- Published on Thursday, 19 July 2012 17:51
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Located in the midst of the fish markets, souvenir shops, and sometimes even within sight of visiting cruise ships, the offices of the world’s offshore banks seem out of place. They are in dozens of often exotic and tropical locations. Island nations that provide the banks with the freedom to operate in a way they can’t in much of the developed world. The Cayman Islands host up to 40 offshore banks, Bermuda has just about as many, Britain’s Channel Islands have long been home to offshore accounts, and today these institutions have found homes in the Bahamas, Barbados and as far away as Malta, Cyprus and even Hong Kong.
The common perception is that offshore banking is a shady business run by squirrely characters that help their depositors avoid taxes and skirt banking regulations or, even worse, handle money (earned illegally) that needs to get a new identity. It’s true that offshore accounts are often a way to avoid paying taxes and to take advantage of easier banking rules. And yes, they have been used to launder illegal earnings. But, that’s by no means a fair assessment of this part of the financial services industry. Offshore banking, and most of the world’s leading banks have offshore activities, is run as a sound international business. But, it still raises eyebrows. That’s why Mitt Romney’s use of offshore banks, on a substantial scale, is getting so much attention.
Most of us, those of us who earn our money in the U.S. and don’t have large overseas investments, don’t think much about off shore accounts. Our money, if we are lucky enough to have some to invest, is usually in savings accounts, a fund, bonds, or stocks. And we naturally pay taxes on what these investments earn. Offshore accounts rarely figure in our tax returns. But, they do for Presidential candidate Mitt Romney.
Romney, whose father was President of American Motors, and who has made a lot of money in his own right as CEO of Bain Capital, has, according to Bain records and his own tax filings, made liberal use of offshore accounts. It’s hard to tell from his 2010 tax returns just how much money he has in offshore accounts. He is one of the richest men ever to run for President. At a minimum, depending on how the accounts are identified, he has $8 million invested offshore and possibly as much as $30 million. Bain Capital alone had over 100 separate investment funds in offshore accounts.
There are several reasons investors like offshore accounts. And these are no doubt what prompted Governor Romney to put so much of his and his firm’s money in offshore banks. For one thing, in the case of most offshore accounts, as long as the money is made through international investments, and is held in a corporate account, and isn’t being returned to the U.S. economy, it isn’t taxed. With that in mind, Governor Romney wouldn’t have to pay taxes until the money comes home. Until then it doesn’t get taxed. Think of this as a rather generous tax deferral. Or, even better.
Also, offshore accounts aren’t strictly regulated. This makes them riskier, but the trade-off is that the banks, not burdened by much in the way of regulations from their island hosts, don’t face the banking rules common in the U.S. This includes financial disclosure requirements, reserve requirements, and conflicts of interest rules. This makes it easier for them to charge lower fees and offer higher interest rates. One other perk, in the case of the Romney owned Sankaty High Yield Investor, Ltd. is that the firm was allowed to charge its investors higher management fees than is allowed in the United States.
There is, so far, no indication that any of the Governor’s investments were illegal. Inappropriate, maybe, but so far, no sign that he did anything illegal. But, given that he is running for President, having so much of his fortune tied up in banking institutions that operate outside U.S. law, don’t follow our banking rules, and certainly aren’t transparent or open for public or media examination raises more than just eyebrows. He should have closed those accounts years ago.