Ninth Circuit Reverses Tax Fraud Conviction Where Returns Were Not “Filed” With Internal Revenue Service

Yesterday the Ninth Circuit addressed the question of whether an individual can be convicted of filing false tax returns pursuant to 26 U.S.C. 7206(1) where the tax returns in question were tendered to an IRS agent during an audit, and were not filed with an IRS Service Center in the normal course. See United States v. Boitano, No. 14-10139 (slip opinion available here). The defendant (who was also an accountant) had been convicted following a jury trial of making a false statement under penalty of perjury on personal income tax returns, and he appealed his conviction to the Ninth Circuit.

The Ninth Circuit’s opinion summarizes the pertinent facts as follows:

During the period relevant to this appeal, Boitano was a partner in Boitano, Sargent & Lilly, an accounting firm. His responsibilities included preparing tax returns and representing clients during IRS audits, but Boitano did not file his own income tax returns for the years 1991 to 2007.

The IRS undertook an examination in 1992/1993 and in 2004. Boitano still did not file any returns, and his case was referred to the IRS’s Special Enforcement Program.

In June 2009, Special Enforcement Program Agent Nick Connors requested a meeting with Boitano regarding his failure to file returns for 2001 through 2007. Connors and Boitano ultimately met three times. During the third meeting, Boitano handed Connors income tax returns for 2001, 2002, and 2003. The returns were signed under penalty of perjury by Boitano and his wife. Connors stamped the first page of the returns “Internal Revenue Service, SB/SE – Compliance Field, Sep 04, 2009, Area 7, San Francisco, CA,” and hand wrote “delinquent return secured by exam” on the first page of each. Per Boitano’s request, Connors copied the first page of the returns and gave the copies to Boitano as receipts.

The returns Boitano handed to Connors reported “estimated tax payments” that had not been made. The 2001 return reported a $26,000 payment, the 2002 return reported a $38,000 payment, and the 2003 return reported a $57,000 payment. In fact, the government calculated that Boitano owed the IRS $52,953.80 for 2001, $72,797.00 for 2002, and $104,545.94 for 2003.

Agent Connors quickly realized that the IRS did not have record of receiving the claimed estimated tax payments. Therefore, instead of sending the returns to the IRS service center for processing, he confronted Boitano with the discrepancy. According to Connors, Boitano “physically got a little pale and said that he was not sure why there [were] differences.” Soon thereafter, Connors sent Boitano a letter asking that he substantiate the estimated tax payments, or, if those estimates were not correct, that he identify the correct estimated amounts with “a written statement dated and signed explaining in detail why you believed the estimated payments to be the amounts reported on the delinquent returns filed on 9/4/09.” Boitano never responded.

Boitano was indicted and charged with three counts of making false statements under 26 U.S.C. § 7206(1). Section 7206(1) establishes that it is a felony for any person to “[w]illfully make[] and subscribe[] any return, statement, or other document, which contains or is verified by a written declaration that it is made under the penalties of perjury, and which he does not believe to be true and correct as to every material matter.” Boitano was also charged with three misdemeanor counts of failure to file taxes under 26 U.S.C. § 7203. He pleaded guilty to the three misdemeanors, but proceeded to trial on the felony charges.

The defendant argued at trial that filing is an essential element of § 7206(1) and that his act of handing the returns to Agent Connors did not constitute “filing” within the applicable IRS statute and regulations. The government agreed that filing is an element of the charged offense, but argued the filing element was satisfied by the uncontradicted evidence showing that the defendant handed fraudulent returns to Agent Connors. The district court agreed with the government. Over objection, Connors was permitted to testify that the defendant “filed 2001, 2002, and 2003 delinquent tax returns with me.” Connors provided additional foundational testimony that the IRS “treat[ed] the[] returns as having been filed” on September 4, 2009, the day the defendant handed them to Connors.

