Credit Suisse, More Secret Bank Accounts and the Israeli Connection

In 2014, Credit Suisse pleaded guilty in U.S. federal court to facilitating tax fraud by Americans via secret bank accounts in Switzerland.  This was among the largest guilty pleas ever by a foreign bank, and Credit Suisse agreed to pay $2.6 billion in fines to the U.S. and New York State.  (Our previous report from 2014 is here, along with a Bloomberg Businessweek article that quoted Asher Rubinstein in 2014.)  Now, Credit Suisse is again facing similar allegations, this time for the bank’s “Israel desk” facilitating tax fraud by Israeli-Americans.

The current accusations stem from the Department of Justice prosecution of Dan Horsky, who held joint U.S. and Israeli citizenship and kept millions of dollars in cash and stock accounts at unreported Credit Suisse accounts in Switzerland.  Mr. Horsky pled guilty, cooperated with DOJ and provided information about Credit Suisse that could result in a new prosecution or punishment of Credit Suisse.  Following the 2014 guilty plea, a new prosecution will likely have severely negative results for Credit Suisse and other U.S.-Israeli taxpayers with unreported secret bank accounts at Credit Suisse and other banks.

We have written extensively about non-compliant foreign accounts in Switzerland, Israel and other jurisdictions around the world.  There is a limited opportunity to bring such accounts into U.S. tax compliance, but only if the IRS does not already know about the accounts.  If Credit Suisse, as part of an investigation, settlement, fine or penalty, reveals the names of its account holders to DOJ, it would be too late for the account holders to make a pre-emptive disclosure in order to avoid prosecution, severe penalties and even jail.  Banks have routinely disclosed the identities of their account holders in order to settle charges of facilitating tax fraud, including UBS, Credit Suisse and Bank Leumi.

If you have unreported foreign accounts, commonly known as secret bank accounts, contact us to discuss your options.

Please also see the following related articles:

Israel Is Becoming the IRS’ Strictest Enforcer of FATCA, by Asher Rubinstein, published in Tax Notes International

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

The Next Wave of IRS Offshore Account Enforcement: Israeli Banks Under Scrutiny

IRS Targeting Undeclared Accounts in Israel for Tax Fraud

With Israeli Bank Accounts Under IRS Scrutiny, Israel is Becoming the IRS’ Most Severe Enforcer of FATCA

In recent years, there has been increasing cooperation between the taxation authorities of many governments.  For example, when Germany purchased bank account information from bank employee “whistle blowers”, Germany shared this information with other European and North American governments, which resulted in tax investigations of people in various countries.  The Foreign Account Tax Compliance Act (“FATCA”), passed by the U.S. Congress in 2010 and coming into effect this year, provides for foreign governments and foreign financial institutions to share information with the IRS regarding U.S. taxpayers with accounts in foreign countries.  Dozens of foreign countries and thousands of foreign banks have signed on to FATCA.  According to one recent report, a staggering 77,000 foreign financial institutions have agreed to cooperate and share information with the IRS, under FATCA.  The reach of the IRS is now truly global creating a challenge for a foreign asset attorney.

On May 1, 2014, Israel announced that it had reached a FATCA agreement with the U.S.  The agreement is a “Model 1” agreement, by which Israeli banks will provide the required information to the Israeli government, which in turn will provide it to the U.S. government.  The FATCA agreement is reciprocal, meaning that the U.S. can report to Israel regarding Israeli owned U.S. accounts.

Israel’s eagerness to accede to FATCA was apparent long before the May 1 official announcement.  In 2012, the Association of Banks in Israel urged Israel’s central bank, the Bank of Israel, to ask the Israeli government to reach a FATCA agreement with the U.S.  Earlier in 2014, even before the signing of the FATCA agreement with the U.S., the Bank of Israel ordered Israeli financial institutions to begin to implement FATCA procedures, including appointing an officer to oversee FATCA compliance, identify U.S. customers, make U.S. customers sign IRS declarations (such as IRS Form W-9) and expel any clients unwilling to do so.   While some foreign governments faced criticism for “caving in to” U.S. pressures to sign FATCA, Israel appears to have needed very little persuasion; in fact, Israel seems to have backed FATCA, and the reach of the IRS into Israeli banks, willingly and eagerly.

Further, Israel appears to be unique among countries in its vigilance to uphold and enforce FATCA within its own borders.  The Israeli Ministry of Finance has drafted proposed regulations which would impose criminal penalties upon Israeli financial institutions (including banks, brokerage houses and insurance companies) that do not comply with their FATCA reporting obligations.  Individual employees at these financial institutions who knowingly assist clients in avoiding FATCA disclosures could face jail sentences as severe as seven years.

It should be noted that of all the foreign “facilitators” charged criminally by the U.S. Department of Justice (i.e., the foreign bankers, lawyers and other professionals who assisted U.S. taxpayers to commit U.S. tax fraud via “secret” accounts), facilitators from Switzerland comprise the largest group, followed next by Israeli bankers.   With Israel’s eagerness to criminally enforce FATCA under Israeli law, it appears to some that Israel may be overcompensating to now maintain a clean banking image.

