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U.S. Should Examine AIG’s use of Tax Havens

by Lucy Komis­ar

Now that it con­trols AIG, the U.S. should inves­ti­gate the extent to which this giant cor­po­ra­tion, with sub­sidiaries in major tax havens, has been using the off­shore sys­tem to cook its books and dodge U.S. tax­es. Evi­dence shows AIG has done so in the past.

The U.S. takeover of the world’s largest insur­ance con­glom­er­ate, AIG, puts it in a unique posi­tion to look into the inner deal­ings of a com­pa­ny that is a prof­li­gate user of tax havens. AIG has employed off­shore shell com­pa­nies to cook its books and dodge tax­es. The new U.S. man­agers should inves­ti­gate how they do it. AIG’s favorite off­shore juris­dic­tions are Bermu­da, Bar­ba­dos, Switzer­land, and Lux­em­bourg, places immune from even the lax enforce­ment of Amer­i­ca’s state insur­ance reg­u­la­tors and the Secu­ri­ties and Exchange Com­mis­sion (SEC). AIG’s off­shore sub­sidiaries include Amer­i­can Inter­na­tion­al Assur­ance Com­pa­ny Lim­it­ed, Bermu­da; Amer­i­can Inter­na­tion­al Rein­sur­ance Com­pa­ny, Ltd., Bermu­da; AIG Life Insur­ance Com­pa­ny Ltd., Switzer­land; and AIG Finan­cial Advi­sor Ser­vices, S.A., Lux­em­bourg. AIG in the past has used tax havens to evade reg­u­la­tions and hide insid­er con­nec­tions in sup­pos­ed­ly “arms-length” deals. This is espe­cial­ly sig­nif­i­cant as the com­pa­ny has moved into finan­cial ser­vices and asset man­age­ment. It has also used the off­shore sys­tem to evade U.S. tax­es. Here are two exam­ples, the first report­ed exclu­sive­ly by this writer. AIG helped Vic­tor Pos­ner, a noto­ri­ous­ly crooked investor, set up an off­shore rein­sur­ance com­pa­ny so that Pos­ner could evade U.S. tax­es. The pol­i­cy scam was dis­cov­ered in the ear­ly 1990s, after the SEC pros­e­cut­ed Pos­ner for a fraud­u­lent takeover scheme con­coct­ed with Wall Street thieves Michael Milken and Ivan Boesky, ordered him to pay $4 mil­lion to fraud vic­tims and banned him from serv­ing as offi­cer or direc­tor of any pub­licly-held com­pa­ny. New man­agers took over Pos­ner’s NVF Corp., which ran a Delaware vul­can­ized rub­ber plant. An insur­ance agent charged with exam­in­ing com­pa­ny poli­cies dis­cov­ered that NVF was pay­ing AIG’s Nation­al Union Fire of Pitts­burgh sub­stan­tial­ly over mar­ket for work­men’s com­pen­sa­tion insur­ance. AIG rein­sured the pol­i­cy through Chesa­peake Insur­ance, an off­shore rein­sur­ance com­pa­ny Pos­ner owned in Bermu­da. In essence, NVF, owned by Pos­ner, was buy­ing insur­ance from an AIG com­pa­ny which was buy­ing rein­sur­ance for the pol­i­cy from an off­shore com­pa­ny owned by Pos­ner. Bermu­da pro­vid­ed tax and cor­po­rate secre­cy, so Chesa­peake’s books were safe from the eyes of Amer­i­can reg­u­la­tors and tax author­i­ties. AIG and Pos­ner made out like ban­dits. AIG got a high­er com­mis­sion from the inflat­ed NVF pre­mi­um before send­ing the rest to Chesa­peake. Pos­ner wrote off the entire amount as a busi­ness expense and enjoyed the extra cash in Bermu­da, tax free, stiff­ing the U.S. gov­ern­ment. Reduced prof­its also meant small­er div­i­dends and share prices for investors. The insur­ance agent can­celled the NVF pol­i­cy with AIG, but the Delaware Insur­ance Depart­ment did not make the scam pub­lic or take any action against AIG. A for­mer insur­ance depart­ment reg­u­la­tor told me, “This was not an iso­lat­ed case with Vul­can [NVF]. AIG did that a lot. AIG helped com­pa­nies set up off­shore cap­tive rein­sur­ance com­pa­nies.” A “cap­tive” is owned by the com­pa­ny it insures. AIG, he alleged, “would then over­charge on insur­ance and pay rein­sur­ance pre­mi­ums to the cap­tives, giv­ing the cap­tive own­ers tax-free off­shore income.” AIG says that it “pio­neered the for­ma­tion of cap­tives” and offers man­age­ment facil­i­ties to run them in off­shore Bar­ba­dos, Bermu­da, Cay­man Islands, Gibral­tar, Guernsey, Isle of Man, and Lux­em­bourg — all places where cor­po­rate and account­ing records are secret and tax­es min­i­mal or nonex­is­tent. Anoth­er scam helped AIG dodge tax­es and U.S. reg­u­la­tions. Insur­ance com­pa­nies nor­mal­ly insure them­selves by lay­ing off part of their risk to rein­sur­ance com­pa­nies, so if a claim comes in above a cer­tain amount, the rein­sur­ance com­pa­ny will pay it. State laws also require them to keep a cer­tain amount of cap­i­tal avail­able to pay out claims. If they have rein­sur­ance, that amount can drop. Com­pa­nies have to show loss­es — amounts they have paid out — on their books. If they have enough good rein­sur­ance, they get a cred­it for that against their loss­es. The rein­sur­er, of course, has to be an inde­pen­dent com­pa­ny; the risk isn’t reduced if it’s just moved to anoth­er divi­sion of the same com­pa­ny. In the mid-1980s, two of AIG’s rein­sur­ers failed. AIG would have had to cur­tail writ­ing new busi­ness, since rules require a cer­tain ratio of assets to risk. Find­ing new rein­sur­ers was going to be dif­fi­cult and expen­sive. CEO Mau­rice “Hank” Green­berg per­suad­ed sev­er­al of his busi­ness friends to set up a com­pa­ny into which he could “cede” AIG insur­ance. The com­pa­ny was launched with a pri­vate sale of shares orga­nized by Gold­man Sachs, then head­ed by Robert Rubin. Green­berg’s front men were loaned the mon­ey to “buy” risk-free shares in the new Coral Re, an alleged­ly inde­pen­dent off­shore rein­sur­ance com­pa­ny, to allow it to ille­gal­ly move debt off AIG’s books and vio­late rules about main­tain­ing min­i­mum lev­els of reserves required to pay off claims. The com­pa­ny was reg­is­tered in Bar­ba­dos, where cap­i­tal require­ments and reg­u­la­tion are min­i­mal, where Amer­i­can reg­u­la­tors could­n’t read­i­ly dis­cov­er AIG’s involve­ment and where, as an added incen­tive, it could evade U.S. tax­es. If Coral Re was an AIG affil­i­ate, it would have to pay tax­es on its income.

