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
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
This week, a US federal judge ordered the seizure of a bank account at UBS in Stamford, Connecticut. This was a “correspondent account” of Swiss bank Wegelin & Co. A correspondent account is a US account utilized by a foreign bank for banking transactions with a US nexus, when the foreign bank does not otherwise have a US banking presence. Wegelin’s correspondent account at UBS was seized and forfeited to the US Treasury because, as prosecutors alleged, the account had been utilized by Wegelin to facilitate tax fraud and money laundering. Specifically, among other charges, Wegelin (and two other banks) assisted the repatriation of undeclared money at its Swiss bank via checks drawn on the correspondent account, rather than wire transfers or checks from Switzerland, which would have been more conspicuous and suspicious.
This seizure followed the indictment against Wegelin by the US Department of Justice (DOJ), on February 2, 2012, for facilitating tax fraud by US taxpayers with “secret” bank accounts at Wegelin in Switzerland. This was the first time in history that a foreign bank had been criminally charged by the US for tax fraud. DOJ also personally charged three Wegelin bankers in January 2012. The charges included that Wegelin bankers actively sought US clients of UBS who were concerned that DOJ and the IRS would discover their undisclosed UBS accounts, and convinced these US clients to transfer their accounts to Wegelin. Wegelin promised these clients that it was “under the radar” and immune from US prosecution because, unlike UBS, it did not have US branches. Wegelin’s prosecutors stated that Wegelin was “undeterred by the crystal-clear warning they got when they learned that UBS was under investigation for the identical practices”. The charges also included that Wegelin charged higher fees for the former UBS clients, due to their heightened nervousness at getting caught, thus exploiting their vulnerability. The charges also included use of intermediary entities like Liechtenstein and Panama foundations and corporations, designed to obscure the true ownership of the accounts, as well as account code names and instructions not to mail correspondence and statements to the US. Such tactics to avoid detection by the IRS are by now very familiar to prosecutors (and tax and defense attorneys).
Wegelin did not answer these charges, nor appear in court. The bank was labeled a fugitive. When a defendant does not answer the allegations, it is known as a “default”. Because Wegelin defaulted, the account was seized and forfeited. The account was taken because Wegelin was a “no show”, not because it was found guilty of the charges. In practical terms, there is little difference.
The first question is, why did Wegelin default? One possible answer is that the amount at stake in the account, approximately $16.2 million, while a large amount to most people, was not enough of a concern for Wegelin to hire US lawyers and defend itself in a criminal proceeding that could take years to resolve. “Cut bait and fish elsewhere”, as they say.
However, there is little fishing elsewhere for Wegelin. In January, 2012, on the eve of the DOJ indictment, Wegelin split itself up. Wegelin’s US-client accounts, under IRS and DOJ scrutiny, were kept intact, while the non-US accounts were sold off to another Swiss bank (Notenstein Privatbank, an entity set up specifically for this acquisition, which in turn was bought by Swiss bank Raiffeisen). This was an attempt to separate and contain the liability for the US-client accounts, reminiscent of the way other “toxic” assets like subprime mortgages and failed derivatives are packaged, contained and sold off at a discount. The rationale for the Wegelin split was that legal action by the US would be focused on the US-client accounts, while the other accounts would now be owned by a new entity, immune from US legal challenge. It is unlikely that US legal action would follow to the acquiring bank, as there are no allegations the Raiffeisen participated in Wegelin’s tax fraud. Following the split up and US legal challenges, Wegelin is left greatly diminished and weakened, and the lingering question is whether Wegelin, Switzerland’s oldest private bank (since 1741), can survive.