The Ninth Circuit’s opinion notes that the defendant’s opening appellate brief reiterates the position he argued unsuccessfully in the district court – that the evidence did not show the subject returns were “filed” within the meaning of the applicable IRS statutes and regulations when he handed them to Agent Connors. The court of appeals noted, however, that the government’s response brief contained an “unusual twist”:

Reversing its prior position, the government now concedes that “there is a single definition of ‘filing’ that applies in both the civil and criminal context,” and that “the record does not support that the returns here were filed.” The government agrees with Boitano that Connors’s testimony that the returns were “filed” when Boitano handed them to him was incorrect. The government’s new argument is that filing is not an element of the charged offense because, “by its own terms, [§] 7206(1) does not require the government to prove ‘filing’ as defined by the IRS regulations to establish a violation of the statute.” The government reasons, “under a correct understanding of Section 7206(1), [Boitano’s] actions violated the statute by his completing a return, signing it, and taking actions by which he gave up any right of self-correction.” (Emphasis added.) Notably, the government concedes that if it had to prove the returns were filed within the meaning of the IRS regulations, then Boitano’s convictions must be reversed.

The Ninth Circuit quickly dispensed with the government’s new argument, concluding that binding precedent supported the defendant’s position:

Our court has long held that “filing” is an element of a § 7206(1) violation. In United States v. Hanson, we affirmed a conviction for making false statements in violation of § 7206(1) where the defendant “fil[ed] false IRS forms that reported payments [defendant] had never made and claimed a tax refund [defendant] was not due.” 2 F.3d 942, 944 (9th Cir. 1993). In so ruling, we stated that “[t]o prove a violation of § 7206(1), making false statements, the government must prove that the defendant (1) filed a return, statement, or other document that was false as to a material matter . . . .” Id. at 945.

The government cites numerous reasons for its new contention that § 7206(1) does not require filing, but it offers no intervening authority for its argument that it should only be required to show that Boitano gave up the right of selfcorrection. It argues: (1) the statute, by its own terms, does not require proof of filing; (2) the Supreme Court has not identified filing as an element of the offense; (3) interpreting the statute not to require filing makes sense because the statute is not limited in its scope to tax returns; (4) the statute’s legislative history does not establish that filing is an element of the offense; and (5) filing a document is one way, but not the only way, to satisfy the statute. We are bound, however, by Hanson’s plain and explicit identification of “filing” as an element of a § 7206(1) offense. Id. (“To prove a violation of § 7206(1) . . . the government must prove that the defendant (1) filed a return. . . .”); see also United States v. Tucker, 133 F.3d 1208, 1218 (9th Cir. 1998).

The Ninth Circuit concluded that because binding circuit precedent establishes that “filing” is an element of a conviction under § 7206(1), and the government conceded on appeal that the record does not support that the returns here were filed, the defendant’s felony convictions must be reversed.

OECD Releases Its Annual Tax Administration Report

On August 11, 2015, the Organisation for Economic Co-operation and Development (OECD) released its annual report addressing global tax administration. The OECD’s stated mission is to “promote policies that will improve the economic and social well-being of people around the world.” The OECD describes its annual report as follows:

Tax Administration 2015, produced under the auspices of the Forum on Tax Administration, is a unique and comprehensive survey of tax administration systems, practices and performance across 56 advanced and emerging economies (including all OECD, EU, and G20 members). Its starting point is the premise that revenue bodies can be better informed and work more effectively together given a broad understanding of the administrative context in which each operates. However, its information content is also likely to be of interest to many external parties (e.g. academics, external audit agencies, regional tax bodies, and international bodies providing technical assistance).

The series identifies some of the fundamental elements of national tax system administration and uses data, analyses and country examples to identify key trends, comparative levels of performance, recent and planned developments, and good practices.

This edition updates performance-related and descriptive material contained in prior editions with new data up to end-fiscal year 2013, and supplements this information on some new topics (e.g. aspects of compliance management and strategic priorities for increased use of on-line services). It also includes coverage of four additional countries (i.e. Costa Rica, Croatia, Morocco, and Thailand).

Of particular interest in this report is the OECD’s finding regarding voluntary disclosure programs for non-compliant taxpayers. With the increased focus on offshore tax evasion by many countries, and the implementation of policies regarding the exchange of tax information among nations (including FATCA in the U.S., which is effective now, and the OECD’s Common Reporting Standard, which is just over the horizon), it is expected that taxpayers in many countries will be making greater use of voluntary disclosure programs. In the U.S., for example, the IRS Offshore Voluntary Disclosure Program for taxpayers with offshore bank accounts is the most successful voluntary disclosure program ever offered by the U.S. tax authority.

