Tax Haven Abuse: (Wyly case) (U.S. Real Estate)

The 8/1/06 Report: United States Senate (Permanent Subcommittee on Investigations/Committee on Homeland Security and Governmental Affairs), (Wyly Case) U.S. Real Estate (excerpted pages 273-276, 287, 360):

(a) Real Estate Transactions in General

From 1992 to 2005, multiple U.S. real estate properties used by Sam and Charles Wyly for personal residences or business ventures were funded in whole or in substantial part with offshore dollars.1084 The properties examined here include a $45 million 244-acre ranch near Aspen, Colorado, known as Rosemary’s Circle R Ranch, containing a half dozen residences built for the Sam Wyly family; a $9 million 26-acre ranch near Aspen, sometimes referred to as the LL Ranch, containing an 8,000 square foot residence used by the Charles Wyly family; a $13 million set of condominiums in downtown Aspen operating as Cottonwood Ventures and containing, in part, art galleries run by Sam Wyly’s daughter; a $12 million 95-acre ranch near Dallas, Texas, known as Stargate Horse Farms, run by Charles Wyly’s daughter; and an $8 million oceanside property in Malibu, California, owned by Sam Wyly until 2002.1085 While each of these real estate transactions had unique characteristics, all had common elements regarding the property’s ownership structure and the financial mechanisms used to obtain offshore funding.

The structures used to acquire and finance the five real estate transactions were designed by legal counsel, in particular Rodney Owens, a partner at Meadows, Owens, Collier, Reed, Cousins & Blau LLP (“Meadows Owens”), a Texas law firm that provided tax and real estate advice to the Wyly family.1086 Meadows Owens told the Subcommittee that the structures were the result of an indepth research effort by Mr. Owens and others to design an innovative means to ensure Wyly access to properties being financed primarily with offshore funds.1087 Numerous emails discussing the real estate transactions refer to Mr. Owens or Meadows Owens, and indicate that legal counsel was being consulted with respect to the real estate transactions.1088 To date, despite Subcommittee requests, the Wylys have not provided a detailed explanation of the legal reasoning behind these real estate structures, and have not provided any legal opinions or analysis, instead asserting the attorney-client privilege.

The common elements in the ownership and funding structures used for the five properties involve a tiered set of shell entities in offshore jurisdictions and the United States. They can be summarized as follows.

The apparent initial step was for one of the Wyly-related offshore trusts to form a new Isle of Man (“IOM”) shell corporation whose sole function was to serve as a funding gateway for offshore dollars to be spent on a designated real estate property in the United States. Next, this IOM corporation and one or more Wyly family members typically established a trust in the United States to manage the designated property. The management trust was established by a
trust agreement signed by the IOM corporation and Wyly family members. This agreement specified that the trust grantors, meaning the IOM corporation and the Wyly family members who signed the trust agreement, were allowed “full and complete Usage” of the property owned by the trust without any obligation by the trustee to monitor such use.1089 These provisions explicitly authorized Wyly family members to make personal and unfettered use of the real estate.

The trust agreement also assigned to each grantor a so-called “Trust Share” reflecting the grantor’s proportional contributions to the trust’s assets.1090 For example, a grantor who contributed ten percent of the trust’s assets acquired a ten percent “trust share.” The agreement further obligated each grantor to pay a portion of the real estate costs reflecting that “trust share,” such as mortgage payments, utilities, operating expenses, and construction costs. In other words, a grantor with a ten percent trust share had to pay ten percent of the real estate costs.

In the five examples examined by the Subcommittee, the IOM corporation typically made a cash contribution to the U.S. management trust resulting in its acquiring a 98 or 99 percent trust share, while Wyly family members made a much smaller contribution resulting in a 1 or 2 percent trust share. Real estate costs were then split on the same basis, with 98 to 99 percent of the costs attributed to the offshore corporation and only 1 to 2 percent attributed to a Wyly family member. This arrangement was apparently intended to enable Wyly family members to obtain full usage of the trust’s real estate, while paying a minimal percentage of the costs.

After the U.S. management trust was established and funded, the final step was for the trust to form a new U.S. partnership or limited liability corporation. This U.S. entity, using funds supplied from the Wylys and from offshore, then acquired the designated property and served as the owner of record for the U.S. real estate.1091

Most of the funds spent to acquire, improve, and operate the real estate moved from an offshore entity to a U.S. entity. The funds typically moved from one of the 58 Wyly-related offshore trusts or corporations in the Isle of Man, to the newly created IOM shell corporation created to serve as the funding gateway for the particular real estate, to the U.S. management trust, and finally to the U.S. entity serving as the owner of record for the property. The property owner then used the offshore funds to pay the acquisition, construction, and operating costs associated with the real estate. On some occasions, Wyly-related offshore entities ignored this funding pathway and wired funds directly to the U.S. management trust or directly to the U.S. property owner. More often, however, perhaps to avoid direct wire transfers from Wyly-related offshore entities to the U.S. property owner, the offshore funds took the longer route, which often required three or more wire transfers to move funds from the originating offshore entity to the final U.S. entity. This multi-step process also made it more difficult for anyone examining the real estate to trace the origin of the funds and determine that they came from an offshore trust related to the Wyly family.

