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Patagonia founder to save on taxes with transfer of company

When Patagonia founder Yvon Chouinard announced this week that he’s transferring 98% of his company, he made clear his distaste for excessive wealth and profit at all cost.

“I was in Forbes magazine listed as a billionaire, which really, really pissed me off,” Chouinard told the New York Times. “I don’t have $1 billion in the bank. I don’t drive Lexuses.”

The 83-year-old may not want to be associated with the excess of the 1%—but Chouinard, who founded the outdoor clothing and gear retailer in 1973, is benefitting from a type of deal more and more billionaires are making.

The transfer of Patagonia is structured so that Chouinard and his family are still in control of the company, which is worth an estimated $3 billion, according to the New York Times. But now, because 98% of it has been transferred to the newly established Holdfast Collective, a nonprofit, they don’t have to pay what Bloomberg estimates could be $700 million in the federal capital gains taxes that would have resulted from a standard sale of the company. And if the Holdfast Collective sells the shares, it also won’t be on the hook for capital gains.

Had Chouinard decided to leave the company to an heir—his two adult children were reportedly not interested in being seen as financial beneficiaries—he would have potentially paid significantly more in estate and gift taxes. The government levies a 40% tax on assets above $12.06 million when they are transferred to heirs. For a $3 billion company, that’s over $1 billion in taxes.

The Chouinard family isn’t making money from the transfer, and the members no longer own the private, for-profit company. But they will able to retain some control over how the business is run.

Donating assets to a nonprofit—specifically a 501(c)(4) like Holdfast Collective—is becoming an increasingly common way for the ultra wealthy to maintain control of their riches after they die. Chouinard’s announcement indicated that Holdfast Collective will use its annual profits toward “fighting the environmental crisis and defending nature”—a cause that is near and dear to his heart.

A 501(c)(4) is similar to the better-known 501(c)(3) nonprofit. But while organizations that are designated a 501(c)(3) can’t lobby or campaign for political purposes, a 501(c)(4) is designed specifically for “social welfare” organizations that can make unlimited political donations. These organizations are exempt from paying taxes.

While it’s not clear exactly what Holdfast Collective will be doing with the Patagonia profits, funding environmental causes would fit the bill for a 501(c)(4). 

“A family that wants their business to continue to operate but for the profits to be used for charitable purposes may take this route,” Barbara Grayson, midwest chair of law firm Willkie Farr & Gallagher’s Private Clients group, said in an email. “It is not just the ability to make political contributions that makes this approach attractive.”

That said, because 501(c)(4) money can be used for political ends, individual donors cannot deduct any contributions from their income tax bill, like they can when donating to a 501(c)(3). So the family didn’t personally get a tax write-off for the transfer.

The remaining 2% of Patagonia shares was moved to the Patagonia Purpose Trust, which is the voting stock in the company. In the announcement, the company says the trust exists “to create a more permanent legal structure to enshrine Patagonia’s purpose and values.” The trust will be overseen by members of the Chouinard family and their advisers.

Bloomberg estimates the family will owe $17.5 million in gift taxes for the shares donated to the trust. Patagonia did not immediately respond to Fortune‘s request for comment.

Estate planning and the ultra rich

Chouinard is far from the only ultra-high net worth individual to use such a tax-planning tactic. ProPublica and the New York Times recently detailed how Chicago billionaire Barre Seid, a manufacturing mogul, donated his company to a conservative 501(c)(4) last year. 

The nonprofit then sold Seid’s business for over $1.6 billion—without Seid paying a penny in capital gains taxes on the transaction.

The profit from the sale will help fund conservative causes important to Seid for years to come—and was arranged via “an unusual series of transactions that appear to have avoided tax liabilities,” according to the Times.

While Seid’s political interests include funding climate change denialism, according to the reports, Chouinard’s are the exact opposite. According to Patagonia’s announcement, Earth is now the company’s “only shareholder.” And the Holdfast Collective has no plans to immediately sell Patagonia.

Chouinard’s family members will elect and oversee the company’s board of directors via the Trust, and will “guide” the Holdfast Collective’s charitable endeavors, meaning they will continue to have a say in how the profits are directed. Specifically, the announcement said the Trust will ensure “there is never deviation from the intent of the founder.”

The Holdfast Collective “will use every dollar received from Patagonia to protect nature and biodiversity, support thriving communities and fight the environmental crisis,” per the announcement. Profits not reinvested into the company each year will be distributed to the Holdfast Collective toward these causes. Patagonia estimates this will amount to around $100 million annually.

