Former UBS Banker Trial Begins in Florida

Opening statements were heard on Tuesday and the first government witness testified yesterday in the trial of ex-UBS AG banking executive Raoul Weil. Prosecutors have sought to show him as the driving force behind the bank’s tax fraud scheme, and defense counsel has claimed that subordinates were at fault and he had no knowledge of the wrongdoing.

According to reporting from Law360, prosecutors explained to the jury in their opening statements that Mr. Weil was the driving force behind UBS’s tax evasion scheme, had many chances to close the cross-border business division but didn’t because it was profitable, and caused UBS bankers who came to the U.S. to meet with clients to engage in precautions “including storing client statements on a second hard drive that could be deleted instantly or meeting clients away from UBS offices – to avoid detection by federal authorities.” Defense counsel minimized Mr. Weil’s role and knowledge, blaming the tax evasion schemes on “subordinates who never told Weil about it and are now cooperating with the government to avoid prison time.” Carolina Bolado, Ex-UBS Exec Says He Didn’t Know About Tax Evasion Scheme (Law360, 10/14/2014, here).

Government witness Hansruedi Schmacher, who is also under indictment, testified yesterday of the details of how UBS managed its secret banking business for U.S. customers, according to a number of media reports. Meetings with customers were held in hotels, which location changed each trip; bankers carried no documents or business cards with the UBS logo or name; hard drives were encrypted; customers were identified on statements by code name, if statements were made available at all, and bankers utilized their own memory techniques to recall the code name used for each customer; customers were telephoned using U.S.-based phone rather than using a Swiss phone; and codes were used for accounts that were secret (“black” or “simple”) as opposed to ones that were declared to the IRS (“white” or “complex”).  Nathan Hale, Ex-UBS Exec Opens Up About Swiss Tax Shelters in Weil Case (Law360, 10/15/2014, here).

Two other key Swiss witnesses are expected. Martin Leichti, the former head of the cross-border banking at UBS, who may be able to establish Mr. Weil’s knowledge of the business division and tax evasion schemes.  The other is an unnamed former top executive at Neue Zürcher Bank who reportedly has recently turned himself over to the Justice Department in order to testify at Mr. Weil’s trial. Ex-banker heads to Florida to testify in Weil case (swissinfo.ch 10/08/2014, here).

The court is permitting three of Mr. Weil’s defense witnesses to testify through video link from London, because the witnesses will not travel to the U.S. to testify in person for the risk of being arrested. These witnesses have not yet been publicly named.  Matthew Allen, Ex-UBS executive Weil finally faces US court (swissinfo.ch 10/13/2014, here).

Mr. Weil was indicated in 2008 for hiding the tax evasion schemes at UBS for more than 20,000 U.S. citizens and over $20 billion in assets. He had been a fugitive and was arrested in 2013 in Italy and extradited to the U.S.  Mr. Weil pleaded not guilty earlier this year and, if found guilty, faces up to five years’ in prison.

Facebook and IMs Provide Key Evidence to Prosecutors in Criminal Cases

Two recent events demonstrate how prosecutors are increasingly turning to other forms of electronic information to construct their cases. First, Francisco R. Legaspi, now 61, who had been a fugitive for the past 22 years, was sentenced on Monday to 21 months’ imprisonment after the government located him this year in Canada after finding him through his Facebook page. Mr. Legaspi had been indicted in August 1992 on three counts of assisting in the preparation of false tax returns for allegedly having submitted false quarterly Forms 941 for Mission Childcare Consortium, Inc., a San Francisco day care center, in 1988 and 1989. He pleaded guilty to one count in November 1992 but did not appear for his sentencing in January 1993, and he was thereafter indicted for failing to appear, to which he also pleaded guilty this year.

In addition, the New York Times reported yesterday that the Justice Department is investigating a number of foreign and American banks for having colluded to influence the price of foreign currencies and is specifically aiming to indict individual bank employees, in addition to seeking guilty pleas from the banks themselves. The key evidence that is allegedly being utilized to incriminate those individual bank employees is their instant messages. (Protess, Ben and Silver-Greenberg, Jessica, Big Banks Face Another Round of U.S. Charges, The New York Times).

DOJ Continues to Prosecute Those Who Fail to File FBARs to Disclose Offshore Accounts

Howard Bloomberg, a forensic account and certified fraud examiner of Atlanta, Georgia, pleaded guilty on Friday to failing to file a Foreign Bank Account Report (FBAR) for the year 2008. Mr. Bloomberg opened a bank account at UBS AG in July 1997. The value of Mr. Bloomberg’s account increased to approximately $930,000 in 2001, and he routinely wired funds from the UBS account to his U.S. accounts. He closed the UBS account in April 2008 and wired the balance of over $540,000 to the U.S.

