UM Foundation invests tens of millions in offshore tax havens

The Paradise Papers leak exposes how university foundations across the country hide money in the Cayman Islands and Bermuda

The University of Montana Foundation has invested more than $30 million in offshore hedge funds and private equity firms in Caribbean and Central American tax havens, including an investment in a multibillion-dollar private equity fund supporting oil exploration and deep-sea drilling, according to an investigation into leaked documents and public tax records.

The investigation by the Kaimin is in collaboration with the International Consortium of Investigative Journalists, which worked with more than 100 media organizations to dig into documents leaked from two offshore law firms. The leak, known as the Paradise Papers, was originally received by German newspaper Süddeutsche Zeitung.

The Paradise Papers leak contained 13.4 million files and revealed the offshore financial affairs of many of the world’s largest corporations and richest individuals. The leak shed light on the ways in which taxes are avoided and investments hidden from public scrutiny.

The offshore leak shows the University of Montana Foundation made a $5 million commitment to a Guernsey-based private equity fund known as Coller International Partners V around 2007. The fund was the largest of its kind, eventually raising $4.8 billion, with investments from more than 200 other public institutions.

The fund in turn invested $1 billion in a joint venture with Royal Dutch Shell, the Anglo-Dutch fossil fuel company. One of the recipients of that joint venture was Xtreme Coil, an oil drilling company focused on reaching “hydrocarbons in deeper horizons,” according to one of its press releases. According to public tax documents, The UM Foundation sold its share in the fund in 2012.

In addition to the Paradise Papers leak, investment portfolios from 2014 obtained by the Kaimin show the UM Foundation held investments in Gazprom, a Russian oil company with close ties to the Kremlin; and Petrobras, a Brazilian petrochemical company whose corruption scandal brought down Dilma Rousseff and Luiz Inácio Lula da Silva, the two previous presidents of that country. A list of the foundation’s top 50 stock holdings include six major fossil fuel companies, as well as tobacco giants Philip Morris International and Imperial Tobacco Group.

The UM Foundation declined to comment on this story, as the Board of Trustees chair, Mary Olson, was out of the country, but Vice Chair Suzanne Peterson said the executives would discuss a response at their May 25 meeting. Foundation CEO Cindy Williams and UM President Seth Bodnar both declined to respond until after the May 25 meeting through Paula Short, UM’s communications director.

More than 100 other universities and university-associated foundations appear in the Paradise Papers leak, showing that offshore investing is far from an isolated incident at UM. While the offshore investing by the UM Foundation appears to be completely legal, the practices of offshore investing have been criticized by the public and scrutinized by the federal government.

The law firm at the center of the Paradise Papers leak, Bermuda-based Appleby, has been repeatedly criticised by inspectors for “failures in the way it applies regulations designed to thwart money laundering and terrorist financing,” according to reporting by the Guardian, which collaborated on the leak investigation.

Jane Gravelle, a senior specialist in economic policy for the Congressional Research Service at the Library of Congress, said the only reason anyone would invest through offshore companies is to hide their money from tax collectors or public scrutiny.

“It’s just a way to avoid taxes,” Gravelle said. “There’s nothing in the Cayman Islands, for example, except a bunch of tourists and a couple of buildings with filing cabinets. Some of these offshore companies are nothing more than a file folder.”

The Internal Revenue Service cracked down in 2009 on investors in offshore hedge funds and private equity firms in an attempt to uncover undisclosed investments that dodged taxes.

According to a report by the Wall Street Journal during the 2009 IRS crackdown, hedge-fund investments in tax havens like the Cayman Islands and Bermuda represent more than two-thirds of the roughly $1.3 trillion hedge-fund industry, with around $250 billion of that coming from tax-exempt foundations, endowments and pension funds.

Investments in hedge funds, private equity, venture capital, and “real assets” such as real estate and oil, are considered to be “alternative investments” — investments outside of the more traditional mixture of stocks and bonds.

