Asher Rubinstein’s article “IRS Offensive Against Offshore Accounts” published in Accounting Today.
IRS Targeting Undeclared Accounts in Israel for Tax Fraud
The IRS and U.S. Department of Justice (DOJ) continue their investigations into foreign banks that assisted U.S. taxpayers in hiding assets from the IRS. There have been reports that Bank Leumi and other Israeli banks are now under investigation. Taxpayers with undeclared accounts at Israeli banks are vulnerable to discovery and prosecution.
The new focus on Israel follows the IRS’ success against Swiss banking secrecy. In 2009, U.S. prosecutors achieved a staggering victory against UBS, forcing the largest Swiss bank to pay $780 million to settle criminal and civil charges that it aided and abetted tax fraud by assisting Americans to hide funds from U.S. taxation. In a stunning breach of hitherto ironclad Swiss banking secrecy, UBS was also compelled to disclose to the IRS the identities of thousands of Americans with formerly “secret” accounts. In February, 2011, DOJ charged bankers at Credit Suisse with offering undeclared accounts to taxpayers. The Credit Suisse bankers were also accused of advising their U.S. clients to transfer funds to Bank Leumi in order to avoid discovery by U.S. authorities. Bank accounts in Israel appear to be one of the next targets. People with undeclared accounts in Israel should take action in light of the IRS crackdown on offshore accounts that are not tax compliant.
Many American Jews maintain bank accounts in Israel for various reasons: business ties, costs associated with owning real estate in Israel, accounts to assist family members, etc. It is completely legal to have an account in Israel, provided that (1) the account is disclosed to U.S. authorities on IRS Form 1040, Schedule B and on the FBAR, Report of Foreign Bank Accounts, Form TD 90.22-1, and (2) income earned in the account (including interest, dividends and capital gains) is reported to the IRS and taxes paid on this income. So long as those two conditions are met, the account is tax compliant. If the account is not tax complaint, a U.S. taxpayer who owns or has beneficial interest in an Israeli account can be prosecuted for civil and criminal tax fraud.
Israel is in a unique situation vis-a-vis the IRS because of ties between Israel and Jews around the world, including Jews who have inherited “Holocaust accounts”. One example of a “Holocaust account” is an account established in Switzerland by European Jews prior to the Holocaust, in an attempt to safeguard their assets from the rise of Nazi Germany. Another example is an account established after World War II by a Holocaust survivor in order to receive German reparation payments. In either case, tax avoidance was not the motivation behind the establishment of the accounts. (The same can be said of Greeks fleeing persecution in Turkey, who put their funds in Switzerland for reasons of safety and stability, or Egyptian Jews fleeing the military coup and dictatorship of Gamal Nasser, or various other refugees who put their money is Swiss banks to preserve and protect their assets in the face of persecution and upheaval.) Now, many decades later, their descendants who have inherited these accounts are in a position of unintended tax non-compliance because they were not aware of their obligation to annually report these accounts to the Treasury Department on the FBAR, even if no tax was due.
Some U.S. taxpayers mistakenly believe that the IRS is reluctant to investigate Israeli banks because of Israel’s close ties with the U.S. However, there is no indication that Israeli banks, unlike Swiss banks, would be immune from the IRS. In fact, Israel and the U.S. have a long history of close cooperation in tax matters.
Whereas Swiss bank secrecy laws presented a formidable challenge to the IRS prior to the UBS case, pursuing undisclosed accounts in Israel will not require nearly as much effort. The tax treaty between the U.S. and Israel enables the two countries to “exchange such information as is pertinent to . . . fraud or fiscal evasion in relation to the taxes which are the subject of this Convention.” Cooperation between the U.S. and Israel is routine in many matters, tax and otherwise. According to the Israeli Ministry of Justice, “the [Israeli Government] has cooperated with requests from U.S. law enforcement in matters of financial crime . . . .” Although this statement refers to Israel’s fight against money laundering, it is not a stretch to conclude that the Ministry would cooperate with requests from the IRS in matters specifically pertaining to undisclosed bank accounts.
In addition, the U.S. and Israel currently grant legal assistance to each other in criminal matters via a Mutual Legal Assistance Treaty (MLAT). The MLAT states that the U.S. and Israel “express their understanding that this treaty applies to . . . criminal tax offenses . . . .” It is particularly noteworthy from an offshore banking perspective that for “serious [fiscal] offenses involving willful, fraudulent conduct,” the treaty even provides for the exchange of bank records.