For having admitted to not filing the 2008 FBAR, Mr. Bloomberg has agreed to pay a penalty of $278,397, representing 50% of highest balance in 2008, and file accurate FBARs from 1997 to 2008. At sentencing, currently scheduled for December, Mr. Bloomberg faces a maximum of five years’ imprisonment and 3 years’ supervised release. According to the U.S. Attorney for the Northern District of Georgia, Sally Quillian Yates:

The era of hiding money in secret Swiss bank accounts is over. Citizens should understand that failing to abide by their banking disclosure obligations to the U.S. Treasury Department could mean criminal prosecution.

(Press release here).

In addition, the trial of Raoul Weil is set to begin next Tuesday, October 14, in Florida. Mr. Weil is the former head of UBS’s global wealth-management business who was indicted in 2008 for allegedly supervising 60 private bankers who managed the secret assets of U.S. account holders. Mr. Weil appeared in court in 2013 and is currently living under house arrest in New Jersey.

For information on all prosecutions under the Department of Justice’s Offshore Compliance Initiative, which began in 2008 with its investigation of UBS, see its “scorecard” here.

More Tax Lessons from Reality Stars on What Not to Do, Plus Lionel Messi

We discussed last week the surprise when a highly visible reality star is charged with or convicted of tax evasion or other financial crimes (see last week’s post here about The Situation and referencing Richard Hatch). This week, stars of the Real Housewives of New Jersey Teresa and Giuseppe (Joe) Giudice were sentenced to 15 and 41 months’ imprisonment, respectively, for having pleaded guilty to conspiracy and bankruptcy fraud charges. Comments made by the federal judge at sentencing indicate that the Giudices were less than forthright in their pre-sentence submissions and that, perhaps more than anything, factored into Teresa receiving a jail sentence, rather than probation. Let these reality stars be a reminder to all defendants to be truthful with the court, including at sentencing, or risk the consequences.

The Giudices were named in a 39-count indictment that described a number of schemes that generally allowed them to live beyond their means for years, beginning in 2001. The schemes involved submitting false documents and making fraudulent statements to lenders, banks, and a bankruptcy court, and, in Joe’s case, failing to file tax returns. Anyone who watches this show and the franchise would agree that the stars’ means often (if not always) is a part of the storylines, though that is no excuse for criminal conduct.

Yesterday, documents and information provided by the Giudices prior to sentencing (required in every case and utilized to assess the defendant and assist in determining an appropriate sentence, including what amounts are appropriate to order in terms of restitution and criminal penalties) were allegedly false and incomplete. According to the government (as reported by ABC News here), Teresa failed to note as assets “several cars, ATVs, and [construction equipment], claimed no jewelry, and said her $3 million home is filled with just $25,000 worth of furniture” (though the couple holds a $1 million insurance policy for household furnishings). These alleged omissions did not please United States District Court Judge Esther Salas, who stated that, “it feels like things have been hidden.” As her further statements make clear, this obfuscation might have been the tipping point in ultimately ordering that Teresa be incarcerated:

For a moment, I thought about probation until I read the government’s report. What you did in the financial disclosure really sticks in my craw. It’s what the court has a problem with. It shows blatant disrespect for the court. I’ve seen a lot, but I’ve never seen the confusion and work that went into these financial documents. The conduct which you piece-mealed, these financial documents, which I needed for this case were harder to decipher than any I’ve encountered.

(As reported by UsMagazine here). In addition, Joe was required by his plea agreement to file accurate personal returns for the years 2000 through 2011, which he had not yet done, and to pay back taxes and penalties amounting to $240,000, which neither he nor his lawyer seemed to know if he had yet repaid.

These sentences also reflect the high degree of discretion a judge retains in fashioning an appropriate sentence because the sentences were ordered to be served consecutively. Teresa will be incarcerated first, beginning January 5, so that she may spend the holidays with her four young daughters. Joe’s period of incarceration will begin once Teresa is released (which, based upon good time credit and other factors, could be less than one year), so that one parent remains available to care for the children. It is likely that the Court intentionally staggered the sentences in this manner, with Teresa being incarcerated first, because Joe is not a U.S. citizen and faces the likelihood of deportation to Italy upon completing his prison sentence.

