2016: The Offshore Year in Review

Offshore account

The year 2016 was an epic year in the offshore world due to the leaks of confidential offshore financial information known as the “Panama Papers”.  In addition, in 2016, more countries began to report offshore financial information to the IRS under FACTA (the Foreign Account Tax Compliance Act).

Also in 2016, the IRS and U.S. Department of Justice (DOJ) continued to successfully attack offshore banking “secrecy”, moving beyond Switzerland to other foreign jurisdictions.  “Going offshore” for the purposes of hiding money from the IRS is now impossible.  Going offshore for asset protection from civil creditors and for tax minimization is still viable and effective, but must be tax-compliant.


Further Erosion of Offshore Bank Secrecy and Encouraging Tax Compliance

  • In 2016, the International Consortium of Investigative Journalists (ICIJ) released a massive amount of once-confidential offshore information known as the “Panama Papers”.  The files included sensitive foreign banking information, including identities of owners of offshore accounts, secretive corporations and other entities established by Panamanian law firm Mossack Fonseca.  Also in 2016, ICIJ released data from the Bahamas including names of directors, shareholders and “nominees” of shell companies, trusts and foundations in the Bahamas.  These most recent breaches of offshore secrecy followed the 2013 release of information, also by ICIJ, regarding offshore accounts in the British Virgin Islands (BVI) and Singapore, the 2008 theft of banking data at HSBC in France, and the 2006 leak at LGT Bank in Liechtenstein.  The lesson, once again, is that hacking, leaks and whistle blowers are as significant a threat to banking secrecy as laws such as FATCA (the Foreign Account Tax Compliance Act) and inter-governmental cooperation and exchange of information.  Another lesson is that offshore asset protection should not — indeed, cannot — be dependent upon “confidentiality” and “secrecy”, simply because offshore “secrecy” no longer exists.
  • During 2016, the IRS and DOJ continued to investigate and prosecute many U.S. taxpayers with undeclared offshore assets. U.S. taxpayers with undeclared foreign accounts in Switzerland, Cayman, Belize, India, Israel, Singapore, Panama and other jurisdictions have been targeted.  In 2016, the IRS collected a $100 million penalty from a U.S. taxpayer who hid his Swiss account.
  • In 2016, most Swiss banks settled with DOJ and reported accounts with a U.S. nexus.  In return for deferred prosecution, these Swiss banks are paying fines to the U.S. and revealing the identities of their American account owners.  Clients of these banks who have not already come into IRS compliance can make a voluntary disclosure of these accounts, but will pay increased penalties in return for no criminal exposure (but not if the IRS already has their names!).  Swiss banking secrecy, seriously weakened since DOJ forced UBS to disclose its U.S. clients in 2009, is now extinct.  Moreover, now the Swiss banks report to the U.S. without advance warning to their U.S. clients.  New legislation in Switzerland imposes penalties on a Swiss bank or bank employee who is aware of a U.S. request for information and then notifies the U.S. account owner prior to transfer of the requested information.
  • All reputable countries are agreeing to the exchange of tax information and banking transparency.  In 2016, Singapore implemented FATCA.  In 2015, Luxembourg began exchange of bank depositor information.   Likewise, Austria, the last remaining EU member holdout, agreed to share banking data.   During 2016, over 100 countries (and hundreds of thousands of foreign banks and other financial institutions)  have agreed to sign on to FATCA and automatically report foreign account and income data to the IRS, including: India, Cyprus, Singapore, Liechtenstein, Switzerland, Barbados, Bahamas, Hong Kong, Brazil, Jersey, Guernsey, Cayman, etc.  If you have financial ties to foreign countries, you must address IRS compliance for foreign accounts and assets.  The fact that a foreign bank has no branches in the U.S. is now irrelevant.
  • The reach of the U.S. Government to foreign banks is undeniable.  In 2016, Bank Julius Baer settled with DOJ, paying a fine of $547 million.  Also in 2016, two Cayman Islands financial institutions pleaded guilty to conspiring to hide millions from the IRS in Cayman accounts.  The IRS is investigating HSBC, the Swiss Kantonal banks, Pictet, Bank HaPoalim, Mizrahi Tefahot and banks in the Caribbean.  During 2016, the IRS focused on Panama, Singapore and the Cayman Islands.  DOJ also issued summonses to U.S. banks for information on U.S. correspondent accounts used by owners of foreign accounts to access funds.  Banks in Switzerland, Israel, India, Singapore and the Caribbean are currently under investigation.  We expect more banks, in other countries, to be targeted in 2017.  Again, the fact that a foreign bank has no branches in the U.S. is now irrelevant.
  • In positive news, the IRS issued recent guidance on FBAR penalties that seems to indicate a trend toward lower penalties for both willful and non-willful failure to file the FBAR.  The new penalty structure allows for a single penalty, rather than multi-year penalties.  In addition, the penalties should not exceed the value of the foreign account.  The new guidance is applicable to cases currently in audit.
  • Recent appellate court cases all uniformly have held that foreign bank statements must be handed over to the IRS regardless of any Fifth Amendment claim against self-incrimination.  This means that the IRS can compel, via Information Document Request (IDR) or subpoena, a taxpayer or his bank to provide his offshore account records even if those records are incriminating.  Prosecutors may then use those records to prove commission of tax crimes, including failure to file bank disclosures, filing false tax returns, tax evasion and tax fraud.
  • In light of the above events, many clients have retained us to make their foreign accounts and other assets tax-compliant.  We have represented many clients in Offshore Voluntary Disclosure Programs (OVDP) introduced by the IRS in 2009, 2011, 2012 and 2014.  The 2014 OVDP is still in effect (although the IRS warns that it may close the program at any time).  We have represented clients with accounts and assets on every continent (except Antarctica), brought them into IRS compliance and avoided prosecution.  In 2014, the IRS changed the terms of its OVDP, and also began new “Streamlined” voluntary disclosure procedures for non-willful conduct.  The Streamlined procedures have greatly reduced penalties (5% for U.S. residents; 0% for non-residents).  We can advise you on which program is best for you.  The penalties within the OVDP are usually less than if the IRS discovers the foreign account via audit, investigation or information the IRS receives from a bank or foreign government.
  • Within the OVDP, the penalty is 27.5% of the highest value of the foreign asset(s).  However, this penalty increases to 50% if the foreign financial institution housing the foreign account is under investigation or is cooperating with DOJ/IRS.  There are approximately one hundred foreign banks on the so-called “naughty bank” list, most but not all in Switzerland.  On November 15, 2016, the “naughty list” increased to approximately one hundred and fifty.  The new additions are foreign “facilitators” of U.S. tax fraud, i.e., the foreign bankers, lawyers, trustees, investment advisors and other service providers who worked with U.S. clients to hide assets and income from the IRS.
  • Clients should bring their accounts into tax compliance on the state level as well.  Some states, such as New York, New Jersey and California, have formal programs for offshore accounts.  Other states, including Connecticut, had a formal program in the past, and we have been successful in applying the favorable terms of the past programs to current clients.  The IRS shares information with state governments, including that a federal tax return was amended to report foreign income.  Please contact us regarding tax compliance on the state and federal levels.
  • Against the background of the U.S. offensive against undisclosed offshore accounts, FATCA and new compliance burdens, many foreign banks have “fired” their U.S. clients and closed even compliant accounts.  In 2016, we assisted clients in keeping open their compliant foreign accounts, or locating new foreign institutions to take their business.  While many foreign banks no longer welcome U.S. account holders, we have relationships with foreign institutions which still service our clients’ tax-compliant accounts.

