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Asset Protection Blog

The Panama Papers:  Effective Asset Protection Should Not Be Compromised by Lack of Banking Secrecy

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The “Panama Papers” purportedly show how one law firm in Panama City with branches from Switzerland to Hong Kong utilized offshore entities and bank accounts to hide money for a world-wide clientele of wealthy people, including political leaders in various governments.  While foreign entities and bank accounts are legal, it is against the laws of many countries to hide income from taxation, to launder bribe money and other proceeds of corruption and criminal activities.  If the reports are true, the Panamanian law firm of Mossack Fonseca participated in tax evasion and money laundering on a global scale.

The “Panama Papers” raise issues, not for the first time, about foreign tax havens, banking secrecy and offshore asset protection.

In 2012, I visited Panama and met with trustees, attorneys and bankers, all eager for business and client referrals.  While I was witness to the explosion of Panama’s banking industry, and I knew that Panama banks were a gateway for doing business in Central and South America, I have not sent a single client to Panama nor recommended Panama as an asset protection jurisdiction.  Years earlier, we had made the decision that we preferred other jurisdictions for asset protection, for reasons including:  the strength of local laws, the degree of difficulty for outsiders to challenge those laws and asset protection structures, and our contacts and experience with other jurisdictions.

One of the factors that we look for in an asset protection jurisdiction is the social, economic and political stability of that country.  Panama was ruled by a military dictatorship from 1969 to 1989.  In 1989, within recent memory, U.S. troops entered Panama to arrest its president, who was also a military general and drug dealer.  While the Panamanian banking system developed since those years, and Panama City skyscrapers soared, the prior history made us hesitant.  Other jurisdictions offered better laws, a better record of political stability, and lawyers, trustees and bankers who we already knew to be professional and honest.

The “Panama Papers” is apparently the second time that a whistleblower has offered Mossack Fonseca documents to tax authorities.  The first instance resulted in raids and tax fraud prosecutions in Germany, and the information was then shared with the UK and U.S. governments.  The current situation arose as a result of a hacker penetrating Mossack Fonseca’s computer system and transferring millions of documents to the International Consortium of Investigative Journalists (ICIJ), which released the documents earlier this year.

In the “computer age”, nothing is immune from hacking and therefore there is no real secrecy.  Four days before the Panama Papers were made public, the Wall Street Journal reported that elite New York law firms Cravath, Swaine & Moore and Weil, Gothal & Manges were hacked.  J.P. Morgan Chase, the biggest bank in the U.S., was hacked in 2014.

Hacking, leaks and whistleblowers can happen anywhere, not only in Panama.  In 2013, ICIJ, the same group that released the Panama Papers, released a trove of offshore account details based on confidential documents obtained from the British Virgin Islands and Singapore.  In 2008, an HSBC tech employee in France stole banking records and handed them over to the French government, which then shared the information with other governments, leading to investigations and prosecutions of many Europeans for tax fraud.  In 2006, an employee at LGT Bank in Liechtenstein (once the most secret of tax havens) sold confidential banking records to the German government for millions of Euros.  The German government shared that data with other governments, including the U.S.  When foreign governments pay millions for stolen banking data (which they have done again and again), it creates an incentive for theft.

It may be said that the entire unraveling of Swiss banking secrecy can be attributed to a single causative event:  UBS employee Bradley Birkenfeld revealing to the U.S. Government how UBS lured wealthy Americans to open accounts in Switzerland, how UBS advised on keeping the accounts secret from the IRS, and how the bank earned high fees for managing the accounts.  So began DOJ’s civil and criminal cases against UBS, UBS paying $780 million in penalties, revealing the names of some 5,000 Americans with non-compliant accounts, and the end of Swiss banking secrecy.

While hacking, theft by bank employees and whistleblowers are universal, Panama is being singled out today due to the size of this latest leak of data, the historical scope (thirty to forty years) as well as the details of illegality.  What makes the “Panama Papers” leak different are the revelations of illegality: banks apparently willing to open accounts for entities without knowing the true beneficial owner of the corporation or trust, or knowing the beneficial owner to be connected to a rogue government but looking the other way; attorneys offering bearer share corporations (which most of the rest of the world no longer does and is illegal in all fifty U.S. states), and attorneys willing to backdate documents.

