The Super-Rich's Offshore Tax Avoidance Strategies

Dmitry Rybolovlev and his wife, Elena Rybolovleva, have been brawling for almost five years in at least seven countries over his $9.5 billion fortune. In a divorce complaint filed in Geneva in 2008, Rybolovleva accused her husband of using a “multitude of third parties” to create a network of offshore holding companies and trusts to place assets—including about $500 million in art, $36 million in jewelry, and an $80 million yacht—beyond her reach. She is seeking $6 billion and has brought legal action against Rybolovlev in the British Virgin Islands, England, Wales, the U.S., Cyprus, Singapore, and Switzerland.

Beyond the staggering details, the suits provide a rare window into the offshore business entities and locations the world’s richest people use to manage, preserve, and obscure their assets. According to Tax Justice Network, a U.K.-based organization that campaigns for transparency in the financial system, wealthy individuals were parking as much as $32 trillion offshore at the end of 2010. Fewer than 100,000 people own $9.8 trillion of offshore assets, according to research compiled by former McKinsey economist James Henry.

Offshore trusts, holding companies, and other entities often shield assets from tax authorities or provide protection from government seizure and lawsuits. And the wealthy seek discretion for other reasons: “If you are married and have a girlfriend in another country, you may have a lot of assets that perhaps you don’t want your wife to know about,” says Mario Gassner, chief executive officer of Liechtenstein’s Financial Market Authority. Some people want to keep assets from children from whom they are estranged, he adds.

Billionaires including Li Ka-Shing and Lee Shau Kee, Asia’s two richest men, and Alisher Usmanov, Russia’s richest man, control parts of their fortunes through offshore entities. More than 30 percent of the world’s 200 richest people, who have a $2.8 trillion collective net worth, according to data compiled by Bloomberg, control part of their personal fortune through an offshore holding company or other entity in which the assets are held indirectly.

Rybolovlev, who lives in Monaco, made most of his money from the sale of two potash fertilizer companies for a combined $8 billion in 2010 and 2011. He held both companies, Uralkali and Silvinit, through Cyprus-based Madura Holding. His artworks by Van Gogh, Monet, and Picasso are now held by Xitrans Finance, a British Virgin Islands-based company, and stored in Singapore, according to divorce documents filed in New York. Rybolovlev bought a New York City apartment for $88 million in 2011 using a trust associated with his daughter, Ekaterina, according to the documents. In the suit, Rybolovleva said her ex-husband put many of his assets, including jewels, furniture, and the yacht, under the control of two trusts, Aries and Virgo, that he established in Cyprus in 2005, a few weeks after she refused to sign a postnuptial agreement. A spokesman for Rybolovlev declined to comment. Marc Bonnant, Rybolovleva’s attorney, also declined to comment.

Since the onset of the global financial crisis in 2008, some countries have been changing the laws and treaties that sustained the offshore tax avoidance industry. Liechtenstein began in 2009 to require its financial institutions to hold, and release when required, details about the beneficial owners of all accounts held there. Andorra and Switzerland made their own concessions within a day of Liechtenstein. Singapore will make it a crime to launder profits earned from tax evasion under a law taking effect on July 1. Luxembourg will end its bank secrecy policy in 2015. Cyprus, a popular spot for Russians to stash money, was bailed out of its financial troubles in March by the European Union, which required the nation to impose a tax on bank deposits of more than €100,000 ($132,000). That month, the country lost $2.4 billion in deposits, according to data from the European Central Bank.

Such moves are sending a message to wealthy individuals who want to hide their assets, according to Philip Marcovici, a Hong Kong-based tax lawyer. “We live in a world where you only have two choices,” he says. “Play by the rules of the country you live in, or get out if you don’t want to play by the rules.”