A press release announcing publication of Tax Administration 2015, and its key findings, is set forth below.

Tax administrations continue to face the challenges of improving their performance while reducing costs, decreasing compliance burdens for taxpayers tackling non-compliance. Improving taxpayer services, while making non-compliance harder, is helping revenue bodies increase their efficiency and allowing governments to finance important programmes that will further benefit their citizens.

Tax Administration 2015 is the sixth edition of the OECD’s comparative information series on tax administration. The report, which surveys 56 advanced and emerging economies (including all OECD, EU, and G20 countries), includes for the first time information: Costa Rica, Croatia, Morocco and Thailand. The series identifies fundamental elements of modern tax administration systems and uses data, analyses and examples to identify key performance trends, recent innovations, and examples of good practice.

Among the many findings and observations, the report in particular highlights:

— Significant organisational change – 40% of revenue bodies reported that they are currently managing the addition of new business activities, amalgamation with other government service providers, and consolidation of work and their office network, at a time when 60% saw reductions in staffing, with significant reductions in Australia, the United Kingdom and the United States.

— Strong investment in digital services– driven by customer expectation and productivity demands revenue administrations have invested significantly in digital on-the-go services. Average IT expenditure as a percentage of the total budget remained constant at 9.5%. Notable exceptions were Austria, Finland, Singapore and Norway where approximately 25% of the total budget is spent on IT.

— Better connected e-services, and future opportunity– while 95% of all revenue bodies offer the opportunity to file returns electronically, and over two thirds achieve usage over 75%, more could be done to move other aspects of the end-to-end process, including assessment, amendment and payment into a more integrated digital service.

— Improving outstanding tax debt position – Total tax debt for OECD member countries rose marginally in 2011 to 2013, from around 22% to just over 24% of net annual revenue collections. This ratio is however significantly impacted by two abnormal “outliers” which when removed change the results for OECD countries to show a decrease from 12.7% in 2011 to 11.1% of annual net revenue collections in 2013.  Notably seven revenue bodies: Estonia, Ireland, Japan, Korea, Norway, Sweden and Switzerland have a collection to debt ratio of less than 5%. Improvements in collection performance can generally be attributed to:

-Strong management information systems;

-Well-developed analytics tools to guide use of extensive enforcement powers;

-Extensive use of tax withholding at source arrangements;

-Wide use of electronic payment methods; and

-Significant investment in information technology

— Improving management of large taxpayers – over 85% of revenue bodies have adopted the structured ‘co-operative compliance model’ recommended by the OECD, for managing their largest taxpayers. One-third use similar arrangements to manage the tax affairs of High Net Worth Individuals.

— Tax gap measurement on the increase – 43% of revenue bodies report they undertake or are researching estimates of the aggregate tax gap for some or all of the major taxes administered.

— Greater use of disclosure policies to improve tax compliance and bolster tax revenues — despite two-thirds of OECD member countries reporting that their tax law permits voluntary disclosures only 40% have a policy to encourage taxpayers to use these. Further only 11 member countries were able to report the results achieved from their voluntary disclosure programme. With the imminent implementation of automatic exchange of financial account information, it is expected that there will be greater interest in these programmes. See the recent report Update on Voluntary Disclosure Programmes: A Pathway to Tax Compliance.

— Electronic matching of VAT invoices continues to expand – with growing concerns about the VAT non-compliance, a relatively large number of revenue bodies, including many in Europe and Latin America, are successfully  using systems to process bulk VAT invoice data for compliance risk management and fraud detection.

FinCEN Renews and Broadens GTOs on Border Cash Shipments in California and Texas

FinCEN logoContinuing its aggressive use of Geographic Targeting Orders (GTOs) to fight money laundering, the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) announced on July 7 that it was renewing a GTO in Southern California and issuing a new GTO in Texas. The California GTO applies to armored cars and other common carriers of currency at two crossings along the Mexican border in that state. The Texas GTO applies to carriers of currency at eight major ports of entry along the Mexican border in that state. The reporting and recordkeeping requirements imposed by these GTOs are designed to enhance the transparency of cross-border money movements and prevent the attempted exploitation of reporting exemptions by some carriers suspected of moving dirty cash for Mexican drug trafficking organizations.

