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

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

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

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

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

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

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

The Offense Conduct

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

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

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

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

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

Cooperation by CNS and CNT

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

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

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

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

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

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

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

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

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

FATCA Update: Latest Intergovernmental Agreements: Finland, Chile, and (Coming Soon) Luxembourg

Finland and Chile became the latest nations to sign agreements pledging tax transparency sought by the Foreign Account Tax Compliance Act (FATCA), bringing the total of such intergovernmental agreements to 24.   According to Law360, an agreement with Luxembourg will be announced soon, once a French translation of the agreement can be validated.  (Drew Singer, Chile, Finland Sign FATCA Agreements, Luxembourg Next, Law360 (March 7, 2014)).  Luxembourg has announced that its anticipated FATCA agreement will be a Model 1 agreement.

FATCA requires U.S. financial institutions to withhold 30% of certain payments made to foreign financial institutions (“FFI”) unless that FFI agrees to report U.S. taxpayer account information to the IRS.  FATCA currently goes into effect on July 1, 2014.

Finland has agreed to a Model 1A agreement where FFIs in Finland will report information to the Finnish Ministry of Finance, which will subsequently exchange information with the IRS.  This agreement is reciprocal, meaning that the U.S. will also report account information about Finnish individuals and entities in the U.S. to Finland.

Chile has agreed to a Model 2 agreement where FFIs in Chile will report information about consenting U.S. accounts directly to the IRS.  Information on non-consenting U.S. accounts can be reported government-to-government through a treaty request.

All FATCA intergovernmental agreements can be found here.

FATCA Update: Italy Signs Intergovernmental Agreement and District Court Upholds New Reporting Regulation

On Friday, Italy became the latest nation to sign an agreement pledging tax transparency sought by the Foreign Account Tax Compliance Act (FATCA), which requires U.S. financial institutions to withhold certain payments made to foreign financial institutions (“FFI”) that do not agree to report U.S. taxpayer account information to the IRS.

Italy signed a Model 1A agreement, where FFIs will provide account information to the Italian government, which will report that information to the IRS.  The U.S. has agreed to reciprocity with Italy such that the U.S. will provide similar account information about Italian individuals who have accounts in the U.S.  Nineteen countries have entered into FATCA compliance agreements, which can all be found here.

On the home front, Judge James E. Boasberg of the United States District Court for the District of Columbia rejected a challenge by the Florida and Texas Bankers Associations to new income-reporting regulations issued by the IRS.  The new regulations require U.S. banks to report the amount of interest earned by accountholders who reside in a foreign country where the U.S. has an exchange agreement.  Part of the impetus for the new reporting requirements was to ensure that the intergovernmental agreements entered into with foreign countries will be respected.  Indeed, FATCA’s success depends upon the exchange of information with foreign financial institutions.  And, since the IRS has obligations under some of the FATCA intergovernmental agreements, like the one with Italy discussed above, it must have the ability to gather the necessary information within the U.S. to disclose to the participating country.

Below is a portion of Judge Boasberg’s opinion where he sets forth (citations omitted) a portion of the IRS’s reasoning for the new expanded reporting regulation:

Expanded reporting was, [the IRS] claimed, “essential to the U.S. Government’s efforts to combat offshore tax evasion.”  Since exchange agreements require mutuality, the regulations “ensure that the IRS is in a position to exchange such information reciprocally with a treaty partner.” Such reciprocity also aids overseas compliance with the Foreign Account Tax Compliance Act, which “require[s] overseas financial institutions to identify U.S. accounts and report information (including interest payments) about those accounts to the IRS.”   Finally, the IRS observed,              “[R]eporting of information required by these regulations will also directly enhance U.S. tax compliance by making it more difficult for U.S. taxpayers with U.S. deposits to falsely claim to be nonresidents in order to avoid U.S. taxation.”

The opinion can be found here.

