Justice Department’s First FATCA Prosecution Yields Guilty Plea

Posted on May 13, 2016 by Matthew D. Lee

On May 9, 2016, the Justice Department announced that Gregg R. Mulholland, a dual U.S. and Canadian citizen and owner of an offshore broker-dealer and investment management company based in Panama and Belize, pleaded guilty to money laundering conspiracy for fraudulently manipulating the stocks of more than 40 U.S. publicly-traded companies and then laundering more than $250 million in profits through at least five offshore law firms. This prosecution is notable in that it represents the first time the Justice Department has brought criminal charges against individuals for conspiring to violate reporting requirements under the Foreign Account Tax Compliance Act (FATCA).

Mulholland and several other defendants were indicted in 2014 by a grand jury in the Eastern District of New York. The indictment alleges that between 2010 and 2014, Mulholland controlled a group of individuals (the Mulholland Group) who together devised three interrelated schemes to: (1) induce U.S. investors to purchase stock in various thinly-traded U.S. public companies through fraudulent promotion of the stock, concealment of their ownership interests in the companies, and fraudulent manipulation of artificial price movements and trading volume in the stocks of those companies; (2) circumvent the IRS’s reporting requirements under FATCA; and (3) launder the fraudulent proceeds from the stock manipulation schemes to and from the United States through five offshore law firms.

According to the indictment, the defendants’ scheme also enabled U.S. clients to evade reporting requirements to the IRS by concealing the proceeds generated by the manipulated stock transactions through the shell companies and their nominees. For example, in response to a request received by a U.S. corrupt client from a U.S. transfer agent who had to determine whether the proceeds from manipulative stock trading transaction were taxable under U.S. law, one of the defendants forwarded an IRS Form signed by a co-defendant as the nominee for the shell company which had been set up at the request of the client.

The indictment further alleges that in order to carry out these interrelated schemes, the Mulholland Group used shell companies in Belize and Nevis, West Indies, which had nominees at the helm. This structure was designed to conceal the Mulholland Group’s ownership interest in the stock of U.S. public companies, in violation of U.S. securities laws, and enabled the Mulholland Group to engage in more than 40 “pump and dump” schemes.

With respect to FATCA, the indictment alleges as follows:

13. The Foreign Account Tax Compliance Act (“FATCA”) was a federal law enacted in March 2010 that targeted tax non-compliance by U.S. taxpayers with foreign accounts. Although enforcement did not commence until July 2014, FATCA required U.S. persons to report their foreign financial accounts and offshore assets. Additionally, FATCA required foreign financial institutions to report to the Internal Revenue Service (“IRS”) certain financial information about accounts held by US. taxpayers or foreign entities in which U.S. taxpayers held a substantial ownership interest. FATCA also targeted the non-reporting and the non-withholding (30% on certain U.S. source payments made to foreign entities) by U.S. financial institutions based on material misrepresentations about the beneficial owners of the foreign accounts.

The indictment reveals that law enforcement authorities employed undercover agents and wiretaps to record numerous conversations involving the defendants. In one recorded meeting, two of the defendants bragged that their strategy enabled clients to evade FATCA’s requirements:

During this meeting, BANDFIELD and GODFREY touted, inter alia, IPC CORP’s success in establishing fraudulent corporate structures, including six IBCs and two LLCs for the Undercover Agent in order to conceal the Undercover Agent’s true beneficial ownership of the brokerage accounts at LEGACY, TITAN, UNICORN and two additional broker-dealers. BANDFIELD explained that this “slick” structure was specifically designed to counter U.S. President Barack Obama’s new laws, a reference to FATCA.

On a recorded telephone call, one of the defendants told a client that the use of offshore nominee companies was specifically intended to evade FATCA’s reporting requirements:

On or about May 19, 2014, GODFREY called Corrupt Client 6, an individual whose identity is known to the Grand Jury, and stated that IPC CORP’s fraudulent scheme using sham IBC and LLC structures was created to evade the IRS, specifically FATCA.

Although the Justice Department has been aggressively targeting offshore tax evasion by U.S. taxpayers since 2009, this case represents the first time that the government has brought criminal charges based upon alleged violations of FATCA. With FATCA’s provisions only becoming effective on July 1, 2014, and with the Justice Department’s offshore crackdown showing no signs of slowing down, we expect to see more criminal prosecutions in the future alleging violations of FATCA’s provisions.

Today’s Panama Papers Release May Require Immediate Action to Mitigate Risk of Criminal Prosecution

Posted on May 9, 2016 by Matthew D. Lee

With Comprehensive Panama Papers Database to Be Released Today, and White House Call for Comprehensive Action to Combat Offshore Tax Evasion, Affected Individuals Should Consider Immediate Action to Mitigate the Risk of Criminal Prosecution

May 2016 (No. 2)

White Collar Defense and Investigations

Action Item: Today at 2:00 p.m. (EDT), a massive database of information from the leaked “Panama Papers” files will be made public for the first time, identifying the real owners behind over 200,000 offshore companies set up by the Panamanian law firm Mossack Fonseca. The database release today follows closely on the heels of President Obama’s call to tighten U.S. laws and regulations to combat tax evasion through the illicit use of secret offshore bank accounts and shell companies. Individuals who believe they may be identified in the Panama Papers as the beneficial owner of an offshore company should consider prompt action to mitigate the risk of criminal prosecution and harsh financial penalties. The Internal Revenue Service (“IRS”) currently offers a number of voluntary disclosure programs for individuals with unreported foreign financial assets, but time is of the essence and immediate action is required in order to qualify for such programs in light of the imminent release of more “Panama Papers” files.

