Two-contract international deals. I have one word for them. Don’t.
If you feel you are being led down a complicated multi-contract or multi-company deal or structure path, you should stop, look, think, and get help from someone interested in helping and protecting you, not in creating complications to profit from you or to try to prevent criminal prosecutions.
The below examples should give you a better sense of what I mean. These examples have been modified to make it impossible to identify any person or entity involved.
1. Don’t participate in two-contract international deals to illegally reduce taxes
I once received a call from a Swiss company that wanted to retain our law firm to sue a Russian aviation company for around $1,750,000. The Russian company had allegedly failed to provide $1,750,000 in contracted-for airplane parts. I asked the Swiss company to send us the documents and I said we would then get back to them with our assessment of the case. The documents arrived and they all said $800,000, not $1.75 million.
When I asked about this massive dollar discrepancy, the owner of the Swiss company explained that the written contract said $800,000 for “Russian tax reasons,” but his company actually had an oral contract to pay $1.75 million and that is what it paid. We told him we did not want the case.
Now sure, we might have been able to produce documentation showing our client had actually paid $1.75 million and not the $800,000 set forth in the written contract, but then again, that documentation might have led the Russian authorities to seek to jail my client for tax fraud, and our international litigation lawyers were not interested in having to constantly try to dance around that.
2. Don’t use complicated corporate structures to hide illegality
More recently, we took on a matter for a U.S. company that brought our law firm in to figure out a three-contract international deal it had inherited by purchasing an Italian company. Our lawyers spent many hours figuring out why the deal had been structured in the incredibly complicated way it had been structured. We were especially perplexed as to why Hong Kong AND Isle of Man entities had been formed and then interposed into the deal structure. We eventually concluded that everything in the country where operations would be taking place was illegal and the Isle of Man and Hong Kong entities had been used to try to protect the Italian company and its personnel from being fined or maybe even jailed.
After much research, consultation, and consternation, our client wisely decided to pull the plug in the foreign country in which it was indirectly operating illegally.
All this reminds me of a mid-sized company that came to our law firm about a decade ago because it had around fifty (yes, 50!) different companies around the world and it was tired of spending hundreds of hours and hundreds of thousands of dollars per year keeping them up. It had British Virgin Island companies, Swiss companies, Russian companies, Hong Kong companies. I could go on and on.
But to make a long story short, we reduced their international corporate structure from 50 to 4 companies, without negatively impacting a thing. All we did was greatly reduce the time, money and headaches they had been incurring in handling such a complicated structure. They decided (rightly) to fire the accounting firm and the law firm that had profited from setting up this mess and had so long been profiting from it.
In the first two examples above, I believe that the two companies originally involved knew they were operating illegally and did not care. The third example involved a company that was not operating illegally, but had for years gone along with the accounting and legal advice it was getting because it had nobody who felt confident enough to challenge it. And, to be fair, some of the companies made sense when originally set up, but because of changing business operations, no longer did.
I wish I had some overarching and specific advice for how to avoid allowing your company to stumble down these sorts of pathways, but I don’t. This is a “sense it when you see it” area and so my best advice is to not say yes to anything unless and until you truly understand the reasons behind it.
Simple is almost always the way to go.
Oh, and I do realize that “don’t” is actually two words. Literary license.
