IRS Targets a Belize Bank with a “John Doe” Summons

The Internal Revenue Service will now obtain information on U.S. accountholders at a Belize bank – Belize Bank International Limited (“BBIL”) or Belize Bank Limited (“BBL”). Yesterday, the Justice Department announced that a federal court has authorized the IRS to serve a “John Doe” summons on Bank of America, N.A. and Citibank, N.A. seeking records for activity from 2006 through 2014 at the correspondent accounts held by BBIL and BBL at Bank of America and Citibank. Once the IRS receives these records, it will be able to identify U.S. taxpayers who held financial accounts at BBIL or BBL and also identify other foreign banks that used BBIL or BBL to serve U.S. clients.

An important aspect to this announcement is that the reason for requesting the “John Doe” summons came from information learned by an IRS investigator having interviewed five taxpayers who disclosed their BBIL or BBL accounts through the IRS’s amnesty program.

In announcing the “John Doe” summons yesterday, the DOJ summarized the basis for the “John Doe” summonses as follows:

According to the IRS declaration, BBL is incorporated and based in Belize, and directly owns BBIL.  The IRS declaration further states that Belize Corporate Services (BCS) is incorporated and based in Belize and offers corporate services including the purchase of “shelf” Belizean international business companies.  BBL, BBIL and BCS are all corporate subsidiaries of BCB Holdings Limited, according to the declaration.  The declaration describes and IRS Revenue Agent’s review of information submitted by BBL and BBIL customers who disclosed their foreign accounts through the IRS offshore voluntary disclosure programs.  The customers in the “John Doe” class may have failed to report income, evaded income taxes, or otherwise violated the internal revenue laws of the United States, according the declaration.

The petition filed by the DOJ (found here) provided more detail and stated that “BBIL and BBL are related banks based in Belize that market their ability to provide secret banking services to foreign residents. Belize Corporate Services is a related corporate service provider that has marketed its ability to set up Belize corporate entities, used to hide the identity of account owners.” The DOJ made these assertions based upon information learned by the IRS in “interviews, voluntary disclosures, and records of criminal prosecutions.” The interviews were of five taxpayers who disclosed their offshore accounts at BBIL or BBL through the IRS’s offshore voluntary disclosure program. Each of the taxpayers admitted to opening accounts at BBIL or BBL, to requesting that account information not be mailed to them in the U.S., and to failing to report income earned in the accounts to the IRS. All but one of these taxpayers admitted to utilizing a Belize corporation to obtain the account at BBIL or BBL and failing to report the corporation on U.S. tax returns. This information, plus publicly-available information gathered through internet research, provided the factual basis for the petition.

In its announcement, the DOJ emphasized its focus on pursuing taxpayers with undisclosed foreign accounts:

“The Department and the IRS are using every tool available to identify and investigate those individuals determined to evade their U.S. tax and reporting obligations through the use of offshore financial accounts and foreign entities,” said Acting Assistant Attorney General Caroline D. Ciraolo of the Justice Department’s Tax Division.  “These John Doe summonses will provide detailed information about individuals using financial institutions in Belize and, to the extent funds were transferred, other jurisdictions.  But rest assured, we are receiving information from many sources regarding hidden foreign accounts and offshore schemes.  The time to come clean is now – before we knock on your door.”

“This court action further demonstrates our relentless efforts to pursue and catch those evading taxes with hidden offshore accounts no matter where they are or what structures are used to hide behind,” said Commissioner John Koskinen of the IRS.  “This court action also reinforces the ongoing importance of the John Doe summons in international tax enforcement.”

Serving a “John Doe” summons on a correspondent bank has proven to be an effective government tool to discover potential tax evaders. It was the result of a “John Doe” summons served on UBS AG that the DOJ obtained records of U.S. accountholders at Swiss bank Wegelin & Co., which was Switzerland’s largest bank and closed after pleading guilty to conspiring to assist U.S. accountholders to evade taxes and paying restitution of $57.8 million. A “John Doe” summons was also utilized in 2013 to obtain records of Canadian Imperial Bank of Commerce FirstCaribbean International Bank by having been served on Wells Fargo, N.A., where FCIB held a correspondent account.

