Three More Non-Prosecution Agreements with Swiss Banks for a Total Penalty of $20 Million

Three more Swiss banks have reached resolutions with the Justice Department under its Swiss Bank Program – Bank La Roche, St. Galler Kantonalbank AG (SGKB), and E. Gutzwiller & Cie, Banquiers.   To resolve their respective tax-related criminal offenses, La Roche agreed to pay a penalty of approximately $9.3 million, SGKB agreed to pay a penalty of almost $9.5 million, and Gutzwiller agreed to pay a penalty of $1.5 million.

Importantly, the DOJ emphasized the data it is obtaining as a result of the program and how it is using this data in its enforcement efforts:

“The cumulative penalties the Swiss Bank Program has generated to date are extraordinary,” said Chief Richard Weber of IRS-Criminal Investigation (CI).  “However, a significant element of the program is the highly-detailed account and transactional data that has been provided to IRS specifically for law enforcement purposes.  We will continue to use this information to vigorously pursue U.S. taxpayers who may still be trying to illegally conceal offshore accounts, ensuring we are all playing by the same rules.”

The DOJ described the relevant conduct of each of the banks in relation to their U.S. accountholders as follows:

Bank La Roche (announced 9/15/2015)

La Roche was founded in 1787 and is based in Basel, Switzerland, with offices in Olten and Bern, Switzerland.  In 2011, La Roche closed a Hong Kong asset management subsidiary that opened in 2008.  On Feb. 13, 2015, La Roche sold its business to Notenstein Privatbank AG.  Most of La Roche’s employees and the clients of La Roche, with the exception of U.S. taxpayers and a few other clients, will be transferred to Notenstein Privatbank AG.  The transaction is expected to close in October 2015.  Thereafter, La Roche intends to wind down its remaining business and relinquish its banking license.

La Roche assisted some U.S. clients in opening and maintaining undeclared accounts in Switzerland and concealing the assets and income the clients held in their accounts from the Internal Revenue Service (IRS).  La Roche used a variety of means to assist some U.S. clients in concealing the assets and income the clients held in their La Roche undeclared accounts, including by

– providing numbered accounts for 70 U.S. taxpayers;

– holding bank statements and other mail relating to 66 U.S.-related numbered accounts, as well as 20 named accounts of U.S. taxpayers domiciled in the United States;

– allowing substantial cash and precious metal withdrawals in connection with the closures of 27 U.S. taxpayers’ accounts for a total amount of $11.6 million

– maintaining records in which certain U.S. taxpayers expressly instructed La Roche not to disclose their names to the IRS;

– providing travel cash cards to five U.S. taxpayers upon their request; and

– opening an account in June 2010 for a U.S. taxpayer who left UBS and who transferred $126,000 from UBS to the La Roche account.

Due in part to the assistance of La Roche and its personnel, and with the knowledge that Swiss banking secrecy laws would prevent La Roche from disclosing their identities to the IRS, some U.S. clients of La Roche filed false and fraudulent U.S. Individual Income Tax Returns (IRS Forms 1040), which failed to report their interests in their undeclared accounts and the related income.  Some of La Roche’s U.S. clients also failed to file and otherwise report their undeclared accounts on Reports of Foreign Bank and Financial Accounts (FBARs).Since Aug. 1, 2008, La Roche maintained 201 U.S.-related accounts with a maximum aggregate value of approximately $193.9 million.  136 of these accounts were beneficially owned by U.S. clients domiciled in the United States, 36 of which were maintained in the names of entities.  La Roche will pay a penalty of $9.296 million.

As part of its participation in the Swiss Bank Program, La Roche provided information concerning 10 U.S. client accounts held at La Roche in Switzerland since August 2008 sufficient to make treaty requests to the Swiss competent authority for U.S. client account records.  It also provided a list of the names and functions of individuals who structured, operated or supervised the cross-border business at La Roche.

In 51 instances, La Roche maintained accounts for U.S. taxpayers as beneficial owners of accounts held by non-U.S. corporations, foundations or other entities, some of which were sham entities that concealed the beneficial ownership of the U.S. taxpayers.  These entities included Liechtenstein foundations, two of which were established or administered by a Liechtenstein trust company, whose manager and director had a long-standing personal relationship with La Roche.

St. Galler Kantonalbank AG (announced today)

St. Galler Kantonalbank AG (SGKB) has its headquarters in the Canton of St. Gallen, Switzerland.  It was founded in 1868 to provide credit services to Cantonal residents and to assist in the development of the regional economy.  By Cantonal law, the Canton of St. Gallen is SGKB’s majority shareholder, owning 54.8 percent of SGKB’s shares.

SGKB offered a variety of traditional Swiss banking services that it knew could assist, and that did in fact assist, U.S. clients in the concealment of assets and income from the Internal Revenue Service (IRS).  These services included hold mail, as well as code name or numbered account services.  These services helped U.S. clients eliminate the paper trail associated with the undeclared assets and income they held at SGKB in Switzerland.  By accepting and maintaining such accounts, SGKB assisted some U.S. taxpayers in evading their U.S. tax obligations.