A Congressional Research Service study, written in part by Gravelle, examined university foundations and the tax policies affecting them. The study, published on May 4, found university foundations were increasingly moving toward these alternative investments. From 2002 to 2017, the average percentage of university portfolios invested in alternatives more than doubled from 20 percent to 52 percent, according to the study.

Thomas Gilbert, a finance and economics professor at the University of Washington, said university foundations across the country have started taking huge risks with their endowments, such as excessive investing in these “alternatives.”

“Stocks are risky, but not as risky as these alternatives. But more importantly, these alternatives are illiquid, which means the money is totally locked up. The foundation can’t call up a hedge fund manager and say, ‘We need the money,’” Gilbert said. “This is a very dangerous game because there is going to be another financial crash at some point and the university will need the cash and it won’t be there.”

University foundations have reasoned that taking these high risks, rather than a traditional mix of stocks and bonds, will result in high returns, but Gilbert said that the high fees and types of hedge funds available to small endowments like UM make them a bad choice.

“These hedge fund managers make a lot of money on the backs of these foundations, but they’ve actually performed worse than simple index funds like the S&P 500 by 6 or 7 percent since the 2008 crash,” he said. “When you only have $180 million dollars like Montana, but paying $4 million or more in fees to the money managers building beach houses in Huntington Beach … as a donor or taxpayer paying for this university, I would be appalled.”

Hedge fund managers have convinced foundations to not disclose the amount they pay in fees because if the information was spread to the public, Gilbert contends, there would be outcries against the wasteful spending.

“You can see the incentive hedge fund managers have had to push for this, but that doesn’t make it right,” he said. “If those fees are disclosed, and it hits the newspapers, people will be appalled and say, ‘Why are we doing this?”

Investing in offshore private equity and hedge funds doesn’t necessarily lead to a lower tax bill for the foundation, either. Tax-exempt nonprofits typically pay no tax on common investments like stock holdings, but investments in things like hedge funds, which are often structured as partnerships or use borrowed funds to invest, are subject to the Unrelated Business Income Tax.

The UBIT essentially says that those types of investments are so far from the the nonprofit’s mission, and potentially puts them in competition with private businesses, that it must pay taxes on them. But crafty investors and lawyers have found ways around the UBIT.

By setting up shell corporations in offshore jurisdictions like the Cayman Islands with little to no taxes, foundations and any other investors can hide their investments from public or government scrutiny. The nonprofit invests in the stock of the shell corporation it creates, which is tax free, and the shell corporation, known as a blocker, in turn funnels that money to hedge funds and private equity firms.

The Paradise Papers leak showed scores of university foundations in the U.S. and U.K., including University of California schools, as well as Oxford and Cambridge, were using blocker corporations to avoid taxes and shield their investments from prying eyes. But this seemingly simple method of dodging taxes is considered legal. While only a small percentage of the UM Foundation’s offshore investments were contained in the leak, there is currently no evidence that the UM Foundation is using a blocker corporation to avoid the UBIT.

In March, the UM Foundation renewed its commitment to keeping much of its financial records out of the public eye when the Board of Regents signed off on a new contract between the foundation and the university.

The agreement included new language allowing the foundation to block public records requests directed at UM officials for up to 20 days in order to seek a protective order. The language is potentially broad enough to allow the foundation to block any record requests to UM whether it involves the foundation or not. Because of the foundation’s status as a private nonprofit, it is able to operate in a black box, denying requests for meeting minutes, investment portfolios or donor agreements.

Helena-based attorney Mike Meloy, who as a Montana legislator helped craft the open records laws in the state constitution, said the foundation may be incorrect in claiming that the state’s transparency laws don’t apply, either before or after the new language was added to the operating agreement with the university.

Meloy recently won a case against the Montana University System leaders, granting access to records requested by investigative author Jon Krakauer, though the ruling could be appealed. Krakauer, who wrote the 2015 analysis Missoula: Rape and the Justice System in a College Town, is still pursuing documents about how the university system handled disciplinary actions of a student-athlete accused of raping another student.

Meloy’s problem with the new agreement is that the foundation could be seen as part of UM, a public institution, making the increased levels of secrecy unconstitutional.