Another open question is whether Wegelin will give up the names of its US account holders? It is likely that the IRS already has those names, following the trail from UBS. Further, it is likely that the IRS has the names, otherwise DOJ would not have had sufficient evidence for criminal prosecution against Wegelin itself, and its bankers. Of the approximately fifty criminal cases for offshore tax fraud brought by DOJ against US taxpayers in recent years, only one has thus far involved accounts at Wegelin (and in that case, the US owner of the Wegelin account was convicted). By comparison, thirty four such cases have involved UBS accounts. It is almost certainly just a matter of time before DOJ files additional criminal cases involving Wegelin accounts. Additional incriminating information against Wegelin was obtained via information provided to the IRS by the thousands of US taxpayer participating in the three offshore voluntary disclosure programs that the IRS has offered since 2009.
There are lessons to be learned from Wegelin’s prosecution and downfall, and the first might be labeled a matter of hubris. In the summer of 2009, following UBS’ settlement with DOJ and agreement to reveal the identities of 4,500 Americans with undeclared UBS accounts, Wegelin managing partner Konrad Hummler published a “commentary” titled “Farewell America” (Wegelin & Co. Investment Commentary No. 265; August 24, 2009), a scathing attack on the United States, its politics, morality, fiscal and tax policy, which ultimately compared the US economic system to Madoff’s Ponzi scheme. Among the accusations, that the US “causes regular crises in the global financial system” and displays “breathtaking moral duplicity in maintaining enormous offshore tax havens in Delaware, Florida and others of its states.” (The full commentary is available here). This was a blatant, angry reaction to DOJ’s success in bringing UBS to its knees, breaking Swiss banking secrecy and extracting the identities of thousands of Americans with UBS accounts.
Beyond that reaction, Wegelin’s hubris was that it actively solicited UBS account holders and offered the very same non-compliant banking services and tax evasion strategies and tactics that brought the IRS and DOJ against UBS in the first place. Moreover, while knowingly offering these services, Wegelin boasted of its non-vulnerability because, unlike UBS, it did not have a US presence. Thus, whereas UBS bankers had been charged with promoting tax non-compliance by visiting the US and courting wealthy Americans at art shows and elsewhere, and then running back to Switzerland and hiding behind Swiss banking confidentiality laws, Wegelin bankers never had to come to the US to promote. The absence of US branches supposedly made Wegelin impervious to US legal action.
Thus, one conclusion is that even if a foreign bank lacks a US presence, it is still vulnerable to US prosecution and seizure of assets. UBS settled with the US (and Credit Suisse appears to be poised to settle) because of its substantial footprint subject to US jurisdiction: branches in the US, assets in the US, employees in the US and a lucrative US banking license. US assets, such as Wegelin’s correspondent account, can be seized by a US court. Wegelin’s boasting of supposed non-vulnerability because of no US presence failed to take into consideration two things: (1) it was offering the very same tax fraud services as UBS, fully aware that UBS was under criminal investigation for those very services, and (2) it had a correspondent account located in the US (at UBS, coincidentally?).
The seizure of $16.2 million from Wegelin’s correspondent account is a small sum by international banking standards, but this could have far-reaching effects. For instance, there are many banks that do not have a US presence, but in order to transact in international banking and finance, need access to correspondent accounts in the US The Wegelin events may cause foreign banks to consider pulling their correspondent accounts out of US banks and utilize correspondent accounts in London, for example. This could have implications for any US counterparties to an international transaction, perhaps causing delays and requiring many steps to transact around the absence of a US correspondent account.
Moreover, the seizure of Wegelin’s correspondent account, in combination with the new requirements applicable to foreign banks under the Foreign Account Tax Compliance Act (FATCA), including 30% withholding on US investment income for non-compliant banks, may cause foreign banks to consider whether they should leave the US entirely. The US has now demonstrated that it has tremendous leverage over the entire world banking system: virtually every bank invests its reserves in US treasuries and other safe US bonds, thereby earning US investment income, and virtually every foreign bank has a correspondent account with one or more US banks.1
The Wegelin matter also demonstrates that the US has more leverage in the four year old offensive against offshore banking secrecy, that unless the Swiss banks deliver what DOJ wants (i.e., the names of Americans with non-compliant accounts), the US can cripple the Swiss banking system and severely affect the Swiss economy. This is exactly why UBS caved to the US in 2009. For UBS to not have revealed the secret accounts would have resulted in US retaliatory action, with significant negative consequences not only to UBS, but to the Swiss nation and economy. Thus, large banks like UBS and Credit Suisse, with assets in the US, are clearly vulnerable to US legal action. Now, after the Wegelin matter, it is clear that small banks, even those without a US presence, are also vulnerable. And US clients with non-compliant accounts at any foreign bank continue to be exposed to discovery and prosecution, and must consider becoming tax compliant.
