| Offshore financial centers are often used to | | | | the "BLIPS".The mechanism was as follows: |
| run tax shelters. They have little or no | | | | Two companies in the Isle of Man (UK), St. |
| taxes, and little or no financial | | | | Croix and another investment firm "Rogue" |
| regulations. For example, in the British | | | | each borrowed $41.7 million from National |
| Virgin Islands, corporations can be formed | | | | Westminster Bank. The loans were for 7 years |
| without the public disclosure of the names of | | | | at fixed interest rates. The loans paid |
| the directors or officers of the corporation. | | | | Interest Only, until a balloon payment at the |
| Favorite offshore tax havens include | | | | end of the 7 years. St. Croix and Rogue |
| colonial relics such as the Cayman Islands | | | | agreed to pay high interest rates of 17.97%, |
| (British), the Dutch Antilles and Curacao | | | | in exchange for a $25 million payment to them |
| (Netherlands). Other places are feudal | | | | from Nat West at the time the loans |
| relics like Monaco, Liechentenstein and | | | | originated. So St. Croix and Rogue, received |
| Andorra in Europe, or other nominally | | | | at the beginning of the loans a total of |
| independent small nations from the old | | | | $66.7 million. Then the $66.7 million plus |
| British, Dutch and French Empires. Other | | | | $1.5 million from each was put in an interest |
| places historically in the U.S. zone of | | | | bearing loan at Nat West.In addition, St. |
| influence are Panama and the U.S. Virgin | | | | Croix and Rogue agreed to pay $25 million to |
| Islands.The leading offshore center is the | | | | NatWest, if they paid off the loan early, |
| Cayman Islands, which is now the fifth | | | | which is exactly what they did a couple of |
| largest banking center in the world, after | | | | weeks later, May 25th, 2000. |
| New York, London, Tokyo and Hong Kong.This is | | | | |
| the backdrop on looking over legal papers | | | | To make it a little juicier, the two onshore |
| from a court opinion on July 20th 2006. The | | | | companies behind the offshore companies had |
| judge in Texas District court ruled that | | | | an interest swap deal with NatWest, where |
| certain technicalities of the case against | | | | they received a floating interest rate, in |
| the BLIPS tax shelter were wrong. This will | | | | exchange for the high fixed interest rate. |
| have some effects in the case against 8 KPMG | | | | Those under indictment argued that the $25 |
| Accounting Firm former executives. KPMG | | | | million that they received upfront was a |
| itself has already pled guilty and paid a | | | | liability or not. It was money they |
| $456 million fine. One gets a feeling how | | | | received, but it was not actually "loaned" to |
| these illegal tax shelter were carried out | | | | them. Plaintiffs argued that it was not a |
| from these papers. BLIPS stands for Bond | | | | liability under IRS section 762, because |
| Linked Issue Premium Structure. It created a | | | | this money was never lent to them. The tax |
| financial structure to make the capital gains | | | | shelters aim to create an illusion of capital |
| tax deductions, through a capital loss. | | | | losses, and also interest payments, both of |
| However, this "loss" had been paid at the | | | | which are tax deductible. |
| beginning of the deal as the "premium", hence | | | | |