The illegal maneuvers the rich use to get richer

“There are routine categories of illicit acts that wealthy individuals often endeavor out of sheer greed,” Matthew Barhoma, a Los Angeles defense attorney, told Business Insider.

Tax evasion, Barhoma said, is “perhaps the most infamous method.”

In a 2021 report, the United States Treasury Department estimated that the wealthiest 1% of Americans evade a whopping $163 billion in owed taxes every year. That accounts for about 28% of the total US tax gap — the difference between the amount of taxes owed and the amount taxpayers pay on time.

The Treasury Department said in the report that tax evasion tends to be concentrated among the wealthy, in part, because they can tap accountants and other experts “who help shield them from bearing their true income tax liability.”

“Because these individuals know enforcement authorities lack the resources needed to pursue them, the consequences of their underpayments are viewed as minor, and so voluntary compliance rates tend to be lower,” the Treasury Department said.

Barhoma explained that to cut corners on their taxes, high-net-worth individuals often set up offshore accounts in “tax havens” like Switzerland or the Cayman Islands “where financial secrecy is paramount.”

These individuals, he said, “often will use shell companies to obscure the true ownership of assets, making it difficult for tax authorities to trace the money.”

“Such deliberate acts are criminally culpable,” said Barhoma.

Veteran criminal defense attorney Tama Kudman said that in cases of tax fraud, individuals sometimes believe that their schemes are so complex and obscured that they will never be exposed.

“They feel like it’s buried in there so deeply nobody will ever find it because they’ve got so many assets and they’ve set up so many fancy sort of shields, like trusts and corporations, and things that are designed to be asset protectors or tax protectors,” said Kudman.

And a lot of the time, those offenders are right. But, sometimes, they get caught.

“Financial crime can be invisible,” said Barhoma. “It takes forensic accounting and high-level review to detect.”

Defense attorney Mark Ressler, a former federal prosecutor, said he’s defended many wealthy people who have faced allegations of tax evasion through the use of illegal tax shelters.

These tax shelters typically involve “convoluted” financial transactions that are intended to “trick the IRS into believing that the transactions have some kind of economic basis — that the sole purpose of these transactions is not just to shield your money from Uncle Sam,” said Ressler, a partner at the New York City-based firm Kasowitz Benson Torres LLP.

The transactions create bogus losses on paper, which are then used to offset legitimate investment gains, in turn cutting overall tax liability, according to Ressler.

“Many feature interest rate swaps, foreign currency exchanges, shell companies, nominee accounts and variations on these themes,” he said. “The IRS is on point to challenge these efforts, but it’s a game of whack-a-mole, as creative tax shelter engineers continue to spin up new dodges every few years.”

Insider trading is ‘rampant’ among some wealthy circles

Another common unlawful method that some of the rich use to get richer is insider trading, according to the attorneys.

“While it’s the classic financial crime, insider trading is still rampant among those with access to privileged information,” said Barhoma, noting, “Often by nature of gaining wealth, you also gain valuable information regarding the market.”

By trading confidential information about a company’s stock before it’s made public, Barhoma said, the wealthy can make big money while the average investor is left in the dark.

Kudman, who has about 30 years of expertise in cases of financial fraud, said that in wealthy circles material non-public information can casually come up in conversation and be viewed by those engaging in it as “locker room talk.”

“Everybody thinks fraud happens in some moment in the movies, where you hear the music in the background, and it’s like it jumps out at you, but sometimes it happens in the most casual circumstances,” Kudman said.

“They just don’t recognize at the moment that they’re trading on inside information that constitutes a violation of securities fraud,” she said.

Like insider trading, money laundering — a process used to conceal the source of illegally obtained cash — is another illicit tactic used by some wealthy individuals, according to the defense attorneys.

“Some high-net-worth individuals didn’t come by their money legitimately to begin with, so they need to find a way to launder it, and a lot of times, the laundering takes the form of the most legitimate of activities” like the buying of real estate, Ressler explained.

Barhoma added that legitimate businesses, including restaurants and real estate, are typically used to mask the origins of “dirty” funds.

“An example of how easy this can be is when a wealthy art dealer buys expensive paintings with dirty money, sells them at a legitimate auction, and voila, the money is now ‘clean,'” he said.

When the rich, or those pretending to be, prey on the rich

Kudman pointed out that straight-up misrepresentation by high-net-worth individuals — and those pretending to be wealthy — is also prevalent among affluent networks.

“The country club is the single greatest place for a fraudster because they get people either to buy into their penny stocks and then they can do a dump, or they get people to invest in their real estate or companies,” she said.

When you’re in that world, said Kudman, your guard is sometimes down because you assume that those around you are also successful.

“Sometimes the wealthy prey upon the other wealthy people and, most often, that gets litigated in a civil context rather than a criminal context,” she said.

According to the attorneys, financial crime is notably tough to prosecute often because of the sophisticated nature of the schemes, emboldening the individuals behind them to act with impunity.

“Having dealt a lot with people who devise these kinds of fraudulent financial transactions, I will say that many of them are absolutely brilliant,” said Ressler. “And had they devoted their genius and their energy to the legitimate pursuit of wealth, they would have been successful as well.”