IRS Targeting Undeclared Accounts in India for Tax Fraud

Posted on February 22, 2011, 6:16 pm by Asher Rubinstein, Esq.

IRS Targeting Undeclared Accounts in India for Tax Fraud
by Asher Rubinstein, Esq.

In 2009, U.S. prosecutors achieved a staggering victory against UBS, forcing the largest Swiss bank to settle criminal and civil charges that it aided and abetted tax fraud by assisting Americans to hide funds from U.S. taxation.  In a stunning breach of hitherto ironclad Swiss banking secrecy, UBS was also compelled to disclose to the IRS the identities of thousands of Americans with formerly “secret” accounts.  The IRS is now targeting other banks in jurisdictions beyond Switzerland.  Bank accounts in India appear to be one of the next targets.  People with undeclared accounts in India should take action in the face of the IRS crackdown on offshore accounts that are not tax compliant.

The IRS appears to be moving past UBS and targeting other banks, including HSBC which has a sizable presence in India.  Since the summer of 2010, HSBC has been the target of a criminal tax fraud investigation by the U.S. Department of Justice (DOJ), for facilitating non-compliant offshore accounts.  In the summer of 2010, DOJ sent letters to HSBC foreign account holders, advising them that they are the subjects of criminal investigations relating to unreported accounts in India and Singapore.  DOJ has also prosecuted a Virginia surgeon and two Miami Beach real estate developers for undeclared foreign accounts with HSBC.

There are also reports that HSBC is implicated in the recent criminal prosecution of Vaibhav Dahake, an Indian-American with undeclared accounts in India and the British Virgin Islands.  While the criminal indictment against Mr. Dahake does not mention HSBC by name, it alleges that an “unidentified bank” operated a division called “NRI Services” which specifically marketed foreign banking services to Americans of Indian decent.  According to the allegations in the indictment, the bank advised that accounts be opened in India because of higher interest rates, no requirement of U.S. tax forms or social security numbers, and no taxation in India.  Interestingly, the indictment details transactions with a total value of less than $200,000. This suggests that the U.S. government is sending a message that all noncompliant foreign accounts, large and small alike, are vulnerable to investigation and prosecution.

It was the substantial U.S. presence of UBS, and now HSBC, that made such banks vulnerable to U.S. prosecution.  With U.S. banking licenses, multiple branches within the U.S., thousands of employees in the U.S., and billions of dollars of assets in the U.S., these banks are clearly within the jurisdiction of a U.S. court and susceptible to an adverse court judgment or order.

As alleged in the indictment against Vaibhav Dahake, HSBC is reported to have specifically targeted Indian-American clients and offered offshore banking services in India and Singapore. The HSBC-India connection represents a particular tangent of offshore banking that will surely warrant scrutiny.  Whereas UBS advised American clients that their accounts may be subject to exposure to the IRS, and therefore suggested pre-emptive disclosure (i.e., voluntarily disclosing to the IRS and correcting a non-compliant foreign account prior to the IRS taking action), Americans with accounts at HSBC in India received letters from DOJ in 2010, making it clear that DOJ already had their names. In such a case, pre-emptive disclosure is impossible; the IRS will reject a voluntary disclosure if the taxpayer is already under investigation or if the IRS already has the taxpayer’s name (regardless of the source, e.g., audit, whistle blower, investigation, etc.).

The IRS has opened or will soon open field offices in Panama, Australia and China. Tax Information Exchange Agreements have been signed by all the former “tax havens”, including Liechtenstein and Monaco.  While the IRS is intensifying its presence and its available tools around the world, there are other indications that the IRS is concentrating on India more particularly.

Another way for the IRS to obtain a taxpayer’s offshore banking data is via an internal bank employee stealing confidential data and offering it to a governmental tax authority in return for money.  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, including, apparently, India.

The stolen LGT bank data purchased by the German government has now formed the basis for Indian authorities to launch prosecutions of Indian citizens who had undeclared accounts outside of India.  This campaign by Indian authorities against so-called “black money” includes monies hidden in Liechtenstein from the Indian tax authorities, even in the absence of the funds having criminal sources or involvement in money laundering.  The issue is now before the Supreme Court of India, which has heard arguments about whether to make public the names of Indian citizens accused of having undisclosed foreign accounts.

In 2010, India signed a tax information exchange treaty with Switzerland, and India is in the process of negotiating tax treaties with 65 countries, including “tax havens” such as the Cayman Islands, Jersey, Monaco, the British Virgin Islands and the Isle of Man.  While there is currently no tax treaty between India and Liechtenstein, Liechtenstein has shown its new transparency by promulgating multiple tax treaties with other countries, including the U.S., and a future treaty with India is likely.  But even in the absence of such a treaty, India already has names, thanks to the LGT affair. The LGT information is almost certainly in the possession of the IRS as well.

Clearly, against this background of the erosion of banking secrecy and cooperation amongst governments in sharing banking data, taxpayers with undeclared accounts in India must consider bringing such accounts into compliance.

In early February 2011, the IRS announced the Offshore Voluntary Disclosure Initiative (OVDI), which closely mirrors the 2009 Offshore Voluntary Disclosure Program (OVDP), with a few refinements.  The new penalties are 25%, greater than the 20% penalty under the prior OVDP, yet less than the 50% penalty that the IRS has been imposing in recent criminal tax fraud prosecutions.

The new OVDI presents an opportunity for taxpayers with foreign accounts, in India and elsewhere, who did not come forward under the former OVDP, but still want to avoid criminal prosecution and bring their foreign accounts into compliance.  It is clear that the IRS is moving past UBS and Switzerland to other banks in other countries, and India appears to be a particular focus.  Taxpayers must 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.

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