The Mormon Church in the @PanamaPapers?!? [Updated]

[Update below]

Yesterday, the ICIJ released its searchable Panama Papers database. (For some background on the Panama Papers, you can look my BCC post or my Surly Subgroup post. Or the ICIJ’s site.) Some enterprising individual appears to have plugged Mormon-related words into the search bar, and came up with at least two hits: Bonneville International and Deseret Investment.

Now, this is exactly what we’re supposed to be doing with this database: searching for those who think they can use tax havens to avoid meeting their obligations. So should you be outraged that the church is doing this?

Short answer: no. But I’m a law professor, so the short answer is never enough.  

There are problems with looking at the data absent any context. In fact, the ICIJ expressly recognizes and warns about the problems with this disclaimer:

There are legitimate uses for offshore companies and trusts. We do not intend to suggest or imply that any persons, companies or other entities included in the ICIJ Offshore Leaks Database have broken the law or otherwise acted improperly. Many people and entities have the same or similar names. We suggest you confirm the identities of any individuals or entities located in the database based on addresses or other identifiable information.

What does this disclaimer mean for our purposes? Different things for each entity.

Bonneville International Limited

Bonneville International Limited almost certainly has no relationship to the church. I mean yes, I know that the for-profit media subsidiary of the church is named “Bonneville International.”

But it’s not like we have exclusive use of the name. I mean, the first thing that pops into my mind when I hear Bonneville is Hugh Bonneville (and I don’t even watch Downton Abbey. Much, at least).[fn1]

Per the ICIJ, Bonneville International Limited is connected with BOS Trust Company (Jersey) Limited, a wealth planning entity associated with the Bank of Singapore. Those aren’t the kind of services the the church would use.

Moreover, Bonneville International Limited was found in the Panama Papers, which were leaked from Mossack Fonseca, a Panamanian law firm. There’s not a lot of reason to believe the church would work with Mossack Fonseca.

Which is to say, the Bonneville thing probably relates to the second part of the ICIJ’s disclaimer.

Deseret Investment Inc.

Unlike “Bonneville,” “Deseret” is pretty much a Mormon word. And Deseret Investment Inc. is almost certainly related to the Deseret Trust Company, the church’s investment manager.

But didn’t I just say that there’s no reason to believe that the church has a relationship with Mossack Fonseca? Yes I did. So how did Deseret Investment Inc. get wrapped up in the Panama Papers?

It didn’t. This database is based on at least four leaks of information; Deseret Investment Inc. was in what they’re calling “Offshore Leaks”; its inclusion in the database predates the Panama Papers.

Still, it’s (probably) a church-owned entity in a tax haven. Isn’t that wrong?

I’m going to give a shortened version of the answer here. (If you’re interested, I’ve written in great detail about the history, reasons, policy, and problems with tax-exempts investing through tax havens in the Northwestern University Law Review.)

The church is exempt from tax under section 501(c)(3) of the Internal Revenue Code. Like other tax-exempt organizations, it generally doesn’t pay taxes on its income. There are a couple exceptions, though, where tax-exempts do pay ordinary income taxes. The big one is where they operate certain for-profit businesses; they must pay taxes on the income from those businesses.

They also have to pay taxes on investment income they earn where they borrowed to fund the investment.

Now, the church doesn’t borrow (much, at least) money. But investment partnerships like hedge funds and private equity funds do. And the tax law treats that borrowing as undertaken by the tax-exempts that invest in the partnerships. So if the church were to invest in a hedge fund that borrowed money, the church would have to pay taxes on a portion of its share of income from the fund.

The thing is, tax-exempts almost by definition aren’t supposed to pay taxes on income from investments. (I go into a lot of detail in my article, but this unrelated debt-financed income rule was initially enacted to combat tax evasion through sale-leaseback transactions.) But tax-exempt entities can avoid these rules by investing, instead, through a blocker corporation, generally incorporated in a tax haven jurisdiction.

Is this bad? I’ve argued that it is. But it’s not wrong like tax-exempts-shouldn’t-do-this wrong; rather, it’s wrong because the unrelated debt-financed income rules are unnecessary and poor tax policy. As long as they exist, though, tax-exempt organizations (including the church) can and should invest through offshore blockers, including through Deseret Investment Inc.