It is unlikely that the IRS is specifically targeting “Holocaust accounts”. Indeed, whereas the 2011 IRS Offshore Voluntary Disclosure Initiative imposes a 25% penalty for offshore accounts, a specially reduced 5% penalty applies, in certain circumstances, to inherited Holocaust accounts. The presence of undeclared assets in Israel (whatever their source, including the cash-heavy jewelry trade) presents a desirable target to the IRS. Along these lines, in 2010, Bank Leumi took the extraordinary step of sending letters to its U.S. customers, strongly advising them to disclose their accounts to the IRS. That Credit Suisse bankers allegedly advised clients to transfer funds to Bank Leumi also presents the IRS with a roadmap to Israeli accounts.
It was the substantial U.S. presence of UBS, that made it vulnerable to U.S. prosecution. Likewise, large Israeli banks like Bank Leumi, with a U.S. banking license, multiple branches within the U.S., thousands of employees in the U.S., and billions of dollars of assets in the U.S., are clearly within the jurisdiction of a U.S. court and susceptible to an adverse court judgment or order.
Amidst the specific enforcement action against individual banks, the larger context is the decline of banking secrecy world-wide.
The IRS has opened field offices in Panama, Australia and China. Tax Information Exchange Agreements have been signed by all the former “tax havens”, including Liechtenstein and Monaco. Even Switzerland changed its internal law to allow for cooperation with foreign governments in tax investigations. While the IRS is intensifying its presence and its available tools around the world, there are indications that the IRS is concentrating more particularly on Israel.
Clearly, against this background of the erosion of banking secrecy and cooperation amongst governments in sharing banking data, taxpayers with undeclared accounts in Israel must consider bringing such accounts into compliance.
In February 2011, the IRS announced the Offshore Voluntary Disclosure Initiative (OVDI), which closely mirrors the 2009 Offshore Voluntary Disclosure Program (OVDP), with a few refinements. The new penalties are 25%, greater than the 20% penalty under the prior OVDP, yet less than the 50% penalty that the IRS has been imposing in recent criminal tax fraud prosecutions.
The new OVDI presents an opportunity for taxpayers with foreign accounts, in Israel and elsewhere, who did not come forward under the former OVDP but still want to avoid criminal prosecution, to bring their foreign accounts into compliance. It is clear that the IRS is moving past UBS and Switzerland to other banks in other countries, and Israel appears to be a particular focus. Taxpayers must bring non-compliant foreign accounts into tax compliance, in order to avoid discovery by the IRS, higher penalties and criminal prosecution. In this new era of international transparency, decreased banking secrecy and stronger enforcement efforts, offshore banking compliance is very highly recommended.
Asher Rubinstein quoted in European Media regarding Credit Suisse and the IRS crackdown on Foreign Accounts
Asher Rubinstein quoted in European Media regarding Credit Suisse and the IRS crackdown on Foreign Accounts
The following report was published on SwissInfo.Ch on March 9, 2011 and Eurasia Review, News and Analysis on March 10, 2011.
US tax probe tightens noose on Swiss banks
Mar 9, 2011 – 22:02
by Matthew Allen, swissinfo.ch
Swiss banks are coming under increasing pressure in the United States as a second wave of arrests and indictments implicated Credit Suisse in tax evasion.
The renewed offensive by the US tax authorities has alarmed the Swiss banking community, sparking fears of a second assault on banking secrecy and rumours regarding which banks may be next to face the music.
One bank that has suffered from adverse conditions in the US is the Neue Zürcher Bank (NZB), that closed down its private banking operations in 2009 after a former employee was indicted in the US on tax evasion charges.
The bank then announced last week that it would also end brokerage activities, citing “increased complexity of background regulations and the corresponding legacy issues from NZB’s private banking business, as well as the more difficult parameters of cross-border banking business between Switzerland and the US”.
Swiss banks have faced continuous problems since UBS put its hands up to aiding and abetting clients to evade US taxes two years ago. The admission shot a huge hole through Swiss banking secrecy laws when the government was forced to hand over 4,450 UBS client files to the US authorities.
UBS round two?
Using this data, plus evidence from some 15,000 US citizens who admitted evasion during a tax amnesty, the US tax authority (Internal Revenue Service IRS) has put together more prosecutions that currently focus on Credit Suisse.
On Tuesday, a former Credit Suisse client told a US court that he had used the bank and UBS to illegally hide money from the tax man.
Two weeks ago, four current and former Credit Suisse employees were indicted in absentia on tax evasion charges, while another is in custody in the US. One of the accused told Reuters that Credit Suisse had always known about his activities.
“I always acted in the name of the bank and according to their instructions,” he said. “It’s not the case that I did anything independently, the bank was always informed and my actions were checked by my bosses.”
