It should come as no surprise that the US routinely uses force to get its way in foreign disputes. After all, we have the world's most powerful military.
Indeed, the US government has been continuously at war my entire life: relatively big wars such as Vietnam, not to mention two wars in Iraq, one in Afghanistan… along with smaller interventions in Grenada, Panama, and most recently, in the "Islamic State."
Perhaps less well known is that the American legal system is just as imperialistic as its military. Even if you live or do business outside the US, Uncle Sam forces you to violate the laws of that country in order to comply with US laws, regulations, and court decisions.
The latest poster child for US legal imperialism is the Argentine subsidiary of banking giant Citicorp, which is caught between the competing laws of the US and Argentina.
In 2001, Argentina defaulted on nearly $100 billion of debt payments. Over the next few years, Argentina persuaded most of its creditors to accept restructured debt for pennies on the dollar. A few creditors didn't sign on – including hedge funds that purchased Argentina's debt for a fraction of its nominal value on the secondary market.
These hedge funds then sued Argentina in US federal court, demanding payment in full. The presiding judge has now ruled that Argentina must pay the non-restructured bonds in full at the same time it makes payments to holders of the restructured bonds. If Argentina fails to comply with this order, any bank that facilitates interest payments on the new bonds will be deemed to violate it.
This puts Citibank Argentina – the custodian of some of the restructured bonds – in the hot seat. Citibank Argentina can't distribute the $5 million in interest payments it will receive from Argentina to the restructured bondholders without violating the US court order, in which case it would face fines and further lawsuits. That's despite the fact that the restructured bonds are governed under Argentine law.
In turn, Argentina wants Citibank Argentina to pay this interest – but not a dime to the hedge funds that didn't agree to the restructuring – by September 30. And the country has threatened Citibank with the loss of its Argentine banking license if it fails to make the payments. With branches in more than 25 cities in Argentina, and nearly $3 billion in deposits, Citibank has a lot to lose.
It's definitely a no-win situation for Citibank.
There's a much larger lesson, though, in this dispute. It illustrates the US's arrogant presumption to impose its law over the entire world, even if the result gives the loser an impossible choice. It can comply with US law and risk civil and criminal sanctions in its own country. And if fails to do so, it risks fines, sanctions, and potentially, loss of the right to operate in the US.
That's not likely to happen to Citicorp, of course – it's too big and too well connected. But it illustrates how litigants use US courts to regulate activity and investments beyond US borders, regardless of the consequences outside the US.
In a certain way, it's the same fear that holds many people back from trying to go offshore in the first place.
They're afraid that the US government will come overseas and bully other countries into giving up US clients.
There's certainly some justification for that belief. But – if you do things properly – there is a way to beat Uncle Sam, while still staying within the law.
For example, I have case records dating back 15 years or more of unsuccessful efforts of US courts to seize assets in offshore "asset protection trusts."
The best-known case dealt with a Nevada couple, the Andersons, who operated a lucrative telemarketing venture. The Federal Trade Commission (FTC) ruled that the venture was a Ponzi scheme. The FTC sued the Andersons and obtained a $20 million judgment. When the Andersons claimed that they couldn't pay the judgment, the agency obtained a court order requiring the couple to repatriate $8 million from a Cook Islands trust they had formed.
Thankfully, the Andersons eventually convinced the court that they had tried – but ultimately failed – to repatriate the trust assets. They eventually got away with paying just 6% of the original judgment,
In many ways, this case is a worst-case scenario for such a structure. The Andersons were found to have been committed fraud, and their trust had serious defects. Yet their offshore trust still protected the bulk of the assets entrusted to it.
The Anderson case – and many more cases like it – proves that despite the best efforts of US courts to impose their will worldwide, there are still asset protection opportunities offshore.
Just be sure you do it right – ideally with the help of a professional. If things had been done properly, the Andersons might have been able to avoid paying anything.
When it comes to offshore, do it right or don't do it at all!