[Update 5/13/16 at 9:13 pm] 

The Deseret News reports that the church has no ties to either entity.


[fn1] That’s not to suggest that Bonneville International Limited is associated with Hugh Bonneville; if you’re trying to hide your assets offshore, I can’t think of much stupider than giving your holding company a name that can be easily traced back to you.

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Comments

  1. such a great summary/overview — thanks!

  2. Let me thank you, Sam, before the comment thread explodes in six dozen negative directions.

  3. Shirley says:

    UPDATE: There is not yet any evidence thay these companies are owned by the Church other than their names with uniquely Mormon ties and shared name with LDS Church owned companies. This information is being further researched to determine if these companies are owned by the Church. We ask that readers not assume wrong doing by the Church like we did below, and to wait until further information is available before making final judgement. We have decided to leave this article up, but realize that it is based on assumptions. Again, we are still waiting for more information either to substantiate or repudiate these claims.

  4. Well I guess Ardis dared me. Actually, thanks and this is great, Sam. If there’s a problem (here comes the “negative directions”) it’s that there are multiple definitions of “wrong” (as you note), and you answer only some and your answers are opinions rather than facts. Tax-exempts in hedge funds is an interesting and complicated subject, and the debt financed income rules even more so. Without playing that out, I’d simply suggest that you qualify your conclusion–the “can and should” is an opinion. For example, if we were to both put on our tax hats I would agree quickly with “can” and engage in a much longer discussion about “should.”

  5. Chris, I’ll give you that. I do a lot more nuance in my law review article; here, by “should,” I’m eliding whether hedge fund investments are normatively good for tax-exempts, and rather saying that, if tax-exempts are going to invest through levered investment partnerships, they should do it through a blocker. (Not putting your tax-exempt client into a blocker if it wants to invest in a hedge or PE fund strikes me as pretty close to malpractice, given the current legal environment.)

    Shirley, I’m not sure what you’re updating, but you’re roughly saying what I said.

    And Ardis and John, thanks!

  6. A Happy Hubby says:

    Just to be clear, there are no hits on the database for “Kirtland Safety Society Anti-Banking Company” – right?

  7. Great write-up, Sam. As a practicing tax lawyer, I’m just curious about your assertion that the Church “wouldn’t work” with a firm like Mossack Fonseca? (Please note that I don’t want the Church to have and am not trying to gin up a case that it did). We occasionally co-counsel with Panamanian firms and the clients usually don’t care which or how. My (limited) dealings with Kirton & McConkie lead me to believe that they would associate foreign counsel as much or as often as needed on a standard business level. Is there something particularly notorious about this firm? Thanks.

  8. dclorenzen, thanks!

    Basically, I don’t see any reason they would have used MF, and MF attorneys have public ally said they didn’t look for US clients–they focused largely on Europe and Latin America. so the church independently finding and using them seems like a stretch to me. (By contrast, if the church has entities in the Caymans—and I have no idea if it does—I assume it used Walkers as local counsel.)

  9. That is, until this leak, I’d say MF was the opposite of notorious.

  10. OK, the part about MF avoiding US clients makes sense. I just wanted to point out the pathway that many US clients are introduced to foreign counsel through supervision by their existing attorneys, so the church wouldn’t need to independently find them.

  11. Shouldn’t a church lead in a direction that benefits the most people? Doesn’t avoiding taxes go against that? Should the church use slave labor where it can because everyone is doing it? Is there something, anything the church could do to change your mind Sam? I know you think it is fine that the church doesn’t submit to an independent audit, but doesn’t this maybe change your attitude? Might there be more? If you don’t think so, how do you know? Given the dubious bail-out of beneficial life a few years ago, and the recent disclosure, don’t you think that there should be more disclosure? Incidentally, do you receive anything of value from the church or any entity in exchange for work that you perform that would be considered promoting the church? Were you paid by anyone to take the position you did in this article?

  12. Flabbergasted:

    Don’t you wonder why your church doesn’t deem you worthy to see its finances? Doesn’t it bother you that church entities are on the Panama list? Or does your cognitive dissonance machine instantaneously provide the justification?

