Offshore hedge funds, mutual funds and so-called high yield investment programs could be next on the IRS hitlist. That’s the conclusion of a recent Wall Street Journal article. After the recent events with Swiss banking behemoth UBS, other large offshore banks and financial institutions are ‘low hanging fruit.’ What does this mean for you as an offshore investor? Peter Macfarlane explains below.

Alex Raskolnikov, a professor and offshore tax expert at Columbia University Law School quoted by the Journal, believes that the IRS and US Justice Department will try to identify tax evaders who invest with offshore hedge funds managed by offshore banks. This will play out as as part of the US government’s ongoing effort to have big foreign financial institutions, which are incorrectly regarded by many as the best offshore banks, to provide them with confidential information about Americans who open offshore bank accounts.

Legislation recently introduced in the US Senate by Finance Committee Chairman Max Baucus would go beyond the existing FBAR (Foreign Bank Account Reporting) requirements, which are filed by taxpayers only on annual basis. It would require U.S. financial institutions to report to the IRS transfers of money into any foreign financial account in real time. The IRS would therefore automatically receive electronic information on new offshore bank accounts as soon as they were opened. Scary stuff, for sure! But that is exactly the purpose of it.

Until recently, US tax attorneys  understood that FBAR requirements did not apply to interests in off-shore hedge funds. However in June of this year, according to the article,  an IRS official stated that the term “financial interest” would include hedge funds that “function as mutual funds.”

Ironically, anecdotal evidence suggests that the majority of investors in offshore hedge funds are in turn US tax-exempt hedge funds such as charitable organizations and pension funds. However, while hedge funds were once the domain of sophisticated investors playing with millions, there is no doubt that many are now operating more like regular mutual funds.

Of course, it is by no means clear how this information on transfers of money into foreign bank accounts would help the IRS. Millions of international transactions clear in New York every day and surely few investors seeking confidentiality offshore would directly transfer money between accounts held in their own names.

How could investors avoid popping up on the IRS radar? Simple. By transacting business in currencies other than the US dollar. This will surely be an advantage rather than an inconvenience for most American offshore investors. The major motivation for going offshore these days is not tax at all, but rather protecting the value of assets against the terminal decline of the dollar and the collapse of the US financial system.

Many of the more private European banks are now actively trying to dissuade clients from transacting business in US dollars at all, preferring that their customer data doesn’t have to be sent to New York. For example, one private banker recently told me that when a client wants to transfer dollars to another bank, they typically fix a EUR-USD rate in advance with the other bank. The transaction settles in Euros, and then is converted back to dollars on arrival in the internal books of the beneficiary/receiving bank. Importantly, my banker prefers to absorb the additional costs of the spread, rather than expose clients to dollar transaction clearance in the US.

Gold is also emerging as a settlement currency for interbank transactions in the mainstream banking system. This is a pleasing novelty that I hadn’t expected to see. Whilst regular readers know I’m a big fan of holding physical gold bullion as opposed to paper or electronic gold liabilities, such liabilities are certainly useful for short term transactions.

Raiffeisen Zentralbank Austria, which with its Eastern European and Asian clients has one of the highest volumes of US dollar clearing outside the USA, has been pioneering this. Since earlier this year they have been offering regular bank accounts denominated in gold ounces, which have prompted a number of offshore banks to offer such services to their clients, using RZB as the correspondent and clearer. A number of banks are now offering gold as a regular currency option in the currency portfolio of their multi-currency bank accounts. Yes, that means you can actually send and receive SWIFT transfers denominated in gold, provided both the sending and receiving banks have appropriate correspondent accounts.

Of course, for many Americans – those most affected by this clampdown – opening bank accounts denominated in other major world currencies appears to be  just a pipe dream. Very few American banks even offer Euro accounts. That’s a far cry from some of the banks we routinely refer clients to, which allow you to hold balances in more than thirty currencies conveniently managed under one account number. And then, there is the problem that many foreign banks simply refuse to work with US clients.

The fact is, however, that despite the government propoganda, opening an offshore bank account is a lot easier than you might think.

It is perfectly legal for Americans to hold as many offshore bank accounts as they wish. And there are still distinguished private banks in reputable tax havens that welcome American clients – especially those who don’t wish to do business in dollars. You will a special note for US Citizens (together with another special note for European Union Citizens) in Q Wealth’s Practical Offshore Banking Guide 2009. Best of all, it includes specific contact details of various banks and brokerage houses. In many cases you can use this information to open your account with no need for hiring an intermediary, and to open an account without even leaving home! You can download this 40-page manual absolutely free with your membership of Q Wealth.

If you are not signing up yet but are interested in hearing more about this topic, don’t hesitate to sign up instead for our Free Q Bytes e-mail newsletter, your weekly guide offering analysis of what’s going on in the offshore banking and asset protection world.

We all know that there are investment scams out there, both offshore and onshore. Almost every week we come across a new scam (and that is not counting the electronic e-gold money games and the like that are barely even worth mentioning). That is why we offer our Q Wealth Report paid-up members a free due diligence consultation within our area of expertise which includes international and offshore investing, as well as so-called High Yield Investment Programs (HYIPs). In fact, members also benefit from a free downloadable report called “HYIP-Hype”

In recent months we have been contacted many times by members enquiring about a company known as Hatfield Oak (website: hatfield-oak.com) or Hatfield Oak International. This website belongs to a financial services company based in Panama with the motto “Your Partner for Asset and Tax Planning, Corporate Structures, Payment Solutions and Investments.”

We don’t want to keep answering the same questions over and over again. The large volume of enquiries we have received about them has led us to publish some findings in public for the benefit of our members. The information below is gleaned only from public records in Panama and the company’s own website.

Please be clear that we are NOT accusing this company of any wrongdoing. However, we draw our members’ attention to the following:

• Hatfield Oak are apparently offering services very similar to a bank, though they are at pains to point out that they are a payment processing company. Their website suggests that they are licensed to provide financial services. We consider this to be an attempt to mislead. Yes, they do have a document that appears to be a license for third party payment processing (amongst other things like business consulting and courier services.) However this is NOT a financial type license. In Panama every business must have a commercial license, and this kind of license (that Hatfield Oak has) is the same type of license you need for say a grocery store or a hairdresser. Financial entities are regulated under a completely separate licensing system. You can verify this at the website of the Panama Financial Regulator (in Spanish only).
• Hatfield Oak apparently have a New Zealand financial company as well. It’s worth pointing out that this kind of financial company is not regulated like a bank in New Zealand either. That is why it is not called a bank. Neither is it permitted to carry on banking business in New Zealand.
• The company’s domain name is registered to Domains by Proxy Inc (an associate of Godaddy) This is very unusual procedure for a company offering financial services. More to the point, is that it places the domain and the business firmly within US jurisdiction.
• Their internal law office “Hatfield Corporate Law Firm” appears to be run by nominees.
• The company do not appear to have any valid contact information.

Hatfield Oak appears to be a private company offering certain services that cannot be considered a substitute for a proper offshore structure with a bank account.

Q Wealth Report members requiring further information are welcome to contact us. If you would like to learn more about a few pitfalls of doing business in Panama, please check out our article Panama Offshore Banking and Corporations: Hidden Truths Revealed