At 2:00 p.m. (EDT) today, the International Consortium of Investigative Journalists (“ICIJ”) will release a searchable database containing information on more than 200,000 offshore entities that are part of the “Panama Papers” investigation. The database is believed to be the largest ever release of records regarding the creation and maintenance of secret offshore companies and the identities of the individuals behind those companies. The information in this database comes from the Mossack Fonseca law firm in Panama and, according to ICIJ, includes “information about companies, trusts, foundations and funds incorporated in 21 tax havens, from Hong Kong to Nevada in the United States” and “links to people in more than 200 countries and territories.” The database is expected to offer an unprecedented window into the previously-secret world of offshore tax evasion and the use of shell or nominee entities to conceal the identity of the real owner of the underlying assets.

The first release of Panama Papers records on April 3, 2016, which comprise over 11 million Mossack Fonseca files, sparked a global outcry over offshore tax evasion. In the United States, the Justice Department has opened a criminal investigation into the offshore tax schemes believed to be exposed by the Panama Papers leak, and New York’s Department of Financial Services has ordered 13 foreign banks to turn over records regarding their dealings with the Mossack Fonseca firm. Last Thursday, the Obama Administration announced significant steps to crack down on money laundering, corruption, and tax evasion in the wake of the Panama Papers leak, and called upon Congress to quickly act to pass legislation addressing these issues. In particular, the White House announced the following:

New rules to increase transparency and disclosure requirements that will enhance law enforcement’s ability to detect, deter, and disrupt money laundering, terrorist financing, and tax evasion, including long-awaited final regulations on “Customer Due Diligence” that require financial institutions to know and keep records on who actually owns the companies that use their services;
New regulations that expand upon existing law by adopting “Customer Due Diligence” requirements for certain prepaid credit and debit cards;
New rules that close a loophole allowing foreigners to hide assets or financial activity behind anonymous entities established in the United States; and
New legislation that would increase transparency into the “beneficial ownership” of companies formed in the United States by requiring that companies know and report their true owners.

The Obama Administration also called upon the Senate to finally approve tax treaties that have been pending for several years that would help crack down on offshore tax evasion.

The Panama Papers database to be released today by ICIJ is expected to include the names of thousands of offshore entities formed by Mossack Fonseca and, most importantly, the identities of the true owners behind such companies. ICIJ has stated that the database will not, however, include bank account records, emails and other correspondence, passports, or telephone numbers.

Individuals who have used offshore companies and believe they may be implicated by today’s data release by ICIJ should consider taking immediate corrective action. The Internal Revenue Service has long maintained a number of well-publicized voluntary disclosure programs that afford non-compliant U.S. taxpayers the opportunity to avoid criminal prosecution by self-disclosing their non-compliance to the IRS, explaining the facts and circumstances of non-compliance, and paying back taxes, interest, and penalties. The most popular voluntary disclosure program offered by the IRS is the Offshore Voluntary Disclosure Program (“OVDP”), which is directed at non-compliant taxpayers with secret offshore assets. U.S. individuals identified as beneficial owners of secret offshore companies may take advantage of the OVDP to avoid criminal prosecution, but only if they commence the voluntary disclosure process before the IRS learns of their non-compliance from third-party sources, including whistleblowers. The IRS may take the position that a voluntary disclosure occurring after public release of an individual’s name through the Panama Papers disclosure is too late and deem them ineligible for OVDP protection. Thus, time is of the essence, and individuals concerned about being named in the Panama Papers database should act quickly and consider whether a voluntary disclosure to the IRS is warranted. Inaction is not a viable option.

Since 2009, the United States has undertaken an aggressive enforcement campaign to combat offshore tax evasion using secret bank accounts in Switzerland and other tax havens, and the use of offshore structures to obscure the identity of the real owner of financial assets held outside of the United States. The following statistics tell the story:

The Justice Department has criminally charged more than 100 U.S. accountholders that evaded U.S. tax laws using hidden offshore accounts, and nearly 50 individuals (mostly foreign nationals) who assisted them.
Due to aggressive law enforcement actions, 80 Swiss banks have admitted to engaging in criminal conduct and paid more than $1.3 billion in penalties.
Under threat of prosecution, more than 54,000 individuals have come forward to disclose their offshore accounts to the IRS through the OVDP and other voluntary disclosure programs, paying more than $8 billion in tax, penalties, and interest.
Under the Foreign Account Tax Compliance Act signed into law by President Obama in 2010, more than 150,000 foreign financial institutions have agreed to report customer information to the United States, in an effort to ensure that tax cheats cannot hide assets offshore.

Blank Rome’s Offshore Tax Compliance Team regularly advises clients as to the U.S. tax consequences of maintaining undisclosed offshore assets, and the compliance options available to such individuals to mitigate risk. Our team includes former federal prosecutors and Justice Department trial attorneys and experienced tax attorneys well-versed in the intricacies of the OVDP and other IRS voluntary disclosure options. Please contact a member of our team should you have any questions regarding the Panama Papers or any other aspect of offshore tax compliance.

