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Caribbean largest individual tax evasion in US history { April 18 2005 } Original Source Link: (May no longer be active)
http://www.washingtonpost.com/wp-dyn/articles/A61202-2005Apr17.htmlhttp://www.washingtonpost.com/wp-dyn/articles/A61202-2005Apr17.html
$200,000,000
Telecom Tycoon Used International Financial Labyrinth
By David S. Hilzenrath
Washington Post Staff Writer
Monday, April 18, 2005; Page E01
After building a long-distance phone business in the early days of Washington's telecom frenzy, Walter C. Anderson did something unusual: He all but gave the company away.
On the verge of a deal that would pay Mid Atlantic Telecom Inc. shareholders about $6.7 million, Anderson transferred his controlling interest to a company called Gold & Appel Transfer SA, based in a Caribbean tax haven. When Mid Atlantic was sold, it was Gold & Appel that reaped the gain.
Prosecutors now allege that the 1992 transfer was one of the first steps in a long-running scheme to cloud ownership of Anderson's assets and escape taxes. All told, the government alleges, Anderson hid more than $450 million in offshore companies such as Gold & Appel. From 1995 through 1999, prosecutors allege, he dodged more than $200 million in personal income taxes in what they describe as the largest individual tax evasion case in U.S. history.
Anderson has pleaded not guilty and said in an interview shortly after his arrest that the assets he controlled in offshore holding companies were to benefit a Panamanian foundation he created to advance human rights, arms control, family planning and the development of space.
In ordering Anderson, 51, held without bail last month, a federal judge cited his "considerable experience in conducting business abroad and moving money and assets across borders without detection."
In fact, Anderson left an extensive paper trail. Whether he was bidding on art at Christie's, investing in telecom companies during the market bubble, attempting to privatize the Mir space station or paying a former girlfriend $2 million for the rights to water on a farm her family owned in Brazil, Anderson had millions of dollars at his disposal. However, it was often unclear where ultimate ownership or control of the assets rested.
A tax-exempt private foundation he created and presided over in the United States became entwined in his business affairs in a variety of ways, using (and ultimately losing) some of its assets as collateral for an Anderson loan, funding research that could support Anderson's profit-making designs on Mir, and lending money to Gold & Appel, which Anderson controlled.
Transactions at the heart of the prosecutors' case appeared in the public record and attracted suspicion in the business arena long ago, evidence of how hard it can be for the government to determine whether sophisticated and successful people are paying their share of taxes.
"The story underneath it that is so shocking is how long it has taken IRS to get its act together and make the case," said Washington lawyer Jack A. Blum, an expert on international taxation and money laundering who believes that many Americans use foreign havens to evade taxes. "If anybody looked at the paper trail and put the pieces together, used some common sense, he would have been up on the front burner a long time ago."
"Why it took so long and why the system can't produce a result in a reasonable amount of time is utterly beyond me," Blum said. "What in the hell are they going to do about all the other guys who are doing this who haven't been quite as flamboyant?"
The Internal Revenue Service's chief of criminal investigation, Nancy J. Jardini, said such criticism is unfair considering, in Anderson's case, the sophistication brought to bear in trying to obscure the ownership of funds.
The IRS is keeping up with tax evaders and has over the past couple of years "really started to extend our enforcement operations to be much, much more international," Jardini said. The agency now conducts undercover operations in foreign countries, "something that we did not do previously," she said.
But generally speaking, she said, "in those cases where we have to start from ground zero and attempt to construct a financial history of these individuals and trace these funds and trace the nominee names and trace the layered transactions, that is a very tedious time-intensive effort and it can take years."
Anderson and his lawyer, Abbe D. Lowell, declined to be interviewed for this article, a spokesman for Lowell's firm said.
Anderson's career began when entrepreneurs were racing to exploit the breakup of AT&T Corp.'s long-distance monopoly. After a brief stint in a low-level sales job at MCI Corp., one of the first companies to challenge AT&T, Anderson set out to replicate MCI's success.
Building District-based Mid Atlantic Telecom was a struggle. Nine years after it was founded, the company was losing money and was in such dubious condition that its auditor, KPMG, warned that it might go out of business, according to an audit report on file with the Securities and Exchange Commission.
