Island tax havens factor into Romney's business success

Island tax havens factor into Romney's business success

Offshore dealings like those of the Republican presidential candidate

trouble many, but they're legal.

By Bob Drogin

Los Angeles Times Staff Writer

December 17, 2007

BOSTON -- Second of two parts

-- While in private business, Mitt Romney utilized shell companies in

two offshore tax havens to help eligible investors avoid paying U.S.

taxes, federal and state records show.

Romney gained no personal tax benefit from the legal operations in

Bermuda and the Cayman Islands. But aides to the Republican

presidential hopeful and former colleagues acknowledged that the tax-

friendly jurisdictions helped attract billions of additional

investment dollars to Romney's former company, Bain Capital, and thus

boosted profits for Romney and his partners.

Romney has based his White House bid, in part, on the skills he

learned as co-founder and chief of Bain Capital, one of the nation's

most successful private equity groups. His campaign cites his record

while governor of Massachusetts of closing state tax loopholes; his

involvement with foreign tax havens had not previously come to light.

In the Cayman Islands, Romney was listed as a general partner and

personally invested in BCIP Associates III Cayman, a private equity

fund that is registered at a post office box on Grand Cayman Island

and that indirectly buys equity in U.S. companies. The arrangement

shields foreign investors from U.S. taxes they would pay for investing

in U.S. companies.

Romney still retains an investment in the Cayman fund through a trust.

Campaign disclosure forms show the investment paid him more than $1

million last year in dividends, interest and capital gains.

In Bermuda, Romney served as president and sole shareholder for four

years of Sankaty High Yield Asset Investors Ltd. It funneled money

into Bain Capital's Sankaty family of hedge funds, which invest in

bonds and other debt issued by corporations, as well as bank loans.

Like thousands of similar financial entities, Sankaty maintains no

office or staff in Bermuda. Its only presence consists of a nameplate

at a lawyer's office in downtown Hamilton, capital of the British

island territory.

"It's just a mail drop, essentially," said Marc B. Wolpow, who worked

with Romney for nine years at Bain Capital and who set up Sankaty Ltd.

in October 1997 without ever visiting Bermuda. "There's no one doing

any work down there other than lawyers."

Investing through what's known as a blocker corporation in Bermuda

protects tax-exempt American institutions, such as pension plans,

hospitals and university endowments, from paying a 35% tax on what the

Internal Revenue Service calls "unrelated business income" from

domestic hedge funds that invest in debt, experts say.

Kevin Madden, Romney's campaign spokesman, said there was nothing

improper about the Bermuda arrangement, or in Romney's investment in

the Cayman fund. In neither case, Madden said, did Romney gain the

ability to defer or avoid paying U.S. taxes.

"I would disagree that these could be described as tax loopholes," he

said. "These are perfectly normal and perfectly legal arrangements

that American companies put together to be successful in the market."

The Cayman fund is registered at P.O. Box 908GT on Grand Cayman

Island, corporate records show. Like the Bermuda company, it maintains

no office or staff overseas.

Romney first purchased a 3.25% share of the Cayman fund, and was

listed as a "general partner (passive)" before his retirement from

Bain Capital in late 2001, records show. He put his financial assets

into a blind trust in January 2003, when he took office as

Massachusetts governor.

Brad Malt, who controls Romney's financial trust, said Bain Capital

organized the Cayman fund to attract money from foreign institutional

investors.

"This is not Mitt trying to do something strange," he said. "This is

Bain trying to raise some number of billions from investors around the

world."

The privately held Cayman fund does not disclose its total investment

pool. But Securities and Exchange Commission records show it has

invested through a Delaware partnership in a California-based network

of healthcare centers, a Texas real estate group, a New Jersey

phosphate manufacturer and numerous other companies.

Romney is the wealthiest candidate running for president, with a

personal fortune of up to $250 million, according to financial

disclosure forms he filed in August. His financial trust retains

investments in at least 32 Bain and Sankaty equity, hedge and debt

funds, among other assets, the documents disclosed.

Under his retirement agreement, Romney retains a share of the profits

at Bain Capital, as well as the right to make new investments in Bain

funds through his trust, until February 2009.

Malt said he had repeatedly increased Romney's stake in the Cayman

fund since 2003. He said he was unaware of the specific figures, but

added that he knew he "wrote a lot of checks," and that it paid a

return of 20% to 30% a year.

Malt said he was "pretty confident" that he had invested in additional

offshore funds for Romney since taking over the trust. "I don't care

whether it's the Caymans or Mars, if it's organized in the Netherlands

Antilles or the Jersey Islands," he said. "That means nothing to me.

All I care about is whether it's a good fund or a bad fund. It doesn't

affect his taxes."