  13. Exiled, I’m more than happy to engage with you on this topic, but you’re going to have to do a little work, too. First, you’re going to have to convince me that you’ve read the OP; your slew of semi-rhetorical questions don’t demonstrate that you have.

    And then you need to enter the discussion as an adult. Assume the people you’re engaging with are smart and well-intentioned. And be sincere.

    Frankly, your comments look like you’re drive-by trolling. And I find trolling dull, frankly, and I don’t have time to engage with it. So I’ll leave your comments, and I’m happy to talk to you here about the Panama Papers and the church’s place in those (which, again, if you’d read the OP, you’d know that the church doesn’t appear to have any entities that appeared in the Panama Papers—what you actually mean is the fact that the church has an indirect subsidiary in the BVIs).

  14. Not well read on the Panama papers issue at all, but I do want to say that “Deseret” is also heavily used in Kingston (Order) businesses and FLDS businesses as well. Both have multi-million dollar businesses. I believe the name “Bonneville” has been linked to some FLDS holdings. The Kingston group owns Deseret Tactical Arms (as one example) and is rumored to be selling weapons to Russian Military. I bring that up, not to sound nuts, but because this group does some serious $$ dealings with serious people and it rarely hits anyone’s radar.

  15. Thanks Sam for a good summary.
    And thanks Lindsay for pointing out that even though Deseret is definitely a Mormon word, it is not used only by the LDS church but other branches of Mormonism use it too.

  16. Lindsay,
    Is it really Deseret Tactical Arms, not Desert Tactical Arms? Either way, I don’t doubt there are companies owned by other Mormon groups with Deseret in their name.

  17. Yes Niklas,

    I apologize. It is Desert Tactical Arms. Deseret is a branch in some of their mining companies.

  18. Also, I just confirmed. FLDS used to own a gas company called Deseret. They shut down some of their stations, but it is likely they have renamed them under something else. Many of their business are hard to track because they name them things like Phaze Concrete (multi-million dollar company). Phaze is a loose acronym for “Priesthood and Zion Eternally,” but not easily identifiable.

    And this is just FLDS. Between Lyle and Warren Jeffs, there are so many hidden companies. If you look at the Nielsen/Naylor group, they also have multi-million dollar holdings. It’s important for many of the leaders to keep their money elsewhere, not only for legal reasons but so it’s not traceable by other members of the church. Since many of them live in abject poverty, the appearance of wealth is frowned upon.

    Another place where Deseret is used is in investment companies and real estate holdings. This is true for several groups.

  19. Thank you Sam for helping us through this. People should actually thank the church for seeking to manage their hidden wealth in a responsible manner.

  20. And people said your summary post about the Panama Papers issue didn’t belong on a Mormon blog! Guess it was a prompting :)

  21. MH, ha!

  22. John Mansfield says:

    Ah, wealth. When it isn’t immodestly flaunted, it’s hidden where we can’t estimate it.

  23. Im from Panama, There are hundreds of thousands of these shell companies being made every year. They almot run out of creative names for them and they have names like SUPER MAN INC. 123456 inc. WHATEVER ENTERPRISES etc. So it is not that surprising that they just look for other company names in a registry and slightly modify them

  24. Thanks, Ardis. When I wrote this, I was completely convinced that Bonneville was unrelated to the church, but I suspected that Deseret was. But yesterday I was helping a reporter at a New York newspaper run something down, and the address for the shell company we were looking at was close enough to understand, but significantly misspelled anyway. With 11.5 million documents, I suspect there was OCRing or exhausted interning in putting the names together. Which is to say, it wouldn’t shock me to find out that “Deseret” was actually “Desert.”

    Also, as others have pointed out, while “Deseret” is a Mormon word, it’s not unique to the mainline LDS church.

    The great thing about the Panama Papers is that they give us a ton of really interesting information and, more valuably, they’ve sparked a public discussion about tax havens. The downside is, the ICIJ hasn’t given us unfettered access to its documents (which, let me emphasize, is laudable and understandable, but also a little frustrating). So it’s worth using a little humility as we figure out the relevance of the information we have.