Confirming That No Country Is “Off Limits,” DOJ Secures Guilty Pleas From 2 Cayman Islands Financial Institutions for Tax Evasion

In its first-ever conviction of a non-Swiss financial institution for tax evasion conspiracy, the Justice Department announced today that two Cayman Islands firms pleaded guilty in a U.S. court to conspiring to hide more than $130 million in Cayman bank accounts. The two financial institutions, Cayman National Securities Ltd. (CNS) and Cayman National Trust Co. Ltd. (CNS), admitted that they helped U.S. clients hide assets in offshore accounts, and agreed to provide files of non-compliant U.S. account holders to the U.S. government.

Today’s announcement comes on the heels of the conclusion in January 2016 of the highly-successful Swiss Bank Program, pursuant to which 80 banks in Switzerland entered into non-prosecution agreements and paid more than $1.3 billion in penalties, and the announcement, in February 2016, of a deferred prosecution agreement with another Swiss bank, Julius Baer. In a recent speech, Acting Assistant Attorney General Caroline D. Ciraolo of the DOJ Tax Division warned that “[o]ur investigations of both individuals and entities are well beyond Switzerland at this point, and no jurisdiction is off limits.” With the Justice Department actively conducting criminal tax investigations around the globe, speculation has swirled about which country or region would be the next target in the U.S. government’s offshore tax evasion crackdown.

“The guilty pleas of these two Cayman Island companies today represent the first convictions of financial institutions outside Switzerland for conspiring with U.S. taxpayers to evade their lawful and legitimate taxes,” said U.S. Attorney Preet Bharara of the Southern District of New York. “The plea agreements require these Cayman entities to provide this office with the client files, because we are committed to finding and prosecuting not only banks that help U.S. taxpayers evade taxes, but also individual taxpayers who find criminal ways not to pay their fair share. We will follow them no matter how far they go to hide their accounts, whether it is Switzerland, the Cayman Islands, or some other tax haven.”

“Today’s convictions make clear that our focus is not on any one bank, insurance company or asset management firm, or even any one country,” said Acting Deputy Assistant Attorney General Goldberg of the Justice Department’s Tax Division. “The Department and IRS are following the money across the globe – there are no safe havens for U.S. citizens engaged in tax evasion or those actively assisting them.”

The two financial institutions entering guilty pleas today provided investment brokerage and trust management services to individuals and entities within and outside the Cayman Islands, including citizens and residents of the United States. CNS and CNT pleaded guilty to a criminal Information charging them with conspiring with their U.S. clients to hide more than $130 million in offshore accounts from the IRS and to evade U.S. taxes on the income earned in those accounts. CNS and CNT entered their guilty pleas pursuant to plea agreements requiring the companies to, among other things, produce through the treaty process account files of non-compliant U.S. taxpayers who maintained accounts at CNS and CNT, and pay a total of $6 million in financial penalties.

“The veil of secrecy has been lifted from what was once a common place for criminals to hide their money offshore,” said Chief Weber. “The IRS and DOJ work aggressively to require banks to follow the laws and not turn a blind eye to criminal activity. When individuals and entities hide behind shell corporations and numbered bank accounts, they are not only cheating the U.S. government, they are cheating the honest taxpaying citizens who are obeying the law and doing the right thing.”

The Offense Conduct

According to a Justice Department press release, from at least 2001 through 2011, CNS and CNT assisted their U.S. account holders in evading their U.S. tax obligations and otherwise hiding accounts held at CNS and CNT from the IRS. CNS and CNT did so by knowingly opening and maintaining undeclared accounts for U.S. taxpayers at CNS and CNT in the following manner:

  • CNS and CNT opened, and/or encouraged many U.S. taxpayer-clients to open accounts held in the name of sham Caymanian companies and trusts, thereby helping U.S. taxpayers conceal their beneficial ownership of the accounts.
  • CNS and CNT treated these sham Caymanian structures as the account holders and allowed the U.S. beneficial owners of the accounts to trade in U.S. securities.
  • CNS failed to disclose to the IRS the identities of the U.S. beneficial owners who were trading in U.S. securities, in contravention of CNS’s obligations under its Qualified Intermediary Agreement (QI) with the IRS.
  • After learning about the investigation of Swiss bank UBS in 2008, for assisting U.S. taxpayers in evading their U.S. tax obligations, CNS and CNT continued to knowingly maintain undeclared accounts for U.S. taxpayer-clients and did not begin to engage in any significant remedial efforts with respect to those accounts until 2011 and 2012.

The sham Caymanian structures that CNT set up for its U.S. clients included trusts, which were nominally controlled by CNT trust officers, but which in fact were controlled by the U.S. clients; managed companies, for which CNT ostensibly provided direction and management services, but which in truth were shell companies that served only to hold the assets of the U.S. clients; and registered office companies, which were shell companies for which CNT simply supplied a Caymanian mailing address. CNS treated these sham Caymanian structures as the account holders and then permitted the U.S. clients to trade in U.S. securities, without requiring them to submit Forms W-9, which are IRS forms that identify individuals as U.S. taxpayers, as CNS was obligated to do under its QI obligations for accounts held by U.S. persons that held U.S. securities. CNS and CNT agreed to maintain these structures for U.S. clients after many of them expressed concern that their accounts would be detected by the IRS.

In or about April 2008, it became publicly known that the Justice Department was investigating UBS for assisting U.S. taxpayers in evading their U.S. tax obligations. Thereafter, despite the public disclosure of the UBS case, and CNS’s awareness of it, CNS continued to assist its U.S. clients in concealing their accounts from the IRS by, among other things, failing to require them to complete Forms W-9. Likewise, up through at least 2010, CNT continued to rely on account opening documentation that, rather than barring the creation of non-tax compliant structures, simply assigned higher “risk” points to such structures. In or about June 2011, CNT hired a new president, who ordered a review of CNT’s files. In the course of that review, not a single file was found to be complete and without tax or other issues. Moreover, with respect to the structures that had U.S. beneficial owners, CNT’s files contained little, if any, evidence of tax compliance.

At their highest point in 2009, CNS and CNT had approximately $137 million in assets under management relating to undeclared accounts held by U.S. clients. From 2001 through 2011, CNS and CNT earned more than $3.4 million in gross revenues from the undeclared U.S. taxpayer accounts that they maintained.

Cooperation by CNS and CNT

As part of their plea agreements CNS and CNT have agreed to cooperate fully with the Justice Department’s investigation of their criminal conduct. To date, CNS and CNT have already made substantial efforts to cooperate with that investigation, including by: (1) facilitating interviews of CNS and CNT employees, including top level executives; (2) voluntarily producing documents in response to DOJ requests; (3) providing, in response to a treaty request, unredacted client files for approximately 20 percent of the U.S. taxpayer-clients who maintained accounts at CNS and CNT; and (4) committing to assist in responding to a treaty request that is expected to result in the production of unredacted client files for approximately 90 to 95 percent of the U.S. clients who maintained accounts at CNS and CNT.

In connection with their guilty pleas, CNS and CNT have agreed to pay the United States a total of $6 million, which consists of the forfeiture of gross proceeds of their illegal conduct, restitution of the outstanding unpaid taxes from U.S. taxpayers who held undeclared accounts at CNS and CNT, and a fine.

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