In better jurisdictions, these practices should not exist.  I personally have not seen a bearer share corporation in about a decade and a half.  Lawyers, banks and trust companies with whom we work around the world have strict “know your client” and due diligence requirements to vet and protect against money laundering and other illegal activities.  We disclose the beneficial owners of foreign accounts, because legitimate banks and U.S. laws require this.  Our asset protection clients are not looking to hide behind sham entities, and our clients do not rely on banking secrecy, because our clients understand that sham entities are ineffective and, where disclosure to tax authorities is involved, bank secrecy has been proven to be extinct.

Of course, another crucial difference is that despots, criminals and tax evaders need a jurisdiction like Panama, where attorneys and bankers look the other way.  Simply put, money laundering and tax evasion requires banking secrecy and the cooperation, or at least the “willful blindness”, of attorneys at Mossack Fonseca.  Asset protection of legitimately earned and tax compliant money does not require banking secrecy.  In that light, Panama is simply offering the very same services that got Switzerland in trouble.

The UBS, HSBC, LGT, Mossack Fonseca and other leaks clearly demonstrate that banking secrecy can be compromised by hackers and renegade bank employees.  Further, the success of the U.S. Department of Justice in penetrating Swiss banks and obliterating Swiss banking secrecy, the adoption of the Foreign Account Tax Compliance Act (FACTA) by banks and governments around the globe, and a host of Mutual Legal Assistance Treaties and Tax Information Exchange Agreements signed between governments, all point toward the conclusion that banking secrecy, at least as it relates to government mandated disclosure, has been effectively destroyed.

Good asset protection does not rely upon banking secrecy.  Foreign banking secrecy has been compromised by hackers, whistleblower employees, investigations and prosecutions of foreign banks and bankers, treaties and governments cooperating with each other and sharing banking information.  In addition, foreign accounts, and foreign trusts and corporations which own foreign accounts, must be disclosed to the IRS.  Even in civil litigation, tax returns are often discoverable by one’s adversaries.  Again, reliance on secrecy to protect offshore assets is no longer a viable strategy in today’s world.

Instead, our clients rely on full compliance with tax and disclosure laws, but they achieve effective asset protection from civil creditors through the use of time-tested asset protection laws in safe and stable jurisdictions.

As we have long-counseled, any of the threats to banking secrecy, whether by governmental agreements, weakened bank secrecy laws, hackers or renegade bank employees, is not material if the funds are legitimately earned and the foreign account is tax-compliant.  It is completely legal to have funds offshore, for many reasons (e.g., international business transactions, global investment and diversification, asset protection), as long as the foreign accounts are part of a tax compliant strategy.  If the offshore accounts are tax-compliant, then the threat of information sharing – – from whatever source, governmental or individual – – is eliminated.  As the window of banking secrecy closes further, those people whose foreign assets do not rely on secrecy and are tax-compliant need not worry.

2013 Year End Notes, Part 3: Offshore Considerations

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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?

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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?

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If You Have an Unreported Foreign Account, You Really Should Be Thinking about Tax Compliance

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If You Have an Unreported Foreign Account,
You Really Should Be Thinking about Tax Compliance

by Asher Rubinstein, Esq.

If you have a foreign account that you have not declared to the IRS, you really should be giving thought to how to bring the foreign account into compliance now.  It will only get more difficult to keep the account open, to access your offshore funds, and to keep the IRS from discovering the account. And, when the IRS does eventually discover the account, it will only get more expensive to correct the non-disclosure and defend against a tax fraud prosecution.

Foreign Banks Are Freezing and Closing Accounts and Limiting Access to Your Money

If you don’t bring the foreign account into IRS compliance, you will have problems trying to access the funds. Many foreign banks are simply freezing the accounts of Americans until the account holders provide signed IRS Forms W-9 or otherwise demonstrate evidence of U.S. tax compliance. If you provide a W-9 to the bank, the bank will likely share your identity and your banking information with the IRS.

We have had many clients tell us that their foreign bank has frozen their account, and they request that we intervene to get the bank to release their money. While we can often assist in that regard, the larger issue is: what are you going to do about the IRS finding the account?

In addition to freezing accounts, many foreign banks are simply closing the accounts of Americans, or of foreign nationals suspected of having a U.S. address or a U.S. tax nexus. These banks do not want to deal with the IRS and with U.S. compliance burdens. These banks are concluding, as a business matter, that it makes better sense for the banks to cease offering banking services to people with a U.S. nexus.

