Business

Privacy Matters

By Noah Houghton, CPA, Paradigm Financial Group

Erosion of privacy has given rise to an outcry from civil rights organizations across the globe. Rapid advances in technology and extensive government monitoring have paved the way for the demise of this once undeniable civil right.

NOTHING TO HIDE?
The majority of people are law-abiding citizens with nothing to hide. Why then does it matter that technology and government have lead to privacy becoming virtually non-existent?

Over a lifetime, hardworking, honest practices often result in the accumulation of a substantial amount of wealth. But wealth is an asset, not a liability, right? Wrong. The more financial success one enjoys, the more of a target one tends to become.

A simple “sandbox analogy” helps explain the concept of how wealth creates a liability: Two children at play in a sandbox, each with a similar toy truck. Happy and content, they play the day away. But then, a new truck is given to one child as a reward for his good behavior. The other looks at his playmate’s shiny new truck, sadly gazes upon his own and what does he do? Cheerily congratulate the other on his success of obtaining the new truck? Possibly, but not likely. With a fistful of sand in the face and a quick snatch, he latches on to his playmate’s prize.

Years down the road, the fistful of sand takes a new form: the lawsuit. The sand of childhood and lawsuit of adulthood are designed to achieve the very same end: the unjust confiscation of wealth from the hardworking by the contemptuous and undeserving.

PRIVACY/LITIGATION CONNECTION
While privacy has decreased over the past decade, there has been a corresponding increase in the rate of litigation. It makes sense intuitively that the more people know, or can find out about one’s personal and financial affairs, the more likely it is that the “sandbox analogy” will come into play.

It is estimated that there are over 100 million lawsuits per year in the United States alone and for business owners and professionals, there is a one in three chance of being named in a lawsuit over the next year. Though the United States is notorious for excessive litigation, the rest of the world is quickly following “suit,” as worldwide litigation rates continue to rise.

THE LAWSUIT LITMUS TEST
One of the first steps undertaken to assess the feasibility of a case is often not an analysis of evidence or precedents (as one might think), but in fact an assessment of a prospective defendant’s financial well-being.

First, an evaluation of the obvious is undertaken: spending habits, residences, vehicles (shiny new trucks), reputation and overall lifestyle. Second, an in-depth analysis of personal background and financial worth is performed.

The type of sensitive information sought in this pre-qualifying stage is surprisingly easy to gather. Type “asset search” into any Internet search engine and one will be amazed at the number of results. Even more frightening is the breadth of information available: bank and investment account details, safety deposit box locations, employment history, current salary, credit card activity and real property ownership, to name a few. Some countries actually do prohibit searches of certain information like bank account records, but this has done little to prevent cunning private investigators from acquiring such information.

If a prospective lawsuit is based on credible and justifiable grounds, the results of an asset search are likely to be less relevant, as there is a matter of principle involved. The plaintiff will feel he or she has been truly wronged, and will likely attempt to obtain justice regardless of the financial health of the defendant.

It is when the basis of a prospective lawsuit is weak and frivolous in nature that an asset search will be a major determining factor. If the search reveals little assets from which to recover compensation for the plaintiff, the potential suit will likely be dropped before it materializes.

RECLAMATION OF PRIVACY: THE OFFSHORE ANTIDOTE
In stark contrast to many onshore countries, offshore financial centers such as the Turks & Caicos Islands (TCI), have enacted legislation designed to maintain the fundamental right of financial privacy.

By structuring financial affairs in a “privacy-friendly” jurisdiction, it removes sensitive, personal information from the radar screen of privacy-infringing acts, such as asset searches, thereby lessening the likelihood of having to defend expensive, unjust lawsuits.

There are a number of privacy protection vehicles available in the TCI to individuals seeking confidentiality in their financial affairs. One of the most popular structures is the Exempt Company (also known as an “IBC” or International Business Company). Exempt Companies are primarily used for holding non-real assets such as equities, bonds and mutual funds. They afford a great deal of confidentiality to investors, as the beneficial owners of the company need not be made a matter of public record. Other benefits include zero local taxation on profits and capital gains, as well as minimal reporting requirements and low maintenance costs.

In terms of estate planning, the Discretionary Trust is a commonly used structure that facilitates privacy and asset protection. Confidentiality is afforded through the non-registration of trust deeds and favorable trust legislation minimizes the potential threat of unreasonable litigation. Trusts established in the TCI also benefit from zero local taxation on income and capital gains, as well as the absence of inheritance and estate tax.

There are a host of other vehicles available in offshore jurisdictions including Hybrid Companies (a corporate entity bearing certain features of a trust) and various insurance-related products, all of which provide varying degrees of privacy and asset protection.

EXERCISE YOUR RIGHT
Everyone has the right to financial privacy. Unfortunately, it has become the responsibility of the individual to preserve this right. Without measures designed to protect financial privacy, the threat of becoming the target of unwarranted litigation that could jeopardize a lifetime of hard work and savings is very real indeed.

Noah C. Houghton is a Certified Public Accountant (CPA), and co-founder of Paradigm Financial Group, a comprehensive financial services company specializing in offshore company formations and wealth management. He may be contacted at (649) 941 4508 or by e-mail at paradigm@tciway.tc.



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