While Credit Suisse itself has not been named in the latest round of prosecutions, the media and other observers believe the bank may soon face the same fate as UBS. But Martin Naville, head of the Swiss-American Chamber of Commerce disagrees.
“The UBS treaty was not an amnesty and we have always said that the situation between the IRS and foreign banks is not over,” he told swissinfo.ch. “What we are seeing is the aftershock of the UBS case. This is certainly not UBS round two that would pit the Swiss government against the IRS.”
Individuals, not banks
On the face of it, there are similarities between the Credit Suisse and UBS cases. Some of the recently indicted bankers and the former NZB fugitive used to work for UBS.
But crucially, the IRS has at present failed to establish a link between the actions of individual employees and the leadership of Credit Suisse.
There have been many suggestions that the IRS will turn its attention on smaller private banks that allegedly opened their doors to UBS account holders to escape declaring illicit funds to the US authorities.
“There has long been a belief that other Swiss banks have to some extent facilitated tax fraud and the IRS is now going after them,” US tax lawyer Asher Rubinstein told swissinfo.ch.
Regulatory pressures
Martin Naville believes many tax cheats may have pointed the finger at Swiss banks during the recent tax amnesty, a voluntary disclosure scheme that is soon to be repeated.
“It appears that some smaller banks advised clients not to participate in the voluntary disclosure scheme,” he told swissinfo.ch. “They may have thought that they could reap the benefits of a windfall, but anyone who thought this was naïve.”
In the meantime, other Swiss banks have exited the US markets because of tough changes to disclosure rules. Foreign banks are now obliged to report on clients who buy or hold US securities and could soon be forced to divulge the details of those that inherit such stocks and bonds.
Banks Wegelin and Sarasin are among those that feel the Foreign Account Tax Compliance Act (Fatca) and changes to estate tax regulations would place them under too great a burden.
Matthew Allen, swissinfo.ch
Asher Rubinstein published in Indus Business Journal regarding IRS crackdown on Offshore Accounts in India
Asher Rubinstein published in Indus Business Journal regarding IRS crackdown on Offshore Accounts in India
Asher’s article, “IRS Ramps up Focus on Offshore India Accounts” was published in Indus Business Journal in March, 2011
INDUS BUSINESS JOURNAL
IRS Ramps Up Focus on Offshore India Accounts
By Asher Rubinstein
Following the 2009 U.S. prosecution of Swiss bank UBS, the Internal Revenue Service is now targeting other banks in jurisdictions beyond Switzerland. Bank accounts in India appear to be one of the next targets. People with undeclared accounts in India should take action in the face of the IRS crackdown on offshore accounts that are not tax compliant.
Since the summer of 2010, HSBC has been the target of a criminal tax fraud investigation by the U.S. Department of Justice, for facilitating non-compliant offshore accounts. In the summer of 2010, DOJ sent letters to HSBC foreign account holders, advising them that they are the subjects of criminal investigations relating to unreported accounts in India and Singapore. DOJ has also prosecuted a Virginia surgeon and two Miami Beach real estate developers for undeclared foreign accounts with HSBC.
There are also reports that HSBC is implicated in the recent criminal prosecution of Vaibhav Dahake, an Indian-American with undeclared accounts in India and the British Virgin Islands. While the criminal indictment against Dahake does not mention HSBC by name, it alleges that an “unidentified bank” operated a division called “NRI Services” which specifically marketed foreign banking services to Americans of Indian decent. According to the allegations in the indictment, the bank advised that accounts be opened in India because of higher interest rates, no requirement of U.S. tax forms or social security numbers, and no taxation in India. Interestingly, the indictment details transactions with a total value of less than $200,000. This suggests that the U.S. government is sending a message that all noncompliant foreign accounts, large and small alike, are vulnerable to investigation and prosecution.
It was the substantial U.S. presence of UBS, and now HSBC, that made such banks vulnerable to U.S. prosecution. With U.S. banking licenses, multiple branches within the United States, thousands of employees in the United States, and billions of dollars of assets in the United States, these banks are clearly within the jurisdiction of a U.S. court and susceptible to an adverse court judgment or order.