INTERNAL REVENUE SERVICE ISSUES STERN WARNING TO NON-COMPLIANT TAXPAYERS WITH OFFSHORE HOLDINGS

Posted on October 16, 2015 by Matthew D. Lee

Just one day after the October 15 deadline for filing personal income tax returns on extension, the Internal Revenue Service issued a strongly-worded warning to non-compliant taxpayers: take action now to fix your problem, or face serious consequences. At the same time, the IRS revealed, for the first time, that nearly 85,000 taxpayers have taken advantage of voluntary disclosure programs for unreported offshore assets over the course of the last seven years. The IRS also disclosed that it has conducted “thousands” of offshore-related civil audits of taxpayers, resulting in the payment of “tens of millions of dollars” to the U.S. Treasury.

In a press release dated October 16, 2015, and entitled “Offshore Compliance Programs Generate $8 Billion; IRS Urges People to Take Advantage of Voluntary Disclosure Programs,” IRS Commissioner John Koskinen touted global cooperation among nations to automatically exchange tax information as providing tax authorities around the world, including the Internal Revenue Service, with substantial greater leverage to combat tax evasion:

“The groundbreaking effort around automatic reporting of foreign accounts has given us a much stronger hand in fighting tax evasion. People with undisclosed foreign accounts should carefully consider their options and use available avenues, including the offshore program and streamlined procedures, to come back into full compliance with their tax obligations.”

The IRS announced updated statistics regarding participation in its offshore voluntary disclosure programs, which have existed since 2009. More than 54,000 taxpayers have utilized the formal IRS amnesty program, called the Offshore Voluntary Disclosure Program (OVDP), paying more than $8 billion in taxes, penalties, and interest to the U.S. Treasury. In addition, the newer Streamlined Filing Compliance Procedures (initiated in 2012 but not fully clarified and expanded until June 2014) have been exceedingly popular with non-compliant taxpayers. The streamlined program, which is designed for “non-willful” taxpayers, has seen more than 30,000 applicants, with two-thirds of those submissions made since June 2014 when the streamlined eligibility criteria were expanded.

These statistics demonstrate overwhelming interest in the streamlined procedures, while applications for the formal OVDP appear to be waning. Prior to announcement of the streamlined procedures, the IRS received withering criticism for the OVDP’s “one-size-fits-all” penalty structure that contained no mechanism to distinguish between individuals who had engaged in outright tax evasion and those taxpayers whose non-compliance was due to “non-willful” conduct, such as a good faith misunderstanding of the law. The streamlined program was designed to provide an alternative to the perceived harsh treatment accorded OVDP participants, and judging by the statistics announced today, it appears that the vast majority of taxpayers who have taken action in the past year have rejected the OVDP option and instead elected for streamlined treatment. Curiously absent from today’s IRS announcement is any discussion of the number of taxpayers whose streamlined applications were rejected. The streamlined program application ominously warns that taxpayers whose conduct is not genuinely “non-willful” risk being rejected from the streamlined program and subject to audit or criminal investigation. The IRS is undoubtedly scrutinizing streamlined applications in an effort to ensure that “willful” taxpayers are not able to “sneak” through the less rigorous program alternative. The IRS also has not provided any statistics regarding the number of taxpayers who have utilized the disfavored (in the eyes of the IRS) “quiet disclosure” path, although tracking such taxpayers is admittedly difficult given the nature of such disclosures.

Today’s announcement by the IRS makes clear the risk to non-compliant taxpayer because of global developments regarding the automatic exchange of tax exchange now in effect. Both the Foreign Account Tax Compliance Act (FATCA), which is now fully effective, and the OECD’s Common Reporting Standard, which starts to become effective in 2016, are mechanisms to provide tax authorities throughout the world (including the U.S.) with information about taxpayers with offshore assets:

Under the Foreign Account Tax Compliance Act (FATCA) and the network of intergovernmental agreements (IGAs) between the U.S. and partner jurisdictions, automatic third-party account reporting began this year, making it less likely that offshore financial accounts will go unnoticed by the IRS.

Also, the Department of Justice’s Swiss Bank Program is another way in which the U.S. will obtain a significant amount of information regarding U.S. taxpayers with Swiss bank accounts:

In addition to FATCA and reporting through IGAs, the Department of Justice’s Swiss Bank Program continues to reach non-prosecution agreements with Swiss financial institutions that facilitated past non-compliance. As part of these agreements, banks provide information on potential non-compliance by U.S. taxpayers. Potential civil penalties increase substantially if U.S. taxpayers associated with participating banks wait to apply to OVDP to resolve their tax obligations.

The overwhelming success of the IRS voluntary disclosure initiatives (both OVDP and the streamlined program) is unquestionably attributable to the U.S. government’s use of a traditional “carrot and stick” approach. With OVDP and the streamlined program representing the “carrot” used to entice non-compliant taxpayers to take action and return to tax compliance, a robust enforcement agenda carried out by the IRS, working hand-in-hand with the Justice Department, represents the “stick.” Enforcement actions in this area consist of both criminal and civil proceedings. The DOJ’s Offshore Compliance Initiative proclaims that “[o]ne of the Tax Division’s top litigation priorities is combatting the serious problem of non-compliance with our tax laws by U.S. taxpayers using secret offshore bank accounts” and maintains an updated list of offshore criminal prosecutions on its website. Today’s IRS announcement reveals that the IRS has conducted thousands of civil audits in this area:

Separately, based on information obtained from investigations and under the terms of settlements with foreign financial institutions, the IRS has conducted thousands of offshore-related civil audits that have produced tens of millions of dollars. The IRS has also pursued criminal charges leading to billions of dollars in criminal fines and restitutions.