We have assisted clients in keeping open their compliant foreign accounts, and we have assisted other clients in locating new foreign banks to take their compliant foreign funds. If you have an undeclared foreign account, and your bank is telling you to leave, you will have to anticipate the successor bank asking the same sort of “know your client” and source of funds inquiries, and asking you to sign a IRS Form W-9. It is getting harder and harder to simply leave foreign Bank A and move the account to foreign Bank B. Very few foreign banks remain willing to take your non-compliant funds.

You Will Have Difficulty Getting Your Money Back to the U.S.

Wiring the funds back to the U.S. is not advisable. A sudden wire transfer of a large dollar amount into a U.S. account would likely lead to the receiving bank asking questions about the wire transfer, the source of funds, and whether the funds are tax-compliant. Banks will not ignore their due diligence and “know your client” obligations, no matter how friendly you might be with your banker. The compliance and legal risks to the bank are too significant.

Moreover, an inbound wire transfer could cause the bank to file an SAR (Suspicious Activity Report) with the U.S. Treasury Department, and there is no requirement that the bank even let you know that it is filing an SAR. Even if you try to deposit a foreign bank check and avoid a large wire transfer, the U.S. bank will likely ask the same questions.

Finally, even assuming that you can get your foreign funds safely back into the U.S., you still have to worry about the IRS discovering the past non-compliance when the funds were offshore. As discussed below, the IRS is interested in the past history of the non-compliant foreign account, even if that account is now closed.

Your Options Are Limited as to Where to Keep the Funds Outside the U.S.

As noted above, it will not be easy for you to simply find a new foreign bank, one that will overlook the fact that your funds are not U.S. tax compliant, one that will not ask you to sign a Form W-9, one that is not concerned about FATCA (the Foreign Account Tax Compliance Act) which will require the bank to report information to the IRS.

FATCA is a U.S. law, passed in 2010, which reaches overseas and requires all foreign banks and financial institutions to automatically report to the IRS (without IRS subpoena or request) information regarding their American client accounts. Essentially, every foreign bank becomes an agent of the IRS. If a foreign bank or financial institution does not agree to FATCA reporting, then the U.S. will penalize it by withholding significant amounts of U.S.-source income. Recently, many countries have signed on to FATCA, including Spain, Italy, Norway, Germany, Mexico, the UK, Ireland and Switzerland. Many other countries (some seventy five around the world) have announced that they are negotiating FATCA deals with the U.S., including South Africa, Singapore and Liechtenstein.

People suggest to us that foreign jurisdictions still exist which could act as shelters for non-compliant assets. We hear that certain countries are “the next Switzerland”. Since 2008, when UBS became the target of DOJ’s civil and criminal prosecution, the flow of funds exiting Switzerland for Singapore, for example, has been significant.

However, no reputable financial jurisdiction (including Singapore) would risk its financial reputation to harbor non-compliant accounts. Singapore makes a significant amount of money from legitimate international banking and would not jeopardize this by being “blacklisted” as an uncooperative tax haven, as it was a decade ago. To this end, Singapore has recently announced that it is in talks with the U.S. on a FATCA-type of agreement. 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.

Virtually all reputable financial institutions around the world – – at least the credible, stable ones, i.e., places one would want to bank because of safety and stability – – will report to the IRS. Nations “off the grid” may welcome dollars, but one must ask whether depositing assets in an unsafe or unstable jurisdiction is a prudent move. Is it worth it to move money from the first world to the third world in order to avoid the IRS, if the risk of losing the money is significant?

Finally, even assuming that you find a new harbor for your foreign assets, there will almost certainly be a paper trail of where your assets went. The last bank statement from your prior account will show an outward transfer. That will be a road map for the IRS once it obtains the statement by subpoena, summons, treaty request or settlement agreement.

Closing the Account May Not be Enough

Merely closing a foreign account is not a viable solution, because DOJ and IRS never limit their investigations to only current accounts. In the case of UBS, DOJ’s John Doe Summons sought banking records back to 2000. In the case of Liechtensteinische Landesbank, DOJ requested records back to 2004. In the case of Julius Baer, the investigation goes back to 2002. DOJ’s request to Liechtenstein trust companies and other fiduciaries sought records back to 2001.