As alleged in the indictment against Vaibhav Dahake, HSBC is reported to have specifically targeted Indian-American clients and offered offshore banking services in India and Singapore. The HSBC-India connection represents a particular tangent of offshore banking that will surely warrant scrutiny. Whereas UBS advised American clients that their accounts may be subject to exposure to the IRS, and therefore suggested pre-emptive disclosure (such as voluntarily disclosing to the IRS and correcting a non-compliant foreign account prior to the IRS taking action), Americans with accounts at HSBC in India received letters from DOJ in 2010, making it clear that DOJ already had their names. In such a case, pre-emptive disclosure is impossible; the IRS will reject a voluntary disclosure if the taxpayer is already under investigation or if the IRS already has the taxpayer’s name (regardless of the source, such as an audit, a whistle blower or an investigation).
The IRS has opened or will soon open field offices in Panama, Australia and China. Tax Information Exchange Agreements have been signed by all the former “tax havens,” including Liechtenstein and Monaco.
Another way for the IRS to obtain a taxpayer’s offshore banking data is via an internal bank employee stealing confidential data and offering it to a governmental tax authority in return for money. In 2008, a renegade employee of LGT Bank in Liechtenstein stole data about client accounts and sold the data to the German intelligence service in return for millions of Euros. With that data, the German government prosecuted many prominent Germans for tax fraud. The German government also shared the data with other governments around the world, including, apparently, India.
The stolen LGT bank data has now formed the basis for Indian authorities to launch prosecutions of Indian citizens who had undeclared accounts outside of India.
The LGT information is almost certainly in the possession of the IRS as well.
In 2010, India signed a tax information exchange treaty with Switzerland, and India is in the process of negotiating tax treaties with 65 countries, including “tax havens” such as the Cayman Islands, Jersey, Monaco, the British Virgin Islands and the Isle of Man. While there is currently no tax treaty between India and Liechtenstein.
Clearly, against this background of the erosion of banking secrecy and cooperation amongst governments in sharing banking data, taxpayers with undeclared accounts in India must consider bringing such accounts into compliance.
In early February 2011, the IRS announced the Offshore Voluntary Disclosure Initiative, which closely mirrors the 2009 Offshore Voluntary Disclosure Program, with a few refinements. The new penalties are 25 percent, greater than the 20 percent penalty under prior regulations, yet less than the 50 percent penalty that the IRS has been imposing in recent criminal tax fraud prosecutions.
The new voluntary disclosure rules present an opportunity for taxpayers with foreign accounts, in India and elsewhere, who did not come forward under prior regulations, but still want to avoid criminal prosecution and bring their foreign accounts into compliance. It is clear that the IRS is moving past UBS and Switzerland to other banks in other countries, and India appears to be a particular focus. Taxpayers must bring non-compliant foreign accounts into tax compliance, in order to avoid discovery by the IRS, higher penalties and criminal prosecution. In this new era of international transparency, decreased banking secrecy and stronger enforcement efforts, offshore banking compliance is very highly recommended.
Asher Rubinstein is a principal at the law firm of Rubinstein & Rubinstein LLP in New York City. His practice concentration is asset protection, wealth preservation, tax planning and tax compliance. He may be reached at www.assetlawyer.com.
Kenneth Rubinstein Interviewed by Reuters on IRS Offshore Crackdown and Credit Suisse
Kenneth Rubinstein Interviewed by Reuters on IRS Offshore Crackdown and Credit Suisse
Reprinted from Reuters
Credit Suisse bankers indicted in U.S. tax case
by Kim Dixon
Thursday February 24, 2011 09:49:19 AM GMT
* Indictment: Bank maintained $3 bln in untaxed accounts
* German officials conduct raids on Credit Suisse offices
* U.S. officials looking beyond UBS for tax evasion (Adds byline, details from indictment, comment)
WASHINGTON, Feb 23 (Reuters) – A U.S. grand jury charged bankers at a Swiss bank, identified by a source as Credit Suisse, with aiding and abetting Americans in evading taxes, in a widening of the government’s probe into foreign banks.
The indictment, filed on Wednesday, charges four current and former bankers at a large Swiss international bank with conspiring to defraud the U.S. government.
The bank was not named in the court filings, but a source familiar with the case said it was Credit Suisse.
The indictment said the bank “maintained thousands of undeclared accounts containing approximately $3 billion in total assets under management.”
U.S. officials say they are probing other banks that may be helping Americans evade taxes abroad after UBS AG <UBS.N> <UBSN.VX> paid $780 million and agreed to hand over nearly 5,000 account names to the U.S. government to settle tax evasion charges.
“It didn’t take a rocket scientist to say if I was the government and I had to look at other banks, I’d be looking at Credit Suisse,” said Ken Rubinstein, an attorney in New York for wealthy American clients with offshore accounts.
UBS and Credit Suisse are the two biggest banks in Switzerland, a nation that prizes its banking secrecy.
A Credit Suisse spokesman declined to comment.