A GTO is an order issued by the United States Secretary of the Treasury requiring all domestic financial institutions or nonfinancial trades or businesses that exist within a geographic area to report on transactions any greater than a specified value. GTOs are authorized by the Bank Secrecy Act in 31 U.S.C. § 5326(a). Originally, GTOs were only permitted by law to last for 60 days, but that limitation was extended by the USA Patriot Act to 180 days.

As explained in FinCEN’s press release announcing its actions, the GTOs temporarily modify the Report of International Transportation of Currency or Monetary Instruments (CMIR) requirements for common carriers of currency when physically moving more than $10,000 in cash across designated border crossings in California and Texas. The GTOs will require 100 percent CMIR reporting and recordkeeping by common carriers of currency at these border crossings because they eliminate the reporting exemption for these carriers that might otherwise apply to transporting currency from a foreign person to a bank. The enhanced reporting requirements of these GTOs will also require common carriers of currency to note additional information when completing the CMIR. This includes the name and address of the currency originator; the name and address of the currency recipient; and the name and address of all other parties involved in the movement of currency and monetary instruments. This additional information significantly assists law enforcement’s ability to identify and prosecute illegal transportation of currency and disrupt the illicit movement of bulk cash across the southwest border. FinCEN issued the GTOs in close coordination with U.S. Immigration and Customs Enforcement’s Homeland Security Investigations and U.S. Customs and Border Protection.

Common carriers of currency subject to the renewed California GTO must continue complying with the enhanced reporting requirements until February 4, 2016. Common carriers of currency subject to the new GTO at ports of entry in Texas must comply with the enhanced reporting requirements beginning on September 17, 2015, and continuing through March 15, 2016.

The Texas border GTO is the fifth such order issued publicly by FinCEN within the past year. Prior GTOs include the California border GTO that was just renewed (prior coverage here); a GTO targeted at businesses located with the Fashion District of Los Angeles (prior coverage here); a GTO focused on exporters of electronics in South Florida (prior coverage here); and a second South Florida GTO aimed at check cashers (prior coverage here).

Businesses that transport currency at border crossing in California or Texas must ensure that they are compliant with the terms of the renewed California border GTO and the newly-issued Texas border GTO. Severe penalties may be imposed for non-compliance with the terms of these GTOs, including the seizure and forfeiture of currency or other monetary instruments pursuant to 31 U.S.C. § 5317. In addition, a partner, director, officer, or employee of any common carrier of currency may be liable, without limitation, for civil sanctions and/or criminal penalties for violation of any of the terms of the GTOs.

Blank Rome’s Anti-Money Laundering & Economic Sanctions practice group can assist companies and individuals in addressing question regarding the scope and requirements of any of the GTOs issued by FinCEN. Please contact Ian M. Comisky or Matthew D. Lee with any questions.

BE-10 Report: The Overlooked International Reporting Form -The June 30 Deadline is Fast Approaching

By: Matthew D. Lee, Paul E. Campbell and Jeffrey M. Rosenfeld

The Bureau of Economic Analysis (“BEA”), an agency of the U.S. Department of Commerce, is currently conducting a benchmark BE-10 survey that requires the filing of a BE-10 report by any U.S. person that directly or indirectly owned or controlled a foreign affiliate at any time during the U.S. person’s 2014 fiscal year. U.S. residents, limited liability companies, partnerships and corporations generally all qualify as U.S. persons for these purposes. A foreign affiliate is an entity located outside of the U.S. in which a U.S. person owns or controls at least 10 percent of the entity’s voting stock if the entity is incorporated or an equivalent interest if the entity is unincorporated. The purpose of the survey is to provide data regarding U.S. investment abroad and to provide a complete and comprehensive picture of the global impact of U.S. investment on the worldwide economy.

The information obtained and filed pursuant to this survey is confidential and is used only for analytical and statistical purposes. The BEA is prohibited from granting another agency access to the data for tax, investigative, or regulatory purposes. Practically speaking, this means that the information reported on a BE-10 report cannot be disclosed to the Internal Revenue Service for tax compliance purposes.

