As a U.S. senator, Claire McCaskill supports cracking down on offshore tax havens.
But the Missouri Democrat's husband has invested $1 million in a hedge fund tied to the Cayman Islands, one of the world's most notorious tax havens.
Joseph Shepard's investment in Matrix Capital Management has earned him between $230,000 and $2.1 million in income since he first invested in 2013, according to McCaskill's financial disclosure forms. Such forms only show a range of income.
If Shepard declares his investment on his taxes, he doesn't directly enjoy much of a tax haven. The earnings would be subject to capital gains tax back in the U.S.
The capital gains rate, however, is lower than the income tax most working Americans have to pay.
Shepard declined to comment for this article. He and McCaskill file their taxes separately, and while she has released her tax information publicly in the past, Shepard never has.
McCaskill's campaign said Shepard pays all taxes on his investment in the hedge fund, which is properly disclosed by the senator.
The campaign declined a request from The Kansas City Star for McCaskill to release her latest tax returns and those of her husband for this article.
The senator plans to release her tax returns later this year, according to her campaign. She will not release her husband's tax return.
The senator has no involvement in her husband's investments, and doesn't consider his business interests when doing her job in the Senate, said Meira Bernstein, a McCaskill campaign spokeswoman.
"Claire does not make decisions on public policy based on what's best for her husband; she makes decisions based on what is best for the people of Missouri," Bernstein said in a statement. "That's why she voted against the recent tax bill that primarily benefited large corporations and the wealthy. And it's why she supported the Stop Tax Haven Abuse Act."
McCaskill was a co-sponsor of the 2009 Stop Tax Haven Abuse Act. The unsuccessful bill targeted the Cayman Islands among several countries identified as tax havens "engaged in economic warfare against the United States, and honest, hardworking Americans."
The legislation contained a number of provisions that, if enacted into law, would have affected hedge funds located in the Caymans but managed and controlled from the United States.
One provision would treat such Cayman hedge funds as U.S. corporations subject to U.S. tax.
The bill also proposed making it easier for U.S. law enforcement to show that someone in the U.S. controlled a Cayman fund, and included language to make it easier for the U.S. to take action against Cayman funds for "impeding U.S. tax enforcement," by refusing to provide information on investors, for example.
Secretive hedge funds seek outsized profits and are open only to the ultra-wealthy, who are considered sophisticated investors and can withstand big losses. These funds do not have to disclose their investors to regulators.
Shepard invested in Matrix Capital Management in 2013, at the same time as a number of other clients of his financial management firm. Shepard's investment was his alone and not a pooled investment, McCaskill's campaign said. Neither the campaign nor Shepard would identify the firm or any of the other investors.
McCaskill's financial disclosure forms, which she is required to file annually with the Senate ethics committee, identify Matrix Capital Management's location as Waltham, Massachusetts. But that U.S.-based fund feeds into a "master fund" located in the Caymans, which makes the actual investments.
The structure — in which a U.S. "feeder" fund funnels money into a "master" fund in the Caymans — is legal and very common for hedge funds. President Donald Trump has investments in hedge funds that have similar structures, according to a personal financial disclosure form filed in 2015 as he campaigned for the presidency.
The arrangement benefits the hedge fund operator more than the individual investors such as McCaskill's husband. The Cayman Islands offer lower taxes and more of a hands-off regulatory approach. It allows the fund to attract investors from countries with a wide range of varying tax treatment. And it shields foreign investors from having to pay U.S. taxes.
U.S. investors such as Shepard also can benefit from a Cayman fund's lower cost structure by virtue of the fact that managers of the fund pay less in tax and fees and presumably lower the costs for all the investors.
"I am sure (Shepard) believed he is operating completely within the law," said Jack Blum, a prominent white-collar lawyer in Washington. "That’s the way U.S. people invest in these hedge funds. The problem is when they go offshore, there is no regulation ... In effect, they are getting a return because nobody has to abide by rules."
The reason why U.S. investors use Cayman-based hedge funds is primarily because the funds themselves decided to locate there — in part because of the tradition of financial secrecy in the Caymans, said Matt Gardner, senior fellow at the Institute on Taxation and Economic Policy in Washington.
"Historically it’s been a jurisdiction where very few questions are asked and scrutiny of the details of financial transactions has been lower in the Caymans," Gardner said.
There's also a burgeoning industry offering a diverse array of supporting services for hedge funds in the Caymans, he said.
"It’s their Vegas, basically," Gardner said.
The intersection of U.S. politics and the Cayman Islands is a rough one. Former Massachusetts Republican Gov. Mitt Romney's 2012 presidential bid was hurt in part because of belated revelations that a sizable chunk of his $250 million fortune was tied up in Cayman Islands-based investment funds.
At the time, Romney and officials from Bain Capital, where Romney had been a partner, made the same argument as McCaskill, that hedge funds like Matrix set up in the Cayman Islands make it easier to attract foreign investors and that there are no special privileges or benefits for U.S. investors.
But many foreigners are from high-tax countries and are seeking to shield income, while American investors get the opportunity for complex tax avoidance and lower cost investments.
Tax havens have been in the news of late, with the 2016 release of the Panama Papers and the 2017 publication of the Paradise Papers, both collaborative reporting projects showing how the ultra-wealthy and fraudsters alike turn to offshore jurisdictions to protect their money and often to hide it.
Bloomberg Markets Magazine recognized Matrix Capital Management as the second best-performing hedge fund on its list of 100 top-performing hedge funds in 2013, the year Shepard invested. The fund's total assets grew from $682 million to $2.3 billion in the four-years between 2013 and the end of 2016.
Matrix Capital Management did not respond to requests for comment.