Wednesday, Feb. 12, 2014, was a bad day for Clover Investment Advisors, a small Cayman fund manager. Two Clover asset managers were ready to give a presentation to prospective clients at The Ritz-Carlton in Miami Beach.
But something was off. Perhaps it was the projector that appeared a little bit outdated. Perhaps it was that the potential clients were from the United States.
Clover founder Eric St-Cyr did not want to do business with Americans. The due diligence involved, collecting documents and information from customers to determine their identity, was becoming more onerous and costly.
The Foreign Account Tax Compliance Act (FATCA) was looming on the horizon, a piece of U.S. legislation that forces banks and other financial institutions worldwide to hand over information on the assets of their American customers to U.S. tax authorities. Those who refuse would be subject to a punitive withholding tax in their transactions with the United States.
Clover, essentially a team of two, did not have the necessary operational structures to effectively comply with FATCA. And St-Cyr, a French Canadian living in the Caribbean, did not want to deal with it, nor did his business partners.
Quite frankly, he thought, it would be a good business strategy not to have American clients at all, or at least only through intermediary financial institutions that would do all the know-your-customer legwork before investing the money with his fund.
But here he was in Miami, ready to pitch to American clients how he would manage their funds, the origin of which he had doubts about.
Most of Clover’s business was referred by banks. Today’s clients, however, had contacted St-Cyr’s colleague and salesman Josh VanDyk. One of them, let’s call him Bob, knew VanDyk from his previous employment with Bateman Financial, a firm in Cayman that on its website purported to be a broker and investment manager but was not licensed as such by the local regulator.
Bob and his sidekicks talked to VanDyk and St-Cyr for months about how to invest money with Clover. St-Cyr told them on several occasions that there was nothing they could do other than refer them to one of the more than a dozen financial institutions the firm had relationships with. These banks were typically small to mid-sized, based in the Caribbean, and had no in-house asset management capacity.
But the prospective clients did not want to do that. FATCA meant that the funds they wanted to invest would eventually be revealed to the authorities. It did not take extraordinary powers of deduction to conclude that the funds had, in all likelihood, not been declared to the taxman.
Ultimately, St-Cyr suggested another French Canadian, Patrick Poulin, a lawyer in the Turks and Caicos Islands, as an intermediary. St-Cyr knew that Poulin’s law firm Bishops had taken on U.S. clients before, and Poulin had invested some of his own money with Clover.
Poulin set up a company, with himself as the shareholder, and the company invested $200,000 deposited by the clients with Clover, where St-Cyr managed the money. The source of the funds was declared by Poulin as a loan from clients for investment purposes and technically Poulin’s corporation became Clover’s client.
When Poulin’s clients wanted to see how their funds would be returned to the United States, St-Cyr, after receiving the instruction from Poulin, sent it back to the company in the Turks and Caicos Islands after deducting his regular management fee. From there, the money made its way back to the clients in Virginia.
Now the clients wanted to deposit more money, $2 million, and things were getting more complicated, when in recent discussions, the source of these funds had started to raise St-Cyr’s and Poulin’s suspicion.
That day in Miami, St-Cyr was ready to outline his investment strategy when the door opened behind him and someone shouted “federal agents.” At first he believed it was Poulin playing a joke on him.
After a few minutes, his hands shackled, the grim reality of what was about to unfold started to sink in.
Eighteen months later, Eric St-Cyr has no doubt he got “a raw deal.” Not only because of his federal prison sentence of 14 months – it could have been far worse – but because his conviction of conspiracy against the United States through money laundering was in his view only a pretext by the U.S. Inland Revenue Service to flush out Americans who evade taxes by using offshore service providers.
While big banks like HSBC settled allegations of laundering billions of dollars of Mexican drug money and got away with fines, St-Cyr was sent to jail, lost his business, his wealth, his livelihood and the ability to earn a living in his previous profession. The difference, according to St-Cyr: “It’s all about money.”
Even the prosecutor told him that he was not a money launderer, St-Cyr said, speaking to the Journal at the end of September, six months after his release from prison. But the same IRS investigators who arrested him, VanDyk and Poulin are now probably touring the conference circuit, presenting how they caught a bunch of offshore money launderers, St-Cyr says.
To be certain, St-Cyr is not entirely innocent either. There was a moment, he concedes, “he stuck his head in the sand,” when he told the prospective client that the less he knew about where the client’s funds came from, the better for both of them. It was one of the mistakes he made that day, he says.
The conversation was recorded by the “client,” who was in fact an IRS undercover investigator.
When St-Cyr had his suspicions about the funds sent by the new clients via a company set up by Poulin, and aptly named Zero Exposure Inc., he sent the money back rather than file a suspicious activity report and inform the authorities, as the law requires. This was his second mistake, he says.
