Legal Issues of Investing Abroad

RyanD
December 8, 2012

A recent report by TribLive News has determined that wealthy individuals in the United States have stashed as much as $25 trillion dollars in overseas bank accounts. Options such as offshore trusts, hedge funds, and limited liability corportations allow investors to place assets in a shelter from taxes and lawsuits. While investing in offshore accounts is a legal practice that provides high net worth individuals asset protection that is not available in the United States, if done improperly, legal issues may arise.

Tax Evasion

Tax evasion is the process of hiding assets or income from the Internal Revenue Service in an attempt to avoid paying income tax on it. In 2011, the federal government announced it would seek out accounts world wide in order to collect taxes on the hidden assets. Investors will be required to disclose the amounts of assets held by 2013 or face harsh penalties.

Not all international investments must be reported for disclosure compliance. Any funds or assets held in United States backed banks and brokerage firms will be exempt as the government tracks these investments. Offshore accounts must be reported according to newly implemented U.S. tax codes.

Money Laundering

Money laundering is an illegal, world-wide epidemic involving hundreds of countries. It involves acquiring money illegally and making it appear as if it was earned legally. Once the origins of the funds appear as they were earned legitimately, an investor can transfer them to an offshore account.

With money laundering, tainted money is deposited into a bank. From here, the launderer makes transactions with the funds in effort to cover the trail. The money travels in and out of several accounts in many different countries. By layering the transactions, the launderer makes it difficult to determine the origins of the funds.

Once the money trail has been erased, the funds are integrated back into the economy. The funds are often deposited into an offshore investment account where they earn interest at rapid rates. For this reason, funds invested abroad are carefully monitored by domestic and international authorities world-wide. Anyone investing funds with questionable origins may face and investigation by authorities.

Evading Creditors by Investing Abroad

While placing assets in an international account is legal when done within the law, it is illegal to transfer any assets in an attempt to defraud creditors. If a creditor or other litigant (including a spouse in which the investor is divorcing) initiates a lawsuit against an investor and the investor shifts assets to an offshore account, it is a fraudulent conveyance.

To be convicted of a fraudulent conveyance, a court of law must demonstrate that the investor acted with the intention to defraud or deny a creditor of entitlements. In this case, the court can seize the assets in transfer and sentence the investor with criminal charges, jail time, and fees. Investors can place assets into an offshore account legally if there is no pending litigation against the assets and proper consideration has been given to the rights of creditors.

With more than half of the assets in the world, both personal and business placed in offshore accounts, it is obvious these accounts offer incredible benefits for growing and protecting wealth. While there are many advantages to placing assets overseas, care should be taken to avoid potential legal troubles that could negatively affect an investors life.

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