While Israel has long been known as a first world country for many industries including science and technology, Israel’s status as a “tax haven” was lesser known, but still real.  As Haaretz reported, seemingly in opposition to Israel’s embracement of U.S. law:

“Israeli banks are subject to laws in Israel, and not to U.S. laws such as FATCA. Until now, Israeli banks were obliged to protect their customers’ privacy and were forbidden from providing information on account holders to any parties unless Israeli regulators explicitly stated otherwise.”  (Haaretz, March 19, 2014).

While Israel’s banking privacy regime was not as well-known as that of Switzerland, Israeli banks have long been utilized by U.S. taxpayers who have not reported their accounts, nor the income earned in the accounts, to the IRS.  As a result, within the last few years, Israeli banks have joined Swiss banks under the scrutiny of the U.S. Department of Justice (DOJ) and the IRS for facilitating U.S. tax fraud.  The Swiss branches of Bank Leumi, HaPoalim and Mizrachi Tefahot have been the targets of DOJ criminal investigations, along with major Swiss banks such as Credit Suisse and Julius Baer.  Although these three Israeli banks have been publicly named as being the targets of criminal tax investigations, it is likely that many other Israeli banks are also being investigated for offering accounts that allowed U.S. taxpayers to escape taxation.

Israel’s recent willingness to implement FATCA and criminalize FATCA non-compliance as a matter of Israeli internal law, comes at the same time as Israeli banks and bankers are increasingly under the spotlight for aiding U.S. tax fraud.  While Israel announced its FATCA agreement with the U.S. on May 1, one day earlier, on April 30, 2014, Israeli banker Shokrollah Baravarian, of Beverly Hills, California, was criminally charged with assisting his U.S. clients with committing U.S. tax fraud, including utilizing accounts in Israel and the Cayman Islands, and also through the use of offshore entities in jurisdictions such as Nevis and the British Virgin Islands.  Baravarian was a senior vice president at Mizrachi Tefahot.

In 2013, multiple U.S. taxpayers with undisclosed foreign accounts in Israel and Israeli banks with branches elsewhere were prosecuted by the DOJ, among them:  David Raminfard (who failed to disclose his Israeli account, along with a Turks & Caicos entity, and accessed his funds via “back to back” loans); Aaron Cohen (accounts in Israel and Cayman, used “back to back” loans); Moshe Handelsman (account in Israel), and Alexei Lazlovsky (account at the Luxembourg branch of an Israeli bank).  In addition, in 2013, David Kalai and Nadav Kalai, two tax preparers in the U.S. with Israeli clients, were prosecuted for facilitating tax fraud through the use of undeclared accounts at Israeli banks, including Israeli banks with branches in Luxembourg.  Israeli accounts appear to be second only to Swiss accounts as targets of DOJ prosecutors.

Against this background, on June 9, 2014, it was reported that Bank Leumi is in discussions with DOJ to settle the tax fraud probe, and that the bank has set aside one billion Shekel (US$300 million) to pay in settlement, in return for a deferred prosecution agreement which would avoid a formal criminal indictment against Bank Leumi.  Only two weeks prior, Credit Suisse paid $2.5 billion to settle U.S. tax fraud chargesUBS paid $780 million to settle U.S. tax fraud charges in 2009, also in return for a deferred prosecution agreement.  As part of its settlement with the U.S. government, UBS released the names of almost 5,000 Americans with formerly “secret” UBS accounts.

It is possible that Leumi’s settlement with DOJ will also include the release of the bank’s client’s names.  Even if not (as was the case with the Credit Suisse settlement last month), the U.S. can still obtain client names via a treaty request or “John Doe” summons which are frequently approved by U.S. courts and served on foreign banks such as HSBC in India and UBS in Switzerland.  John Doe summonses are also served upon U.S. banks in connection with foreign accounts.  In 2013, a U.S. court approved John Doe summonses upon Bank of New York (Mellon), Citibank, JPMorgan Chase, HSBC Bank USA, and Bank of America to produce information about U.S. taxpayers with undisclosed accounts at The Bank of N.T. Butterfield & Son Limited and its affiliates in the Bahamas, Barbados, Cayman Islands, Guernsey, Hong Kong, Malta, Switzerland and the United Kingdom.   Also in 2013, a U.S. court approved John Doe summonses upon the Bank of New York (Mellon) and Citibank to produce information about U.S. taxpayers who may have had unreported accounts at Zurcher Kantonalbank (“ZKB”) in Switzerland.  Thus, even if the Credit Suisse and Bank Leumi settlement agreements with the U.S. government do not include the banks handing over “secret” account details, the IRS and DOJ can still readily obtain the identities of U.S. clients at foreign banks.