Even before this week’s announcement, Patagonia operated as a B Corp, meaning it is a social enterprise that creates value for non-shareholders, such as the environment. It donated—and says it will continue to donate—1% of its total sales each year to grassroots activists.

“Hopefully this will influence a new form of capitalism that doesn’t end up with a few rich people and a bunch of poor people,” Chouinard told the Times. “We are going to give away the maximum amount of money to people who are actively working on saving this planet.”

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Wall Street hit with $2 billion in fines over employees using WhatsApp and other unauthorized messaging apps

U.S. regulators reached settlements with a dozen banks in a sprawling probe into how global financial firms failed to monitor employees’ communications on unauthorized messaging apps, bringing total penalties in the matter to more than $2 billion. 

The Securities and Exchange Commission announced $1.1 billion in fines and the Commodity Futures Trading Commission disclosed $710 million in penalties in separate statements Tuesday. Those levies — against firms including Bank of America Corp., Citigroup Inc. and Goldman Sachs Group Inc. — combined with JPMorgan Chase & Co.’s $200 million in fines from December, bring the total to $2.01 billion, making them the biggest penalties ever against US banks for record-keeping lapses. 

“Finance, ultimately, depends on trust. By failing to honor their record-keeping and books-and-records obligations, the market participants we have charged today have failed to maintain that trust,” SEC Chair Gary Gensler said in the agency’s statement. “As technology changes, it’s even more important that registrants appropriately conduct their communications about business matters within only official channels, and they must maintain and preserve those communications.”

Tuesday’s announcements cap months of discussions between regulators and the banks. Morgan Stanley said in July it was nearing a settlement that would see it pay a $200 million fine, with other major banks also disclosed setting aside similar figures as part of their second-quarter results without specifying the reason.

JPMorgan had been the only bank until now to reach a settlement with the regulators, and was the first to report the fines, in December. Even managing directors and other senior supervisors at the largest US bank had skirted regulatory scrutiny by using services such as WhatsApp or personal email addresses for work-related communication, regulators said at the time.

Finance firms are required to scrupulously monitor communications involving their business to head off improper conduct. That system, already challenged by the proliferation of mobile-messaging apps, was strained further as firms sent workers home shortly after the start of the Covid-19 outbreak.

In the SEC probe, eight firms agreed to penalties of $125 million each: Barclays Plc, Bank of America, Citigroup, Credit Suisse Group AG, Deutsche Bank AG, Goldman Sachs, Morgan Stanley and UBS Group AG. Jefferies Financial Group Inc. and Nomura Holdings Inc. agreed to pay $50 million apiece, and Cantor Fitzgerald LP agreed to pay $10 million.

Bank of America had the biggest CFTC penalty, at $100 million, followed by Barclays, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, Morgan Stanley and UBS at $75 million each. Nomura was fined $50 million, Jefferies $30 million and Cantor Fitzgerald $6 million.

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Ray Dalio says the U.K.’s policies ‘suggest incompetence’ and warns other governments not to make the same mistakes

Ray Dalio added his name to a growing list of critics of the U.K.’s new spending plan, unveiled last week by Prime Minister Liz Truss and Chancellor of the Exchequer Kwasi Kwarteng.

The billionaire investor—who founded what is now the world’s largest hedge fund, Bridgewater Associates, in 1975—argued the plan’s aggressive tax cuts will raise the U.K. debts to an unsustainable level and cripple the pound.

“Investors and policymakers: Heed the lesson of the UK’s fiscal blunder,” Dalio wrote in a Tuesday tweet. “The panic selling you are now seeing that is leading to the plunge of UK bonds, currency, and financial assets is due to the recognition that the big supply of debt that will have to be sold by the government is much too much for the demand.”

On Monday, in response to Truss’ new spending plan, the U.K.’s bond market experienced the largest one-day sell-off in its history, pushing the total losses in the country’s stock and bond markets since Truss’ appointment as prime minister on Sept. 5 to over $500 billion. Meanwhile, the pound sank to a record low of $1.05 against the U.S. dollar on Monday morning, and although it has since risen to $1.07, the currency remains near a 40-year low vs. the dollar. 

After the new Truss spending plan was announced, the U.K. Debt Management Office said that it will raise its debt issuance by 72.4 billion pounds for the current fiscal year to 234.1 billion pounds.