Wegelin & Co. Account Holder Sentenced to Prison Term

Kordash received cash distributions from his undeclared account at Wegelin and used the account for his antiques business in New York.  Kordash opened the account decades ago, when he was a Russian citizen living in Russia.  He came to the U.S. in 1984, and later became a U.S. citizen.
Wegelin & Co. was the oldest private bank in Switzerland.  In January 2013, the bank pleaded guilty to felony tax charges, thus becoming the first foreign bank to do so.  The bank admitted to conspiring to defraud the United States by helping U.S. account holders hide assets from the IRS in undeclared accounts.  A federal district court also authorized the IRS to issue a “John Doe” summons that allowed the United States to determine the identity of U.S. taxpayers who held accounts at Wegelin and other banks based in Switzerland to evade federal income taxes.

A Race To Disclose Secret Offshore Accounts: New Justice Department Program Pits Swiss Banks Against Their U.S. Accountholders

The Department of Justice has announced another program designed to identify United States taxpayers who have unreported foreign bank accounts.  Continuing the unprecedented cooperation between U.S. and Switzerland to combat tax evasion, the two countries issued a joint statement earlier this fall announcing a new program entitled “Program for Non-Prosecution Agreements or Non-Target Letters for Swiss Banks.”  Available only to Swiss banks not currently under criminal investigation, this unique program is designed to provide Swiss banks a roadmap to resolving any potential criminal exposure under U.S. tax laws.  Switzerland has encouraged its banks to “give serious consideration to their participation” in the program and announced last week that it had authorized a number of Swiss banks to cooperate with the U.S. under the program. 

A Swiss bank that has reason to believe that it may have committed tax-related or monetary transaction offenses in connection with undeclared U.S. accounts may apply to the program.  The bank then will be required to provide detailed information on all accounts held by U.S. taxpayers and pay substantial penalties based upon the amount held in the identified accounts.  In exchange, the government will agree not to prosecute the participating bank.  The result of this program will be to fully eliminate any ability of a U.S. taxpayer to conceal a Swiss bank account from the IRS.

Initial Disclosures Required for a Non-Prosecution Agreement

A Swiss bank interested in the program must send a letter to the Department of Justice by December 31, 2013, requesting entry into a non-prosecution agreement.  In this letter, the bank must set forth its plan to comply with the program; identify an independent examiner (a qualified attorney or accountant) who will verify all account information ultimately disclosed to the U.S.; affirm that it will maintain all records and comply with treaty requests for records; and waive certain statute of limitations defenses.  The bank then has 120 days from December 31 to meet the program’s requirements, subject to one 60-day extension, for good cause shown. 

Following the bank’s initial letter expressing interest in the program, several disclosures are required.  The bank must provide information regarding how it structured, operated, and supervised its cross-border business, including the name and function of the individuals responsible for that business; how account holders were attracted and serviced by the bank; and the total number of U.S. accounts and the maximum aggregate dollar value of each account in existence on August 1, 2008, opened between August 1, 2008 and February 28, 2009, and opened after February 28, 2009.  In addition, the bank must make an in-person presentation with documentation supporting these initial disclosures and agree to cooperate or provide further information as requested.  If the Tax Division determines that the bank fulfilled the program’s requirements, then it will agree not to prosecute the bank for those tax-related or monetary transaction offenses, and the bank will then begin disclosing U.S. taxpayer information.

Disclosure of Taxpayer Information

Upon entry into a non-prosecution agreement, the Swiss bank must disclose detailed financial information on all accounts in which any U.S. taxpayer has any kind of interest.  Basic information must be turned over, including the maximum value of each account, the identity of any individual or entity affiliated with each account, and the interest that each individual or entity has in each account.  But the program also requires the Swiss bank to identify all professionals, including any “relationship manager, client advisor, asset manager, financial advisor, trustee, fiduciary, nominee, attorney, accountant, or” any such similar individual, affiliated with each account.  Information regarding all transfers of funds into and out of the account, including whether the transfers were made in cash, whether the funds were transferred through an intermediary, and all countries to or from which the funds were transferred, also must be provided.  Importantly, all of this information must be compiled by the bank prior to execution of the non-prosecution agreement, because the government will execute the non-prosecution agreement only upon receipt of a verification from the bank’s independent examiner attesting that the information is accurate and was compiled appropriately.

Swiss banks in the program also are subject to ongoing obligations.  The bank must retain records for ten years after the termination of the non-prosecution agreement, provide testimony to allow the information provided to be used in any United States proceeding, and generally cooperate with treaty requests or other requests for additional information.  Banks also must close all secret accounts that have not otherwise been disclosed and implement procedures to thwart any account holder from being able to further conceal unreported funds.