At least one other former star of the Real Housewives franchise has also recently found herself in criminal trouble. Dana Wilkey, who appeared on the Real Housewives of Beverly Hills and was best known for announcing the cost of whatever she was wearing, including a pair of $25,000 sunglasses, was arrested in June 2014 for wire fraud conspiracy and wire fraud. She allegedly paid $360,000 in kickbacks through her advertising agency for internet marketing work performed for Blue Shield of California to two named defendants, one of whom was a Blue Shield employee who assisted in having the contract awarded to Ms. Wilkey’s agency and thereafter also concealed the inflated invoices submitted by Ms. Wilkey for payment. Ms. Wilkey has pleaded not guilty.

In celebrity tax evasion news abroad, BBC News is reporting today that Lionel Messi will face tax evasion charges in Spain. Mr. Messi is widely considered the world’s best soccer player and, now, the highest paid, following a $50 million deal earlier this year with his Spanish club, FC Barcelona, and a reported $20 million in endorsement deals. Last year, Mr. Messi and his father Jorge Messi were accused of defrauding the Spanish tax authorities of $5.4 million by utilizing companies in Belize and Uruguay from 2007 through 2009 to conceal income earned in endorsement deals with Adidas, Pepsi-Cola, and others. In defense, Mr. Messi argued that his father controlled his finances to such a degree that he should not be held culpable for any tax fraud, and his father caused a “corrective payment” of over $6.2 million to be made to satisfy the unpaid tax with interest. The Spanish prosecutors thereafter recommended that the charges be dropped, reasoning that Mr. Messi was not involved in the decisions relating to his finances or fully aware of the implications of utilizing foreign entities as it related to his tax obligations in Spain. Today, the court rejected this prosecutors’ request, explaining that Mr. Messi can still be charged with tax fraud, even if he did not “have complete knowledge of all the accounting and business operations nor the exact quantity” but was only “aware of the designs to commit fraud and consent to them.”

Lessons from The Situation: Pay your Taxes and Do Not Alter your Accounting Records

Reality stars being charged with tax evasion is always surprising, because not only does the whole television audience see you making money, but the government does, too. The first notable instance was the first winner of the CBS reality show Survivor, Richard Hatch, who was accused of not paying taxes on his million dollar prize and was later found guilty of filing a false tax return (among other crimes) for the year he won the competition.

Another reality star, Michael Sorrentino (aka “The Situation”), formerly of MTV’s Jersey Shore, now finds himself in a similar situation. Yesterday, Mr. Sorrentino and his brother, Marc Sorrentino, were indicted by a federal grand jury in New Jersey for filing false tax returns for 2010 and 2012, as well as conspiracy to defraud the United States. “The Situation” was also charged with failure to file a tax return for 2011. The Sorrentinos allegedly failed to report over $8.9 million earned through promotional and other activities, including publishing a comic book (featuring The Situation as a superhero, of course), owning a vodka company, and endorsing products such as vitamins and sunglasses. (See Indictment here). The Situation also allegedly improperly claimed deductions for business expenses that were really for personal use, including “personal grooming expenses.” U.S. Attorney Paul J. Fishman released this statement yesterday:

According to the indictment, Michael and Marc Sorrentino filed false tax returns that incorrectly reported millions made from promotions and appearances. The brothers allegedly also claimed costly clothes and cars as business expenses and funneled company money into personal accounts. The law is absolutely clear: telling the truth to the IRS is not optional.

(See Press Release here). Telling the truth to your accountant is not optional, either. According to the Indictment, the Sorrentino brothers allegedly provided their (unnamed) accounting firm with false information. In addition, the Indictment alleges that after the accounting firm received a grand jury subpoena for its QuickBooks software that contained the Sorrentinos’ books and records for 2012, entries in the software were “altered” whereby certain taxable payments were “reclassified” as non-taxable payments. It is not clear from the Indictment who directed that those changes be made, but the IRS obviously discovered the “reclassifications” during the criminal investigation, and the act of altering corporate book and records to cover up a crime almost certainly influenced the decision to prosecute in this case.

High Court Opens Door To IRS Personnel Examination

Today’s blog was first published in the June 19, 2014 edition of Law360. To learn more, please click here or visit www.law360.com. Reprinted with permission from Law360.

The U.S. Supreme Court issued a unanimous opinion Thursday in United States v. Clarke (No. 13-301) addressing the standard that must be satisfied before a taxpayer can question Internal Revenue Service personnel about its reasons for issuing a summons. The standard announced by the court, in an opinion authored by Justice Elena Kagan, requires a taxpayer to show “specific facts or circumstances plausibly raising an inference of bad faith” before a taxpayer may examine IRS officials.