Initially, a BE-10 report was due no later than May 29, 2015 for U.S. persons required to file less than 50 forms. However, the BEA recently granted an extended due date of June 30, 2015 for all new filers who have not previously filed a BE-10 report.

Failure to file can result in both civil and criminal penalties. Civil penalties can range from fines of $2,500 to $25,000 in addition to injunctive relief requiring compliance. Willful failure to file can result in a penalty of not more than $10,000 and, for an individual, up to one year in prison, or both.

Below are answers to some frequently asked questions concerning the BE-10 report.

Why am I only now hearing about this?

In prior years, only U.S. persons who were contacted directly by the BEA were required to participate in the survey. However, this year’s survey requires a BE-10 report for every U.S. person who owned or controlled a foreign affiliate at any time during the 2014 fiscal year, regardless of whether such U.S. person was contacted by the BEA.

Do I have to file a BE-10 report if I own real property in a foreign country which I currently lease to others?

Generally, yes. As discussed above, a BE-10 report must be filed by any U.S. person which owns or controls a foreign affiliate. For this purpose, a U.S. person that owns real property located in a foreign country is considered to control a foreign affiliate. However, a U.S. person need not file a BE-10 report if such U.S. person owns real estate that is held exclusively for personal use. For example, a primary residence abroad that is leased to others while the owner is a U.S. resident, but which the owner intends to reoccupy, is considered real estate held for personal use.

What if multiple U.S. persons own more than a 10% interest in the same foreign affiliate?

In such a case, the U.S. person with the highest ownership percentage in the foreign affiliate will file a complete BE-10 report, and the other U.S. persons will file only a partial BE-10 report (in accordance with the instructions) and make proper reference to the U.S. person filing the complete BE-10 report.

For example, if eight U.S. persons each own 12.5% of a U.S. limited liability company that, in turn, owns 100% of a foreign affiliate, then the U.S. limited liability company will file the complete BE-10 report, and each of the eight U.S. members of the U.S. limited liability company will file a partial BE-10 report in accordance with the instructions, making proper reference to the U.S. limited liability company’s complete BE-10 report consistent with the rules discussed in the preceding question and answer.

If I own an interest in a U.S. entity that, in turn, owns an interest in a foreign affiliate, must I file a BE-10 report? Must the U.S. entity? Must we both file a BE-10 report?

If a U.S. individual owns more than 50% of a U.S. entity that, in turn, owns a foreign affiliate, then the U.S. business enterprise, not the individual, must file the BE-10 report. However, on its BE-10 report, the U.S. entity will be required to disclose the U.S. individual’s direct investments in the foreign affiliate.

If a U.S. individual owns 50% or less of a U.S. entity that, in turn, owns a foreign affiliate, then the rule mentioned in the preceding paragraph will not apply, and both the U.S. individual and U.S. entity will be required to separately file appropriate BE-10 reports.

How do the consolidation rules work?

If a U.S. corporation is a U.S. reporter, then it must file a BE-10 report on a consolidated basis with its entire U.S. domestic consolidated business enterprise. In other words, the parent corporation (a corporation that is not more than 50% owned by another U.S. reporter) must file (i) a BE-10 report on its own behalf and (ii) a BE-10 report for each U.S. business enterprise, proceeding down each ownership chain from said parent corporation, whose voting securities are more than 50% owned by the U.S. business enterprise above it.

Informal guidance suggests that a U.S. limited liability company or partnership must follow these same consolidation rules despite the fact that the instructions only refer to a U.S. corporation being subject to these rules.

What should I do if I am unable to complete the BE-10 report or I do not have the information necessary to accurately complete the BE-10 report?

Reasonable requests for an extension of the filing deadline will be considered. Extension requests must be received by the BEA no later than June 30, 2015 and enumerate substantive reasons necessitating the extension. The BEA will provide a written response to such requests.

In addition, the instructions to the BE-10 report specifically provide that the data disclosed on the BE-10 reports may be comprised of reasonable estimates based upon the informed judgment of persons in the responding organization, sampling techniques, pro rations based on related data, etc. The instructions require that the U.S. reporter consistently apply estimating procedures used on all BEA surveys.

Once I complete the BE-10 report, will I have any reporting obligations on a moving-forward basis?