KPMG fought with Mid Atlantic over how the company wanted to account for the sale of a subsidiary to another Anderson venture, Esprit Telecom Ltd. Mid Atlantic wanted to claim revenue from the sale, but KPMG maintained that no real sale had occurred because Mid Atlantic appeared to have control over Esprit, according to a document filed with the SEC.
In January 1992, to arrange a payment plan with one of Mid Atlantic's creditors, Anderson personally guaranteed a corporate debt, according to court records retrieved from the National Archives. Within months, the creditor declared that Mid Atlantic had failed to pay and demanded more than $400,000 from Anderson.
Meanwhile, Anderson's personal taxes were in disarray. For several years, he filed delinquent returns, but he did not pay the taxes he owed, according to the federal indictment against him.
It was against this backdrop that Anderson began shifting assets to Gold & Appel, in the British Virgin Islands.
A 1993 letter prepared by the law firm Swidler & Berlin LLP for Mid Atlantic, filed with the SEC in connection with the planned sale of Mid Atlantic, shows how it worked: First, Anderson gave the offshore company an option to purchase almost his entire stake in Mid Atlantic Telecom for 3 cents a share. Then, Gold & Appel exercised the option. Anderson, who already had authority to manage Gold & Appel's affairs, also had an option to buy the offshore company for a "nominal price," according to the letter.
The prosecution alleges that Anderson made those arrangements in anticipation of a gain from the sale of Mid Atlantic. The indictment says Anderson formed Gold & Appel in September 1992 -- the month that negotiations for the sale of Mid Atlantic began, according to information reported to the SEC.
However, the Swidler letter says Anderson gave Gold & Appel the option to buy his Mid Atlantic stake in 1991, "prior to the date on which Mid Atlantic began discussions" with the company that would later acquire it.
The Swidler letter said that, based on information provided by Anderson and Gold & Appel, the offshore company was given the option to buy Anderson's shares in Mid Atlantic "for valid business purposes and not for tax avoidance purposes."
"Anderson controls Gold & Appel and is the beneficial owner of substantially all of the equity of Gold & Appel," Swidler & Berlin said, citing information provided by Anderson. Anderson intended to exercise his option "and become the legal owner of substantially all of the outstanding equity of Gold & Appel," the law firm said.
In early 1993, with the sale of Mid Atlantic still in the works, a court ordered Anderson to pay more than $450,000 to make good on the corporate debt he had guaranteed, and a creditor was taking action to seize his local bank accounts, records of the litigation show.
Before the year was out, Mid Atlantic was sold and Gold & Appel received more than $4 million in stock from the acquiring company, the prosecution says.
The next year, other circuitous stock transfers unfolded at a company Anderson helped found, Telco Communications Group. The transactions were disclosed in a 1996 SEC filing as Telco was preparing to sell stock to the public.
First, Telco bought about 5.8 million of its own shares back from Anderson for $25,000. Then, several days later -- and one day before Anderson was scheduled to meet with IRS agents about his taxes, according to an IRS affidavit -- Telco sold about 6.5 million shares to Iceberg Transport SA, a Panamanian corporation, for $50,000.
Later, Iceberg transferred the shares to its wholly owned subsidiary -- Gold & Appel.
When Telco was sold for $1.2 billion in 1997, Gold & Appel's holdings turned into more than $90 million in cash, plus 4.6 million shares of stock in the acquiring company.
Inside Telco, people were uncomfortable with Anderson's transactions, the enigma of who ultimately owned Gold & Appel, and the way the deals might look to outside investors, an associate said.
Anderson's offshore dealings didn't escape notice in the financial world, particularly among his adversaries. In 1995, when Anderson was questioned in a lawsuit over a business dispute, he was asked who owned Gold & Appel. He replied that it was owned by another corporation of which he had no knowledge, according to an IRS affidavit. Then, after another witness revealed the existence of Iceberg Transport, Anderson acknowledged in a court deposition that Iceberg owned Gold & Appel, the affidavit says.
In the fall of 1998, Anderson and Gold & Appel were attempting a hostile takeover of a New Jersey long-distance company called Total-Tel USA Communications Inc. In a letter filed with the SEC, the chairman and chief executive of Total-Tel warned shareholders about Anderson's "chain of 'mysterious' foreign entities." Warren H. Feldman noted in his letter that Anderson had Gold & Appel's power of attorney, but Gold & Appel had only one director, a management firm that acts as "board member for hire," while Gold & Appel's parent company, Iceberg Transport, was registered in Panama.