U.S. and offshore financial institutions played a vital role in making these real estate structures work effectively. Lehman Brothers, Bank of America, Bank of Bermuda (IOM), Queensgate Bank and Trust, and other financial institutions routinely authorized the offshore trusts and corporations to wire substantial funds into the United States, with few questions asked. In these five examples, hundreds of thousands and sometimes millions of dollars moved through multiple accounts, across international lines, within days. Securities accounts often functioned as bank accounts, allowing millions of dollars to pass through them without any securities transactions. Without the cooperation of the banks and securities firms that controlled the financial accounts, these complex real estate structures could not have effectively been used to pay the U.S. real estate bills.

Also critical to the functioning of these complex real estate structures were the financial professionals who processed the paperwork, tracked the real estate costs, and identified available offshore funds. Key players included Ms. Robertson and Ms. Hennington from the Wyly family office, Ms. Boucher from the Irish Trust Company, and the IOM offshore service providers who administered the offshore trusts and corporations. Together, they moved tens of millions of offshore dollars into the United States through real estate transactions benefitting the Wyly family.

The five examples examined in this Report show how these complex structures, designed by lawyers and implemented by bankers, brokers, and other financial professionals, were used to supply millions of offshore dollars to pay U.S. real estate costs and, through sham real estate sales and loans, provide additional millions of offshore dollars for the personal use of Wyly family members in the United States. Two of the examples are explained here; the other three appear in Appendix 5.

(d) Analysis of Issues

The five real estate examples examined by the Subcommittee show how $85 million in untaxed, offshore dollars were used to buy residential and commercial property in the United States; pay real estate maintenance, operating, and construction costs; and enable Wyly family members to enjoy, at minimal personal expense, residential and business properties costing millions of dollars. In these instances, offshore dollars paid for 90 percent or more of the real estate costs. For example, of the $45 million spent on Rosemary’s Circle Ranch, all but $434,000 was supplied from offshore. The examples also show how, in some instances, properties were used to justify sham real estate sales and loans that brought millions of offshore dollars into the United States for the Wylys’ personal use.

These real estate transactions provide additional proof that the Wylys and their representatives were directing the use of the offshore assets. In the instances examined by the Subcommittee, the Wylys chose the properties to be purchased or sold, determined the timing of the transactions, supervised construction and renovation projects, and made personal use of the real estate. They built homes, art galleries, and a state-of-the-art equestrian facility. Wyly representatives routinely requested offshore funds to pay the real estate costs, and the Wyly-related offshore trustees routinely complied. The Subcommittee saw no instance in which a trustee refused a request for funds; most funding requests were supplied within days. The Subcommittee also saw no instance in which an offshore trustee initiated a real estate transaction on its own. Instead, the offshore trustees routinely deferred to Wyly representatives, supplying funds whenever asked.

In 2001, Sam Wyly decided to sell the Malibu property. Ms. Hennington and Ms. Boucher warned him that unless he sold it for at least $10 million, he would owe money from the transaction, because he would have to repay the first and second mortgages on the property as well as significant real estate taxes.1397 In September 2001, Mr. Wyly apparently signed papers agreeing to sell the house and its furnishings to a third party for $8.1 million. Ms. Boucher described the $8.1 million as “a good price,” but noted “the shortfall from taxes will be tough to cover.”1398 The Malibu sale apparently closed on February 13, 2002, which is also the date when the Sam Wyly Malibu Trust supposedly paid Security Capital $7.8 million to satisfy the outstanding loan.1399

The Malibu property is an example of U.S. real estate that was pledged as security for a loan from a Cayman shell corporation, Security Capital, that sent millions of untaxed, offshore dollars into the United States for Sam Wyly’s personal use. The loan also paid for the Malibu property’s renovation and operating costs for more than two years. In 2002, when the property was sold to a third party, Mr. Wyly sent over $7 million back offshore as repayment of the Security Capital loan. The fact that Sam Wyly was able to obtain an $8 million loan on real estate already encumbered by another loan, and was able to use the bulk of this cash for his personal use, is further evidence of Wyly ability to direct the use of the offshore assets.

View complete report: Tax Haven Abuses: The Enablers, The Tools, & Secrecy