While in private business, Mitt Romney used shell companies in two offshore tax havens to help eligible investors avoid paying US taxes, federal and state records show.
Romney gained no personal tax benefit from the legal operations in Bermuda and the Cayman Islands. But aides of the Republican presidential hopeful and former colleagues acknowledged that the tax-friendly jurisdictions helped attract billions of additional investment dollars to Romney's former company, Bain Capital, and thus boosted profits for Romney and his partners.
Romney has based his White House bid, in part, on the skills he learned as cofounder and chief of Bain Capital, one of the nation's most successful private equity groups. His campaign cites his record while governor of Massachusetts of closing state tax loopholes; his involvement with foreign tax havens had not come to light before.
In the Cayman Islands, Romney was listed as a general partner and personally invested in BCIP Associates III Cayman, a private equity fund that is registered at a post office box on Grand Cayman Island and that indirectly buys equity in US companies. The arrangement shields foreign investors from US taxes they would pay for investing directly in US companies.
Romney still retains an investment in the Cayman fund through a trust. Campaign disclosure forms show the investment paid him more than $1 million last year in dividends, interest, and capital gains.
In Bermuda, Romney served as president and sole shareholder for four years of Sankaty High Yield Asset Investors Ltd. It funneled money into Bain Capital's Sankaty family of hedge funds, which invest in bonds and other debt issued by corporations, as well as bank loans.
Like thousands of similar financial entities, Sankaty maintains no office or staff in Bermuda. Its only presence consists of a nameplate at a lawyer's office in downtown Hamilton, capital of the British island territory.
"It's just a mail drop, essentially," said Marc B. Wolpow, who worked with Romney for nine years at Bain Capital and who set up Sankaty Ltd. in October 1997 without ever visiting Bermuda. "There's no one doing any work down there other than lawyers."
Investing through what's known as a blocker corporation in Bermuda protects tax-exempt American institutions, such as pension plans, hospitals, and university endowments, from paying a 35 percent tax on what the Internal Revenue Service calls "unrelated business income" from domestic hedge funds that invest in debt, specialists say.
Kevin Madden, Romney's campaign spokesman, said there was nothing improper about the Bermuda arrangement or in Romney's investment in the Cayman fund. In neither case, Madden said, did Romney gain the ability to defer or avoid paying US taxes.
"I would disagree that these could be described as tax loopholes," he said. "These are perfectly normal and perfectly legal arrangements that American companies put together to be successful in the market."
Romney first purchased a 3.25 percent share of the Cayman fund and was listed as a "general partner (passive)" before his retirement from Bain Capital in late 2001, records show. He put his financial assets into a blind trust in January 2003, when he took office as governor of Massachusetts.
Brad Malt, who controls Romney's financial trust, said Bain Capital organized the Cayman fund to attract money from foreign institutional investors.
"This is not Mitt trying to do something strange," he said. "This is Bain trying to raise some number of billions from investors around the world."
The privately held Cayman fund does not disclose its total investment pool. But Securities and Exchange Commission records show it has invested through a Delaware partnership in a California-based network of healthcare centers, a Texas real estate group, a New Jersey phosphate manufacturer, and numerous other companies.
Romney is the wealthiest candidate running for president, with a personal fortune of as much as $250 million, according to financial disclosure forms he filed in August. His financial trust retains investments in at least 32 Bain and Sankaty equity, hedge, and debt funds, among other assets, the documents disclosed.
Under his retirement agreement, Romney retains a share of the profits at Bain Capital, as well as the right to make new investments in Bain funds through his trust, until February 2009.
Malt said he repeatedly had increased Romney's stake in the Cayman fund since 2003. He said he was unaware of the specific figures, but added that he knew he "wrote a lot of checks" and that it pays a return of 20 percent to 30 percent a year.