Report Tax Evasion and Money Laundering in the Cayman Islands

Tax havens, such as the Cayman Islands isn’t necessarily illegal per se. In fact, this can be beneficial for corporations to optimize their tax structures and reduce their overall tax burden.

It only becomes a problem when individuals or corporations use them to hide income or avoid paying taxes altogether. Or if individuals use such havens to conceal illegally obtained funds, such as from drug trafficking.

The U.S. has very strict laws and regulations over how corporations can use tax havens, and the IRS and FinCEN closely monitors such activities.

For example, say Acme Corporation wants to reduce its overall tax burden. They decide to create a subsidiary called Acme Holdings in the Cayman Islands.

They then shift their patents or trademarks to the Cayman Islands holding company. They may require that the U.S. company pay royalties to the subsidiary to use these intellectual rights.

Since the subsidiary is in the Cayman Islands, they do not pay any tax on the income generated from the royalty payments.

Let’s look at another example. Say a drug cartel operating out of South America generates billions of dollars in illicit profits each year. They’ll likely want to conceal the source of this money, and thus decide to set up banking in a tax haven, such as the Cayman Islands.

The cartel will begin by establishing a shell company in the tax haven, which will show very little sign of real operation or asset value. They will then begin transferring illegally obtained funds into the shell company, marking them as investments or business transactions.

This company then integrates this cash into the legitimate economy by purchasing real estate, stock, or other assets. This money is slowly integrated into the global financial system, which makes it difficult to trace its origins.

As you can see, these are loopholes being exploited, which creates a major loss of tax revenue that can be collected by the U.S. government which could be used to improve infrastructure, public services, reduce national debt, and improve the overall economy.

Tax havens can also facilitate corruption, where criminals and public officials alike, use such jurisdictions such as the Cayman Islands to hide their proceeds from their illegal activity, such as bribes, making it impossible for law enforcement to track.

It also crates inequality and an erosion of trust. Those who pay taxes bear a disproportionate share of the tax burden. And when they believe that the wealthy can avoid paying their fair share of taxes, they begin to question the efficacy of the tax system, which can lead to social unrest.

To address tax evasion in tax havens, governments and international organizations have been working to implement measures to curb the use of tax havens. Measures include increased transparency, stricter reporting requirements, and international cooperation to combat tax evasion and money laundering.

As previously mentioned, the U.S. regulators such as the Internal Revenue Service (IRS) and the Financial Crimes Enforcement Network (FinCEN), are keeping a close eye on U.S. individuals and corporations with cash or assets in the Cayman Islands.

However, given privacy laws and the complex transactions made by U.S. corporations who are staffed by top accountants and attorneys, and cunning criminal enterprises, whistleblowers are often the leading source of information in such tax evasion or money laundering cases.

And there are a two main U.S. whistleblower programs that protect and provide substantial awards to whistleblowers who come forward with sensitive information. Below is an overview of these two programs:

The IRS Whistleblower Program was developed to combat criminal and non-criminal tax evasion, as well as the underpayment of taxes.

It incentivizes whistleblowers with awards and protection if their information leads the successful recovery of taxes, penalties, and interest recovered. This award is between 15 and 30 percent of the recovery attributed to the information submitted by a whistleblower.

The percentage can vary depending on many different factors, which are labeled as positive and negative award factors. Positive factors increase the award percentage, and negative factors decrease the percentage. This is all considered during the investigation process.

Anonymous whistleblowing is not permitted. However, the IRS has a strong reputation for safeguarding the identity of whistleblowers through strict confidentiality procedures. It’s recommended that whistleblowers work with a tax whistleblower attorney in such cases.

There are some minimum eligibility requirements to receive a reward, such as the tax in question must exceed $2 million, which includes taxes and penalties.

Rolled out in 2022, the Anti-Money Laundering and Sanctions Whistleblower Program incentivizes individuals with information regarding money laundering to come forward. In return, FinCEN offers protection and awards of up to 30 percent of the monetary sanctions over $1 million that the government imposes, based on the information received in connection with the information a whistleblower provides. Information could be violations of the Bank Secrecy Act (BSA), the main AML law, or the reporting of criminal activity, such as drug trafficking, or sanctions violations.

Additionally, the U.S. Department of the Treasury also created it’s Kleptocracy Asset Recovery Rewards Program, which provides an award up to $5 million to whistleblowers who provide information leading to the seizure or forfeiture of assets linked to government corruption. Given the status as a tax haven with strict privacy protocols, the Cayman Islands is surely a place in which this law is enforced; and thus, it’s up to whistleblowers to come forward.

This provides a general overview of tax evasion and money laundering in the Cayman Islands and is meant to be a primer. The laws surrounding tax evasion and money laundering in tax havens is complex, and the process of blowing the whistle on such activity even more so.

We’ve worked on some of the largest tax evasion cases in history, including one that landed our client Bradley Birkenfeld a $104 award and ended Swiss banking secrecy for good. Also, a $200 billion money laundering scheme exposed by client Howard Wilkinson, that moved Russian rubles into Estonia and into U.S. banks.

There is no case too big for us to handle. If you have information regarding tax evasion or money laundering in the Caymans, and would like to become a whistleblower, get in touch with our firm for a free and confidential case evaluation.