Internal Revenue Service Announces That U.S., Australia, and United Kingdom Will Share Tax Information About Offshore Trusts and Companies

The IRS announced today that the tax authorities in the United States, Australia, and the United Kingdom have agreed to share tax information about the use of offshore trusts and companies organized in jurisdictions such as Singapore, the British Virgin Islands, Cayman Islands and the Cook Islands.  The announcement states that the U.S., Australia, and the U.K. have each acquired a “substantial amount of data” on the use of offshore trusts and companies.  The data apparently includes the identities of the owners of such entities as well as advisors who helped set up the structures.  It was disclosed that the IRS, the Australian Tax Office and HM Revenue & Customs “have been working together to analyze this data and have uncovered information that may be relevant to tax administrations of other jurisdictions” and that the three countries have developed a plan to share the data.  IRS Acting Commissioner Steven T. Miller said that today’s announcement is “part of a wider effort by the IRS and other tax administrations to pursue international tax evasion.  Our cooperative work with the United Kingdom and Australia reflects a bigger goal of leaving no safe haven for people trying to illegally evade taxes.”

At the conclusion of its announcement, the IRS offers the following warning:

There is nothing illegal about holding assets through offshore entities; however, such offshore arrangements are often used to avoid or evade tax liabilities on income represented by the principal or on the income generated by the underlying assets.  In addition, advisors may be subject to civil penalties or criminal prosecution for promoting such arrangements as a means to avoid or evade tax liability or circumvent information reporting requirements.

. . .

U.S. taxpayers holding assets through offshore entities are encouraged to review their tax obligations with respect to these holdings, seek professional advice if necessary, and to participate in the IRS Offshore Voluntary Disclosure Program where appropriate.  Failure to do so may result in significant penalties and possibly criminal prosecution.

The IRS Offshore Voluntary Disclosure Program is an option for U.S. taxpayers maintaining undisclosed foreign assets (including but not limited to bank accounts) and with unreported income from such foreign assets.  Currently there is no deadline for participating in the OVDP, but the IRS has said it may close the program at any time.  U.S. taxpayers with undisclosed offshore trusts or companies should consult with tax counsel as to whether enrolling in the OVDP is appropriate.

Today’s announcement is part of a broader effort by the United States and other countries to cooperate and share tax information.  We have previously written about the Foreign Account Tax Compliance Act (FATCA) (see prior post here) which, when fully implemented, will require foreign banks to annually disclose to the IRS the names of their U.S. depositors or face a substantial withholding tax on U.S. source payments.  In addition, as we discussed in a client alert, the U.S. Treasury has been busy negotiating bilateral FATCA agreements with countries around the world.  In September, the U.S. and the United Kingdom announced that they had signed the first intergovernmental agreement implementing FATCA.  On November 8, 2012, Treasury announced that it is engaging with more than 50 countries and jurisdictions in order to implement FATCA and improve international tax compliance.  Treasury previously released model reciprocal and nonreciprocal intergovernmental agreements pursuant to which foreign financial institutions would report account information to their national governments for delivery to the U.S.  On November 14, Treasury published a second model agreement pursuant to which foreign financial institutions would report information directly to Treasury.  Copies of the model agreements are available here.

In its November 8 press release, Treasury stated that it is currently negotiating intergovernmental agreements with France, Germany, Italy, Spain, Japan, Switzerland, Canada, Denmark, Finland, Guernsey, Ireland, the Isle of Man, Jersey, Mexico, the Netherlands, and Norway. Treasury further stated that it was engaged in a dialogue aimed at concluding intergovernmental agreements with the following countries: Argentina, Australia, Belgium, the Cayman Islands, Cyprus, Estonia, Hungary, Israel, Korea, Liechtenstein, Malaysia, Malta, New Zealand, the Slovak Republic, Singapore, and Sweden.  Finally, Treasury announced that it is exploring options for intergovernmental engagement with Bermuda, Brazil, the British Virgin Islands, Chile, the Czech Republic, Gibraltar, India, Lebanon, Luxembourg, Romania, Russia, Seychelles, Saint Maarten, Slovenia, and South Africa.

The current list of countries which have concluded FATCA agreements with the U.S. is available here.