Thursday, April 29, 2004

Via Real Clear Politics, I found a link to this series of three pages on the Boston Globe's site. Kerry had an offshore tax shelter? It's rather interesting in light of his stated positions on both taxes and "exporting American jobs". (After all, investing money in companies abroad means that the money WASN'T invested in American companies, ultimately costing American workers potential jobs.)

While I have a degree in Finance, I am many years out of UF and have not relied on those skills much in my professional life, so I am certainly no expert in these matters. However, I do have enough knowledge to believe that the Globe is in error in one major specific - the amount of money that Kerry was investing offshore.

From my reading, rather than investing a mere 25 to 30 thousand, Kerry in fact invested closer to 200 thousand dollars. Notice on page one, Kerry is promising to pay $238,527.5 two years later. That's pretty much the future value (FV) of $200,000 at about 9 percent interest.

UPDATE: Curiouser and curiouser. I found the original article that goes with those pages. It looks much worse for Kerry from my reading. His explanation really does not jibe with the documents at all. I wonder why this has never been followed up on?

Notice that I worked out that Kerry was in fact investing 200,000 dollars, and in the article it states that the "financially struggling" Kerry of that time received a "windfall" of 225,000. If you are going to bother with a tax shelter, why do it with a piddling 11-13 percent of your "windfall" income? It doesn't make any sense to set up some exotic tax shelter on such a small (25-30 thousand) amount. 200 thousand, on the other hand... I can imagine that Kerry LOST 25-30 thousand on this scheme, but I don't believe for a second that his actual investment was less than 6 figures. Total investment and loss on said investment are just not the same thing.

Some damning passages:

"You need a major overhaul of the tax structure," Kerry told a panel of reporters on a May 6 broadcast of WBZ-TV (Channel 4). "You need to close crazy loopholes that are non-productive."

Weeks before that interview, Kerry, by his own account now, had jettisoned an investment of between $25,000 and $30,000 in an exotic tax shelter after his accountant questioned its legitimacy. In an interview with the Globe, Kerry acknowledged that fear of political embarrassment was a factor in his decision to swallow the loss.


Kerry said he wanted to protect some of the money at tax time, and, on advice of some of his fund-raisers, jumped into the commodities investment.

"I thought it was a way to try to minimize tax consequences," he said.


"I did not want to file an income tax return as a public person that I thought could have been subject to question," Kerry said.

He also did not cite the investment in his financial disclosure statements filed with the US Senate, and only a fragment was in his Massachusetts statement of financial interests for calendar year 1983, when Kerry was lieutenant governor.


For the next year, when Kerry was a sitting senator, he did not report the investment. Unlike candidates, senators must report all financial transactions exceeding $1,000 in the preceding year. Kerry campaign counsel Marc Elias said Kerry's abandonment of his investment did not constitute a reportable transaction -- "purchase, sale, or exchange" of an asset -- under the Senate's guidelines.

"My understanding is that the shares were returned to the promoter; that he was no longer going to take advantage of the investment," Elias said. "He simply unwound the transaction."

Now we get to the documents in question that I originally commented on in this post:

Kerry has never reported a stake in Peabody Commodities, which, like Sytel Traders, was registered in the Cayman Islands, according to records of the Register of Companies office in the Caymans, where strict secrecy rules conceal corporate ownership interests. Peabody Commodities was registered eight days before Kerry's transaction, the records show.

Kerry did not dispute the authenticity of the documents, but he dismissed them as "paperwork" that did not reflect real assets, actual debt, or liability arising from the complex scheme.

"There was no real collateral that I was involved in; none whatsoever," Kerry said. "It was paperwork. That's why my accountant said it sucked. . . . I was never, ever on the hook for any number in that note. Nobody ever noticed me to that effect nor was that in fact the legal reality. I completely walked away from my own personal investment. End of issue."

This is either a complete, utter, baldfaced lie to that reporter, or Kerry committed fraud with the documents he signed with Sytel. I don't see any other way to read it. He signed a promisory note for over 200 thousand dollars (future value), and pledged as collateral a specific number of shares in a specific company. If that collateral was mere "paperwork" and was "no[t] real", then how is that not fraud? It reminds me of that textbook accounting fraud case "Z Best", in which a company (Z Best) forged work contracts, which it then used as collateral to borrow huge sums of money.

No one ever "noticed" Kerry to the fact that he was on the hook for large sums of money??? That's what the contract that he signed stated! What type of bullshit is this?

I'm sorry, but from what data I see available, the most favorable explanation that I can come up with is that Kerry invested in an (self-admittedly) illegitimate offshore tax avoidance scheme. He was later advised that this could blow up in his face, and he pulled out, incurring a penalty of at least 25 thousand dollars. He tried his best to hide the entire fiasco, going at least as far as lying on his senate disclosure forms.

Now this is the best that can be said of Kerry from what few details he has not been able to keep unpublicized. The truth may be worse.

UPDATE2: The more I think about this, the more it smells. The "financially struggling" John Kerry was willing to blow off 25+ thousand dollars just to keep this quiet? While I'm sure that, being a politician, the news of this would have the potential to harm him more than most, this seems a little excessive. What's really got me thinking is this bit (from the same Globe article:

But records kept by a Kerry aide at the time and reviewed by the Globe indicate Kerry also owned stock in another company, Peabody Commodities Trading Corp., as part of the transaction. In an agreement he signed on Dec. 13, 1983, Kerry pledged 2,470 shares he held in Peabody Commodities as collateral for a $238,527.40 promissory note he signed the same day to Sytel Traders Ltd. Sytel was to lend that amount to "Gin Vest Inc." to cover forward contracts to buy and sell unspecified commodities.

Kerry has never reported a stake in Peabody Commodities, which, like Sytel Traders, was registered in the Cayman Islands, according to records of the Register of Companies office in the Caymans, where strict secrecy rules conceal corporate ownership interests. Peabody Commodities was registered eight days before Kerry's transaction, the records show.

Now, why would you register a company in the Caymans, presumably put your investment of $200,000 into it, and a mere EIGHT DAYS LATER, borrow the same $200,000 from a different company using your recent investment as collateral? In addition to potential tax evasion, this begins to sound like the first stage in a money laundering scheme. As the State Dept describes each activity:

Money laundering generally involves a series of multiple transactions used to disguise the source of financial assets so that those assets may be used without compromising the criminals who seek to use the funds. These transactions typically fall into three stages: (1) Placement, the process of placing, through deposits, wire transfers, or other means, unlawful proceeds into financial institutions; (2) Layering, the process of separating the proceeds of criminal activity from their origin through the use of layers of complex financial transactions; and (3) Integration, the process of using an apparently legitimate transaction to disguise the illicit proceeds. Through this process the criminal tries to transform the monetary proceeds derived from illicit activities into funds with an apparently legal source.

The United States and other nations are also victims of tax evasion schemes that use various financial centers around the world and their bank secrecy laws to hide money from tax authorities, undermining legitimate tax collection. Financial centers that have strong bank secrecy laws and weak corporate formation regulations, and that do not cooperate in tax inquiries from foreign governments, are found worldwide. These financial centers, known as "tax havens," thrive in providing sanctuary for the deposit of monies from individuals and businesses that evade the payment of taxes in their home jurisdictions and allow them to keep the money they have deposited from the knowledge of tax authorities.

UPDATE3 - I noticed that the header by the Boston Globe in the original documents that Real Clear Politics linked to has another major error, though the article got it right. Kerry did not "pledge to buy" those Peabody shares, he was actually using them as collateral for his loan.

UDATE4 - More here