

SEABROOK: Okay. Because you can't help that. Say I have 70 million left…

Mr. CUMMINGS: Um-hum.

SEABROOK: …a paltry sum, and I transfer it to a bank account in the Cayman Islands.

Mr. CUMMINGS: Um-hum.

SEABROOK: And then what?

Mr. CUMMINGS: There are what they call dead instruments and there are all kinds of guarantee return instruments that happen in these hedge funds offshore that you have absolutely no visibility on because their bank secrecy laws prevent it. And I would spread it out about multiple countries and the U.S. government would never have any vision of what happened, what you're doing. They wouldn't see it.

SEABROOK: So I'd put some in the Cayman Islands and some in Morocco and different kinds of hedge funds and kind of spread it around?

Mr. CUMMINGS: Absolutely. Because you never know what happens in politics. One of these countries changes leadership, the laws changes and then you're exposed. So that's why they spread it all over the place.

SEABROOK: And my money, my $70 million spread across the world in these illegal places or these…

Mr. CUMMINGS: Well, we call them…

SEABROOK: …gray area…

Mr. CUMMINGS: …gray areas…

SEABROOK: …places.

(Soundbite of laughter)

SEABROOK: It's actually making money for me?

Mr. CUMMINGS: Absolutely. You're talking about returns in 14 percent, 28 percent. Yeah, you're getting some pretty good returns out there that you're not paying taxes on.

SEABROOK: Wow. So, why don't all the rich people go and live in the Cayman Islands?

(Soundbite of laughter)

Mr. CUMMINGS: Well, a good deal of their money is there. But a majority of these banks that do this, you couldn't live in the Cayman Islands and use your money because they're not based upon their banking license. They're not allowed to do business in the Cayman Islands; they can only do business offshore. But there's a lot of very honest people and not all billionaires are bad. A lot of them pay taxes. But, you know, you've got to be careful.

SEABROOK: Frank Cummings runs the Financial Crimes Research Center, a business that tracks suspicious activity in banking and finance. Mr. Cummings, thanks very much for speaking with us.

Mr. CUMMINGS: Thank you for having me.

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