Also under scrutiny is whether certain charities invested with Mr. Madoff had improperly allowed their donors to shift money offshore, and whether foreign banks had withheld American taxes on Madoff accounts, as required by the Internal Revenue Service, according to this person, who was given anonymity because of the delicate nature of the investigation.
Mr. Madoff was arrested Dec. 11 at his New York apartment and charged with securities fraud. The authorities have characterized the fraud as a worldwide Ponzi scheme — perhaps the largest ever.
On Tuesday, the trustee in charge of Mr. Madoff’s investment firm won court approval to use $28.1 million from the firm’s accounts to pay for its liquidation costs.
While the inquiries into the role of offshore funds in the scheme are at an early stage, it is hardly surprising that such funds are coming under scrutiny.
Offshore entities played key roles at Bayou Management, a Connecticut hedge fund that collapsed in scandal in 2005, as well as at Enron, which used nearly 900 offshore entities, mostly in the Cayman Islands, to conceal bogus trades and accounting fraud.
“You’re going to be trying to identify all the vehicles for the fraud, and drawing on past experience, the use of offshore accounts and entities would certainly be vehicles,” said David N. Kelley, a former federal prosecutor in Manhattan who is now a partner at the law firm Cahill, Gordon & Reindel.
Nearly all hedge funds, including funds of funds, operate affiliates and partnerships offshore. Such havens offer low tax rates and light regulation. Offshore havens also help fund managers to defer or avoid American taxes on their personal profits by channeling the earnings through offshore affiliates.
Fred L. Abrams, a lawyer and offshore fraud specialist based in New York, said large-scale investment swindles often involved the use of offshore nominees, or agents, with legal power over an investor’s foreign bank accounts. Another feature, he said, was the use of multiple jurisdictions to carry out trades. “With this, it’s possible to transfer enormous sums of money and perhaps do it under the radar,” he said.
At least a dozen offshore entities were involved with Mr. Madoff’s firm, according to several regulatory filings. They include funds linked to the Fairfield Greenwich Group, a fund of funds that lost $7.4 billion of its investors’ money after entrusting it to Mr. Madoff.
Other offshore entities involved are affiliated with Tremont Group Holdings, which had $3.3 billion invested, and several Swiss banks, including Union Bancaire Privée and Banc Benedict Hentsch & Cie.
Fairfield Greenwich operates affiliates in offshore havens like the Cayman Islands. At another affiliate, in Bermuda, Amit Vijayvergiya, Fairfield Greenwich’s chief risk officer, managed flows into Sentry, its largest fund that was a main recipient of money that had been invested with Mr. Madoff. It also runs Fairfield Sentry in Ireland, one of Europe’s largest offshore havens, and a joint venture in Singapore, a leading Asian haven, called Lion Fairfield Capital Management.
A spokesman for Fairfield Greenwich declined to comment about the offshore operations.