Finally, while acknowledging the reality that the Internal Revenue Service has faced years of budget cuts and deep declines in its workforce (both civil revenue agents and criminal special agents), today’s announcement warns that the agency remains vigilant and aggressive even while resource-constrained:

The IRS remains committed to stopping offshore tax evasion wherever it occurs. Even though the IRS has faced several years of budget reductions, the agency continues to pursue cases in all parts of the world.

U.S. taxpayers with undisclosed offshore accounts or assets should well heed today’s warning from the IRS. With the implementation of tax exchange mechanisms such as FATCA, and other enforcement initiatives like the Swiss Bank Program, the IRS has access now to far more information about the offshore activities of U.S. taxpayers than ever before. And non-compliant taxpayers who fail to take voluntary, corrective action now will surely face harsh consequences when they are invariably discovered by the IRS or other tax authorities.

Matthew D. Lee is the author of The Foreign Account Tax Compliance Act Answer Book 2015 (published by the Practising Law Institute), a definitive treatment of the due diligence, withholding, reporting, and compliance obligations imposed by FATCA on foreign financial institutions, non-financial foreign entities, and withholding agents. For more information on this publication, please click here.

Internal Revenue Service Begins Reciprocal Automatic Exchange of Tax Information Under FATCA IGAs

Posted on October 3, 2015 by Matthew D. Lee

On October 2, 2015, the Internal Revenue Service announced that it had achieved a key milestone in implementation of the Foreign Account Tax Compliance Act (FATCA), a critical anti-tax evasion law passed by Congress in 2010 but not fully implemented until July 2014. The milestone announced by the IRS was the exchange of financial account information with certain foreign tax administrations by September 30, 2015. To achieve the reciprocal exchange of tax information by the September 30 deadline, the IRS successfully and timely developed the information system infrastructure, procedures, and data use and confidentiality safeguards to protect taxpayer data while facilitating reciprocal automatic exchange of tax information with certain foreign jurisdiction tax administrators as specified under the intergovernmental agreements (IGAs) implementing FATCA.

“Meeting the Sept. 30 deadline is a major milestone in IRS efforts to combat offshore tax evasion through FATCA and the intergovernmental agreements,” said IRS Commissioner John Koskinen. “FATCA is an important tool against offshore tax evasion, and this is a significant step in the process. The IRS appreciates the assistance of our counterparts in other jurisdictions who have helped to make this possible.”

The reciprocal, automatic exchange of information with certain partner jurisdictions is part of the IRS’s overall efforts to implement FATCA, enacted in 2010 by Congress to target non-compliance by U.S. taxpayers using foreign accounts or foreign entities. FATCA generally requires withholding agents to withhold on certain payments made to foreign financial institutions (FFIs) unless such FFIs agree to report to the IRS information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest.

In response to the enactment of FATCA and other jurisdictions’ interest in facilitating and participating in the exchange of financial account information, the U.S. government entered into a number of bilateral IGAs that set the groundwork for cooperation between the jurisdictions in this area. Certain IGAs not only enable the IRS to receive this information from FFIs, but enable more efficient exchange by allowing a foreign partner to gather the specified information and provide it to the IRS. And some IGAs also require the IRS to reciprocally exchange certain information about accounts maintained by residents of foreign jurisdictions in U.S. financial institutions with their jurisdictions’ tax authorities. Under these reciprocal IGAs, the first exchange had to take place by September 30, giving the IRS a deadline to put in place a process to facilitate this data exchange.

The IRS announcement further stated that the information now available provides the United States and partner jurisdictions an improved means of verifying the tax compliance of taxpayers using offshore banking and investment facilities, and improves detection of those who may attempt to evade reporting the existence of offshore accounts and the income attributable to those accounts.

The IRS will only engage in reciprocal exchange with foreign jurisdictions that, among other requirements, meet the IRS’s stringent safeguard, privacy, and technical standards. Before exchanging with a particular jurisdiction, the United States conducted detailed reviews of that jurisdiction’s laws and infrastructure concerning the use and protection of taxpayer data, cyber-security capabilities, as well as security practices and procedures.

“This groundbreaking effort has fundamentally altered our relationship with tax authorities around the world, giving us all a much stronger hand in fighting illegal tax avoidance and leveling the playing field,” Koskinen said.

The IRS announcement further stated that meeting this deadline reflects a significant international collaboration and partnership with dozens of jurisdictions around the world. The capacity for reciprocal automatic exchange builds on numerous accomplishments including the following:

Development of a consistent data reporting format, or schema, and the agreement to use this format by all jurisdictions;
Establishment of the details and procedures required to assure data confidentiality;
Creation of a data transmission system to meet high standards for encryption and security; and
Cooperation with foreign jurisdiction tax administrations to achieve the timely implementation of this exchange.

The IRS announcement declined to identify which countries received tax information from the IRS, but The Wall Street Journal reported that a total of 34 countries are eligible to receive tax information from the U.S. That list includes the following countries:

Australia, Brazil, Canada, Czech Republic, Denmark, Estonia, Finland, France, Germany, Gibraltar, Guernsey, Hungary, Iceland, India, Ireland, Isle of Man, Italy, Jersey, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Mauritius, Mexico, Netherlands, New Zealand, Norway, Poland, Slovenia, South Africa, Spain, Sweden, and the United Kingdom.