“The foundation bills itself as the development arm of the University of Montana, and because it functions in that capacity, to say its records are not open to public disclosure is not only a bad idea from a policy standpoint, it arguably violates the right-to-know in Montana’s constitution,” he said.

The recently approved operating agreement was first reported on by the Missoula Independent and prompted a scathing editorial from the Missoulian.

Meloy said donor privacy shouldn’t allow the foundation to completely evade transparency laws.

“I think there is a reasonable expectation of privacy for donors who want to keep their names private, but that doesn’t translate into a need to keep all of the financial operations private,” Meloy said.

“I don’t know anything about why they decided to invest outside the country,” he said. “If they had made their records open to the public, they’d be able to explain why they did what they did, but when they don’t make their records available, the public gets suspicious. And I don’t blame them for getting suspicious even though the foundation may have sound reasons for [investing offshore].”

UM’s student government, the Associated Students of the University of Montana, has waged a battle to incorporate student voices into the secretive UM Foundation for nearly three years, with particular interest in advocating for fossil-fuel divestment alongside the student group Reinvest Montana.

Sam Forstag served as the ASUM president during the 2016-2017 school year and fought for the sitting ASUM president to hold a seat on the Foundation’s Board of Trustees. Over the past three years, ASUM passed 12 resolutions supporting either student representation on the foundation, fossil-fuel divestment, or open Board of Trustees meetings.

After about a year of negotiations, which included the threat of a lawsuit by ASUM for what it saw as a right-to-know violation, the foundation agreed to allow the ASUM president the role of student liason to the Board of Trustees. But the agreement fell short of a seat on the board, and only allows the liaison to make comment on student-related issues.

Forstag said one of the reasons he thinks the Foundation was unwilling to allow a seat to a student was its desire to remain outside the domain of transparency laws. If the foundation began allowing more UM related seats on its Board of Trustees, it would be easier to construe it as a public entity in court, and therefore open it up to records requests.

Braden Fitzgerald, who served as ASUM president for the past academic year, was the first student to take advantage of the liaison position. In his comments to the foundation’s executive committee at a January meeting, Fitzgerald asked the board to answer questions about why it has consistently declined divesting from fossil fuels and whether it would consider some less drastic alternatives.

Months later, Fitzgerald received a one page letter from Mary Olson, the Board of Trustees chair.

The letter briefly responded to the four questions. In response to a question about whether the board would consider committing any portion of its portfolio to “sustainable investments,” Olson replied simply:

“No. The Board has a fiduciary responsibility to maximize risk-adjusted return.”

Recently, through the University Planning Committee, UM renewed its commitment to sustainability and the environment as a core tenet of its academic offerings. President Bodnar pushed for sustainability to be part of the UPC’s commitments from the very beginning. But the leaders of UM’s fossil-fuel divestment student group, Reinvest Montana, think UM and the foundation, which has denied repeated calls to pull out of fossil fuels, need to learn how to walk the talk.

“Students come here because it’s supposed to be an environmentally friendly place, and they get here and it’s not that, and they can get turned off,” Bev Sitton, a Reinvest co-coordinator, said. Tess Gallagher Clancy, another co-coordinator agreed.

“You can blame the critics for making these issues public,” she said. “But we believe if we bring these issues to light, that’s the only chance we have at changing anything.”

In April, Gallagher Clancy submitted an op-ed to the Kaimin saying her years of working with the University administration to shift fundraising priorities had been a waste, and that a March meeting with Bodnar had left her feeling “belittled.” She said her mission of fossil-fuel divestment has largely subsided to pushing for any amount of substantive communication with the foundation leadership.

At a May 2 ASUM Senate meeting, the student senators discussed their reactions to the foundation’s letter declining to consider fossil fuel divestment or any similar, but less drastic, alternatives. The letter was the first tangible result of ASUM’s newly granted, but limited, voice in the foundation. Most voiced frustration with the amount of time it took for such a simple response which had no substantive difference from previous communications from the foundation.

“I want to be on the record,” student senator Bailey Durnell said. “The foundation will be embarrassed by this decision in 20 years.”