Marco Adami, Emanuel Agustoni, Michele Bergantino and Roger Schaerer are the bankers listed in the indictment.
The defendants are at large and being sought by U.S. authorities.
Earlier on Wednesday, German prosecutors conducted new raids on Credit Suisse offices, targeting four of the bank’s employees as part of an ongoing tax probe.
The indictment was filed in the U.S. District Court for the Eastern District of Virginia. (Criminal No. 1:11-CR-95)
MOVING MONEY
The indictment says the bank’s managers and bankers used its New York office to provide services for customers’ undeclared accounts and that they advised clients to use offshore credit cards linked to offshore accounts.
It also alleges defendants discouraged U.S. customers from taking part in the U.S. tax amnesty program that lured in 15,000 tax dodgers in 2009. The U.S. just revived that program, with less generous terms.
The court filing also names two unnamed private Swiss banks and an Israeli bank with headquarters in Tel Aviv, with a subsidiary in Switzerland.
The indictment alleges the bankers spurred their clients to move money from Credit Suisse to smaller Swiss banks, the Israeli bank and a bank in Hong Kong.
U.S. tax commissioner Douglas Shulman has said authorities are looking beyond Europe to Asia as money moves globally amid the U.S. probes into foreign banks.
In a separate case, on Tuesday, a U.S. law enforcement official said a Credit Suisse banker was arrested in New York and was being moved to Florida for a court appearance.
(Additional reporting by Kevin Gray in Ft. Lauderdale, Martin De Sa’Pinto in Zurich, Maria Aspan in New York and Jeremy Pelofsky in Washington) (Reporting by Kim Dixon; editing by John Wallace, Lisa Von Ahn and Bernard Orr)
Asher Rubinstein Interviewed by Swiss Media on IRS Offshore Crackdown and Credit Suisse
Asher Rubinstein Interviewed by Swiss Media on IRS Offshore Crackdown and Credit Suisse
Reprinted from swissinfo.ch
Tax evasion glare turned on Credit Suisse
by Matthew Allen, swissinfo.ch
Monday 28.02.2011
The spectre of tax evasion has come back to haunt Switzerland following the indictments of four current or former Credit Suisse staff in the United States.
Efforts by the Swiss authorities to purge the financial centre of ill-gotten gains, following the UBS debacle, have failed to deter countries from pursuing aggressive legal measures against other banks.
The US indictments on Thursday follow the arrest of another Credit Suisse employee and – in a separate case – another raid by the German authorities on the bank’s offices in that country.
One US tax lawyer has likened the latest action by the Department of Justice to the successful case brought against UBS in 2008. UBS was fined $780 million while the Swiss government had to lift the veil of banking secrecy a year later by releasing details of thousands of the bank’s clients.
“In 2009 we knew that UBS would be the tip of the iceberg and that other Swiss banks would follow,” Asher Rubinstein told swissinfo.ch. “We have now reached that moment.”
“There has long been a belief that other Swiss banks have to some extent facilitated tax fraud and the IRS (Internal Revenue Service) is now going after them.”
Guilty by association
This week, a federal grand jury in Virginia charged four bank wealth advisors with aiding and abetting US citizens to dodge taxes. It is alleged that the bankers – only one of whom is still at Credit Suisse – created thousands of offshore accounts with a combined value of $3 billion (SFr3 billion).
The incriminating evidence appears not to have been sourced from a whistleblower but could have come either from the handover of UBS client data or a US tax amnesty that netted 15,000 tax dodgers in 2009.
Credit Suisse has distanced itself from the charges by stating that they are aimed at individuals and not the bank. The bank said it is cooperating with the US authorities.
One of those accused told the Associated Press on Sunday that he would not cooperate and that he would not to travel to the US to answer the indictment. In an interview with the Der Sonntag newspaper, he also criticised the US authorities.
Under US corporate law, a company can be held culpable for the offences of its staff, according to US tax lawyer Scott Michel.
“If an employee, or group of employees, of a corporation is found to have committed a criminal offence related to their work then the corporation itself can also be charged with criminal conduct,” he told swissinfo.ch.
In other words, if the charges against the four suspects stick in court, it would be at the discretion of the Department of Justice (DoJ) whether to indict Credit Suisse.
Swiss coming clean?
In such a case prosecutors would judge whether senior managers encouraged the actions of individuals or if the bank’s compliance systems were negligently lax, Michel added. A lack of such evidence would still leave the bank liable, but could result in a more lenient stance from the US authorities.