The type of information typically exchanged pursuant to the FATCA IGAs consists of the name of the account holder, address, account number, account balance, and amount of dividend and interest payments, among other items. This disclosure applies to accounts above a certain threshold.

The conclusion of the IRS announcement contained another warning to non-compliant taxpayers of the increasing risks of detection:

Koskinen noted the risks of hiding money offshore are growing and the potential rewards are shrinking.

Since 2009, tens of thousands of individuals have come forward voluntarily to disclose their foreign financial accounts, taking advantage of special opportunities to comply with the U.S. tax system and resolve their tax obligations. At the beginning of 2012, the IRS reopened the Offshore Voluntary Disclosure Program (OVDP), which is open until otherwise announced.

FATCA Update: Institute of International Bankers Submits Comment Letter on FATCA Regulations

Posted on September 20, 2015 by Matthew D. Lee

The Institute of International Bankers (IIB) has submitted a comment letter (available through Bloomberg BNA here; subscription required) to the Internal Revenue Service addressing various issues arising under the FATCA regulations. According to its website, the IIB is described as follows:

Founded in 1966, the IIB is the only national association devoted exclusively to representing and advancing the interests of internationally-headquartered banking/financial institutions operating in the United States. Its membership is comprised of internationally headquartered institutions from over 35 countries around the world. Collectively, the U.S. branches, agencies, banking subsidiaries, securities affiliates and other operations of the IIB’s member banks are an important source of credit for U.S. borrowers and enhance the depth and liquidity of U.S. financial markets. IIB member banks also inject billions of dollars each year into the economies of major cities across the country through the direct employment of U.S. citizens and permanent residents, as well as through other operating and capital expenditures.

The IIB begins its letter by stating that “[w]e are writing to highlight and suggest ways to resolve issues that our member banks are encountering in connection with implementing certain requirements of the Foreign Account Tax Compliance Act (FATCA).” In summary, the issues, and the proposed resolutions, identified by the IIB are as follows:

Remediating pre-existing accounts after the June 30 deadline. The IIB contends that participating foreign financial institutions (PFFIs) should be allowed to treat pre-existing accounts as “cured” for reporting purposes if the curative documentation is received after the applicable June 30 deadline, but before the reporting deadline in the following year.
Reporting requirements for closed or transferred accounts. The IIB suggests that pre-existing accounts (individuals and entities) subject to a remediation period, and not yet identified or documented for FATCA purposes, should be reported as follows: (1) If the account is closed or transferred prior to the expiry of the remediation period, the account should not be subject to reporting since the account holder’s status has not been determined; and (2) If the account is closed or transferred after the remediation period expires and the account is not cured, the account is subject to reporting based on the applicable presumption rules (although the PFFI may still try to cure the account based on the proposal above).
Clarifying treatment of “professionally managed” entities. The IIB suggests that the IRS should clarify the application of the “managed by” test that will require certain passive entities to be treated as investment entities (and, consequently, as foreign financial institutions (FFIs)).

The IIB suggests that all of these proposed clarifications could be made through the FAQs published in the IRS website.

Remediating pre-existing accounts after the June 30 deadline

The IIB notes that PFFIs are generally required to remediate pre-existing accounts held by individuals that have U.S. indicia. For pre-existing accounts held by individuals, the remediation deadlines are June 30, 2015, for high-value accounts (balance or value greater than $1 million) and June 30, 2016, for other accounts (assuming the effective date of the FFI Agreement is June 30, 2014). If uncured by the applicable June 30 deadline, such accounts are reclassified as recalcitrant (or non-consenting under a Model 2 IGA). Treas. Reg. §1.1471-5(g)(3).

Subject to certain exceptions, PFFIs also are required to remediate pre-existing financial accounts held by entities in order to determine if the entity is a nonparticipating FFI (NPFFI). For entities other than prima-facie FFIs, the remediation deadline is June 30, 2016. If uncured by this date, the entity will generally default to NPFFI status.

Recalcitrant accounts and NPFFIs are subject to reporting under FATCA on Form 8966. It is unclear, however, if such reporting is required if the PFFI obtains curative documentation after the remediation deadline has passed.

The IIB’s proposal to address this issue is as follows: To clarify the consequences of the expiration of the remediation period, the IIB proposes the following approach:

If a PFFI receives curative documentation after the remediation deadline, but before the due date (plus extensions) to file Form 8966, the PFFI may treat the account as cured and not subject to reporting on this form. A financial institution may also rely on the curative documentation for purposes of reporting the chapter 4 status on a Form 1042-S. Furthermore, the affidavits described in the refund procedures of Treas. Reg. §1.14713(c)(7) should not be required, unless withheld tax is to be refunded.
The above proposal would not apply to any recalcitrant account holders subject to FATCA withholding due to their status as recalcitrant or NPFFI account holders.

Reporting requirements for accounts that are closed or transferred before remediation period expires

The IIB comment letter notes that PFFIs are required to report certain information to the IRS regarding financial accounts held by specified U.S. persons, U.S.-owned foreign entities or owner-documented FFIs that are closed or transferred during the year.

It is unclear how the above reporting requirements apply to a pre-existing account (individual or entity) that is not yet identified or documented for FATCA purposes and that is closed or transferred before the expiration of the applicable June 30 remediation deadline. The regulations do not clearly require reporting in such a case. Furthermore, since the PFFI does not know the account holder’s status at the time of the account closure or transfer, reporting does not seem appropriate. The regulations simply do not require a PFFI to reclassify an account holder of a closed or transferred account as recalcitrant or as an NPFFI after the expiration of the remediation period.