1 While Wegelin was clearly wrong about its lack of US presence rendering it impervious to US legal enforcement, in an ironic twist, Konrad Hummler, in “Farewell America”, was correct that “the USA is attempting to exploit its almost unlimited position of strength with regard to the international transaction systems (Swift, clearing systems, custodians) and the fundamental attractiveness of its capital market to impose its ideas on the rest of the world.”
Moreover, even prior to FATCA, Hummler concluded that “it will be simply too dangerous to own US securities, to hold them as custodian for third parties, or to trade them as a bank.”
Asher Rubinstein on Swiss TV (in French) regarding Swiss banking and the indictment against Wegelin Bank
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Asher Rubinstein on Swiss TV (in German) regarding foreign banking
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On February 2, 2012, the U.S. Department of Justice (DOJ) indicted Swiss bank Wegelin & Co. for tax fraud. A U.S. court also froze Wegelin’s correspondent account in the US, seizing $16 million, an unprecedented move. In non-legalese, this is a bombshell. It will cause ripple effects in the global banking world. It also shows that the U.S. has the upper hand in the four year old battle with the Swiss over “secret” bank accounts.
As we wrote, six days ago, Wegelin & Co. split itself up. Wegelin’s U.S.-client accounts, under IRS and DOJ scrutiny, were kept intact, while the non-U.S. accounts were sold off to another Swiss bank. This was an attempt to separate and contain the liability for the U.S.-client accounts, similar to the way other “toxic” assets like subprime mortgage and failed derivatives are packaged, contained and sold off at a discount. The rationale for the Wegelin split was that legal action by the U.S. would be focused on the U.S.-client accounts, while the other accounts would now be owned by a new entity, immune from U.S. legal challenge.
The Wegelin split followed the indictments of three Wegelin bankers in early January, 2012. DOJ has been prosecuting individual foreign bankers, lawyers and trustees, as well as the banks themselves, along with U.S. clients who had the Swiss accounts. Following UBS’s 2009 admission of assisting U.S. tax fraud, some fifty separate prosecutions have ensued. DOJ is specifically alleging that after UBS came under IRS and DOJ scrutiny, Wegelin bankers deliberately courted UBS clients, and their non-compliant funds, offering a safe harbor from the IRS. Wegelin bankers assured former UBS clients that because Wegelin has no U.S. branches, it was immune from prosecution.
DOJ’s indictment of Wegelin and seizure of its U.S. correspondent account, and Wegelin’s self-engineered break up, clearly demonstrate that Wegelin bankers were wrong.
Thus, the first conclusion: Even if a foreign bank lacks a U.S. presence, it is still vulnerable to U.S. prosecution and seizure of assets. UBS settled with the U.S. (and Credit Suisse appears to be poised to settle) because of its substantial U.S. assets subject to U.S. jurisdiction: branches in the U.S., assets in the U.S., employees in the U.S. and a lucrative U.S. banking license, any of which could be seized by a U.S. court. Wegelin’s perception of non-vulnerability because of no U.S. assets failed to take into consideration two things: (1) it was offering the very same tax fraud services as UBS, fully aware that UBS was under criminal investigation for those very services, and (2) it had a correspondent account at a bank in the US, in fact, at a UBS (coincidence?) branch in Connecticut.