"Mr. Anderson claims not to know the source of Iceberg's initial capital, has not met any of Iceberg's directors, and has no regular communication with them. Nor does he know whether Iceberg itself is owned or controlled by another person or entity," Feldman wrote in a letter to shareholders. "Are you confused yet?"
By operating in concert with another investor, Anderson had defied a court order not to acquire more Total-Tel shares, Feldman wrote, posing a question to investors: "[H]ow can you trust him to run Total-Tel in your best interests?"
According to SEC filings, Anderson later struck a deal for Feldman to resign as chairman, offering Feldman and his father a way to liquidate hundreds of thousands of Total-Tel shares at far more than the going price. The deal, signed on a day the stock closed at $12.25 a share, obligated Anderson or one of his companies to buy stock from the Feldmans for $16 a share. But before long, the deal was amended to involve another party: the Foundation for the International Non-Governmental Development of Space, a tax-exempt charitable foundation that Anderson created and presided over.
The revised deal shifted to the foundation responsibility for buying much of the Feldmans' stock. In early 2000, the foundation spent more than $7.3 million making good on the deal, according to records filed with the SEC.
Feldman declined to comment.
The foundation became involved in other aspects of Anderson's affairs. In 1998, it lent $1 million to Gold & Appel, and in late 1999 and early 2000, it made grants of more than $1.2 million for research on technology to keep Mir from falling back to Earth -- research that could support Anderson's plans to turn the Mir into a for-profit business -- according to foundation tax returns. (Russia eventually destroyed the space station by plunging it into the Pacific Ocean.)
In March 2000, a company called U.S. Wats Inc. made arrangements to borrow up to $1 million from Gold & Appel and up to $500,000 from the foundation, SEC records show. Anderson served on the U.S. Wats board, and Gold & Appel was its majority shareholder as of several months earlier, according to an SEC filing.
In August 2000, Anderson and Gold & Appel borrowed $13 million from former colleague Donald A. Burns at an interest rate of 18 percent, according to SEC records, and the foundation put up as collateral more than 700,000 shares of Total-Tel, since renamed Covista Communications Inc. Gold & Appel agreed to pay the foundation tens of thousands of dollars for putting its assets at risk, according to an SEC filing.
Burns subsequently declared the loan in default, and in 2002, he seized the collateral.
Anderson said in an interview that the holdings he managed had declined sharply in value.
"Gold & Appel was in a very severe cash squeeze because of the market decline, and we needed cash," Andersen testified in litigation over the Burns debt. "We needed desperately to get some cash to pay our obligations."
The foundation's former executive director, Rick N. Tumlinson, said he focused on grant-making and left other foundation matters to Anderson. "All of the financial transactions that Walt was doing on the investment side I just don't recall much about," Tumlinson said.
The government accuses Anderson of behaving evasively in his dealings with the courts -- refusing to identify the owners of Gold & Appel when ordered to do so by a judge in a civil suit, and traveling to the Caribbean to form another entity to hold Gold & Appel's assets when he was scheduled to be giving a handwriting sample to a grand jury. The court rescheduled that appearance based on a lawyer's assertion that Anderson was on a business trip to Europe.
Anderson says he used offshore vehicles for legitimate tax savings and to maintain privacy. In an interview at the D.C. Jail shortly after his arrest, Anderson said the government "has not understood or doesn't want to understand" who ultimately owns his holding companies -- the Smaller World Foundation, which Anderson created and controlled and through which he planned to give away money.
He said he formed the organization in 1993 as a trust based in the British Virgin Islands and moved it to Panama after he learned about the federal investigation because a Panamanian foundation "would be less likely to be intimidated into giving up its assets to the IRS."
But Anderson seemed to concede that doing business in foreign tax havens can inspire skepticism.
"For every company like Gold & Appel, Iceberg . . . that is located in a tax haven, there are 50 that are committing, there to commit fraud. They're there to hide assets from your spouse, they're there to hide assets from your partner, they're there to hide assets from the IRS, which you can see doesn't work very well," Anderson said.
Staff researcher Madonna Lebling contributed to this report.
© 2005 The Washington Post Company
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