The new spending plan will also push the U.K.’s debt to GDP ratio to around 101%, the highest level of debt the U.K. has held since 1962, according to Deutsche Bank.

Deutsche Bank, UK Office of Debt Management

In Ray Dalio’s view, this rapid increase in debt, coupled with the lack of demand for the pound on the global stage, is a recipe for disaster.

“That makes people want to get out of the debt and currency. I can’t understand how those who were behind this move didn’t understand that. It suggests incompetence,” Dalio said. “Mechanistically, the U.K. government is operating like the government of an emerging country, it is producing too much debt in a currency that there is not a big world demand for.”

The investor went on to argue that this should be a teaching moment for governments around the world to not increase their debts to unsustainable levels.

“I hope, but doubt, that other policymakers who are doing similar things…will recognize that they are risking a similar outcome—and that investors will see this too,” he said.

Analysts are also worried that the U.K.’s new spending plan, which was designed to spur economic growth and help alleviate the effects of high energy prices in the short term, could end up exacerbating inflation in the U.K. overall. And consumer prices already jumped 9.9% from a year ago in August.

“The government is trying to balance support for consumers and businesses with measures that might trigger further inflation, whilst also trying to reinvigorate a stagflationary economy,” Giles Coghlan, chief market analyst at global Forex broker HYCM, told Fortune. “Such a large fiscal package could contribute to elevated prices in the medium to long term that could inflict further damage to an economy and currency that are already on their knees.” 

The potential inflationary impact of the new spending plan has increased calls for the Bank of England (BoE) to dramatically hike interest rates, with some economists even calling for the U.K.’s base interest rate to move from 2.25% to as high as 6% next year

That’s bad news for the U.K.’s homeowners. Monthly mortgage rates will increase immediately for 2 million people on tracker or variable interest rate plans if the BoE follows through with its next rate hike. And another 1.8 million homeowners with fixed-rate deals will also be forced to pay significantly higher rates next year, according to U.K. Finance.

With the U.K. facing more interest rate hikes ahead, rising government debts, a sinking pound, and a European energy crisis, Deutsche Bank’s chief economist, David Folkerts-Landau, said he now believes the country will experience a severe recession that lasts three to four quarters.

“We’re thinking in terms of a recession that will be deep and long,” he told Bloomberg on Tuesday. “It’s the price we have to pay for financial stability and for getting on the right track.”

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Russian billionaire Petr Aven used estate management companies as a personal ‘piggy bank’ British authorities say

Petr Aven does not have a bank account himself, authorities say.  

Instead, he has been using his wife’s account, and that of other estate management firms, as his personal “piggy bank” to support his lifestyle, lawyers for the National Crime Agency (NCA), a British law enforcement agency, told Bloomberg Tuesday.

The Russian oligarch is under investigation for allegedly routing nearly £3.7 million from an Austrian trust into the U.K. hours before Europe imposed sanctions on him following Russia’s invasion of Ukraine in late February. British authorities are now accusing Aven of using the funds of his companies for personal expenses, with no personal bank account of his own.

The Kleptocracy Unit, a new team within the NCA created to monitor sanctioned Russian oligarchs, says it was alerted to the last-minute fund transfer by Monzo Bank and HSBC Holdings. Authorities ultimately froze £1.5 million of the funds linked to the billionaire, Bloomberg reported. 

Aven has said that the transfer was meant to pay for things like security at his Surrey mansion and London property, Bloomberg reported. He is worth $4.98 billion, per the Bloomberg Billionaire Index

In a lower court hearing, a judge relaxed some of the restrictions on Aven’s estate accounts, allowing him to pay for “basic needs.” Lawyers representing Aven’s estate companies suggested that the NCA was looking for criminality in the money transfer by tying it to sanction evasion. Lawyers for Aven’s companies are now challenging the decision to keep his accounts frozen in London’s High Court, Bloomberg reported. 

Adrian Waterman, a lawyer for the companies that manage Aven’s household, told Bloomberg Tuesday that the NCA painted a “muddled factual picture.”

Waterman did not immediately return Fortune’s request for comment. 

Aven, along with his business partner, Mikhail Fridman, made a considerable amount of his wealth from oil-related investments, especially after selling stakes in TNK-BP to the state-owned Rosneft in 2013. The duo also built a banking and financial services empire in Russia. They served on the boards of Alfa-Bank, Russia’s largest private bank and Luxembourg-based investment firm LetterOne, stepping down from their directorial roles days after they were sanctioned.

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