The seizure of $16 million is a small sum by international banking standards, but this will have far-reaching effects. Many foreign banks do not have branches in the U.S. but must have access to the U.S. banking system via correspondent accounts in order to transact. The Wegelin events may cause foreign banks to pull their correspondent accounts out of U.S. banks. The seizure of Wegelin’s correspondent accounts, in combination with the new requirements applicable to foreign banks under the Foreign Account Tax Compliance Act (FATCA), including 30% withholding on U.S. investment income for non-compliant banks, may cause foreign banks to consider whether they should leave the U.S. market entirely. The U.S. has now demonstrated that it has tremendous leverage over the entire world banking system: virtually every bank invests its reserves in U.S. treasuries and other safe U.S. bonds, thereby earning U.S. investment income, and virtually every foreign bank has a correspondent account with one or more US banks.
Lately, the IRS and DOJ offensive against the Swiss has been somewhat of a chess match. Following UBS’ settlement with the U.S. in 2009, the US indicted Credit Suisse bankers last July, indicted Julius Baer bankers last October, and Wegelin bankers last month, in addition to investigating other Swiss banks like the Kantonal banks. The Swiss would rather have a global settlement rather than defending bank by bank. Last week, the Swiss responded to a DOJ ultimatum for banking information by surrendering millions of e-mails between bankers and U.S. clients; however, the information was provided in encrypted form, to be un-encrypted when the U.S. side delivered something in return, such as a global settlement.
It’s possible that the Wegelin indictment and asset seizure was a direct response to the cheeky Swiss move of disclosing, but not fully disclosing. However, the indictment required significant time to investigate and prepare. DOJ likely had the Wegelin indictment ready for a while (along with, probably, indictments against Credit Suisse, Julius Baer, the Kontanal banks, etc.) and was waiting for the opportune time to serve it.
The Wegelin indictment and asset seizure can also be viewed as a statement that the U.S. has more leverage in the four year old offensive against banking secrecy, that unless the Swiss deliver what DOJ wants, the U.S. can cripple the Swiss banking system and severely affect the Swiss economy. This is exactly why UBS caved to the US in 2009. For UBS to not have revealed the secret UBS accounts would have resulted in extreme U.S. action, with significant negative consequences to not only UBS, but to Switzerland in its entirety. Thus, large banks like UBS and Credit Suisse, with assets in the U.S., had a clear vulnerability to U.S. legal action. Now, it is clear that small banks, even those without a U.S. presence, are also vulnerable. And U.S. clients with non-compliant accounts at any foreign bank continue to be exposed to discovery and prosecution.
As we wrote last month, the re-opening of the IRS Offshore Voluntary Disclosure Initiative (OVDI) was timed to precede another U.S. step in the offensive against Swiss banking secrecy, so as to incentivize U.S. taxpayers to come forward and make their Swiss accounts compliant. The Wegelin indictment and asset seizure demonstrate that the U.S. is getting closer to checkmate.
1. In response to a deadline imposed by the United States Department of Justice (DOJ), the Swiss gave to the U.S. a cache of e-mails between Swiss bankers and their U.S. clients. The number of e-mails is in the millions. However, in a surprising move in this continuing chess game between DOJ and the Swiss, the information was provided to the DOJ in encrypted form. The Swiss state that they will de-crypt the information when the U.S. responds favorably, such as by agreeing to a global Swiss banking settlement covering all Swiss banks.
I am not a computer nor encryption expert, but I find it odd that the Swiss would think that the resources of the American government would not be used to crack the encryption. It’s almost a belief that Swiss encryption is better than American counter-encryption. But then again, the Swiss once believed that their banking secrecy was invincible also.