Payment of Penalty

The penalties to be imposed are defined in the program.  For unreported accounts in existence prior to August 1, 2008, the penalty is 20% of the accounts’ maximum aggregate dollar value.  For accounts opened between August 1, 2008 and February 28, 2009, the penalty increases to 30% of the maximum aggregate account value.  Accounts opened after February 28, 2009 are subject to a 50% penalty based upon their maximum aggregate value.

Program for Swiss Banks that Have Not Violated any U.S. Laws

Even a Swiss bank that has not violated U.S. laws may participate in the program and obtain assurances that it is safe from prosecution.  These banks must send a letter to the Department of Justice between July 1, 2014 and October 31, 2014, requesting a non-target letter.  Along with providing the initial information described above, the banks must conduct an internal investigation to confirm that no unreported U.S. accounts exist and otherwise verify that the bank’s compliance program is effective.  A report from the bank’s independent examiner regarding the internal investigation is to be provided to the Tax Division.

Local banks that service Swiss residents, including those already qualified as a “Deemed Compliant Financial Institution” that is a “Financial Institution with Local Client Base” under the Foreign Account Tax Compliance Act (“FATCA”), also can request a non-target letter.  These banks must provide certain minimal disclosures, including a statement that an independent examiner has verified that the bank has met the FATCA standard. 

Importantly, if the Department of Justice later learns of criminal culpability for any bank that received a non-target letter, then the bank will not be protected from prosecution and will be exposed to increased liability if the bank hid or misrepresented its activities in order to obtain the non-target letter.

What Taxpayers Can Do

From now until the end of the year, no new criminal investigations of Swiss banks will be initiated, thereby offering qualifying banks a narrow window of opportunity to investigate their accounts and apply to the program.  Swiss banks are likely evaluating their accounts now to meet the year-end deadline.  Indeed, some taxpayers already have received correspondence from Swiss banks revealing their intention to participate in the program and requesting confirmation about what the taxpayer has disclosed to the IRS in order to determine potential reporting requirements and penalty exposure.

Therefore, any United States taxpayer who still has an interest, no matter how indirect, in funds held in an unreported Swiss bank account may want to consider disclosing that account now to the IRS.  For instance, eligible individuals can enroll in the IRS’s Offshore Voluntary Disclosure Program (“OVDP”) and disclose their foreign accounts, pay certain penalties, forego the risk of criminal investigation or prosecution, and otherwise become compliant with their U.S. tax obligations.  Once a Swiss bank complies with the initial disclosures of this program and receives an executed non-prosecution agreement, taxpayer information will be turned over.  The IRS has historically been unwilling to permit a taxpayer to enter into the OVDP after the taxpayer’s unreported foreign bank account has been disclosed to the U.S. 

Other Efforts to Identify Undisclosed Offshore Bank Accounts

In addition to the unique program directed to Swiss banks described above, there are two other recent legal developments that may impact the ability to conceal foreign accounts from the IRS and provide additional incentives for noncompliant U.S. taxpayers to consider enrolling in the OVDP at this time.

On November 7, 2013, two United States District Judges for the Southern District of New York entered orders authorizing the IRS to issue “John Doe” summonses to a number of U.S. banks to produce information about U.S. taxpayers that may have committed tax evasion by not disclosing their interests in undisclosed foreign accounts.  The orders are directed to the Bank of New York Mellon, Citibank NA, JPMorgan Chase Bank NA, HSBC Bank USA NA, and Bank of America NA.  The five banks will be required to produce correspondent banking information regarding any U.S. taxpayer that maintains accounts at Zurcher Kantonalbank and its affiliates in Switzerland and The Bank of N.T. Butterfield & Son Limited and its affiliates in the Bahamas, Barbados, Cayman Islands, Guernsey, Hong Kong, Malta, Switzerland, and the United Kingdom. 

Finally, Liechtenstein, Hungary, and Andorra were the most recent countries to join Switzerland, China, and others in agreeing to sign the Multilateral Convention on Mutual Administrative Assistance in Tax Matters by the Organisation for Economic Co-operation and Development (available here).  The purpose of this agreement is for signatory nations to be able to participate in automatic exchanges in order to share information, conduct tax examinations abroad, and assist in tax collection all to combat tax evasion.  Actions from countries like Switzerland and Liechtenstein, which have a history of being safe havens for tax avoidance, indicate an international focus on eliminating tax evasion and tax fraud.  The United States signed this agreement in 1989.