Generally, yes. A U.S. person may have an obligation to report to the BEA on a quarterly basis, annual basis, or every five years, depending on the value of the foreign affiliates that were reported on the BE-10 report. Once a U.S. person files the BE-10 report, it is anticipated that the BEA will send the U.S. person a list of all follow-up reports required with applicable deadlines.

Individuals with questions about the BE-10 report should consult experienced counsel to understand the applicable reporting requirements, as well as to ensure proper completion of all applicable BE-10 reports. Blank Rome LLP has significant experience with international compliance matters and can assist individuals in ensuring the proper completion of the BE-10 report.

The instructions to the BE-10 report can be found at https://www.bea.gov/surveys/pdf/be10/BE-10%20Instructions.pdf.

The BE-10 report and the answers to other Frequently Asked Questions can be found at http://www.bea.gov/surveys/respondent_be10.htm.

DOJ Announces Four More Swiss Bank Resolutions

DOJ logoLate yesterday, the Justice Department announced that it had reached resolutions with four more Swiss banks under the terms of the DOJ Swiss Bank Program. The latest banks to resolve their U.S. tax issues are the following:  Société Générale Private Banking (Lugano-Svizzera); MediBank AG; LBBW (Schweiz) AG; and Scobag Privatbank AG.

Yesterday’s announcement brings the total Swiss bank resolutions to seven to date. The Justice Department previously announced resolutions with BSI SA, Vadian Bank AG, and Finter Bank Zurich AG.  More than 100 Swiss banks previously notified the Tax Division that they wished to enroll in the program.

In the DOJ press release announcing the resolutions, Acting Assistant Attorney General Caroline D. Ciraolo made the following statement:

Today’s agreements reflect the Tax Division’s continued progress towards reaching appropriate resolutions with the banks that self-reported and voluntarily entered the Swiss Bank Program. The department is currently investigating accountholders, bank employees, and other facilitators and institutions based on information supplied by various sources, including the banks participating in this Program. Our message is clear – there is no safe haven.

Richard Weber, Chief of IRS-Criminal Investigation (CI) made the following statement about the resolutions:

These four additional bank agreements signal a change in terrain for offshore banking. No longer is it safe to hide money offshore and expect that it will not be discovered. ‎ IRS CI Special Agents will continue to follow the money to find those who circumvent the offshore disclosure laws and hold them accountable.

The Swiss Bank Program, which was announced on August 29, 2013, provides a path for Swiss banks to resolve potential criminal liabilities in the United States.  Swiss banks eligible to enter the program were required to advise the Tax Division by December 31, 2013, that they had reason to believe that they had committed tax-related criminal offenses in connection with undeclared U.S.-related accounts.  Banks already under criminal investigation related to their Swiss-banking activities and all individuals were expressly excluded from the program. Under the program, banks are required to:

  • 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 signed today, 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 the penalties in return for the department’s agreement not to prosecute these banks for tax-related criminal offenses.

The Justice Department announcement provided the following details about each bank’s U.S.-related accounts and practices related thereto:

Société Générale Private Banking (Lugano-Svizzera) SA (SGPB-Lugano) was established in 1974 and is headquartered in Lugano, Switzerland.  Through referrals and pre-existing relationships, SGPB-Lugano accepted, opened and maintained accounts for U.S. taxpayers, and knew that it was likely that certain U.S. taxpayers who maintained accounts there were not complying with their U.S. reporting obligations.  Since Aug. 1, 2008, SGPB-Lugano held and managed approximately 109 U.S.-related accounts, with a peak of assets under management of approximately $139.6 million, and offered a variety of services that it knew assisted U.S. clients in the concealment of assets and income from the Internal Revenue Service (IRS), including “hold mail” services and numbered accounts.  Some U.S. taxpayers expressly instructed SGPB-Lugano not to disclose their names to the IRS, to sell their U.S. securities and to not invest in U.S. securities, which would have required disclosure and withholding.  In addition, certain relationship managers actively assisted or otherwise facilitated U.S. taxpayers in establishing and maintaining undeclared accounts in a manner designed to conceal the true ownership or beneficial interest in the accounts, including concealing undeclared accounts by opening and maintaining accounts in the name of non-U.S. entities, including sham entities, having an officer of SGPB-Lugano act as an officer of the sham entities, processing cash withdrawals from accounts being closed and then maintaining the funds in a safe deposit box at the bank and making “transitory” accounts available, thereby allowing multiple accountholders to transfer funds in such a way as to shield the identity and account number of the accountholder.  SGPB-Lugano will pay a penalty of $1.363 million.