It should be noted that any undisclosed account in Israel, or at a branch of an Israeli bank elsewhere, is vulnerable to discovery by the U.S. government, whether via FATCA, John Doe summons or treaty request.  The threshold for reporting foreign accounts to the IRS is low, only $10,000.  DOJ will prosecute U.S. taxpayers with accounts of all values, not only in the millions of dollars.  DOJ does not want an account owner with, e.g., “only” $50,000 offshore to feel that his or her account is “too low” for IRS scrutiny.  In addition, even if a U.S. taxpayer had an undisclosed foreign account, but did not utilize foreign corporations, back to back loans, and other methods of hiding the foreign funds, the taxpayer could still be the target of an audit, investigation and civil penalties.  Such civil penalties can exceed the value of the foreign account.  Even if the account is depleted by such penalties, the U.S. taxpayer would still be responsible for the deficiency, and the IRS would then proceed against the taxpayer’s U.S. assets.

As noted, the account holder need not have employed sophisticated methods of offshore concealment.  The following examples, all much more benign, are all still subject to IRS reporting:

  • Use of an account in Israel in connection with Israeli real estate (and if such real estate gives rise to rental income unreported to the IRS, then the taxpayer has a double problem);
  • Use of an account in Israel in connection with the support of relatives in Israel;
  • Israeli accounts that remained open following immigration to the U.S.

In addition, the following scenarios could also trigger IRS reporting requirements:

  • Americans who immigrated to Israel (made Aliyah), still remain U.S. citizens and are obligated to report to the IRS their foreign accounts and Israeli income;
  • Israeli children of American citizens, who may never even have visited the U.S. nor have any U.S. tax nexus, but are still subject to U.S. tax law and reporting requirements.

The tentacles of the IRS are clearly global, both in terms of the extra-territorial reach of U.S. tax law and reporting obligations, as well as the willingness of foreign governments and foreign financial institutions to join FATCA and report to the IRS.  In the case of Israel and Israeli financial institutions, the IRS seems to have found ready, willing and eager partners, more so than in any other foreign country.

In light of the DOJ and IRS investigations and prosecutions of U.S. taxpayers with undeclared accounts in Israel, coupled with Israel’s eagerness to join FATCA and assist the IRS, U.S. taxpayers with undisclosed accounts at Israeli banks must take steps to come into U.S. tax compliance.  There is an opportunity to come into U.S. tax compliance pre-emptively, avoid criminal prosecution and pay lower penalties than if the IRS learns about the accounts first (such as via FATCA).  If you have unreported foreign assets, you must see a U.S. tax attorney with experience in offshore accounts and IRS compliance.  Come speak with a foreign asset attorney, before the IRS finds you.

 

For additional information, please see the following articles:

The Next Wave of IRS Offshore Account Enforcement:  Israeli Banks Under Scrutiny

Did You Receive a Letter from a Foreign Bank Urging you to Report Your Account?

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

IRS Targeting Undeclared Accounts in Israel for Tax Fraud

 

Credit Suisse Pleads Guilty; Asher Rubinstein Quoted in Businessweek

As we’ve previously written, Credit Suisse had been under investigation by the U.S. Department of Justice (DOJ) for the past few years for facilitating tax fraud by U.S. clients with “secret” Credit Suisse accounts in Switzerland.  On May 19, 2014, Credit Suisse pleaded guilty to the charges and agreed to pay a fine of $2.5 Billion to Federal and New York authorities.  Credit Suisse was allowed to stay in business, which had been an open issue, since a bank which pleaded guilty to a federal crime could have its banking license cancelled.  It is very likely that DOJ and the IRS will now proceed against American taxpayers with undisclosed Credit Suisse accounts.

Asher Rubinstein was quoted in Bloomberg Businessweek on the end of Swiss banking secrecy.  Please see:  http://www.businessweek.com/articles/2014-05-20/the-end-of-the-swiss-bank-account-as-we-know-it

For additional articles on Swiss banking secrecy and Offshore tax issues, please see the following:

 

 

2013 Year End Notes, Part 3: Offshore Considerations

During 2013, the IRS and U.S. Department of Justice (DOJ) continued to successfully attack offshore banking “secrecy”.  The IRS’ success against UBS and other banks eroded Swiss banking secrecy, effectively ending “going offshore” to hide money from the IRS. Going offshore for asset protection from civil creditors, however, is still viable and effective, but must be tax-compliant. Continue reading

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

We have written extensively about the erosion of foreign banking secrecy, IRS discovery of undeclared foreign accounts, and the IRS Offshore Voluntary Disclosure Program (OVDP) to come into tax compliance before the IRS discovers the foreign assets. However, entering the OVDP means that you will pay a 27.5% penalty on the highest aggregate value of the foreign assets.  We recognize that this penalty, although much less than civil and criminal tax fraud penalties, is still quite onerous.  The question thus becomes: are alternatives available to come into IRS compliance, and, at the same time, to also avoid the 27.5% penalty of the OVDP?

Continue reading

Search


Categories

as seen onbloombergcnbcforbesnytimeswall street
Menu