Switzerland has vowed to clean up its act following the UBS prosecution. In addition to cutting the UBS client data deal with the US, Switzerland has promised to offer more legal assistance to countries investigating tax fraud and is negotiating a series of revised double taxation agreements.
But the latest legal strong arm tactics show that the US authorities are not entirely convinced that Switzerland is doing enough to clean up its act, according to Michel.
“There is a feeling that people in some Swiss banks were advising clients not to reveal their hidden accounts and were frustrating efforts to uncover information at the same time that the Swiss and US governments were negotiating to open things up,” he told swissinfo.ch.
German raids
Some other Swiss banks, including the Basel Cantonal Bank, have been recently linked in the US media to the continued tax evasion crackdown.
Michel added that it would be no coincidence that the Credit Suisse employee indictments followed just weeks after the announcement of another tax amnesty programme in the US. A large slice of the success of the 2009 programme was put down to the UBS prosecution a year earlier.
In the meantime, the German authorities this week launched another raid on Credit Suisse offices in Germany. The raids started last year, shortly after German tax offices bought several CDs of client data stolen from Swiss banks.
Switzerland announced at the end of last year that it would negotiate special treaties with both Germany and Britain that would oblige Swiss banks to pay backdated and future withholding taxes on offshore accounts held by citizens of those countries.
Credit Suisse chief executive Brady Dougan has repeatedly stated over the past two years that his bank is fully compliant with regulations of other countries. It appears that those assertions will be put to the test by the US and German authorities in the coming months.
Matthew Allen, swissinfo.ch
IRS Targeting Undeclared Accounts in India for Tax Fraud
In 2009, U.S. prosecutors achieved a staggering victory against UBS, forcing the largest Swiss bank to settle criminal and civil charges that it aided and abetted tax fraud by assisting Americans to hide funds from U.S. taxation. In a stunning breach of hitherto ironclad Swiss banking secrecy, UBS was also compelled to disclose to the IRS the identities of thousands of Americans with formerly “secret” accounts. The IRS is now targeting other banks in jurisdictions beyond Switzerland. Bank accounts in India appear to be one of the next targets. People with undeclared accounts in India should take action in the face of the IRS crackdown on offshore accounts that are not tax compliant.
The IRS appears to be moving past UBS and targeting other banks, including HSBC which has a sizable presence in India. Since the summer of 2010, HSBC has been the target of a criminal tax fraud investigation by the U.S. Department of Justice (DOJ), for facilitating non-compliant offshore accounts. In the summer of 2010, DOJ sent letters to HSBC foreign account holders, advising them that they are the subjects of criminal investigations relating to unreported accounts in India and Singapore. DOJ has also prosecuted a Virginia surgeon and two Miami Beach real estate developers for undeclared foreign accounts with HSBC.
There are also reports that HSBC is implicated in the recent criminal prosecution of Vaibhav Dahake, an Indian-American with undeclared accounts in India and the British Virgin Islands. While the criminal indictment against Mr. Dahake does not mention HSBC by name, it alleges that an “unidentified bank” operated a division called “NRI Services” which specifically marketed foreign banking services to Americans of Indian decent. According to the allegations in the indictment, the bank advised that accounts be opened in India because of higher interest rates, no requirement of U.S. tax forms or social security numbers, and no taxation in India. Interestingly, the indictment details transactions with a total value of less than $200,000. This suggests that the U.S. government is sending a message that all noncompliant foreign accounts, large and small alike, are vulnerable to investigation and prosecution.
It was the substantial U.S. presence of UBS, and now HSBC, that made such banks vulnerable to U.S. prosecution. With U.S. banking licenses, multiple branches within the U.S., thousands of employees in the U.S., and billions of dollars of assets in the U.S., these banks are clearly within the jurisdiction of a U.S. court and susceptible to an adverse court judgment or order.
As alleged in the indictment against Vaibhav Dahake, HSBC is reported to have specifically targeted Indian-American clients and offered offshore banking services in India and Singapore. The HSBC-India connection represents a particular tangent of offshore banking that will surely warrant scrutiny. Whereas UBS advised American clients that their accounts may be subject to exposure to the IRS, and therefore suggested pre-emptive disclosure (i.e., voluntarily disclosing to the IRS and correcting a non-compliant foreign account prior to the IRS taking action), Americans with accounts at HSBC in India received letters from DOJ in 2010, making it clear that DOJ already had their names. In such a case, pre-emptive disclosure is impossible; the IRS will reject a voluntary disclosure if the taxpayer is already under investigation or if the IRS already has the taxpayer’s name (regardless of the source, e.g., audit, whistle blower, investigation, etc.).