Created in 1979 and headquartered in Zug, Switzerland, MediBank AG (MediBank) provided private banking services to U.S. taxpayers and assisted in the evasion of U.S. tax obligations by opening and maintaining undeclared accounts.  In furtherance of a scheme to help U.S. taxpayers hide assets from the IRS and evade taxes, MediBank failed to comply with its withholding and reporting obligations, providing “hold mail” services and offering numbered accounts, thus reducing the ability of U.S. authorities to learn the identity of the taxpayers.  After it became public that the Department of Justice was investigating UBS, MediBank hired a relationship manager from UBS and permitted some of that person’s U.S. clients to open accounts at MediBank.  Since Aug. 1, 2008, MediBank had 14 U.S. related accounts with assets under management of $8,620,675.  MediBank opened, serviced and profited from accounts for U.S. clients with the knowledge that many likely were not complying with their U.S. tax obligations.  MediBank will pay a penalty of $826,000.

LBBW (Schweiz) AG (LBBW-Schweiz) was established in Zurich in 1995.  Since August 2008, LBBW-Schweiz held 35 U.S. related accounts with $128,664,130 in assets under management.  After it became public that the department was investigating UBS, LBBW-Schweiz opened accounts from former clients at UBS and Credit Suisse.  Despite its knowledge that U.S. taxpayers had a legal duty to report and pay tax on income earned on their accounts, LLB permitted undeclared accounts to be opened and maintained, and offered a variety of services that would and did assist U.S. clients in the concealment of assets and income from the IRS.  These services included following U.S. accountholders instructions not to invest in U.S. securities and not reporting the accounts to the IRS and agreeing to hold statements and other mail, causing documents regarding the accounts to remain outside the United States.  LBBW-Schweiz will pay a penalty of $34,000.

Headquartered in Basel, Switzerland, Scobag Privatbank AG (Scobag) was founded in 1968 to provide financial and other services to its founders, and obtained its banking license in 1986.  Since August 2008, Scobag had 13 U.S. related accounts, the maximum dollar value of which was $6,945,700.  Scobag offered a variety of services that it knew could and did assist U.S. clients in the concealment of assets and income from the IRS, including “hold mail” services and numbered accounts. Scobag will pay a penalty of $9,090.

The DOJ noted that in accordance with the terms of the Swiss Bank Program, each bank mitigated its penalty by encouraging U.S. accountholders to come into compliance with their U.S. tax and disclosure obligations.  While U.S. accountholders at these banks who have not yet declared their accounts to the IRS may still be eligible to participate in the IRS Offshore Voluntary Disclosure Program, the price of such disclosure has increased.

Most U.S. taxpayers who enter the IRS Offshore Voluntary Disclosure Program to resolve undeclared offshore accounts will pay a penalty equal to 27.5 percent of the high value of the accounts.  On August 4, 2014, the IRS increased the penalty to 50 percent if, at the time the taxpayer initiated their disclosure, either a foreign financial institution at which the taxpayer had an account or a facilitator who helped the taxpayer establish or maintain an offshore arrangement had been publicly identified as being under investigation, the recipient of a John Doe summons or cooperating with a government investigation, including the execution of a deferred prosecution agreement or non-prosecution agreement.  With today’s announcement of these non-prosecution agreements, noncompliant U.S. accountholders at these banks must now pay that 50 percent penalty to the IRS if they wish to enter the IRS Offshore Voluntary Disclosure Program.

