Mr. J. is an entrepreneur in the United States. His ‘chief fundraiser’ for investments in the U.S. is a Columbia businessman who, according to informed sources, is under international investigation for narcotics trafficking and money laundering.
Mr. J. is friends with a U.S. citizen who owns an offshore insurance company. Mr. J. purchases insurance using money placed with his U.S. company for investments by his “chief fundraiser.” The premium is $1 million. The premium is treated as a business expense, thus a tax deduction.
The money laundering, loan stacking, and tax fraud is now underway – it works as it follows:
Mr. J. now borrows $700,000 from the insurance company – loans are not taxable income. He then pays another insurance premium of $700,000 and borrows another $490,000 from the offshore insurance company. He then pays a $490,000 premium and borrows $343,000.
The sham transaction, without a valid business purpose, represents a tax saving for Mr. J. of nearly $800,000, depending on his total effective tax rate. Thus, Mr. J. keeps in pocket a total of more than $1.1 million – $343,000 from the last loan plus at least $800,000 in immediate savings from the more than $2 million in deductions in exchange for a total outlay of $657,000 to the “insurance company.” The insurance company could show the loans as account receivables, an asset, on its books so it could remain adequately capitalized for the offshore insurance regulators.
Mr. J. may decide to retain the proceeds rather than pay a return to the Colombia investor. The investor could be told by the “chief fundraiser” that their money was lost in investments that went bad in the U.S. If the investment funds were the proceeds from low-level narcotics trafficking, to whom are they going to complain?
Note: the loan stacking and tax scenario were taken from a filing in a civil case that has been ongoing for at least four years.