This year has been an unprecedented year both domestically and offshore.  We can assist you in navigating through the changing offshore world and advise you regarding offshore (and onshore) assets.

 

Switzerland Defeated, the U.S. Turns Against Accounts in Other Countries

Recently, the last Swiss banks to seek non-prosecution agreements with the U.S. Department of Justice (DOJ) have paid their fines and revealed the identities of their U.S. account holders.  The U.S. Government is able to credibly announce that Swiss banking secrecy has been thoroughly defeated.  Contemporaneous with the victory over Swiss banks, the U.S. has turned its attention to hidden bank accounts in other tax haven jurisdictions.

On March 9, 2016, two Cayman Islands financial institutions, Cayman National Securities (CNS) and Cayman National Trust Co. (CNT) pled guilty in federal court in New York to conspiring with American account holders to hide accounts and evade U.S. taxes.  These guilty pleas are the first from financial institutions outside of Switzerland.  The pleas included details of CNS and CNT creating “sham” corporations and trusts for their U.S. clients to obscure the true beneficial owners of the accounts.  DOJ also pointed out that CNS and CNT continued to provide “secret” banking services even after 2008, when it was publicly known that DOJ was investigating and prosecuting UBS for facilitating the same type of tax fraud.  The Cayman institutions will pay a penalty of $6 million.

The guilty pleas revealed that “[f]rom 2001 through 2011, CNS and CNT earned more than $3.4 million in gross revenues from the undeclared U.S. taxpayer accounts that they maintained.”  That doesn’t seem to be much of a return on the illicit activity, especially amortized over that ten year period.  It is especially surprising that the Cayman institutions, on notice since 2008 of the DOJ investigation and prosecution of UBS, made the business decision to continue to offer the very same “secret” banking services when the return was so low and the risk was so high.

