Tuesday, May 13, 2008

Anonymous Investment Accounts

Back when I was a younger pup, part of my pipe dream of expatriating and living in a "foreign" country was that I could take my first world assets and live on the "rent" (interest, capital gains, etc) while my cost of living would be denominated in 3rd world assets.

Yeah, there's an orginal thought - NOT! :)

Well, there are a -few- flaws with that theory. In fairness the "grand plan" started taking shape around the beginning of the tech bust (2001-ish) and really solidified when i calculated how much i was spending in property tax alone on my bay area home of 1930 construction.

The first flaw was that I had *wrongly* assumed, "hey since I don't live in the US, I won't owe any US taxes" -- (survey says.......bzzzzzttt!)

As it turns out, there IS a tax exemption for those who live outside of the country, but it is only available on the first 80,000 dollars and it is available for earned income only. Although god knows, when you trade as poorly as I do every wretched dollar you pry from the market's stingy grasp is clearly 'earned' the IRS and the US government doesn't see it the same way.

To get around this little "glitch" in my plan, i would need to create a complex structure which attempted to trade the assets as an entity and pay me a salary. It's all entirely doable, but after spending a year or more longer after the end of my employment in the US waiting on Golden Lotus' schooling -- and our lease to be finalized, I wasn't as fat as I had wanted to be and the prospect of paying mid 5 figures to get a tax advantaged structure setup and administered properly didn't seem that appealing to me.

Yes, you can get it done cheaper, but after all the horror stories I'd heard about with people being hit with back taxes and fees and penalties owed that they thought they had legally avoided, it seemed like one of those things that i didn't want to scrimp on.

(The second, more subtle problem with my plan was that even in places advertised as "cheap", unless you are going to live in a yurt and sew your clothes with thread made from animal blubber and yak hides, chances are, trying to replicate 1st world conveniences are going to cost you more than you estimated. The falling dollar and domestic (UY) price inflation hasn't really helped matters either.)

What makes matters more frustrating for the little guy is that foreigners who invest in the same north american markets pay no cap gains taxes. This of course extends to "offshore entities", hedge funds and the like which use the anomolies created by all the sheeple attempting to manage their tax bite each year to catch some relatively predictable and profitable trades around the end of the calendar year.

What I thought was that what the world really needed was a way for the "little guy" to move his money offshore, AND be able to make his money still work for him.

When I looked into it there were a few guys offering "managed futures accounts" and "managed forex accounts". To me, these just looked like sophisticated ponzi schemes, or trading schemes that I equate to "picking up nickels in front of steam rollers" -- for instance selling volatility -- a trade that works really well to give you 4-5% a month or so, until you get your head handed to you and take a massive draw down in the 6th or 7th month effectively wiping all your gains and then some.

What I really wanted was an affordable flexible platform that would allow me to trade offshore like the big boys without the big boy expenses. Hey, if you're managing $1Billion dollars or so, the cost of setting things up properly can be pretty easily handled within the realm of your hedge fund's 2+20% management fee.

If however, you are like fubarrio and your networth amounts to a couple of nickels, some jujubeads and some pocket lint, then a few 10 thousands here and there adds up.

What I learned in the course of joining the offshore industry is that the hick-up is with the brokers. They are all obligated to follow and adhere to the exchange's rules. And, one of those rules is that while money can sometimes go into a brokerage account with one name from a bank account with another beneficial owner, it can't go back out that way. So, it's kind of like the roach motel in that regard. Incoming wires are (sometimes) OK, but moving the money back out to an account with a different named owner is a big no-no.

So what happens is, through a series of mandatory disclosures, the brokerage accounts make sure that they know who the beneficial owner of their account is, and offshore company holders need to have banking setup for their offshore company -- something that is not nearly as trivial as it used to be years ago.

By getting the banking lined up through our offshore financial company, we were able to setup anonymous investment accounts for clients of my offshore banking house.


Well, technically, the account is held in the name of the offshore banking house and the accounts are run through subsidiary companies of the offshore banking house in sub accounts -- which are under the master account.

The client clears due diligence, know your customer (KYC) rules with the offshore financial company, and he or she is automatically good to go with their segregated offshore trading account -- all the while maintaining their anonymity.

It's brand new, so I'll keep you updated as to how it ends up working out. I'm still waiting for some nerd from compliance to puff up and tell us we can't do what we're doing....right about the time we are really getting rolling :)

I'm not actually "eating my own dog food" yet, in that all of my investment/trading money is firmly "onshore" where the tax man (IRS) and everyone else that cares knows where it is when it comes time to pay for all these baby boomer retirements :)

Happy Investing and Trading,

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