SGKB agreed to open accounts for at least 58 U.S. taxpayers who had left other banks being investigated by the department without ensuring that each such account was compliant with U.S. tax law from their inception at SGKB.  SGKB also issued checks, including series of checks, in amounts of less than $10,000 that were drawn on accounts of U.S. taxpayers or structures in at least nine cases, totaling $3 million.  For example, one U.S. taxpayer made 31 wire transfers for just less than $10,000 between June 2012 and December 2012.  SGKB further processed large cash withdrawals totaling approximately $5.8 million for at least 14 U.S. taxpayers at or around the time the clients’ accounts were closed, even though SGKB knew, or had reason to know, the accounts contained undeclared assets.

Since Aug. 1, 2008, SGKB held accounts for 41 entities or structured accounts.  Eight of these accounts came to SGKB as part of the acquisition of business from Hyposwiss Privatbank AG, of which SGKB formerly was the parent company.  Of the remaining 33 entities, 18 were incorporated at or around the time their SGKB accounts were opened.  These entities were incorporated in Switzerland, Liechtenstein, St. Vincent and the Grenadines, the United States, Ireland, Panama, Haiti and Belize.

In August 2008, SGKB mandated that no new funds would be accepted from U.S. residents without a signed IRS Form W-9.  However, certain executives had full discretion and authority to make exceptions to this policy, in keeping with SGKB’s general bank policy of permitting flexibility in its directives.  One executive first requested the authority to make a specific exception because he already had agreed to accept a “pipeline” of problematic U.S.-related accounts from UBS and wanted to keep his word to his former UBS colleague.  This “pipeline” consisted of six U.S.-related accounts with approximately $9.2 million in assets under management.  This executive granted another significant exception from this policy in connection with clients of an external asset manager.  At least 72 accounts with approximately $150 million in assets under management were opened at an SGKB subsidiary between late October and December 2008 without a Form W-9 as an exception to SGKB’s policy.  The majority of these accounts were transferred from UBS.

Since Aug. 1, 2008, SGKB held a total of 626 U.S.-related accounts with approximately $303 million in assets under management.  SGKB will pay a penalty of $9.481 million.

Gutzwiller & Cie, Banquiers (announced today)

Gutzwiller & Cie, Banquiers, was founded in 1886 and is headquartered in Basel, Switzerland.  This entity is affiliated with two asset managing entities in Geneva and Zurich, Gutzwiller SA Geneve and Gutzwiller AG Zurich, respectively (collectively Gutzwiller).

Of the 128 U.S.-related accounts at Gutzwiller, approximately 96 used hold mail services.  Gutzwiller also opened and maintained 11 U.S.-related accounts held by non-U.S. entities, such as a Panama foundation or a British Virgin Islands corporation, with the knowledge that a U.S. person was the true beneficial owner of assets.  With respect to some of those 11 accounts, the entity properly identified the U.S. beneficial owners of the assets for Swiss “Know Your Customer” rules, but Gutzwiller’s IRS Forms W-8BEN falsely declared that the beneficial owner of the account was not a U.S. person.  The false Forms W-8BEN thus allowed the true ownership of the accounts to be concealed.

In addition, Gutzwiller accepted an account from a U.S. citizen and resident who presented a U.S. passport at the account opening in 1992.  At various times, the U.S. client refused to sign a Form W-9, prohibited anything relating to the account from being reported to the IRS or other U.S. governmental authority, and refused to respond to Gutzwiller’s questions about whether the account was declared to the IRS.  Although Gutzwiller did not use code names or numbers to communicate with clients, the U.S. client communicated with Gutzwiller by signing communications with an identifying number.  Beginning in 2009, Gutzwiller began to urge the U.S. client to close the account.  Over approximately the next year, the U.S. client began liquidating the account by withdrawing large amounts of cash in person in the form of U.S. dollars, Swiss francs, Euros and U.S. travelers checks.  Gutzwiller also honored the U.S. client’s requests to prepare numerous checks written in amounts below $10,000, which the U.S. client then picked up at Gutzwiller.  In late 2010, Gutzwiller declined a request to liquidate remaining funds in the account in a similar manner and informed the U.S. client that it would only close the account through a single payment in the form of a cash withdrawal, a single check or a wire transfer.  The account was closed in 2011 with a wire transfer of more than $3 million to another Swiss bank, without the U.S. client coming into compliance with U.S. tax obligations.  The U.S. client later voluntarily disclosed the account at Gutzwiller and the other Swiss bank to the IRS.

Since Aug. 1, 2008, Gutzwiller held a total of 128 U.S.-related accounts with a high value of approximately $271 million.  Gutzwiller will pay a penalty of $1.556 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 these non-prosecution agreements, 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 each of these announcements:

  • The La Roche non-prosecution agreement and statement of facts (available here).
  • The SGKB non-prosecution agreement and statement of facts (available here).
  • The Gutzwiller non-prosecution agreement and statement of facts (available here).

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.

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.