The IIB’s proposal to address this issue is as follows: The IRS should provide guidance clarifying that a PFFI is not required to file Form 8966 with respect to an unremediated pre-existing individual or entity account that has been closed or transferred prior to the expiration of its remediation period.

Post-expiration of the remediation period, if a pre-existing account is closed or transferred and is not cured, it would remain subject to reporting based on the applicable presumption rules. (As proposed above a PFFI would treat the account as “cured” for reporting purposes, if the documentation is subsequently received prior to the reporting deadline.)

Clarifying treatment of professionally managed entities

According to the IIB comment letter, there has been some confusion about the treatment of certain passive entities that are managed by other financial institutions. In general, such an entity will be an FFI if: (1) the entity’s gross income is primarily attributable to investing, reinvesting, or trading financial assets; and (2) the entity is managed by another entity that qualifies as an FFI (other than certain investment entities) (“professionally managed”). Treas. Reg. §1.1471-5(e)(4). The regulations also provide examples of the management test, illustrating that a trust managed by a trust company and a fund managed by an entity investment advisor should each be treated as an FFI. Treas. Reg. §1.1471- 5(e)(4)(v) (examples 3 and 6).

Based on these regulations and the related examples, the IIB is concerned that a passive NFFE certification is unreliable if the account holder invests in financial assets and there are indicia that the account holder is managed by a financial institution. Such indicia may include, for example:

A corporate trustee for an account holder that is a trust, foundation, or similar entity, and the trustee’s name reasonably indicates it is a financial institution;
A corporate director for a client that is a corporation, company, or similar entity, and the director’s name reasonably indicates it is a financial institution; or
An individual who, as part of his or her duties as an employee of an entity, acts under a power of attorney for the account holder, and the entity’s name reasonably indicates it is a financial institution.

This list is not exclusive, but it illustrates the type of indicia that may result in a questionable passive NFFE certification.

The IIB comment letter sets forth a potential cure for this problem: where a financial institution suspects (but does not know) that an entity is being professionally managed, the IRS should allow a financial institution to perform additional due diligence and “cure” the types of indicia described above if the entity claiming passive NFFE status also indicates in a written statement that it is not managed by another financial institution. Requiring this additional statement will help ensure that professionally managed entities will not improperly claim passive NFFE status. The written statement could be incorporated as part of the self-certification used by the financial institution opening the account, or provided separately.

Furthermore, in many cases, a financial institution may have actual knowledge that a passive NFFE certification is invalid if the entity making such a certification receives management services from that same financial institution (e.g., through a “discretionary account” or “managed account” in which the financial institution has full discretion over investment decisions) and the entity’s account holds financial assets. Except as noted below, the financial institution receiving the passive NFFE certification may not rely on it. It would be helpful, however, for the IRS to confirm this understanding in order to establish a level playing field in the industry.

Nevertheless, a financial institution may rely on a passive NFFE certification if the entity providing the certification also confirms in a written statement that it is a passive NFFE despite the fact that it is professionally managed (e.g., because it does not meet an applicable gross income test because, for example, most of its assets are real estate, or because it resides in a country that classifies certain entities as passive NFFEs, even if they are actively managed (e.g., Canada)).

If an entity maintains the view that it is a passive NFFE despite being professionally managed and fails to provide a written statement, a financial institution should have the option of: ( I) asking the entity for a new Form W-8 indicating an FFI status; or (2) treating the entity as an owner-documented FFI (“ODFFI”) and reporting all its specified US owners and certain debtors on Forms 8966 as long as the financial institution has the information it needs to report.

The IIB’s proposal to deal with this problem: The IIB proposes that the IRS issue an FAQ that provides guidance consistent with the comments above, namely that:

Potential indicia of management by another financial institution may be cured by obtaining an additional written statement from the passive NFFE that it is not professionally managed; and
Providing a discretionary mandate or similar service will generally result in the financial institution having actual knowledge that the entity is an FFI (in which case the financial institution has the option to collect a new tax form or treat the entity as an ODFFI), unless the entity provides an additional written statement establishing that it is a passive NFFE despite being professionally managed.

FATCA Update: Treasury Relaxes September 30 Deadline for Model 1 IGA Jurisdictions to Exchange Tax Information

Posted on September 18, 2015 by Matthew D. Lee

With less than two weeks remaining until many countries are required to exchange tax information with the U.S. pursuant to the Foreign Account Tax Compliance Act (FATCA), the U.S. has agreed to provide partner jurisdictions with more time to implement information exchange systems. Today, the Treasury Department and the Internal Revenue Service issued Notice 2015-66 which relaxes the September 30, 2015, deadline for countries which have signed Model 1 Intergovernmental Agreements (IGAs) to hand over information regarding accounts held by U.S. taxpayers. As of today, 112 countries have either signed an IGA with the U.S. or agreed in substance to the terms of an IGA. (A complete list is available here.) Under the terms of the Model 1 IGA, once the agreement enters into force, information relating to calendar year 2014 is generally required to be reported to the U.S. by September 30, 2015.