A Delaware Insur­ance Depart­ment reg­u­la­tor’s report in 1996 said that Coral Re “may be an affil­i­ate” of AIG. It described how AIG played an inte­gral role in the cre­ation of Coral Re; that its pur­pose was to rein­sure risks for AIG com­pa­nies; that vir­tu­al­ly all Coral Re’s busi­ness orig­i­nat­ed from AIG units; and that Coral Re was man­aged by an AIG sub­sidiary. It con­clud­ed that the arrange­ment did not trans­fer risk and had to come off the books. The insur­ance depart­ments of New York and Penn­syl­va­nia agreed. But delays and stonewalling allowed AIG to use Coral Re for more than eight years. By the time it had to shut it down, it did­n’t need it any­more. Cowed by AIG, none of the agen­cies levied a penal­ty.

It would be unthink­able for the U.S. to allow a busi­ness it con­trols to finesse reg­u­la­tions, evade tax­es or help oth­ers to evade them. The turnover of AIG to the U.S. will involve exten­sive exam­i­na­tions by accoun­tants. An analy­sis of the com­pa­ny’s off­shore strate­gies should be part of the audit. What accoun­tants learn could stop illic­it prac­tices by AIG and lead to laws to pre­vent oth­er insur­ance com­pa­nies from doing the same.