In other words, closing an account today does nothing to remedy the non-compliant past, and DOJ and the IRS focus on past non-compliance. In addition, a wire transfer or bank check from the foreign account to a U.S. account (or account elsewhere) creates an easy trail back to the foreign account, and also gives rise to due diligence, “know your client” and source of funds inquiries by the recipient bank. Using the non-compliant funds to buy real estate or other assets also creates a trail and does nothing to undo the non-compliant past, which will be the focus of the IRS investigation.

The Era of Bank Secrecy is Over

It seems that with every passing year, bank secrecy continues to decrease and the risk of discovery increases. In 2013, the following events occurred:

– Switzerland agreed to a settlement with the U.S. Department of Justice (DOJ) whereby almost all Swiss banks will begin to report bank account data to the U.S. without a need for court orders or government-to-government treaty requests.

– Liechtenstein agreed to sign a global treaty allowing for increased bank transparency and automatic exchange of tax information. It is also expected that Liechtenstein will sign on to FATCA.

– All reputable countries are agreeing to the exchange of information and banking transparency. In 2013, Luxembourg agreed to automatic exchange of bank depositor information beginning in January 2015. Likewise, Austria, the last remaining EU member holdout, agreed in 2013 to share banking data.

– The U.S. Department of Justice has sent summonses and requests for banking information to the following: Bank Julius Baer, the Liechtenstein Foundation Supervisory Authority, CIBC First Caribbean International Bank, Bank of Butterfield, HSBC and others. DOJ is investigating many Swiss banks, Israeli banks, banks in Luxembourg, the Caribbean and elsewhere. IRS and DOJ are not stopping at Switzerland. U.S. investigators are paying particular attention to “leaver accounts”, i.e., the accounts of those people who leave Swiss banks in favor of banks elsewhere, in an attempt to continue to evade the IRS. It should be noted that under the 2013 Swiss-U.S. settlement agreement discussed above, Swiss banks are required to identify “leaver accounts” specifically, and report them to DOJ.

In 2014, foreign banks will begin to report information to the IRS under FATCA.

The Window of Opportunity to Come Into Compliance Could Close Anytime

It is possible to bring your foreign assets into tax compliance by disclosing the assets to the IRS before the IRS learns of those assets, and to participate in a partial amnesty program known as the Offshore Voluntary Disclosure Program (“OVDP”). If the IRS learns about your foreign assets (through any means, including from a foreign bank or foreign government, as a result of an audit or investigation, or even because of a whistle blower such as an ex-spouse or adversary), then the IRS will not accept your disclosure and the full weight of tax fraud penalties will apply, including criminal prosecution. If accepted into the OVDP, such consequences can be avoided, although back taxes, interest and penalties will be due.

However, at any time the IRS can “close the door” on the opportunity to voluntarily disclose a foreign financial asset and to participate in the OVDP. Under the most recent terms of the Voluntary Disclosure Program, the IRS merely has to announce that account holders at any specific bank under investigation are precluded from making a voluntary disclosure. The significance is that U.S. clients can no longer wait for an announcement of a DOJ summons or a treaty request before they decide to come forward. The door to come forward can be closed by the IRS much earlier and without warning. That is a new variable in the opportunity to make a voluntary disclosure. It increases the risk of prosecution and it creates more immediate pressure to come into tax compliance. Timing, once again, is everything, and the IRS can close the door at any time.

Conclusion

The common theme through all of the above is that if you have a foreign account or other asset that is not U.S. tax compliant, it will only get more difficult to keep the IRS from discovering the account, to maintain the account in a safe and secure institution, and to access your funds. Now is the time to consult with U.S. tax counsel on what to do about your offshore assets, how to minimize your exposure, how to bring the assets into compliance, and how to safely access your money.

U.S. & Switzerland Reach Agreement: Almost All Swiss Banks to Provide Account Information to IRS

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We’ve written much about the ability of the IRS to discover unreported Swiss accounts, and we need not repeat warnings about criminal prosecution and onerous fines and penalties in the event that the IRS learns of undisclosed accounts.

