Offshore Update: Continued Investigation and Prosecution of Foreign Accounts Amidst a New Opportunity for Pre-emptive Disclosure
by Asher Rubinstein, Esq.
The U.S. government continues in its offensive against non-compliant offshore banking, targeting both the U.S. taxpayers who failed to declare foreign accounts, as well as the foreign bankers who provided non-compliant banking services.
Last month, a US taxpayer in San Francisco was indicted for failing to declare his UBS account. Last week, a doctor and medical professor was sentenced by a federal court in New York for failing to declare his account at UBS. Additional, non-UBS banks were also included in both cases.
At the same time, prosecutors are also charging the foreign bankers who facilitated the foreign accounts and provided foreign banking services. Bankers at Wegelin & Co., a private Swiss bank, were indicted in early January. Bankers at Julius Baer were indicted last October.
The indictments detail tactics such as setting up accounts using code names, sham corporate entities and having foreign relatives as the purported owners of the accounts. The indictments also allege that the bankers told U.S. clients that their accounts were not vulnerable to discovery by the IRS because the banks did not have a U.S. presence such as a U.S. branch office.
In additional to Wegelin and Julius Baer, Credit Suisse, the local Swiss Kantonal banks, as well as banks in Israel, India and Liechtenstein are all under investigation for aiding and abetting tax fraud by US taxpayers. The IRS and Department of Justice (DOJ) are pursuing these banks because of the purported “money trail” that left UBS as UBS prepared to surrender once-”secret” bank data to the U.S. government. According to one recent indictment, UBS bankers suggested only transferring Swiss Francs from UBS to a local Kontonal bank in order to minimize detection.
Tracing noncompliant funds to other banks, in Switzerland and elsewhere in the world, is indicative of the expanding global scrutiny and effectiveness of the investigations.
As legal counsel to many taxpayers with foreign accounts, when we read the news reports of new tax investigations, indictments and prosecutions, we note that the names of some foreign bankers appear again and again. We have been able to observe connections between separate clients who had common foreign bankers. The IRS, of course, is reaching similar conclusions. If the name of a banker appears again and again, that banker comes to be “on the radar” at the IRS and DOJ. If the banker is then criminally charged, the banker is likely to cooperate with prosecutors and divulge bank account information as part of a negotiated settlement. For instance, Renzo Gadola, a former UBS banker in Switzerland was charged with facilitating US tax fraud. He pled guilty in December 2010 and has been cooperating with DOJ prosecutors. He has provided information about U.S. clients and other Swiss bankers who assisted in hiding foreign assets. As part of Gadola’s settlement, he must return to the U.S. annually to further assist DOJ investigations of foreign banking.
Many of our clients who came forward with timely voluntary disclosures were relieved when they later learned that their foreign bankers had been criminally charged. If the clients had delayed in coming forward, and the bankers had shared account information with the government, then the clients would not have been accepted into the voluntary disclosure program and might have faced criminal prosecutions themselves!
At the same time that the government is going on an offensive against non-compliant offshore accounts, it is also offering yet another opportunity to come forward and declare such accounts in return for lower penalties and no criminal prosecution.
In January, 2012, the IRS announced the re-opening of the 2011 Offshore Voluntary Disclosure Initiative (OVDI), which had previously expired in September, 2011. The 2011 OVDI followed a similar 2009 program that likewise encouraged taxpayers to bring their foreign accounts into tax compliance, in return for lower penalties and avoidance of criminal prosecution. The renewal of the OVDI presents another opportunity for taxpayers to bring their foreign accounts into tax compliance. The terms of the program are the same as the OVDI, but the penalties have been increased. Still, the penalties are significantly lower than the penalties that would apply if the IRS discovers the account, and criminal prosecution can also be avoided.