Pursuant to a treaty request, CNS and CNT have already disclosed twenty percent of their U.S. clientele to DOJ, and will now reveal ninety to ninety five percent of their U.S. clientele.  For U.S. taxpayers who have not already come forward and voluntarily disclosed their accounts at CNS and CNT to the IRS, a pre-emptive disclosure is now too late.  Those taxpayers can now expect IRS investigations and criminal prosecutions.

Two weeks prior to the Cayman guilty pleas in New York, in a different offshore banking prosecution in Miami, DOJ requested that a federal court issue a “Bank of Nova Scotia” summons to UBS in Miami.  The summons demanded the records of a UBS account in Singapore belonging to a U.S. taxpayer in China.  In the past, DOJ has repeatedly used “John Doe” summonses against foreign banks (including in Switzerland, Belize, India and the Caribbean) to obtain information about a broad class of U.S. taxpayers unknown by specific name.  “Bank of Nova Scotia” summonses have not been used as frequently until now.  They derive from a court case where a U.S. court compelled a branch of Scotiabank in Miami to disclose information to DOJ regarding a Scotia branch in the Cayman Islands, notwithstanding Cayman’s secrecy laws.

In the present case, UBS will argue that Singapore’s bank secrecy laws prevent UBS from providing the account records to DOJ.  The parallel argument applied, of course, to accounts at UBS in Switzerland when DOJ prosecuted UBS in 2008.  And yet, Swiss bank secrecy failed for UBS (and its U.S. clients) in 2009.  Because of UBS’ substantial presence in the U.S., it was forced to settle with DOJ or else face penalties against UBS’ banking licenses and assets within the United States.  For the same reason, we can expect that, just like the Swiss account records, the UBS Singapore account records will ultimately be handed over to DOJ.

Notwithstanding UBS’ vulnerability with respect to its U.S. assets, it is unlikely that the state of Singapore would risk its financial reputation to protect non-compliant accounts.  Singapore makes a significant amount of money from legitimate international banking and finance and would not jeopardize this by being “blacklisted” as an uncooperative tax haven, as it was a decade ago.  To this end, in 2014 Singapore signed FATCA, whereby Singapore financial institutions report information about U.S. account owners to the Inland Revenue Authority of Singapore, which in turns furnishes the data to the IRS.  In addition, a new Singapore regulation requires banks to identify all accounts that may harbor the proceeds of tax evasion, and close them.  Failure to abide by this new law will result in criminal charges for the Singaporean bankers.

It is of course no surprise that DOJ and the IRS are pursuing undisclosed accounts in Cayman and Singapore.  The U.S. has not limited its enforcement activity to non-compliant accounts in Switzerland alone.  Within the last couple of years, DOJ has moved against banks and financial institutions in the Caribbean (CIBC First Caribbean, Stanford Bank and Butterfield Bank in the Bahamas, Barbados and elsewhere), Belize (Belize Bank International Limited and Belize Bank Limited), Panama (Sovereign Management) and India (HSBC India).  We expect that other financial institutions, in other jurisdictions, are being investigated as well.

The settlement by some one hundred Swiss banks with DOJ, whereby in exchange for paying fines and naming U.S. account holders the banks avoid prosecution, has now freed up manifold resources at DOJ and IRS to examine and prosecute other financial institutions beyond Switzerland.  Moreover, the account information handed over by the Swiss banks when settling with DOJ provided DOJ with a road map of funds leaving Switzerland and where these funds went, the so-called “leaver accounts”.  DOJ and IRS are especially driven to investigate and prosecute these account holders, as they show an added level of intent to deceive the IRS.  Many of the leaver accounts went to jurisdictions like Dubai, Israel, Singapore, Hong Kong and Panama.  These jurisdictions are now targets of DOJ investigation.

There is still an opportunity to bring foreign accounts into IRS compliance, via the IRS Offshore Voluntary Disclosure Program (OVDP) and, for less egregious non-willful infractions, the Streamlined disclosure procedures.  However, it has been some eight years since the 2008 DOJ prosecution of UBS signaled the end of Swiss banking secrecy.  There have been recent hints by the IRS that, given the amount of time that has elapsed, the opportunity to voluntarily disclose the accounts to the IRS in return for lower penalties may be closing.  U.S. taxpayers who still have non-compliant offshore accounts would be well advised to seek competent legal assistance in addressing how to best come into compliance, and they should do this before the IRS finds them.

For additional information, please read our articles below:

Foreign Accounts: the Best Way Toward US Tax Compliance, and Assessing Eligibility for the Streamlined Disclosure Program

Should Everyone with Undeclared Foreign Assets Make a Voluntary Disclosure to the IRS? Are there Less Costly Alternatives to a Voluntary Disclosure?

Regarding Foreign Accounts, Are You Willful? Or, Should You Apply for the Streamlined Disclosure Procedures?

 

Search


Categories

as seen onbloombergcnbcforbesnytimeswall street
Menu