The IRS has opened or will soon open field offices in Panama, Australia and China. Tax Information Exchange Agreements have been signed by all the former “tax havens”, including Liechtenstein and Monaco. While the IRS is intensifying its presence and its available tools around the world, there are other indications that the IRS is concentrating on India more particularly.
Another way for the IRS to obtain a taxpayer’s offshore banking data is via an internal bank employee stealing confidential data and offering it to a governmental tax authority in return for money. In 2008, a renegade employee of LGT Bank in Liechtenstein stole data about client accounts and sold the data to the German intelligence service in return for millions of Euros. With that data, the German government prosecuted many prominent Germans for tax fraud. The German government also shared the data with other governments around the world, including, apparently, India.
The stolen LGT bank data purchased by the German government has now formed the basis for Indian authorities to launch prosecutions of Indian citizens who had undeclared accounts outside of India. This campaign by Indian authorities against so-called “black money” includes monies hidden in Liechtenstein from the Indian tax authorities, even in the absence of the funds having criminal sources or involvement in money laundering. The issue is now before the Supreme Court of India, which has heard arguments about whether to make public the names of Indian citizens accused of having undisclosed foreign accounts.
In 2010, India signed a tax information exchange treaty with Switzerland, and India is in the process of negotiating tax treaties with 65 countries, including “tax havens” such as the Cayman Islands, Jersey, Monaco, the British Virgin Islands and the Isle of Man. While there is currently no tax treaty between India and Liechtenstein, Liechtenstein has shown its new transparency by promulgating multiple tax treaties with other countries, including the U.S., and a future treaty with India is likely. But even in the absence of such a treaty, India already has names, thanks to the LGT affair. The LGT information is almost certainly in the possession of the IRS as well.
Clearly, against this background of the erosion of banking secrecy and cooperation amongst governments in sharing banking data, taxpayers with undeclared accounts in India must consider bringing such accounts into compliance.
In early February 2011, the IRS announced the Offshore Voluntary Disclosure Initiative (OVDI), which closely mirrors the 2009 Offshore Voluntary Disclosure Program (OVDP), with a few refinements. The new penalties are 25%, greater than the 20% penalty under the prior OVDP, yet less than the 50% penalty that the IRS has been imposing in recent criminal tax fraud prosecutions.
The new OVDI presents an opportunity for taxpayers with foreign accounts, in India and elsewhere, who did not come forward under the former OVDP, but still want to avoid criminal prosecution and bring their foreign accounts into compliance. It is clear that the IRS is moving past UBS and Switzerland to other banks in other countries, and India appears to be a particular focus. Taxpayers must bring non-compliant foreign accounts into tax compliance, in order to avoid discovery by the IRS, higher penalties and criminal prosecution. In this new era of international transparency, decreased banking secrecy and stronger enforcement efforts, offshore banking compliance is very highly recommended.
More Prosecutions Related to Offshore Accounts, and the Lessons to be Learned
We’ve written extensively about the IRS offensive against non-compliant foreign bank accounts and criminal prosecution of Americans with such accounts. Two recent criminal prosecutions are noteworthy because they represent a widening of the IRS campaign.
First, the criminal indictment against Samuel Upham is based on charges of conspiracy and aiding the filing of false tax returns. Mr. Upham himself was not the owner of a non-compliant UBS account at issue. The actual account owner was Mr. Upham’s mother, Sybil Upham, who is already facing criminal charges regarding her UBS account. Ms. Upham is one of the 4,500 Americans identified by UBS to the IRS in settlement of the criminal prosecution against the bank, notwithstanding prior promises of account secrecy.
The indictment against Mr. Upham is significant because although he was not the account owner (his mom was), he allegedly assisted the tax non-compliance, assisted in the filing of false tax returns and smuggled money into the U.S. The charges also include use of a Liechtenstein foundation and Hong Kong corporate entity in order to obscure the true ownership of the account. As we’ve written, prosecutors seem to be focusing on use of sham entities (trusts, foundations, corporations, etc.), although taxpayers who had accounts in their own names have been IRS targets as well.
The lesson here is that the IRS is not only investigating and prosecuting the owners of the undeclared foreign accounts. The IRS is also targeting people who facilitated and assisted in the non-compliance, including family members of account holders.
The second case involves a former UBS banker, Renzo Gadola, accused of advising and assisting Americans to evade taxes. Criminal charges against foreign bankers, and even lawyers, who facilitated tax fraud are not new. But the allegations in this latest prosecution are noteworthy.