Background

Treasury has released two versions of the Model 1 IGA. A Model 1A IGA provides for reciprocal information exchange between the United States and the partner jurisdiction. The obligation to exchange information generally begins after the IGA enters into force under Article 10(1) of the IGA and the competent authorities provide notification that each is satisfied that the other jurisdiction has in place the necessary safeguards to ensure that the information received will remain confidential and be used solely for tax purposes and the infrastructure necessary for an effective exchange relationship. A Model 1B IGA provides for information to be exchanged only by the partner jurisdiction. Under a Model 1B IGA, the obligation for a partner jurisdiction to exchange information with the United States begins when the IGA enters into force under Article 10(1) or Article 12(1) (as applicable) of the IGA.

Once an IGA has entered into force and any relevant notifications described above for the Model 1A IGA have been provided, Article 2 of both versions of the Model 1 IGA requires the partner jurisdiction to obtain and exchange specified information with respect to each U.S. reportable account. Under Article 3(5) of the Model 1 IGA, the partner jurisdiction is obligated to obtain and exchange information within nine months after the end of the calendar year to which the information relates. In the case of information required to be obtained and exchanged with respect to 2014 pursuant to a Model 1 IGA that is in force, the 2014 information should be exchanged by the partner jurisdiction by September 30, 2015.

Notice 2015-66 recognizes that many countries that have signed IGAs, or have agreed to such in principle, are continuing to work through their internal procedures in order to bring the IGA into force. Such countries are continuing to develop and implement systems needed for automatic exchange and may not have those systems in place by September 30, 2015. In addition, several partner jurisdictions are in the process of enacting legislation to implement their IGAs, without which they are unable to exchange tax information with the U.S. For these reasons, Treasury and the IRS have decided to relax the September 30 reporting deadline.

Model 1 IGA Jurisdictions for Which the Obligation to Exchange Has Not Taken Effect

For those Model 1 IGA jurisdictions where the obligation to exchange information has not yet taken effect, Notice 2015-66 provides that FFIs in that country will be treated as FATCA compliant, and not subject to withholding, so long as the jurisdiction “continues to demonstrate firm resolve to bring the IGA into force.” Under these circumstances, the deadline to exchange information for calendar year 2014 will be extended one full year, to September 30, 2016. Notice 2015-66 does not, however, change the deadline for FFIs to report information to their local tax authority, which remains governed by law of that country.

Model 1 IGA Jurisdictions for Which the Obligation to Exchange Is In Effect

For those Model 1 IGA jurisdictions where the obligation to exchange is in effect now, Notice 2015-66 provides that FFIs in that country will be treated as FATCA compliant, and not subject to withholding, so long as the partner jurisdiction notifies the U.S. before September 30 that it requires more time, and “provides assurance that the jurisdiction is making good faith efforts to exchange the information as soon as possible.” Notice 2015-66 does not, however, change the deadline for FFIs to report information to their local tax authority, which remains governed by law of that country.

Conclusion

Notice 2015-66 provides a much-needed reprieve for Model 1 IGA countries and affords such jurisdictions more time to implement information exchange systems and, if necessary, legislation to implement IGAs. Unless the Model 1 IGA jurisdiction modifies its internal deadline for reporting, FFIs in those jurisdictions will still have to report information regarding their U.S. reportable accounts to their respective tax authorities irrespective of the relaxed deadlines in Notice 2015-66. Today’s announcement also provides a reprieve, of sorts, to non-compliant U.S. taxpayers who maintain financial accounts at FFIs in Model 1 IGA jurisdictions. The relaxation of the September 30 deadline for reporting to the U.S. affords such taxpayers additional time to take steps to become compliant, by utilizing the various IRS voluntary disclosure programs such as the Offshore Voluntary Disclosure Program or the Streamlined Filing Compliance Procedures. Once a foreign jurisdiction turns over account information to the U.S., non-compliant taxpayers generally cannot take advantage of the IRS disclosure programs and will be subject to audit or, worse, a criminal investigation.

Swiss Banks Bank Zweiplus and Banca Stato Have Entered into Non-Prosecution Agreements under the DOJ’s Swiss Bank Program

Posted on August 21, 2015 by Stephanie C. Chomentowski

Two more Swiss banks have reached resolutions with the Justice Department under its Swiss Bank Program. Yesterday, DOJ announced that bank zweiplus ag (Bank Zweiplus) and Banca dello Stato del Cantone Ticino (Banca Stato) have each entered into a non-prosecution agreement for any tax-related criminal offenses and agreed to pay a penalty of just over $1 million and $3 million, respectively.

In its announcement yesterday, the DOJ described the relevant conduct of each of these banks as in relation to their U.S. accountholders as follows:

Bank Zweiplus

Bank Zweiplus was founded in July 2008 as a retail bank based in Zurich. Offices located in Geneva and Basel, Switzerland, were closed in 2008 and 2012, respectively. Since Aug. 1, 2008, Bank Zweiplus maintained and serviced 44 U.S.-related accounts with an aggregate value of approximately $12.1 million.

Bank Zweiplus was aware that U.S. taxpayers have a legal duty to report to the Internal Revenue Service (IRS) their ownership of bank accounts outside the United States and to pay taxes on income earned in such accounts. Nevertheless, in disregard of U.S. laws, the bank provided a variety of traditional Swiss banking services that assisted some U.S. taxpayers in concealing their undeclared accounts. For example, Bank Zweiplus maintained numbered accounts and accounts held in the name of structures which were effectively owned or controlled by U.S. persons, including structures in the British Virgin Islands and the Bahamas.

Bank Zweiplus cooperated with the department during its participation in the Swiss Bank Program and encouraged its U.S. clients to enter the IRS Offshore Voluntary Disclosure Program. Bank Zweiplus will pay a penalty of $1.089 million.

