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Shell companies become go-to investment tool for universities

It only took a quick Google search; I found three websites immediately that offered to register me to own an offshore shell company. After selecting Fidelity Corporate’s website because it looked the most professional, chose which country I wanted to incorporate in (Belize) and filled in my personal information on an online application. I did the whole process on my outdated iPhone 5 while sitting on the couch. 

 

After about twenty minutes, I was prepared to open up for business my limited liability corporation, aptly named “Belize it or Not, LLC.” It would have cost me $530. I just had to press apply. 

 

Of course, there would have been paperwork, and I would have had to send in some sort of identification, but that was the only stated requirement. I listed my dog as the sole director of the company. If I had actually registered the shell company rather than exiting the page, it would have been a completely legitimate and legal business that could be used  just as shell companies are commonly used  for money laundering and tax evasion. 

 

Although $530 can be a lot of money for a college student, universities themselves are increasingly finding offshore companies as viable avenues of investment and growth for their endowments  >span class="TextRun SCXW133839693" xml:lang="EN-US" lang="EN-US">is bequeathed to universities by donors. 

 

Many endowments from some of the country’s most renowned universities now stretch into the multi billions. In fiscal year 2016, the largest 20 U.S. universities measured by endowment size had $278.9 billion in total reservesAt the top three institutions measured for their endowment size alone  Harvard, Yale, and >span class="TextRun SCXW133839693" xml:lang="EN-US" lang="EN-US">  >span class="EOP SCXW133839693" data-ccp-props="{}"> 

 

As more of America’s richest private universities  including Harvard, Princeton and the University of Pennsylvania  gravitate towards more of these lucrative and risky investment strategies, they open themselves up to becoming taxed, which economics and tax professor Francois Brouard of Carleton University said can help explain why tax havens can be attractive even for non-profit universities. 

 

Although universities are nearly exempt from paying taxes on their endowment investments, they can still be taxed on gains made from investing with borrowed funds — a common practice of private equity firms and hedge funds.  

 

University endowments are often managed by outside firms so they can create sustainable gain for things like scholarships for students, but this money is more and more being funneled overseas into tax havens, which can be risky,” Brouard said. It’s abusing the system, and I can’t think of how this could end in a good way.” 

 

>span class="TextRun SCXW133839693" xml:lang="EN-US" lang="EN-US">scrutiny from government officials; Dean Zerbe, former senior counsel to the U.S. Senate Finance Committee, said that while there has no “line drawn in the sand” on the issue, that federal regulators and U.S. representatives are becoming more aware of universities’ lucrative investment strategies. 

 

“I think Congress should close the loophole,” Zerbe said. “>span class="TextRun SCXW133839693" xml:lang="EN-US" lang="EN-US">>span class="TextRun SCXW133839693" xml:lang="EN-US" lang="EN-US"> 

 

Although a handful of university endowments are multi-billon dollar assets, most universities heavily constrict the amount that is open for investing  most is saved securely for infrastructure renovations and lowering tuition for students through scholarships.  

 

For Harvard University, which has an endowment exceeding $35 billion, 5 percent of that money is payable  >span class="TextRun SCXW133839693" xml:lang="EN-US" lang="EN-US">$1.8 billion free for investment opportunities. In its most recent 990 Revenue Form released to the public, Harvard listed that it has approximately 17 percent of that amount309 million, is invested overseas in Central America. 

 

In all, 96 universities in the United States have endowments of more than $1 billion, and in many of these universities investments in Central America were higher than >span class="TextRun SCXW133839693" xml:lang="EN-US" lang="EN-US">in any other region in the world.  

 

With the release of the Paradise Papers in November of last year by the International Consortium of Investigative Journalists, it was revealed that along with many international leaders and multi-billion dollar companies, that four prominent universities within the top 10 by endowment size had millions invested in shell companies. 

 

Columbia, Princeton, Stanford and the University of Pennsylvania together held a total of $73.7 billion that was found being held by hedge funds and private equity firms in the Cayman Island, according to the released documents. These particular funds were especially concerning to federal investigators, who found that through hedge funds, these universities were reaping gains from investing in carbon-polluting industries despite publicly supporting efforts to prevent climate change. 

 

Despite holding many of these investments for more than five years, the four universities  among many others nationwide  were able to securely invest in hedge funds and private equity firms through using shell companies as intermediaries to hide their identity. 

 

“Think of shell companies like a Swedish bank account,” Brouard said. “They’re extremely private; you can place as much money as you want in them, and no one has to know your true identity.” 

 

 

For Brouard, utilizing shell companies in this way creates avenues for universities to not be held accountable for using what little payout money the university allows from its endowment to invest in high-risk ventures. Despite many universities claiming that their endowments are restricted  >span class="TextRun SCXW133839693" xml:lang="EN-US" lang="EN-US">tell the university what they want their money to be used for  Zerbe said that many universities’ investment managers can find ways around these restrictions. 

 

“A university can say, ‘This money is restricted to create scholarships for students who can’t afford to attend our school,’ and then with a little paperwork, can send that money wherever they want to as long as its payable,” Zerbe said. 

 

While increasing their spending in overseas shell companies over the past decade, universities across the United States have also increased their overall tuition rates. >span class="TextRun SCXW133839693" xml:lang="EN-US" lang="EN-US">ten years, private nonprofit universities and four-year public universities have seen a 2.4 and 3.2 percent rise in tuition respectively when accounted for inflation. 

 

>span class="TextRun SCXW133839693" xml:lang="EN-US" lang="EN-US">Zerbe said, thus directly affect student bodies across the country. He contended that while many universities see big gains on their investments, >span class="TextRun SCXW133839693" xml:lang="EN-US" lang="EN-US">for scholarships never actually translates to the students. Sometimes the risky investment schemes with hedge funds go bad; Harvard reported losing millions after investing in Central America.  

 

>span class="TextRun SCXW133839693" xml:lang="EN-US" lang="EN-US">Brouard adds. Zerbe, who worked extensively with university tax regulation and enforcement during his time working for the Senate Finance Committee, said that while placing a large sum of money in overseas shell companies raises a red flag for federal tax attorneys, that there’s really no legal action available. 

 

It doesn’t exactly put a gold star next to your university’s name if you choose to do this type of thing,” Zerbe said. “But it quite frankly has become such a common thing in higher education that many investors feel compelled to do this. 

 

While Congress did announce that it will begin to tax investment income at private colleges with assets valued at $500,000 per full-time student as part of last year’s tax overhaul, there has been relatively no motion to close loopholes that allow universities —w hich are exempt from taxes on most purchases and investments  to avoid paying taxes altogether. 

 

“And until they do close that loophole,” Zerbe said. “Not only will the government lose millions, but our college students across this country will continue to be a second priority.” 

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