First, Mr. Gadola utilized a smaller bank, Basler Kantonalbank, rather than UBS which was being investigated by the US Goverment, in the hopes of avoiding detection. Lesson one: even smaller banks are “on the radar”. We can now add Basler Kantonalbank (and presumably, other regional Swiss banks like Zurich Kantonalbank) to the list of banks being investigated, which include Credit Suisse, HSBC, Julius Baer, Liechtensteinische Landesbank and Bank Leumi.
Second, it is alleged that Mr. Gadola advised the US account holder that the account at Basler Kantonalbank would be too small to be detected. Lesson two: accounts of all sizes are vulnerable. The IRS does not want taxpayers to believe that an account under a certain size is “safe” from discovery.
Third, it is alleged that Mr. Gadola kept his US client’s funds in cash, advising “There is no paper trail.” Lesson three: there is always a paper trail or a wire transfer trail.
Fourth, it is alleged that Mr. Gadola advised his US client to falsify banking records to make the money look like a loan. Lesson four: this strategy will not work. It will also likely result in additional criminal charges.
Finally, Mr. Gadola advised his US client not to enroll in the Voluntary Disclosure Program by which the US client could have made his account tax-compliant and avoid criminal prosecution. Obviously the lesson here is that owners of non-compliant foreign accounts should consider the IRS voluntary disclosure program.
These two new criminal cases, both commenced in the last few weeks, show the vulnerability of non-compliant offshore accounts to discovery. Moreover, they show that the IRS is aware of the tactics and methods used by taxpayers, and their advisors, to avoid detection.
Please contact us if you have questions related to foreign accounts. We can advise on how to bring a foreign account into compliance. We can also advise if you are being investigated by the IRS in regard to an offshore account.
Newsflash: IRS Commissioner Further Comments on Possible New Offshore Voluntary Disclosure Program
We recently wrote that the IRS has hinted about a new voluntary disclosure program (VDP) for non-compliant foreign accounts. Our post from November 18, 2010 can be found here and discusses the earlier VDP that expired in 2009, as well as commentary about the possible penalties that might be part of a second, new VDP.
Last week, IRS Commissioner Shulman again stated that the IRS is considering a second VDP. Commissioner Shulman’s most recent remarks, following the earlier hints from November, suggest a strong possibility that a second VDP will be announced soon.
Clearly, following the IRS success against UBS, plus current IRS investigations of other banks such as HSBC, Credit Suisse, Julius Baer, Liechtensteinische Landesbank, Bank Leumi and others, the IRS has the upper hand in discovering and prosecuting tax fraud related to undeclared offshore accounts. Foreign bank secrecy has been further eroded by the passage of the HIRE Act earlier this year, which increases reporting obligations by US taxpayers with foreign holdings as well as new reporting obligations incumbent upon foreign banking institutions. Fines and penalties for undeclared offshore accounts and unreported foreign income are significantly increased by the HIRE Act.
Commissioner Shulman’s recent remarks make it clear that the IRS is not stopping at UBS alone. Other banks are next. Commissioner Shulman stated:
As I have said from the beginning, this was never about one country or one bank. The John Doe Summons [against UBS] was just one piece of a much larger effort underway here at the IRS on international tax compliance issues that is producing real results for U.S. taxpayers.
* * *
The VDP and UBS matters are significant, but there is obviously more to come. We have been scouring the vast quantity of data we received from the VDP applicants and from other sources. Although more data mining is still to be done, this information has already proved invaluable in supplementing and corroborating prior leads, as well as developing new leads, involving numerous banks, advisors and promoters from around the world, including Asia and the Middle East.
Clearly, a new voluntary disclosure program would be welcome for taxpayers who need to bring their foreign holdings into tax compliance. Presumably, a new VDP would also include clarification of what the penalties will be. The prior VDP, which ended in October 2009, imposed a special penalty of 20% of the highest aggregate balance of the offshore accounts. But taxpayers who voluntarily disclosed their foreign accounts after the expiration of the prior VDP face uncertainty of what the penalties would be. By law, the IRS is allowed to take 50% of the non-compliant account for each year that the account is non-compliant. Commissioner Shulman hinted about the new penalty regime:
Given its success, we are seriously considering another special offshore Voluntary Disclosure program. However, there will be some fundamental differences. Taxpayers will not get the same deal as those who came in under the original program. To be fair to those who came in before the deadline, the penalty – and thus the financial cost to participate – will increase. Let me say too that we expect to make the terms of any new program available to those who have already come in after October 2009 when that program expired. Stay tuned for more details as they become available.
We will continue to monitor the issue. In the interim, please contact us with any questions about foreign accounts , voluntary disclosures , tax compliance and offshore reporting issues.