What is new, however, is that the IRS will soon have direct, unimpeded, easy access to banking information from hundreds of Swiss banks.  In a statement released by the U.S. Department of Justice (DOJ) and Swiss Federal Department of Finance on August 29, 2013, both sides reached an agreement whereby almost all Swiss banks will soon report to the IRS about Swiss accounts “in which U.S. taxpayers have a direct or indirect interest”, including accounts owned by U.S. persons, or where U.S. persons are beneficiaries, signatories, hold powers of attorney or have other incidents of ownership.  In exchange for the provision of information to the IRS, the DOJ will not prosecute these banks as it did against UBS and Wegelin.Continue Reading

Update on Offshore Banking: Danger of Prosecution Increases

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There have been many important recent developments regarding offshore banking.  The cumulative result of these recent events is the continued eradication of offshore banking secrecy for accounts that are not tax compliant and the consequent increased risk of discovery and prosecution.

1. Additional Criminal Prosecutions For Undeclared Foreign Accounts

The US Department of Justice (DOJ) continues to criminally prosecute taxpayers with undisclosed foreign bank accounts.  Please see our recent post here  for details.  This latest wave of criminal prosecutions appears to be timed to give additional incentive for taxpayers to take advantage of the IRS Offshore Voluntary Disclosure Initiative (OVDI), which runs until August 31, 2011.

Acceptance into the OVDI results in lower penalties and the avoidance of criminal prosecution.  On the government’s side, it brings foreign funds back into the US tax system and avoids using governmental resources for investigating and then prosecuting the tax non-compliance.  Thus, the OVDI can benefit both the government and the taxpayer.

2. Credit Suisse And Other Foreign Banks Under IRS And DOJ Investigation; HSBC and Bank Leumi Warn Clients To Become Tax Compliant

We have known for a long time that Credit Suisse, like UBS before it, has been the target of a US government investigation for assisting US clients in hiding foreign funds from taxation.  This week, Credit Suisse revealed that it received a letter from the US Department of Justice officially alerting the bank that it is the target of a criminal tax investigation.  Credit Suisse, along with Bank Julius Baer, Wegelin Bank and the regional Swiss Cantonal banks, are all under investigation for aiding and abetting US tax fraud.

In February 2011, four Credit Suisse bankers were indicted in the US for assisting Americans to hide income from the IRS.   The Department of Justice stated that “the conspiracy dates back to 1953 and involved two generations of US tax evaders including US customers who inherited secret accounts.”  The allegations also included a charge that a Credit Suisse banker suggested that non-compliant funds be transferred from Switzerland to a bank in Israel in order to avoid detection by the IRS.  Tracing noncompliant funds from Swiss banks to Israeli banks is indicative of the expanding global scrutiny and effectiveness of the investigations.  (For our article on Israeli banks under scrutiny, please click here.)

The investigations are not limited to Swiss banks.  Banks of all sizes, in many other countries, are being targeted.  HSBC is also facing similar allegations, and is the subject of a federal court summons to reveal the identities of account holders with undeclared accounts in India.  (For our articles on Indian banks under scrutiny, please click here and here.)   Also this week, HSBC sent a letter to its US clients urging them to bring their accounts into tax compliance.  The letter provided details about the IRS Offshore Voluntary Disclosure Initiative.  Last year, Bank Leumi, an Israeli bank, sent similar letters to its US clients with foreign accounts.   Liechtensteinische Landesbank in Liechtenstein, Bank Leumi and Bank Hapoalim in Israel are also under investigation by the IRS and US Department of Justice.

Those are the foreign banks whose investigations are public.  We have reason to believe that many additional banks in various foreign countries are also being investigated by the IRS for similar activities.  To facilitate the investigations, the IRS has opened field offices in Australia, Panama, China and Hong Kong.  From the many thousands of voluntary disclosures thus far, the IRS and DOJ have compiled an extensive database of foreign banks and individual bankers, attorneys, trustees and other service providers who are under investigation for facilitating tax fraud.  DOJ prosecutes both the foreign service providers and the US account holders who did not disclose the foreign accounts.

In light of DOJ’s success in obtaining account information from UBS and the eradication of Swiss banking secrecy over the past few years, we anticipate that HSBC and Credit Suisse will have little ability to withstand a DOJ information subpoena and/or criminal indictment.  This is underscored by the decision this week by the Swiss Federal Supreme Court (see 4. below) that the disclosure of secret UBS bank account data to the IRS in 2009 was lawful.