Connections with offshore companies became a presidential campaign

issue in April, when the Washington Post reported that Democratic

candidate John Edwards had worked as a paid advisor to the Fortress

Investment Group. Fortress incorporated hedge funds in the Cayman

Islands, allowing its partners and foreign investors to avoid or defer

paying U.S. taxes. The disclosure embarrassed Edwards, who has called

for reducing financial inequalities in America and who had sharply

criticized corporations that utilize offshore tax shelters.

Eugene Steuerle, co-director of the Urban-Brookings Tax Policy Center

at the Urban Institute, a nonpartisan Washington-based think tank,

said he was troubled by the growing use of offshore jurisdictions,

even for legitimate purposes.

"There's clearly something wrong when you have to use post office

boxes to conduct business," he said. "You ideally want a world where

setting up shell corporations wouldn't be necessary."

But offshore companies are now "part and parcel" of America's booming

private equity and hedge fund business, said Kurt Schacht, managing

director of the Centre for Financial Market Integrity at the CFA

Institute, which represents chartered financial accountants, in

Charlottesville, Va. He defended the practice.

"I don't think they're loopholes," he said. "It's not like they're

trying to break the law. It's just taking advantage of what's

available under current tax laws."

As a presidential candidate, Romney regularly touts his successful

business background. But he rarely describes his unusual experience in

the rarefied world of international high finance.

After starting as a management consultant, Romney helped found Bain

Capital in 1984. Initially launched as a venture capital fund to

provide seed money to start-up companies, Bain Capital quickly evolved

into a leveraged-buyout shop. Romney and his partners borrowed money

to buy dozens of troubled companies, and then charged high fees to

revamp management, consolidate operations and, in some cases, lay off

workers. To cash out and pay the underlying debt, they resold the

companies or took them public as quickly as possible.

Romney took a leave of absence from Bain Capital in February 1999 to

take over the scandal-marred 2002 Salt Lake City Winter Olympics. By

then, Bain Capital already had opened its first offshore entities.

According to a report by Fitch IBCA, a major credit-rating service,

Bain Capital managed more than $5.5 billion in assets by mid-1999. The

total included $2 billion managed by Sankaty Advisors, which included

at least two Bermuda-based subsidiaries set up during Romney's tenure.

Public documents do not disclose how much of the $2 billion was

channeled through Bermuda. The Sankaty funds are named for a red-and-

white lighthouse on the Massachusetts island of Nantucket.

Romney legally remained the top executive at Bain Capital during his

leave of absence. On Feb. 20, 2001, a Bain filing to the SEC described

Romney as "sole shareholder, a director and president of Sankaty Ltd.

and thus . . . the controlling person of Sankaty Ltd." The company, it

added, was organized "under the laws of Bermuda."

Today, Bain Capital manages $60 billion in assets, according to a

spokesman. The total includes $23 billion in Sankaty debt and credit

funds. Half a dozen Sankaty affiliates now are active in Bermuda,

corporate registry records show.

The Sankaty debt hedge funds are organized as partnerships in Delaware

that produce taxable business income by investing in fixed-income

bonds and other debt instruments. Under tax law, even tax-exempt U.S.

institutions may face a 35% tax if they invest directly in such hedge

funds. By investing instead through a Bermuda corporation, the taxes

are legally blocked, experts say.

In Congress, both the House Ways and Means Committee and the Senate

Finance Committee held hearings in September that examined whether the

use of such offshore blocker corporations allowed tax-exempt U.S.

organizations to improperly engage in business.

"A lot of people are looking at this," said a Senate investigator, who

asked not to be identified because he was not authorized to deal with

the media. "It grates that these people are only using these offshore

arrangements to avoid paying taxes."

Janne Gallagher, vice president and general counsel of the Council on

Foundations, a nonprofit membership group of 2,100 charities and grant-

making foundations, said the practice was "pretty prevalent" in her

field as portfolio managers sought to spread risk through hedge funds.

"It's a substantial tax, and that's what generally has led people to

invest in these offshore blockers," she said. "I think everyone would

prefer not to if they could avoid the consequence."

Rep. Sander M. Levin (D-Mich.) introduced legislation that would allow

tax-exempt institutions to make such investments without going

offshore. The bill passed the House but has drawn little support in

the Senate.

As governor, Romney helped raise at least $300 million in much-needed

state revenue by closing what he called tax loopholes. Critics called

the strategy a backdoor way to raise taxes, and Romney failed in an

effort to give state officials the authority to penalize corporations

that lowered their tax bills by moving their profits out of state.

As a presidential candidate, Romney calls for lowering the corporate

tax rate, lowering income taxes and eliminating taxes on interest,

dividends and capital gains for those earning less than $200,000. He

does not discuss the use of offshore tax havens on his campaign

website.

Times staff writer Walter F. Roche in Washington contributed to this

report.