The Justice Department released the following documents as part of its announcement:

FinCEN issues $1.5 million Penalty against Pennsylvania Bank for AML Violations

By: Matt Lee & Jed Silversmith

On February 26, 2015, the Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) issued an assessment of a civil money penalty totaling $1,500,000 against First National Community Bank (“FNCB”), which is located in Dunsmore, Pennsylvania. The penalty was issued in conjunction with the Office of the Comptroller of the Currency, which is FNCB’s primary regulator. The penalty was premised on FNCB’s failure to file suspicious activity reports (“SARs”) stemming from the “Kids for Cash” scandal.
The “Kids for Cash” scandal involved payoffs that two state court judges received. The payoffs were made by an operator of a juvenile detention facility. The two judges, Mark Ciavarella and Senior Judge Michael Conahan, sentenced thousands of juveniles to excessive terms of incarceration for petty crimes. In exchange, they received payments from the facility operator. Conahan pleaded guilty and Ciavarella was convicted after a jury trial. Conahan had received $2,600,000 in bribes. He was sentenced to a term of 17.5 years.

FinCEN’s assessment of a civil money penalty against FNCB was premised on the bank’s anti-money laundering violations. Conahan had banked at FNCB. The notice focused on three “red flags” missed by the bank: (1) a law enforcement subpoena submitted in 2007 for information related to Conahan and other individuals and entities; (2) activity occurring as early as 2005, involving many large, round-dollar transactions often occurring on a single day; and (3) an abnormal volume of activity compared to account balances.

According the assessment, Conahan deposited the bribe proceeds into a business bank account for company named Pinnacle. The agency took FNCB to task for not taking note that in 2005, Conahan purchased a condominium as an investment and then refinanced the unit three months later. According the assessment, Conahan reported a substantial increase in the condominium and was able to perform a “cash out” refinancing. Further, FinCEN’s assessment stated: “From 2004 to 2005, Conahan’s and Ciavarella’s incomes nearly quadrupled, purportedly as a result of rental income from the condominium purchased through Pinnacle.” FinCEN also noted that the size, frequency, and type of deposits into the Pinnacle account should have also alerted regulators.

In a press release announcing the assessment, Jennifer Shasky Calvery, the director of FinCEN, said: “FNCB’s failure to file timely suspicious activity reports may have deprived law enforcement of information valuable for tracking millions of dollars in related corrupt funds.”

According to Bloomberg, Conahan sat on the FNCB’s board. Attorneys for the bank told Bloomberg that bank officials were unaware of Conahan’s role in the “Kids for Cash” scandal. “The way his account was viewed is the way any judge’s account would be viewed and it is unfair to imply that his account would be handled differently with regard to whether he was on the board,” the bank’s attorney told the wire service.

Given the isolated nature of the account, one has to wonder whether FinCEN’s decision to take an enforcement action stemmed from the fact that Conahan was a member of FNCB’s board. The penalty appears disproportionate to the financial side of the transaction. Given Conahan’s abuse of trust, it is hard to quantify the true harm that he caused.

IRS Clarifies Requirements for Streamlined Filing Procedures

On October 9, 2014, the Internal Revenue Service published additional guidance clarifying the requirements for participation in the Streamlined Filing Compliance Procedures.  (See prior coverage of the new procedures announced in June 2014 here.)  Here are links to the new guidance published on the IRS website:

  • Updated general description of Streamlined Filing Compliance Procedures here;
  • Updated instructions for taxpayers residing in the United States here;
  • Frequently asked questions for domestic taxpayers here;
  • Updated instructions for taxpayers residing outside the United States here;
  • Frequently asked questions for taxpayers residing outside the United States here.

The IRS also released frequently asked questions for the Delinquent International Information Return Submission Procedures (available here).  In a notable change, the IRS now states that these procedures are available to taxpayers even if they have unreported income:

The Delinquent International Information Return Submission Procedures clarify how taxpayers may file delinquent international information returns in cases where there was reasonable cause for the delinquency. Taxpayers who have unreported income or unpaid tax are not precluded from filing delinquent international information returns. Unlike the procedures described in OVDP FAQ 18, penalties may be imposed under the Delinquent International Information Return Submission Procedures if the Service does not accept the explanation of reasonable cause. The longstanding authorities regarding what constitutes reasonable cause continue to apply, and existing procedures concerning establishing reasonable cause, including requirements to provide a statement of facts made under the penalties of perjury, continue to apply. See, for example, Treas. Reg. § 1.6038-2(k)(3), Treas. Reg. § 1.6038A-4(b), and Treas. Reg. § 301.6679-1(a)(3).

We will analyze this guidance and provide further analysis in future posts.