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.
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