At some point, the Swiss bank account data, currently encrypted but in U.S. hands, will be revealed. This can happen by way of a global settlement with the Swiss (as the Swiss hope), going after individual banks one at a time (first UBS, then Credit Suisse, now Baer, Wegelin, the Kantonals, etc. . . ), or the US cracking the encryption. Once that happens, depending on the number of U.S. taxpayer account holders revealed, this could be the biggest breach of Swiss banking secrecy since UBS revealed close to 5,000 names of U.S. account holders. Good thing the IRS re-opened the OVDI a few weeks ago.
Query whether other countries, such as Britain and Germany, which reached agreements with Switzerland on non-compliant accounts, will now attempt to get more out of the Swiss.
In addition, one must ask whether the Swiss would try such a tactic – – revealing, but not actually revealing – – within the context of an actual lawsuit. The provision of the encrypted data was within the context of a DOJ investigation and settlement negotiations, not within the context of an actual lawsuit like United States v. UBS AG. An actual lawsuit would be held before an actual judge. A judge would probably not think very highly of purported compliance but not actual compliance. The U.S. assets of the Swiss banks (branch offices, assets on deposit, banking licenses) would be vulnerable to an adverse judgment or finding of contempt by a U.S. judge.
This is the latest example of not only the deterioration of Swiss banking secrecy, but also of how the Swiss, who previously promised their clients the world’s most secretive banking, will shed those promises and give up their clients in the face of foreign pressure.
We repeat: Good thing the IRS re-opened the OVDI a few weeks ago.
2. Last Week, Wegelin & Co., Switzerland’s oldest private bank, essentially split apart. One part, the part that used to service American account holders, remained Wegelin. The other, larger part containing Swiss and other European business, was spun off and sold. The reason for the break up was to contain the liabilities associated with the non-compliant bank accounts of U.S. taxpayers. We know that Wegelin has been under investigation by the IRS and DOJ for providing non-compliant banking services. In January 2012, three Wegelin bankers were indicted by DOJ for facilitating tax fraud via “secret” accounts. The indictments include allegations that Wegelin took over such accounts after the account holders left UBS in favor of other banks, supposedly “under the radar”. DOJ is also prosecuting Americans who had such accounts at Wegelin.
What is interesting is that to the Swiss, the U.S. accounts need to be isolated and separately contained, as a means of damage control. We are reminded of assets considered to be “high risk”, such as collateralized debt instruments and subprime mortgages, and left out of sales of banks and bank assets, sold on their own at a sharp discount because of their toxicity.
Will Wegelin’s acquirer (Notenstein Privatbank, an entity set up specifically for this acquisition, which in turn was bought by Swiss bank Raiffeisen) now be insulated from liabilities arising from the non-compliant accounts of U.S. taxpayers?
Our answer is, probably. For one thing, if Raiffeisen is now the target of a DOJ subpoena or “John Doe” summons, it will now probably be able to legitimately say that it lacks the account data responsive to the DOJ request, since that information will likely have remained with Wegelin. In fact, assuming that Raiffeisen was not offering similar non-compliant banking services as UBS, Credit Suisse, Wegelin, etc., and further assuming that Raiffeisen only bought “clean” European accounts rather than non-compliant American accounts, it is likely that Raiffeisen may be insulated from future DOJ attacks. However, to the extent that former Wegelin bankers merely changed employers, these individuals may still face accountability for assisting tax fraud at their former employer. As we have seen, DOJ charges both banks and individual “facilitators” including foreign bankers, attorneys and trustees (along with, of course, American owners of such accounts).
3. As we have written, Switzerland still offers banking advantages: a safe and stable political, economic and social structure; experienced banking infrastructure and regulation; an educated, savvy banking workforce; good investment opportunities; privacy and confidentiality vis-a-vis private, civil creditors, and asset protection. What Switzerland no longer offers is tax secrecy. Thus, assuming a Swiss account is tax-compliant, it offers many benefits. Assuming a Swiss account, or any foreign account, is not tax-compliant, the beneficial owner of the account must take heed of the eradication of offshore banking secrecy, and make the account compliant.