“It’s not that I made a conscious decision not to go to the authorities,” he says. “It did not even cross my mind.” He claims most service providers in Cayman would have done the same: “If they get the money they do not completely trust, they just send it back.”
His message is that what he did was not as clear-cut as his arrest and guilty plea would make it appear; that he operated in a gray area; and that it could have happened to other service providers in Cayman.
“If I did commit a crime, I had no criminal intent,” he emphasizes. The fact that he charged a typical 2 percent fee for the management of the fund, in his view, proves this point. If he had been willingly engaged in money laundering, he could have charged 10 times more.
St-Cyr believes the services provided by Clover were legal at the time and probably still are today. The contractual arrangements with financial institutions that would invest their clients’ money in segregated accounts with Clover had been vetted by compliance officers and the banks agreed to comply with Cayman’s anti-money laundering regulations.
“However, I don’t claim to be 100 percent innocent in the eye of the law,” he says. “What I intend to show is that the notion of guilt may not always be black or white. I returned the money to the client when I had some doubts about the source of funds. We asked for more information before accepting new money and we were arrested at the meeting where this information was supposed to be provided. The law says that Clover should have contacted the authorities instead of returning the funds; we didn’t. Therefore, we were guilty. However, I didn’t charge the fees associated with criminal activities and I didn’t have criminal intentions. On those terms, past judgments would say I was innocent. You make your call.”
Asked whether he was aware that the funds were probably not declared to the authorities and that he was potentially facilitating a tax crime, he agrees. However he adds that this is the foundation of many services in the Cayman Islands. After all, it is the taxpayer who is responsible for declaring their assets for tax purposes, not the service providers.
St-Cyr claims he did not know that the $2 million he was supposed to invest was coming from a purported bank fraud – he says it was his colleague who was told about the origin of the funds – but he acknowledges that discussions with the clients held during their visit to Cayman in January 2014 gave him “a bad feeling” about the source of funds.
He showed the Journal an email sent by Poulin to the clients days before the fateful Miami meeting, requesting additional information about the source of the funds, other KYC documents needed to process the money and the completion of a client third party transaction disclosure form.
“In general, I would appreciate you also providing me with further information regarding the failed development (name, place, principals) so I can have a better documented file moving forward,” Poulin wrote to the client.
“Finally, as I mentioned over the phone, I want to make clear that we are not providing any U.S. tax or legal advice. We are assuming that you have American advisors for that part of the matter. Our role is limited to matters of local law,” he added.
People who want to keep their money offshore want to do so for a reason. The question is the legality of it, says St-Cyr, as he repeats the well-known bon mot: “The only difference between tax planning and tax evasion is a good lawyer.”
St-Cyr’s own lawyers did their job well, so instead of the 41 months of incarceration mandated by the sentencing guidelines, his sentence was knocked down to 14 months, in large part to account for his cooperation in explaining offshore structures to the court, the prosecutors and the IRS.
He says, “They did not give me 30 percent just for being a good guy. The prosecutors asked questions like how does it work? I was surprised that I had to explain. They did not know what a STAR Trust was, they did not know that you can have a trust structure without a beneficiary.”
The Cayman STAR Trust is a statutory trust that can be established for individuals or for specific purposes, and St-Cyr explained to the court some of the asset protection purposes it can be used for legally. He also told prosecutors that physical precious metals held directly do not need to be declared to the IRS, but he says this was all information that is readily available on the Internet.
“I really believe it could happen to anybody. Anybody who touches Americans directly or indirectly can be framed in a way that they will commit something they did not consider a crime.”
Once one is inside the U.S. judicial system, it is virtually impossible to prove one’s innocence, he says. Contrary to his conviction, the whole operation in his case was not about money laundering.
“If you read the court documents, it rarely mentions money laundering. It’s all about tax evasion.”
Yet, to his knowledge, none of his clients have been implicated, nor did the prosecutors and investigators turn up anything else they could have charged him with. “They could not prove anything else that was wrong,” he says.
He admits it was a harsh price to pay for making only 2 percent a year for managing $200,000, and says the whole affair was as hard on his family as it has been on him. But he does not want to elaborate on his private life.
St-Cyr wrote a book in his native French about his experience. “A l’ombre du soleil,” a play on words which means both “In the shadow of the sun” and “In prison from the sun,” describes the hopelessness he felt in the days after his arrest and details how the proceedings played out in court as well as his daily life in jail. “I wrote the book because I want my kids to know what happened.”
He says he misses Cayman a lot, a place he considered home. He will probably never return and his future is uncertain.
Except for one thing. When he was released from prison on March 18 and guards drove him to Niagara Falls, New York, to the Canadian border, they offered him some final advice: “Don’t come back.”