The resulting conclusion is that owners of non-compliant foreign accounts, whether at Credit Suisse or elsewhere, should apply for acceptance into the OVDI before they are discovered.  The OVDI expires on August 31, 2011.

3. FATCA Reporting Requirements For Offshore Assets Are Delayed

The Foreign Account Tax Compliance Act (FATCA), which was signed into law in 2010 as part of the HIRE Act, imposes additional reporting requirements on US taxpayers with foreign holdings, and also obligates foreign banks to report account information to the IRS.  FATCA’s reporting requirements were scheduled to commence in 2013.  This week, the IRS announced a delay in the beginning dates of these new requirements.   The new requirements will be phased in over 2014 and 2015.

It has been reported that these delays reflect the many negative comments received by the IRS on the new reporting requirements.  Foreign banks and taxpayers alike have commented that these disclosure requirements are very burdensome.  Many critics of FATCA predict that the new laws will result in many foreign financial institutions no longer doing business in the US, and a resulting decline in US investments from abroad.

4.  Swiss High Court Affirms That UBS Revealing “Secret” Banking Information Was Lawful

Also this week, the Swiss Federal Supreme Court upheld the 2009 disclosure of UBS bank account information to US authorities, notwithstanding that the disclosure violated Swiss banking secrecy laws.  The Swiss court ruled that the disclosure was lawful because it was necessary to avoid an economic catastrophe that would have ensued if UBS had not disclosed the account information.

Even if the Swiss high court had held the opposite way, i.e., that provision of account information to the IRS was improper, the incriminating information has already been in the possession of the IRS and US prosecutors for months, and has formed the basis for multiple prosecutions (see point 1, above). Had the Swiss court ruled the other way, it would have had no practical effect on these prosecutions or given the US defendants any relief.  It might have, however, given the US account holders a cause of action to sue UBS in Swiss courts.  But now, it appears that even that road is dead.

Further, this ruling should be scary to US taxpayers with accounts at Credit Suisse, Julius Baer, Wegelin, the Kantonal banks and other Swiss banks, because essentially, the Swiss high court has given its blessing to the end of Swiss banking secrecy.

5. No Settlement Between US And Switzerland On Offshore Banking

Last month, we wrote that the United States and Swiss governments were in negotiations toward ending US investigations of numerous Swiss banks for hiding assets from US taxation. Under such an agreement, the US would not prosecute the Swiss banks, and the banks would provide information to the US about Americans with non-compliant accounts and pay large penalties.   This week, we learned that the negotiations have ceased after the US stated its lack of interest in pursuing a settlement.

Given the expanding offensive of the IRS and DOJ against Credit Suisse and other banks (see point 2, above), this latest twist is not surprising.  Clearly, the US has significant leverage against Swiss banks.  From over twenty thousand voluntary disclosures, the US has a mass of information implicating many Swiss banks and individual bankers for their roles in tax fraud.  Credit Suisse has a significant presence in the US – – employees, branches and valuable assets within the US, plus a lucrative US banking license.  The same US presence and vulnerability compelled UBS to settle with the US in 2009 and avoid criminal prosecution.   With such momentum and continued leverage on its side, no wonder the US is flexing its muscles and walking away from a settlement.

6. Whistle Blowers Are Still A Threat To Offshore Accounts

We reported earlier this year that account information from Swiss bank Julius Baer had been copied by a Julius Baer employee and would be made public, via Wikileaks.  This followed the purchase by the German government of supposedly secret account data from an employee of LGT Bank in Liechtenstein, and the provision of stolen HSBC data to the French government.

This week, it emerged that one disc containing the Julius Baer data was blank and the other disc did not contain incriminating bank data.  Nevertheless, we’ve known for months that Julius Baer is already “on the radar” because many Americans accepted into the IRS Voluntary Disclosure Program have disclosed their Julius Baer accounts.  For Americans who did not disclose their Julius Baer accounts, immediate disclosure via the OVDI is strongly advised. Once the IRS gets the name of an account holder from any source (audit, whistleblower, investigation or otherwise) a voluntary disclosure is too late and criminal prosecution is likely.

