Offshore investments have again emerged as controversial investment tools used by asset managers in diversifying the investment portfolio of their clients. Although considered as legal forms of investments, offshore holdings first drew controversy when its connection to tax evasion schemes was exposed.

How are Offshore Investments Linked to Shady Financial Transactions?

While investing in equities and other marketable securities offered by financial centres of foreign countries became viable as portfolio diversification options, they also presented legal loopholes. Such loopholes were exploited by asset managers, particularly hedge fund firms, to help their ultra-wealthy clients gain larger amounts of profits.

In 2017, an international investigative report known as the “Panama Papers” exposed the use of offshore investments for tax evasion schemes and other shady deals. They used shell or dummy companies to hide the wealth of ultra-rich investors.

Last week a similar report, dubbed as the “Pandora Papers” revealed that majority of the so-called tax evaders are prominent world political personalities, religious leaders, famous celebrities and known drug dealers

Both reports were based on legal documents that were leaked from offices of law firms handling transactions related to offshore investments. The recent set of leaked documents provided information connecting the dummy or shell corporations to the tax evaders.

Other documents show that most offshore investments were made in the form of high-end real estate properties like mansions and villas located in prime beachfront areas. This is considering that the recent property-buying spree of offshore investors had causes the prices of real estate to increase, particularly in the U.S. After all, real estate properties are highly favored as an investment alternative because they store value that appreciates over time,

The greater revelation this time is that it turned out that many of the tax evaders include important personalities who owned questionably large amounts of wealth invested in offshore holdings. In addition to having unexplained hidden wealth, it became apparent that the political and religious figures have been committing acts of tax evasion. They  been depriving their country millions of tax revenues that governments could use in providing services to their countrymen, especially the members of the underserved sector.

The Report Points to Hedge Funds and Tax Havens as Proponents of Shady Offshore Investment Deals

Based on the types of investment deals revealed by the leaked documents, it became apparent that they were arranged through hedge funds, a type of asset management that caters only to a select and exclusive group of super wealthy people.

Hedge funds work differently as the pooled funds can be placed in almost any type of high-risk investment, including real estates, precious metals and lately digital assets like cryptocurrencies and NFTs. As much as possible, hedge fund managers make sure that their clients will realize substantial profits, since their own revenues as asset managers are in the form of commissions deducted from the investment profits.

This denotes that mutual funds are not involved, since this type of offshore investment is limited to shares of stocks, bonds and short-term placements. Mainly because the pooled money are fairly small sums coming from regular folks looking to earn extra income at higher rates than the savings and time deposit interest rates offered by banks.

While there are mutual funds located in tax havens, mutual funds registered in The Cayman Islands like the einvestment.com platform, optimize offshore investment earnings by taking advantage of the island’s no-income tax policy. Moreover, mutual fund managers collect revenues based on the yield exceeding the amount of yield promised to investors.

However, the Organisation for Economic Co-operation and Development (OECD) also blames tax havens like The Cayman Islands. This jurisdiction has relaxed policies on offshore investments and in licensing corporate entities. It allows the creation of dummy or shell corporations used in hiding the identities of political and religious figures who have amassed large amounts of questionable hidden wealth.