“Naked allegations of improper purpose are not enough,” the court held. Instead, “[t]he taxpayer must offer some credible evidence supporting his charge.”

The case arose out of an IRS examination of Dynamo Holdings Limited Partnership focusing on interest expenses reported on the 2005 through 2007 income tax returns. When the three-year statute of limitations was about to expire, Dynamo agreed to a one-year-long extension, and later to a second one-year extension with the IRS. Dynamo refused, however, to grant the IRS a third extension.

Shortly after being refused the third extension, the IRS issued summonses to five individuals seeking information about Dynamo’s tax liabilities. Four of the five individuals refused to comply with the summonses. Two months later, the IRS issued a Final Partnership Administrative Adjustment that increased Dynamo’s tax liability, and Dynamo filed suit in Tax Court contesting the adjustment. Three months later, the IRS initiated summons enforcement proceedings in the district court.

The enforcement proceedings focused on whether the IRS acted in good faith in issuing the summonses. An IRS agent submitted an affidavit that attested to the required factors to obtain enforcement of an IRS summons pursuant to United States v. Powell, 379 U.S. 48 (1964): (1) there was a legitimate purpose for the investigation; (2) the summons inquiry is relevant to the purpose; (3) the IRS does not already have the information sought; and (4) administrative steps required by the Internal Revenue Code have been followed.

Seeking to demonstrate that the IRS acted in bad faith, the summoned individuals claimed that the IRS issued the summonses for two improper purposes: (1) as retribution for Dynamo’s refusal to agree to a third statute of limitations extension; and (2) as an inappropriate end-around the limited discovery rules in Tax Court in order to obtain additional evidence to use against Dynamo in that proceeding. The individuals argued that they were entitled to question IRS personnel to explore these issues.

The district court denied the taxpayers’ requests and ordered them to comply with the summonses. On appeal, the Eleventh Circuit reversed, holding that the district court abused its discretion in refusing to allow the IRS agents in question to be examined.

Following established circuit precedent, the court of appeals reasoned that “requiring the taxpayer to provide factual support for an allegation of an improper purpose, without giving the taxpayer a meaningful opportunity to obtain such facts, saddles the taxpayer with an unreasonable circular burden, creating an impermissible ‘Catch 22.’” The individuals therefore could “question IRS officials concerning the Service’s reasons for issuing the summons[es].”

Notably, the appellate court’s ruling was an anomaly, as every other circuit addressing the issue (including the First, Third, and Seventh Circuits) had held that bare allegations of improper motive were insufficient to justify examination of an IRS agent. The Supreme Court granted certiorari to resolve the conflict, and firmly guided the Eleventh Circuit back into the fold by holding that “some credible evidence” of alleged improper motive must be adduced before IRS agents may be examined.

Specifically, the taxpayer must come forward with “specific facts or circumstances plausibly raising an inference of bad faith.” Because direct evidence will rarely be available, circumstantial evidence is sufficient, but “[n]aked allegations” are not. This standard, the court reasoned, should sufficiently protect a summons dispute from turning into a fishing expedition. Because the Eleventh Circuit never assessed the facts and circumstances submitted by the summoned individuals in support of their bad-faith claims, the court vacated the decision and remanded for further proceedings.

The Supreme Court’s decision is not surprising in that it aligned the Eleventh Circuit with other federal circuits, but it is surprising in that it adopted a formulation of the summons enforcement standard that is different from the standards already in use by other circuits. Crafting its own standard, the court now requires a showing that “plausibly rais[es] an inference of bad faith” or improper motive.

Justice Kagan’s opinion also provided guidance regarding the appropriate standard of review for appellate courts in summons enforcement proceedings. First, a court of appeals must review for abuse of discretion a trial court’s decision as to whether an examination of IRS agents is warranted. But, the court cautioned, a district court’s decision in this regard is entitled to deference only if based upon the correct legal standard. Second, the district court is not entitled to deference as to legal issues as to what qualifies as an improper purpose for issuance of an IRS summons.

The court’s limited opinion focused almost entirely on the legal standard and refrained from deciding any other aspect of the case. For example, the court did not opine as to whether issuing a summons to gain an unfair advantage in Tax Court litigation or to retaliate against a taxpayer for refusing to further extend the statute of limitations are improper motives for issuing a summons. Instead, the court left those issues to be decided by the court of appeals on remand, noting that both are legal issues for which no deference is due the district court.

The court also chose not to opine as to whether the evidentiary proof of bad faith submitted by the individuals (primarily, two sworn declarations) would satisfy the new standard.