As a footnote, this week it was also revealed that Hans Kieber, the LGT banker who stole account data, sold it to the German government and has been in hiding ever since, recently testified to authorities in Australia about undeclared offshore bank accounts.  As we’ve written, the revelation of bank account data by whistle blowers remains a serious threat to offshore bank secrecy.

Conclusion

The above developments further highlight the withering of offshore banking secrecy and the serious enforcement efforts by the IRS and DOJ against foreign banks and US taxpayers with noncompliant foreign accounts.  The OVDI deadline is August 31, 2011. Bringing noncompliant foreign accounts into tax compliance is very strongly recommended.

Additional Criminal Prosecutions for Undeclared Offshore Accounts

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This week, Anton Ginzburg, another taxpayer with a non-compliant account at UBS, plead guilty in a Federal Court in New York to criminally concealing his account and failing to disclose the account on the required FBAR form.  This taxpayer faces a jail sentence of up to five years and a fine of approximately $1.5 million, constituting fifty percent (50%) of the value of the account during 2007.  In fact, the law allows the government to impose a 50% penalty for every year that the account was non-compliant, although the pattern in recent criminal prosecutions is that if the defendant enters a guilty plea, the government imposes a 50% penalty for one year.

This potential jail sentence and monetary fine stands in contrast to taxpayers who voluntarily disclose their foreign accounts.  A proper voluntary disclosure would avoid a criminal prosecution and jail time, and the fine would be capped at twenty five percent rather than fifty percent.

On June 28, Dr. Arvind Ahuja, another Indian-American taxpayer, was indicted in Federal Court in Wisconsin for failing to disclose his foreign accounts at HSBC India and the Channel island of Jersey.  We have written at length about the particular focus that the government has on accounts in India owned by Indian-Americans.  See our articles here, here and here.

Also in late June, taxpayer Kenneth Heller pled guilty in Federal Court in New York to failing to disclose his foreign account at UBS.  His fine was close to $10 million and he faces a potential prison term of up to fifteen years.  Mr. Heller’s case also involved his attempts to avoid detection by moving his foreign funds from UBS, which was under IRS scrutiny, to Wegelin, a smaller Swiss bank.  However, as we know, many Swiss banks are under investigation for providing non-compliant accounts, including Wegelin, Julius Baer and the regional Cantonal Banks.

Also in late June, taxpayers Sean and Nadia Roberts pled guilty in Federal Court in California to failing to disclose their offshore accounts at UBS in Switzerland, as well as other accounts in Liechtenstein, Isle of Man, Hong Kong, South Africa and New Zealand.

Finally, also in June, taxpayer Robert Greeley was charged in Federal Court in California with failing to disclose a foreign account at UBS.

Comments and lessons from these latest prosecutions:

  1. This recent wave of criminal prosecutions for undeclared foreign accounts appears to be timed to incentivize taxpayers with such accounts to come forward under the Offshore Voluntary Disclosure Initiative, which runs until August 31, 2011.
  2. Accounts in various countries (not only Switzerland) are being targeted.  Accounts in India (see above) and Israel are particular targets.   Accounts of various sizes are being targeted.  The IRS has opened field offices in Panama, Hong Kong, China and Australia to investigate offshore tax noncompliance.  Efforts to move assets from large banks to smaller banks supposedly “under the radar” are ineffective and could result in additional criminal charges.
  3. Some of the taxpayers prosecuted for non-compliant foreign accounts utilized foreign corporations in attempt to obscure the true beneficial ownership of such accounts.  As these prosecutions show, such a strategy is not effective.  Using a foreign entity like a corporation, trust or foundation seems to draw even more anger by the IRS, as it exhibits an additional level of willful non-compliance and obfuscation of the foreign assets.  However, even taxpayers whose foreign assets are in their own names and not in the names of foreign entities are being prosecuted.  The lesson is that non-compliant foreign assets, whether in your name or the name of an entity, are vulnerable to investigation and criminal prosecution.
  4. Based on recent criminal prosecutions, plea deals and sentences, we can make the following rough conclusions:

Fight the IRS accusations at trial and lose: long jail sentences (e.g., ten years) and large fines.

Plead guilty to the IRS accusations and avoid a trial: shorter sentences, house arrest and probation, plus 50% penalty during one year (rather than 50% each year).

Voluntarily disclose the account: no jail, 25% penalty.

