There have been a number of noteworthy developments recently regarding the IRS crackdown on unreported foreign bank accounts.  The overwhelming theme to the recent developments is the continued erosion of offshore banking secrecy throughout the world.  This is not new a development, but rather the continuance of a trend over the past five years, resulting from the IRS and Department of Justice (DOJ) success against UBS.  What is new, however, is that the open door to IRS amnesty for an unreported foreign account can close at any time, with little or no warning.  It should also be noted that the IRS is offering a partial amnesty, meaning that back taxes, interest and penalties would be imposed on the foreign assets and foreign income.  These amounts would be much less than the penalties, and potential criminal sentences, that would be imposed outside the amnesty, if the IRS learns of the foreign assets.

Continued US Government Investigations and Prosecutions of U.S. Taxpayers with Undeclared Foreign Accounts

Over the last few weeks, the following events have transpired:

• The US has issued a treaty request to Bank Julius Baer in Switzerland for information regarding bank accounts utilized by American taxpayers to hide income from the IRS.  A “treaty request” refers to the U.S.-Switzerland tax treaty, which allows for information requests without the necessity of a court order.  Bankers are advising their US clients that Julius Baer expects to comply with the request and turn over banking information to the US.   US clients of Julius Baer have been rushing to voluntarily disclose their accounts to the IRS before Baer reveals their names and account data to the US.

• The US has also issued a treaty request to the Liechtenstein Foundation Supervisory Authority for similar information; namely, foundations (stiftungs) and bank accounts utilized by American taxpayers to hide income from the IRS.  Foundations are legal entities, like corporations, set up in order to obscure the true beneficial ownership of foreign accounts.  As we’ve written before, Liechtenstein was quick to amend its internal law to allow for a similar treaty request in 2012 for account records of Liechtensteinische Landesbank (LLB).  It is expected that soon, records of Liechtenstein foundations and their bank accounts will be provided to the IRS on a large scale.

• A US court has approved a “John Doe Summons” for records of CIBC FirstCaribbean International Bank regarding Americans with undeclared accounts.  In this case, even though CIBC FirstCaribbean has no branches or offices in the US, it does maintain a U.S. correspondent account at Wells Fargo.  Thus, the court approved service of the summons upon Wells Fargo for records of transactions through CIBC’s correspondent account.  This is reminiscent of the seizure by a US court of Swiss bank Wegelin’s correspondent account at a US bank.  The fact that a foreign bank lacks a US presence is no longer a bar to US enforcement efforts against the foreign bank.  In Wegelin’s case, Switzerland’s oldest private bank was put out of business in January 2013 by the US enforcement action.

• DOJ and IRS investigations of foreign accounts have resulted in criminal charges against the account owners who failed to report.  To date, there have been dozens of criminal prosecutions of US taxpayers with non compliant foreign accounts.  Most recently in 2013, taxpayers with accounts at Swiss banks UBS and Pictet, and Israeli bank Leumi have faced criminal charges.  More charges and criminal sentences will be forthcoming; the IRS and DOJ continually bring (and publicize) charges to incentivize others to come forward with voluntary disclosures.  Every taxpayer who comes forward means one less taxpayer for whom the government has to allocate resources to investigation and prosecution.  In this light, voluntary disclosures can be a win-win for both the taxpayer and the government.  The US taxpayer pays back taxes and penalties, avoids criminal prosecution and can now have access to and repatriate the foreign funds if desired.  The government gets revenue, brings foreign assets into the US tax system and avoids the resources of investigation and prosecution.

The lessons to be learned from the above are:

1.  The US is not stopping in its investigation of banks around the world that facilitated the hiding of assets and income from the IRS.  The investigation of CIBC is noteworthy because it indicates that the IRS and DOJ have added the Caribbean to their focus.  Previously, banks in Switzerland, Liechtenstein, Israel and India have been named.  CIBC is the first Caribbean bank to be added to this list.  The IRS recently opened an office in Panama City.  We expect other Caribbean jurisdictions to be added.

2.  The information request to the Liechtenstein Foundation Supervisory Authority is significant because rather than going bank by bank, the US went to the Liechtenstein governmental authority for information from all Liechtenstein banks.  We have previously written about Liechtenstein, formerly the most secretive of tax havens, altering its internal laws in order to allow cooperation with the US.  Although the Liechtenstein foundation boards and banks will provide the information to the Liechtenstein government for review, and this procedure may be subject to legal challenges within Liechtenstein, Liechtenstein foundations and their bank accounts are no longer secret vis-a-vis the IRS.

3.  US taxpayers with undeclared financial assets, whether at Credit Suisse, Julius Baer, CIBC, HSBC, Leumi, Pictet, or anywhere else, must act swiftly to come into tax compliance.  It is no longer a question of whether the foreign banks might comply with IRS or DOJ information requests; compliance must be expected.

However, the additional constraint is that now, the IRS can “close the door” on the opportunity to voluntarily disclose a foreign financial asset.  Under the most recent terms of the IRS Voluntary Disclosure Program (OVDP), 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 US clients can no longer wait for an announcement of a John Doe 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.

