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?

 

The Offshore World in 2015: Further Erosion of Offshore Bank Secrecy and Encouraging Tax Compliance

During 2015, 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 and for tax minimization is still viable and effective, but must be tax-compliant.

• During 2015, the IRS and DOJ continued to investigate and prosecute U.S. taxpayers with undeclared offshore assets.

Switzerland agreed to a settlement with DOJ whereby Swiss banks began to report bank account data to the U.S. without a need for court orders or government-to-government treaty requests.  In 2015, dozens of 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 over.  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 that 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 2015, Luxembourg began exchange of bank depositor information.  Likewise, Austria, the last remaining EU member holdout, agreed to share banking data.  During 2015, over 100 countries, and over 170,000 foreign banks and other financial institutions have agreed to sign on to Foreign Account Tax Compliance Act (FATCA) and automatically report foreign account and income data to the IRS.  Most recently, India and Cyprus agreed to implement FATCA, joining 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.  The IRS is investigating HSBC, Bank Julius Baer, the Swiss Kantonal banks, Pictet, Bank HaPoalim, Mizrahi Tefahot and banks in the Carribean.  DOJ also issued summonses to U.S. banks such as Bank of America, Citibank and Bank of New York Mellon for information on U.S. correspondent accounts used by owners of foreign accounts to access funds.  Banks in Switzerland, Liechtenstein, Israel, India and the Caribbean are now under investigation.  We expect more banks, in other countries, to be targeted in 2016.  The fact that a foreign bank has no branches in the U.S. is now irrelevant.

• In 2015, Israeli banks froze many accounts of U.S. persons, until the account owners signed IRS Forms W-9 disclosing their social security numbers or provided evidence of U.S. tax compliance.  U.S. persons with Israeli accounts now face two challenges: access to their money, and IRS compliance.  Many are now entering the Offshore Voluntary Disclosure Program.  Israel has become the most vigilant of foreign countries in enforcing FATCA, to the extent that an Israeli banker may face criminal liability under Israeli domestic criminal law, for failing to abide by FATCA, a U.S. law.

• In positive news, in 2015, the IRS issued 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 to provide his or her offshore account records even if those records are self-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.  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 less egregious 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.

• If you participated in one of the OVDP/OVDI programs and paid a penalty (20-50%), you should consider whether your conduct was “non-willful” so that you might qualify for a lower 5% penalty.  If so, you may be entitled to a refund of the higher penalty.  Contact us to explore this option.

• Taxpayers should bring their accounts into tax compliance on the state level as well.  Some states, such as New York, Connecticut, New Jersey and California, have formal programs for offshore accounts.  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 non-disclosed offshore accounts, FATCA and new compliance burdens, many foreign banks have “fired” their U.S. clients and closed even compliant accounts.  In 2015, we assisted clients in keeping open their compliant foreign accounts, or locating new foreign banks to take their business.  While many foreign banks no longer want U.S. account holders, we have relationships with foreign banks which still service tax-compliant American clients.

Following its success against foreign banks and foreign banking secrecy, we expect the IRS in 2016 to continue to pursue offshore tax fraud investigations of many foreign banks in many foreign countries.  We also expect DOJ to continue its prosecution of U.S. taxpayers with non-compliant foreign assets.  If you have a non-compliant or undeclared foreign asset, we can help you bring it into IRS compliance.  If you are being investigated by the IRS, we can represent you, defend you and negotiate for lower fines and penalties and for civil, rather than criminal, prosecution.

Contact us for a confidential consultation regarding your offshore assets and tax compliance.

Recent Offshore Developments

By now, it is common knowledge that the IRS is investigating and DOJ is prosecuting U.S. taxpayers with undisclosed foreign assets that are not U.S. tax compliant, as well as prosecuting the foreign banks themselves for assisting in the commission of U.S. tax fraud.  It is also common knowledge that foreign assets are subject to reporting on the FBAR (FinCEN Form 114) as well as IRS Form 8938.  Here are some newer offshore developments:

Earlier this year, the IRS issued 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 will not exceed the value of the foreign account.  This 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 to provide his or her offshore account records even if those records are self-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.  Please see our earlier post here.

More countries continue to sign on to the Foreign Account Tax Compliance Act (FATCA), by which foreign banks and other financial institutions (brokerages, insurance companies) will report accounts and assets beneficially owned by U.S. taxpayers, to the IRS.  Most recently, India and Cyprus agreed to implement FATCA and provide foreign financial information to the IRS.  If you have financial ties to foreign countries, you must address IRS compliance for foreign accounts and assets.

The IRS continues to reach settlement agreements with multiple Swiss banks, whereby the banks avoid criminal prosecution (which happened to UBS and Credit Suisse) for aiding and abetting tax fraud.  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!

The FBAR due date is now tied to the due date of IRS Form 1040.  In addition, it is now possible to request an extension for FBAR filing.

The due dates for IRS Form 3520 (reporting foreign gifts and interests in foreign trusts) has been changed to April 15, while the due date for IRS Form 3520-A (generally filed by a foreign trustee or U.S. agent of a foreign trust) has been changed to the 15th day of the third month after the close of the tax year of the foreign trust.

We can assist you in navigating offshore issues and IRS compliance for foreign assets.  Do not overlook even possibly minor assets such as completely legitimate and common foreign retirement plans that may not be in IRS compliance simply because you may have neglected to think about an old plan from “back home”.   Contact us for a confidential consultation.

India to Share Banking Data with the IRS

India has become one of the latest countries to sign on to the Foreign Account Tax Compliance Act (FATCA) and report data from Indian financial institutions to the IRS.  FATCA was passed by the US Congress in 2010. Over one hundred foreign countries have agreed to participate, including former “tax havens” such as Cayman, Liechtenstein and Switzerland.  The agreement by so many foreign countries to share information with the IRS represents yet another example of the elimination of foreign bank secrecy.
Continue reading

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

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