A New US-Swiss Settlement of Offshore Banking Investigations Presents an Increased Threat to Secret Bank Accounts

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Reports are circulating that the governments of the United States and Switzerland are in negotiations toward ending US investigations of numerous Swiss banks for hiding assets from US taxation. Under this agreement, the US will not prosecute the Swiss banks, and the banks will provide information to the US about Americans with non-compliant accounts and pay large penalties. The US will then use the disclosed banking information to investigate and prosecute more Americans with undisclosed Swiss bank accounts.

This is reminiscent of the settlement agreed to by UBS in 2009. Under that agreement, the US dropped civil and criminal charges against UBS, which paid a fine of $780 million and provided once-“secret” banking data on 4,500 Americans with accounts at UBS. The information provided by UBS resulted in criminal charges against numerous US taxpayers who had UBS accounts that were not disclosed to the IRS.

It was the substantial presence of UBS in the United States that made UBS so vulnerable to US prosecution. With UBS branches in the US, employees in the US, substantial assets in the US, and a US banking license, the US Department of Justice (DOJ) had significant leverage over UBS and was able to coerce a settlement with UBS. Credit Suisse and Bank Julius Baer are likewise targets of DOJ investigations for providing similar “secret” bank accounts, and those banks´ similar presence in the US would likewise suggest that they would agree to a settlement under the terms currently being discussed by the Swiss and American governments.

An open issue is whether smaller Swiss banks, especially those without a presence in the US, would agree to these terms. It is possible that this will be a global settlement, since negotiations are at the governmental level and not with individual banks. The IRS might insist that the settlement cover all Swiss banks holding American accounts, including the smaller Kantonal and other banks without US assets or a US presence and would otherwise not be subject to IRS pressure to disclose accounts. This would dramatically increase the number of non-compliant accounts disclosed by the Swiss and would cover the flight of non-compliant accounts from UBS and large Swiss banks to smaller Swiss banks that occurred earlier in the IRS-UBS litigation.

US account holders at these smaller banks, which include the various Kantonal banks, should not consider themselves off the IRS radar. Even if these smaller banks do not avail themselves of the settlement, the American government still has significant tools to discover non-compliant accounts. These tools include a Tax Information Exchange (TIE) Agreement and a Mutual Legal Assistance Treaty (MLAT) between the US and Switzerland. Furthermore, US courts have issued “John Doe” summonses to foreign banks, most recently HSBC. These summonses demand banking information on a large class of unnamed Americans with accounts at the banks. In addition, banking data is also subject to theft by whistle blowers, who share the data with foreign governments. In recent years, theft of banking data occurred at LGT Bank of Liechtenstein, Julius Baer and HSBC. The recently enacted Foreign Account Tax Compliance Act (FATCA) also obligates many foreign banks to report information to the IRS. The cumulative end result is the death of offshore banking secrecy and an ever-wider IRS net exposing undeclared foreign accounts.

An agreement between the US and Switzerland would allow the Swiss banks to end the DOJ investigation and avoid prosecution. It would also free up US governmental resources; for example, the IRS would obtain information about US account holders without asking a court for a John Doe summons, and without proceeding on the diplomatic level with a TIE or MLAT. The banking data would be delivered to the IRS without a formal investigation, and the IRS could then devote increased resources to prosecuting Americans for tax fraud.

The agreement with the Swiss will likely serve as a template for other banks. For instance, HSBC is currently the target of a John Doe summons and IRS investigation for providing the same type of non-compliant banking services as UBS. The IRS is focusing on additional jurisdictions, most notably India, Israel, Panama, Hong Kong, Singapore and others. Such countries have even less banking secrecy than the Swiss, which suggests that banks in these countries would sign on to such an agreement and provide account information even faster than UBS. Similar agreements with other banks and other countries would, again, free IRS resources to focus on even more prosecutions against US persons with non-compliant foreign accounts.

Once these deals are finalized, the IRS will obtain foreign banking data with relative ease. There will thus be little incentive for the IRS to offer additional tax amnesties for US taxpayers with offshore accounts.

The resulting conclusion is that US taxpayers with undeclared foreign accounts, in Switzerland and elsewhere, should move quickly to take advantage of the current amnesty program, before the IRS learns of their accounts from other sources. The current opportunity expires on August 31, 2011. After that date, it is likely that the IRS will proceed against such account holders with relative ease, and with little mercy.