Continuing Erosion of Offshore Banking Secrecy

To use a cliché, “it’s a whole new world”.  Not that long ago, many foreign banks in many foreign jurisdictions offered confidential and even “secret” banking.  That is no longer the case.  All the former tax havens have agreed to banking transparency and exchange of information with foreign governments.  The following recent developments further illustrate this trend:

• Switzerland and the US have agreed to a settlement in the US investigation of multiple Swiss banks.  Under the agreement, the Swiss government will allow each bank to settle charges individually, pay a large fine and reveal the identities of Americans with undisclosed accounts.  While many Swiss citizens will protest what they view as another infringement on Swiss sovereignty and capitulation to the US, many Swiss banks welcome the opportunity to end the US investigations, pay a fine, reveal their US clients to the IRS, and focus on future, tax-compliant business.  Some foreign banks have already announced that they have allocated substantial amounts of money in anticipation of paying a fine to settle US charges of tax fraud.  Credit Suisse, Julius Baer and Zurcher Kantonalbank in Switzerland have made such announcements, as have Bank Leumi in Israel and HSBC in India.  Such settlements will include not only fines, but also the transmission of account details to the US Government.  It has been reported that the settling banks will have a short window to report names to the US and negotiate fines, as soon as one hundred and twenty days.  We can anticipate that thousands of additional US taxpayers will now be racing to make voluntary disclosures to the IRS, before the IRS gets their names from the settling banks.

• More countries have agreed to implement the Foreign Account Tax Compliance Act (FATCA).  FATCA is a US 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 for the IRS.  If a foreign bank or financial institution does not agree to FATCA reporting, then the US will penalize it by withholding significant amounts of US-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 US, including South Africa and Singapore.

The inclusion of Singapore is significant because of the rise of Singapore as a major international financial center.  The flow of        funds from Switzerland to Singapore when Swiss banking secrecy evaporated was substantial.  According to one report, the amount on deposit in Singapore has grown more than fifty percent over the last five years, which is precisely the period of time since UBS was sued by the DOJ.  Although there have been suggestions that Singapore might be “the next Switzerland”, this is unlikely.  Singapore would not risk its financial reputation (depending on the report, either the fourth or fifth largest world financial center, after New York, London, Tokyo and Hong Kong) to be a harbor for 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 US on a FATCA-type of agreement.  In addition, a new regulation requires Singapore 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 under Singapore law.

Virtually all financial institutions around the world – – at a minimum, 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 a  lesser, 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?

• Some countries are developing their own FATCA-like laws to discover their own citizens evading taxes.  These countries include France, Germany, Italy, the UK and Spain.  Germany in particular has been as aggressive as the U.S. against undeclared Swiss and Liechtenstein bank accounts, going so far as to pay bounties for secret bank information stolen by bank employee “whistleblowers”.  Germany then shared the information with other governments.

• Additional countries are agreeing to the exchange of information and banking transparency.  Most recently, 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 May 2013 to share banking data.

• England and its former colonies and territories have agreed to exchange of bank information.  Many such colonies and territories are known as tax havens, including the Cayman Islands, Bermuda, British Virgin Islands, Guernsey, Jersey and the Isle of Man.  While this would not appear to impact US taxpayers, note that the exchange of information among friendly Western powers including the UK and US is already routine.  Recall, for example, that when Germany paid millions of Euros for stolen banking information on “secret” accounts at Liechtensteinische Landesbank, it then shared that information with France, England, Canada and the U.S.  Thus, information on an account in BVI or Cayman can easily make its way to the IRS, even without a John Doe summons.

• Recently, the IRS and tax authorities in the UK and Australia agreed to exchange information regarding offshore trusts and corporations.  In its press release announcing this agreement, the IRS specifically noted that the three countries have already “acquired a substantial amount of data revealing extensive use of such entities organized in a number of jurisdictions including Singapore, the British Virgin Islands, Cayman Islands and the Cook Islands.  The data contains both the identities of the individual owners of these entities, as well as the advisors who assisted in establishing the entity structure.”

• Breaches of banking secrecy have not been limited to governments.  Also in 2013, the International Consortium of Investigative Journalists publicly released a very large cache of offshore banking information that has exposed accounts and their owners, along with details regarding many offshore trusts and corporations, from the British Virgin Islands to the Cook Islands.  The amount of information is massive, some 260 gigabytes containing 1.2 million files on 120,000 offshore companies and trusts.  According to one report, some 4,000 Americans are included in this information release.

In light of the above, there can be no expectation or even hope of banking secrecy.  US taxpayers with undisclosed foreign assets have little choice but to voluntarily come into tax compliance, before the IRS comes to them.

Merely closing a foreign account is not an alternative, 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.  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 US account (or account elsewhere) creates an easy trail back to the foreign account, and would also give 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.

Moreover, the IRS has taken a particular interest in the transfer of funds from a non-compliant account as an attempt to continue to avoid or keep a step ahead of the IRS.  For instance, once UBS cooperated with the IRS, the IRS followed the flow of funds from UBS to banks such as Wegelin in Switzerland and Leumi in Israel.  Wegelin was criminally indicted for its acceptance of funds from UBS, and Leumi is under investigation for the same reason.  In fact, evidence of such transfers could be used by DOJ prosecutors in building a case that a taxpayer willfully evaded the IRS and, rather than bringing a foreign account into tax compliance, proactively took steps to continue the hiding of assets and income from the IRS.  Such facts would have profound consequences in a criminal tax fraud prosecution, settlement possibilities and punishment.

In most cases, the only viable path forward is to take advantage of the current IRS amnesty program and bring the foreign account into tax compliance.  The IRS 2012 Offshore Voluntary Disclosure Program remains open, although the IRS can end the program at any time.  Equally important, the IRS can announce at any time that US clients of a specific foreign bank or banks under investigation are no longer eligible to participate in the OVDP.  Thus, US taxpayers who still own foreign accounts that are not tax compliant must not take a “wait and see” attitude because it might be too late, as the door to amnesty – – and lower penalties – – could be abruptly closed.