1. The Continued Risk of “Quiet Disclosure” of Offshore Accounts
Americans with a non-compliant foreign account are faced with various choices about what to do with the account. One option is to make a voluntary disclosure. This will bring the account into tax compliance and avoid criminal penalties, but comes at the cost of back taxes, interest and some civil penalties. Another option is to do nothing, or transfer the account somewhere else, and hope that the IRS doesn’t find the account. A sort of middle ground is to not make a formal voluntary disclosure (a “noisy” disclosure), but instead to file back taxes and retroactive FBAR forms in an attempt at retroactive tax compliance. This is known as a “quiet” disclosure. We have, in the past, advised against “quiet” disclosures. Please see our article, “Quiet Disclosure of Foreign Bank Accounts Still Causes Noise“.
There has been at least one criminal prosecution that involved a “quiet” disclosure. See: U.S. v. Schiavo, U.S. District Court, Massachusetts, involving offshore accounts at HSBC which the defendant attempted to “clean up” via a quiet disclosure. The charges against Schiavo specifically referred to a “silent disclosure”.
More recently, IRS personnel have stated that the IRS is currently and actively examining “quiet” disclosure cases. In the event that a “quiet” disclosure is caught, the taxpayer will not have the protection of a “noisy” voluntary disclosure. This means that all penalties are potentially applicable, including criminal penalties.
It seems to us that a “quiet” disclosure is easily detected. The sudden filing of FBARs for prior years is an obvious “red flag”. Moreover, comparing a newly filed amended tax return that shows foreign income, to an originally filed tax return that did not show foreign income, is a clear indication of a “quiet” disclosure. We reiterate our prior position that quiet disclosures are not advisable.
2. Incarceration of US taxpayer with UBS and Wegelin Accounts
Last week, another criminal offshore account defendant was sentenced. The defendant, Kenneth Heller, eighty two years old and in ill health, received a sentence of forty five days in jail.
Forty five days in jail for an eighty two year old in ill health seems harsh, especially when we consider that most of the offshore banking defendants have received sentences like probation and house arrest. The Assor/Cohen-Levy defendants did get multi-year sentences, but that was a rare case that went to trial rather than plea agreement. Heller did not go trial and took a plea. He also already paid an FBAR penalty of almost $10 million.
We can only speculate on why Heller received jail time. Perhaps it was because he was not a sympathetic person, having been disbarred from practicing law previously. Perhaps it was because of the large amount of undeclared foreign income. Perhaps the judge wanted to make a point, irrespective of the defendant’s age.
3. U.S. Clients Not Welcome at Offshore Banks
We’ve been keeping a tally of foreign banks that no longer welcome U.S. clients. While UBS and Credit Suisse have been closing offshore accounts for U.S. clients and transferring the clients to on-shore, tax-compliant divisions, other offshore banks have been firing U.S. clients outright.
Banks that no longer welcome U.S. clients include: Clariden Leu (Switzerland), Mirabaud & Cie (Switzerland), Basler Kantonalbank (Switzerland) Mizrahi Tefahot (Israel), Bank Hapoalim (Israel), LGT (Liechtenstein) and Liechtensteinische Landesbank (Liechtenstein). These firings are happening notwithstanding years-long banking relationships and many years of fees paid by the clients.
In other cases, foreign banks are willing to keep U.S. clients, but only if they provide evidence of U.S. tax compliance, such as Form W-9. Most recently, Aargauische Kantonalbank advised clients that for the banking relationship to continue, the client must present evidence of tax compliance. Interestingly, while Basler Kantonalbank is firing U.S.. clients outright, Aargauische Kantonalbank still welcomes tax-compliant accounts.
The Foreign Account Tax Compliance Act (FATCA) will introduce additional requirements applicable to foreign accounts.
Still, having a foreign bank account is not illegal, provided it is tax-compliant. And, there are many legitimate reasons to have a foreign account: international trade and business income; ownership of foreign assets including real estate; international investment diversification; currency trading; providing money to relatives in foreign countries; children studying abroad.