One declaration set forth the timeline of Dynamo’s refusal to extend the statute of limitations and the issuance of the summonses, thereby implying the retributive nature of the summonses. The other described how IRS attorneys who were handling the Tax Court litigation were present when the one individual complied with the summons, and the initial investigating agents were not, tending to show the summons’ purpose was to support the Tax Court litigation.

Whether these are in fact improper motives, and whether declarations of this type are a sufficient basis to meet the new standard, will have to be addressed on remand as well as by lower courts now that the legal standard for challenging a summons enforcement has been clarified by the Supreme Court.

DOJ Offshore Enforcement Update: In Landmark Case, Credit Suisse Pleads Guilty, Agrees to Pay $2.6 Billion Penalty; Swiss Bank Program Continues to Move Forward

Yesterday, the Department of Justice announced that Credit Suisse AG pleaded guilty to having assisted U.S. taxpayers in evading the payment of U.S. taxes and agreed to pay a penalty of $2.6 billion. Deputy Attorney General James M. Cole described this announcement as “an historic guilty plea” and “the largest monetary penalty of any criminal tax case ever.”

Attorney General Eric Holder described the conduct of Credit Suisse as follows:

The bank actively helped its account holders to deceive the IRS by concealing assets and income in illegal, undeclared bank accounts.   These secret offshore accounts were held in the names of sham entities and foundations.   This conspiracy spanned decades. In the case of at least one wholly-owned subsidiary, the practice of using sham entities to conceal funds began more than a century ago.   Credit Suisse not only knew about this illegal, cross-border banking activity; they willfully aided and abetted it.  Hundreds of Credit Suisse employees, including at the manager level, conspired to help tax cheats dodge U.S. taxes.

 In the course of these activities, Credit Suisse deceived the IRS, the Federal Reserve, the Securities and Exchange Commission, and the Department of Justice.   The bank went to elaborate lengths to shield itself, its employees, and the tax cheats it served from accountability for their criminal actions.   They subverted disclosure requirements, destroyed bank records, and concealed transactions involving undeclared accounts by limiting withdrawal amounts and using offshore credit and debit cards to repatriate funds.   They failed to take even the most basic steps to ensure compliance with tax laws.   And when the bank finally began to feel pressure to correct illegal practices and comply with the law – as a result of the Justice Department’s investigation, of which they were notified in 2010 – Credit Suisse failed to retain key documents, allowed evidence to be lost or destroyed, and conducted a shamefully inadequate internal inquiry.

The Statement of Facts can be found here; the plea agreement can be found here. Credit Suisse must now disclose all evidence and information about its U.S. accounts that is required by the Program for Non-Prosecution Agreements of Non-Target Letters for Swiss Banks (“Swiss Bank Program”). This includes, among other things, information on how its cross-border business operated; how Credit Suisse attracted and serviced its account holders; and the total number of accounts held by U.S. persons with the maximum dollar value. Credit Suisse must also supply the number of U.S. persons affiliated with each account, identify whether each account was held by an individual or entity, disclose the name of any financial advisor, attorney or other representative associated with the account, and reveal detailed information about what funds were transferred into and out of the account. The DOJ may then make treaty requests to Switzerland for actual account records that would reveal the names of those U.S. account holders. Unlike the situation with UBS where UBS agreed to pay $780 million and turned over the names of approximately 4,000 U.S. account holders after being specifically authorized to do so by the Swiss government, Switzerland has not enacted legislation that would specifically permit Credit Suisse to turn over U.S. account holder names to the DOJ without violating Swiss banking secrecy laws.

Regarding the Swiss Bank Program, Kathryn Keneally, Assistant Attorney General of the Department of Justice’s Tax Division, spoke at an American Bar Association Section of Taxation meeting last week and stated that Swiss banks that are participating in the program are making disclosures to the DOJ about accounts held by individual U.S. taxpayers. She urged anyone who has not yet come clean to make a disclosure through the U.S. Offshore Voluntary Disclosure Initiative (OVDI) but noted that it may be too late for some people who have already been identified as a result of the information provided via the program. She also noted that some Swiss banks in the program are offering to pay part of the penalty on behalf of its account holders who apply and are accepted to the OVDI. She also mentioned that the DOJ has expanded its efforts beyond Switzerland, with activities in Israel, India, and in the Caribbean. See Allison Bennett, Nonprosecution Program for Swiss Banks Providing Significant Amount of Information (Bloomberg BNA 5/13/2014). [Our full breakdown of the Swiss Bank Program can be found here].