Federal Court Authorizes IRS to Serve “John Doe” Summons Regarding CIBC FirstCaribbean International Bank

The U.S. government’s unrelenting crackdown on offshore tax evasion shows no sign of slowing down (for prior coverage, see here).  Late yesterday a federal judge in San Francisco authorized the IRS to serve what is known as a “John Doe” summons seeking the identities of U.S. taxpayers who maintain bank accounts at Canadian Imperial Bank of Commerce FirstCarribbean Bank (FCIB) (see DOJ press release here).  This latest development shows that the U.S. government is expanding its global probe into the Carribbean region.

According to the Internal Revenue Manual, “[a] John Doe summons is any summons where the name of the taxpayer under investigation is unknown and therefore not specifically identified.”  The IRS has frequently employed “John Doe” summons to obtain the identities of U.S. taxpayers who maintain offshore bank accounts.  In 2009, the IRS served a John Doe summons seeking the identities of U.S. taxpayers maintaining bank accounts at UBS in Switzerland.  In that proceeding, the IRS alleged that 52,000 U.S. taxpayers had accounts at UBS.   In 2011, the IRS received court approval to serve a John Doe summons seeking the identities of U.S. taxpayers maintaining undisclosed bank accounts at HSBC in India.  Most recently, in January 2013, a federal judge authorized the IRS to serve a John Doe summons seeking the names of account holders at Swiss bank Wegelin & Co.  Wegelin itself was prosecuted and pleaded guilty to conspiring with U.S. taxpayers and others to maintain secret accounts at the Swiss bank.

According to the DOJ press release, FCIB is based in Barbados and has branches in 18 Caribbean countries. Although FCIB does not have U.S. branches, it maintains a correspondent account in the United States at Wells Fargo Bank N.A.  The John Doe summons directed to FCIB seeks records of FCIB’s U.S. correspondent account at Wells Fargo N.A., which will allow the IRS to identify U.S. taxpayers who maintain bank accounts at FCIB and other financial institutions that used FCIB’s Wells Fargo correspondent account. 
It appears that the IRS learned that U.S. taxpayers were hiding funds at FCIB based upon information submitted by taxpayers participating in the IRS voluntary disclosure programs.  The IRS has stated that it is aggresively “data mining” the information provided by the more than 38,000 individuals who have made voluntary disclosures regarding offshore bank accounts since 2009.  It appears that more than 120 account holders at FCIB have made voluntary disclosures regarding their accounts, and the IRS obviously believes that there are more taxpayers with accounts at FCIB who have not yet “come in from the cold.”
In its press release announcing approval of the John Doe summons, the Justice Department reminds taxpayers that the IRS continues to offer an Offshore Voluntary Disclosure Program (OVDP) for taxpayers with unreported foreign bank accounts and related unreported income.  Kathryn Keneally, Assistant Attorney General for the Justice Department’s Tax Division, stated that “[t]his John Doe summons is a visible indication of how we are using the many tools available to us to pursue this activity wherever it is occurring. Those who are still hiding should get right with their country and their fellow taxpayers before it is too late.”

The fact that the IRS has served a John Doe summons on FCIB does not necessarily mean that taxpayers maintaining accounts at that bank are no longer eligible to take advantage of the IRS OVDP.  This precise issue is addressed in one of the Frequently Asked Questions and Answers that the IRS has posted on its website regarding the OVDP.  FAQ 21 provides as follows:

Q.  If the IRS has served a John Doe summons or made a treaty request seeking information that may identify a taxpayer as holding an undisclosed foreign account or undisclosed foreign entity, does that make the taxpayer ineligible to make a voluntary disclosure under this program?

A.  No. The mere fact that the Service served a John Doe summons, made a treaty request or has taken similar action does not make every member of the Joe Doe class or group identified in the treaty request or other action ineligible to participate. However, once the Service or the Department of Justice obtains information under a John Doe summons, treaty request or other similar action that provides evidence of a specific taxpayer’s noncompliance with the tax laws or Title 31 reporting requirements, that particular taxpayer will become ineligible for OVDP and Criminal Investigation’s Voluntary Disclosure Practice. For this reason, a taxpayer concerned that a party subject to a John Doe summons, treaty request or similar action will provide information about him to the Service should apply to make a voluntary disclosure as soon as possible.

 As this FAQ makes clear, however, once the IRS or DOJ obtain information in response to a John Doe summons, it is too late to make a voluntary disclosure.  In light of the court’s approval of the John Doe summons, individuals who maintain (or have maintained in the past) bank accounts at FCIB would be well advised to promptly consider enrolling in the OVDP before it is too late.