We can help you navigate the changing world of offshore banking, including compliance with U.S. tax laws and regulations, and the changing requirements of the foreign banks.
Offshore Update: Continued Investigation and Prosecution of Foreign Accounts Amidst a New Opportunity for Pre-emptive Disclosure
by Asher Rubinstein, Esq.
The U.S. government continues in its offensive against non-compliant offshore banking, targeting both the U.S. taxpayers who failed to declare foreign accounts, as well as the foreign bankers who provided non-compliant banking services.
Last month, a US taxpayer in San Francisco was indicted for failing to declare his UBS account. Last week, a doctor and medical professor was sentenced by a federal court in New York for failing to declare his account at UBS. Additional, non-UBS banks were also included in both cases.
At the same time, prosecutors are also charging the foreign bankers who facilitated the foreign accounts and provided foreign banking services. Bankers at Wegelin & Co., a private Swiss bank, were indicted in early January. Bankers at Julius Baer were indicted last October.
The indictments detail tactics such as setting up accounts using code names, sham corporate entities and having foreign relatives as the purported owners of the accounts. The indictments also allege that the bankers told U.S. clients that their accounts were not vulnerable to discovery by the IRS because the banks did not have a U.S. presence such as a U.S. branch office.
In additional to Wegelin and Julius Baer, Credit Suisse, the local Swiss Kantonal banks, as well as banks in Israel, India and Liechtenstein are all under investigation for aiding and abetting tax fraud by US taxpayers. The IRS and Department of Justice (DOJ) are pursuing these banks because of the purported “money trail” that left UBS as UBS prepared to surrender once-“secret” bank data to the U.S. government. According to one recent indictment, UBS bankers suggested only transferring Swiss Francs from UBS to a local Kontonal bank in order to minimize detection.
Tracing noncompliant funds to other banks, in Switzerland and elsewhere in the world, is indicative of the expanding global scrutiny and effectiveness of the investigations.
As legal counsel to many taxpayers with foreign accounts, when we read the news reports of new tax investigations, indictments and prosecutions, we note that the names of some foreign bankers appear again and again. We have been able to observe connections between separate clients who had common foreign bankers. The IRS, of course, is reaching similar conclusions. If the name of a banker appears again and again, that banker comes to be “on the radar” at the IRS and DOJ. If the banker is then criminally charged, the banker is likely to cooperate with prosecutors and divulge bank account information as part of a negotiated settlement. For instance, Renzo Gadola, a former UBS banker in Switzerland was charged with facilitating US tax fraud. He pled guilty in December 2010 and has been cooperating with DOJ prosecutors. He has provided information about U.S. clients and other Swiss bankers who assisted in hiding foreign assets. As part of Gadola’s settlement, he must return to the U.S. annually to further assist DOJ investigations of foreign banking.
Many of our clients who came forward with timely voluntary disclosures were relieved when they later learned that their foreign bankers had been criminally charged. If the clients had delayed in coming forward, and the bankers had shared account information with the government, then the clients would not have been accepted into the voluntary disclosure program and might have faced criminal prosecutions themselves!
At the same time that the government is going on an offensive against non-compliant offshore accounts, it is also offering yet another opportunity to come forward and declare such accounts in return for lower penalties and no criminal prosecution.
In January, 2012, the IRS announced the re-opening of the 2011 Offshore Voluntary Disclosure Initiative (OVDI), which had previously expired in September, 2011. The 2011 OVDI followed a similar 2009 program that likewise encouraged taxpayers to bring their foreign accounts into tax compliance, in return for lower penalties and avoidance of criminal prosecution. The renewal of the OVDI presents another opportunity for taxpayers to bring their foreign accounts into tax compliance. The terms of the program are the same as the OVDI, but the penalties have been increased. Still, the penalties are significantly lower than the penalties that would apply if the IRS discovers the account, and criminal prosecution can also be avoided.
In light of the erosion of foreign banking secrecy, discovery of the account by the IRS is very likely. Notwithstanding promises to its clients of banking secrecy, UBS revealed the names of almost 5,000 U.S. clients to the U.S. government, in return for the U.S. dropping a civil and criminal tax fraud prosecution against UBS. Credit Suisse is facing similar charges and is expected to settle these charges by likewise handing over client names. Negotiations are currently underway between the U.S. and the Swiss for a global settlement that will involve all Swiss banks, including Wegelin, Julius Baer, the Kantonal Banks, and others. It is expected that the settlement will require the Swiss banks to reveal the names of U.S. account holders to the U.S. government. The announcement of the re-opening of the OVDI is well-timed to allow another opportunity for such account holders to pre-emptively disclose their accounts to the IRS before the Swiss do so.
Another threat to bank secrecy comes from bank employees who divulge account details of customers, in contravention of bank policy and local (e.g., Swiss) law. The most recent example is the case of the Central Governor of the Swiss National Bank, Philipp Hildebrand, who last week resigned following allegations of improper currency trades made by his wife. The allegations resulted from information disclosed by an IT employee “whistle blower” at the Swiss National Bank.
Bank employees handing over supposed “secret” banking data is not new. Back in 1999, John Mathewson, the former owner of Guardian Bank and Trust, a defunct Cayman Islands Bank, was charged in the U.S. with money laundering. When Mr. Mathewson was arrested, he gave U.S. investigators bank records that contained information about American depositors at the bank who had evaded U.S. tax obligations. Mathewson gave up the banking data in return for leniency in his criminal sentencing.
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. In 2009, an employee of HSBC provided bank account data to the French government. In 2010, Germany again purchased banking data, stolen by an employee of a Swiss bank. The DOJ was able to successfully prosecute UBS, and then UBS clients, because of information that had been disclosed by UBS banker Bradley Birkenfeld to the U.S. government.
Thus, there is no bank secrecy. The discovery of a “secret” offshore account can be the result of numerous factors: First, internally at the bank, via whistle blowers, “snitches” and thieves. Second, due to the vigilance of the U.S. government in pursuing foreign banks and bank accounts, demonstrated by IRS/DOJ success against UBS, and current investigations of numerous other banks (including HSBC, Credit Suisse, Wegelin, Julius Baer, Leumi, Hapoalim, Liechtensteinische Landesbank and others).
A third significant blow to foreign banking secrecy is via the newly implemented Foreign Account Tax Compliance Act (FATCA), which imposes new offshore reporting requirements on account owners and on foreign banks. New IRS Form 8938 requires disclosure of foreign financial assets with an aggregate value in excess of $50,000, and applies to offshore assets owned during 2011. Form 8938 will be due, along with Form 1040, by April 15, 2012.
In light of the above challenges to offshore secrecy, clearly anyone with a foreign asset that is still not tax compliant must take immediate measures to bring the asset into tax compliance. As noted, it is widely believed that the renewal of the Offshore Voluntary Disclosure Initiative is purposely timed to incentivize compliance before the next wave of banking data is released to the U.S. government. Whether through additional prosecutions of banks and bankers, or via a settlement with Swiss banks, each outcome will lead to the revelation of the identities of account owners and other banking data to the U.S. government. Once the U.S. government has the identities of the account owners, a pre-emptive disclosure is too late, and all penalties, including criminal prosecution, may apply.
The renewal of the OVDI presents an opportunity for those who still have not brought their offshore assets into compliance. The new penalties are 27.5%, 2.5% greater than the 25% penalty under the 2011 OVDI, yet less than the 50% penalty that the IRS has been imposing in recent criminal tax fraud prosecutions. In addition to lower penalties, a proper, timely voluntary disclosure can still avoid criminal prosecution. As we’ve noted repeatedly, the IRS continues to target foreign accounts. We strongly advise taxpayers to 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.