In light of the erosion of foreign banking secrecy, discovery of the account by the IRS is very likely. Notwithstanding promises to its clients of banking secrecy, UBS revealed the names of almost 5,000 U.S. clients to the U.S. government, in return for the U.S. dropping a civil and criminal tax fraud prosecution against UBS. Credit Suisse is facing similar charges and is expected to settle these charges by likewise handing over client names. Negotiations are currently underway between the U.S. and the Swiss for a global settlement that will involve all Swiss banks, including Wegelin, Julius Baer, the Kantonal Banks, and others. It is expected that the settlement will require the Swiss banks to reveal the names of U.S. account holders to the U.S. government. The announcement of the re-opening of the OVDI is well-timed to allow another opportunity for such account holders to pre-emptively disclose their accounts to the IRS before the Swiss do so.
Another threat to bank secrecy comes from bank employees who divulge account details of customers, in contravention of bank policy and local (e.g., Swiss) law. The most recent example is the case of the Central Governor of the Swiss National Bank, Philipp Hildebrand, who last week resigned following allegations of improper currency trades made by his wife. The allegations resulted from information disclosed by an IT employee “whistle blower” at the Swiss National Bank.
Bank employees handing over supposed “secret” banking data is not new. Back in 1999, John Mathewson, the former owner of Guardian Bank and Trust, a defunct Cayman Islands Bank, was charged in the U.S. with money laundering. When Mr. Mathewson was arrested, he gave U.S. investigators bank records that contained information about American depositors at the bank who had evaded U.S. tax obligations. Mathewson gave up the banking data in return for leniency in his criminal sentencing.
In 2008, a renegade employee of LGT Bank in Liechtenstein stole data about client accounts and sold the data to the German intelligence service in return for millions of Euros. With that data, the German government prosecuted many prominent Germans for tax fraud. The German government also shared the data with other governments around the world. In 2009, an employee of HSBC provided bank account data to the French government. In 2010, Germany again purchased banking data, stolen by an employee of a Swiss bank. The DOJ was able to successfully prosecute UBS, and then UBS clients, because of information that had been disclosed by UBS banker Bradley Birkenfeld to the U.S. government.
Thus, there is no bank secrecy. The discovery of a “secret” offshore account can be the result of numerous factors: First, internally at the bank, via whistle blowers, “snitches” and thieves. Second, due to the vigilance of the U.S. government in pursuing foreign banks and bank accounts, demonstrated by IRS/DOJ success against UBS, and current investigations of numerous other banks (including HSBC, Credit Suisse, Wegelin, Julius Baer, Leumi, Hapoalim, Liechtensteinische Landesbank and others).
A third significant blow to foreign banking secrecy is via the newly implemented Foreign Account Tax Compliance Act (FATCA), which imposes new offshore reporting requirements on account owners and on foreign banks. New IRS Form 8938 requires disclosure of foreign financial assets with an aggregate value in excess of $50,000, and applies to offshore assets owned during 2011. Form 8938 will be due, along with Form 1040, by April 15, 2012.
In light of the above challenges to offshore secrecy, clearly anyone with a foreign asset that is still not tax compliant must take immediate measures to bring the asset into tax compliance. As noted, it is widely believed that the renewal of the Offshore Voluntary Disclosure Initiative is purposely timed to incentivize compliance before the next wave of banking data is released to the U.S. government. Whether through additional prosecutions of banks and bankers, or via a settlement with Swiss banks, each outcome will lead to the revelation of the identities of account owners and other banking data to the U.S. government. Once the U.S. government has the identities of the account owners, a pre-emptive disclosure is too late, and all penalties, including criminal prosecution, may apply.
The renewal of the OVDI presents an opportunity for those who still have not brought their offshore assets into compliance. The new penalties are 27.5%, 2.5% greater than the 25% penalty under the 2011 OVDI, yet less than the 50% penalty that the IRS has been imposing in recent criminal tax fraud prosecutions. In addition to lower penalties, a proper, timely voluntary disclosure can still avoid criminal prosecution. As we’ve noted repeatedly, the IRS continues to target foreign accounts. We strongly advise taxpayers to bring non compliant foreign accounts into tax compliance, in order to avoid discovery by the IRS, higher penalties and criminal prosecution. In this new era of international transparency, decreased banking secrecy and stronger enforcement efforts, offshore banking compliance is very highly recommended.