Banca Stato

Banca Stato was established in 1915 and is headquartered in Bellinzona, Switzerland. Banca Stato was aware that U.S. taxpayers had a legal duty to report to the IRS and pay taxes on the basis of all of their income, including income earned in accounts that the U.S. taxpayers maintained at the bank. Despite this, the bank opened and serviced accounts for U.S. clients who the bank knew or had reason to know were not complying with their U.S. income tax obligations.

In 2001, Banca Stato entered into a Qualified Intermediary Agreement with the IRS. In 2001, the bank issued an internal directive prohibiting U.S. persons without a Form W-9 on file with the bank from buying U.S. securities. However, prior to 2011, Banca Stato’s relationship managers were not instructed to, and did not, evaluate or screen incoming U.S. clients for U.S. tax compliance status. At that time, more than 70 percent of the assets under management were related to U.S. accountholders who had not provided a Form W-9 to the bank.

In 2011, Banca Stato implemented a project that it called “Colombo” to change the manner in which it handled U.S. clients. The bank recognized both risks and rewards of handling U.S. clients. As to the former, the bank recognized that “[w]e can no longer have clients who are U.S. Persons who have not signed the W-9 form.” But the bank also recognized an opportunity to attract new U.S. clients because many Swiss banks declined to service U.S. persons from Ticino, Switzerland, and the bank perceived “a huge demand from fully tax-compliant U.S. Persons . . . attracted by the brand BancaStato (especially because we have no branches in the US).”

Banca Stato entered into a relationship with a Lugano-based U.S. Securities and Exchange-registered investment advisory firm to partner in attracting U.S. persons living and working in the Ticino region who could not open or maintain accounts at other institutions. The bank paid the firm a one-time finder’s fee of 0.5 percent on the incoming funds. Despite the bank’s decision to refuse to open new accounts of U.S. persons without a Form W-9, it did not always adhere to this policy.

Banca Stato offered a variety of traditional Swiss banking services that it knew would and in certain instances did assist U.S. clients in concealing assets and income from the IRS, including hold mail and code name or numbered accounts. In addition, the bank employed a variety of other means or conduct that it knew or should have known would assist U.S. taxpayers in concealing their Banca Stato accounts, including opening accounts for U.S. taxpayers who left other banks being investigated by the department and allowing U.S. clients to direct repeated wire transfers between $9,000 and $9,900 in an effort to conceal their Swiss bank accounts from U.S. authorities.

During the applicable period, Banca Stato maintained and serviced 187 U.S.-related accounts with an aggregate maximum balance of approximately $137 million. Banca Stato will pay a penalty of $3.393 million.

Under the Swiss Bank Program, eligible Swiss banks that had notified the DOJ by December 31, 2013 of an intent to participate in the Program were eligible to resolve any potential criminal liabilities in the U.S. by completing the following:

Make a complete disclosure of their cross-border activities;
Provide detailed information on an account-by-account basis for accounts in which U.S. taxpayers have a direct or indirect interest;
Cooperate in treaty requests for account information;
Provide detailed information as to other banks that transferred funds into secret accounts or that accepted funds when secret accounts were closed;
Agree to close accounts of accountholders who fail to come into compliance with U.S. reporting obligations; and
Pay appropriate penalties.

Swiss banks meeting all of the above requirements are eligible for a non-prosecution agreement.

According to the terms of the non-prosecution agreements announced yesterday, each bank agrees to cooperate in any related criminal or civil proceedings, demonstrate its implementation of controls to stop misconduct involving undeclared U.S. accounts and pay penalties in return for the DOJ’s agreement not to prosecute these banks for tax-related criminal offenses.

The Justice Department released the following documents with its announcement:

The Bank Zweiplus non-prosecution agreement and statement of facts (available here).
The Banca Stato non-prosecution agreement and statement of facts (available here).

Tax Controversy Watch

Focusing on Significant Developments in the Tax Controversy World

Category Archives: Foreign Account Tax Compliance Act

Justice Department’s First FATCA Prosecution Yields Guilty Plea

Today’s Panama Papers Release May Require Immediate Action to Mitigate Risk of Criminal Prosecution

With Comprehensive Panama Papers Database to Be Released Today, and White House Call for Comprehensive Action to Combat Offshore Tax Evasion, Affected Individuals Should Consider Immediate Action to Mitigate the Risk of Criminal Prosecution

INTERNAL REVENUE SERVICE ISSUES STERN WARNING TO NON-COMPLIANT TAXPAYERS WITH OFFSHORE HOLDINGS

Internal Revenue Service Begins Reciprocal Automatic Exchange of Tax Information Under FATCA IGAs

FATCA Update: Institute of International Bankers Submits Comment Letter on FATCA Regulations

FATCA Update: Treasury Relaxes September 30 Deadline for Model 1 IGA Jurisdictions to Exchange Tax Information

Swiss Banks Bank Zweiplus and Banca Stato Have Entered into Non-Prosecution Agreements under the DOJ’s Swiss Bank Program

Share this:

Like this:

With Comprehensive Panama Papers Database to Be Released Today, and White House Call for Comprehensive Action to Combat Offshore Tax Evasion, Affected Individuals Should Consider Immediate Action to Mitigate the Risk of Criminal Prosecution

Share this:

Like this:

Share this:

Like this:

Share this:

Like this:

Share this:

Like this:

Share this:

Like this:

Share this:

Like this: