Offshore Tax Enforcement Update: DOJ Announces Criminal Charges Against Bank Julius Baer

The U.S. government has filed criminal charges against another Swiss Bank — Bank Julius Baer — and simultaneously secured guilty pleas from two Julius Baer bankers who had been fugitives for the past five years. Pursuant to the terms of a deferred prosecution agreement, the bank admitted that it knowingly assisted many of its U.S. customers in evading their obligations under U.S. law. Julius Baer must pay $547 million as part of the deal. Resolution of the U.S. government’s investigation of Julius Baer has been long-awaited, and follows the UBS deferred prosecution agreement in 2009 and the guilty plea of Credit Suisse in 2014.

The full text of the Justice Department’s press release follows.

Manhattan U.S. Attorney Announces Criminal Charges Against Bank Julius Baer Of Switzerland With Deferred Prosecution Agreement Requiring Payment Of $547 Million, As Well As Guilty Pleas Of Two Julius Baer Bankers

Bankers Daniela Casadei and Fabio Frazzetto, Fugitives since 2011, Surrender and Plead Guilty to Felony Tax Charges

Preet Bharara, the United States Attorney for the Southern District of New York, Caroline D. Ciraolo, Acting Assistant Attorney General of the Justice Department’s Tax Division, and Richard Weber, Chief, Internal Revenue Service – Criminal Investigation, (“IRS-CI”), announced the filing of criminal charges against Bank Julius Baer & Co., Ltd. (“JULIUS BAER” or the “Company”), a financial institution headquartered in Zurich, Switzerland.   JULIUS BAER is charged with conspiring with many of its U.S. taxpayer-clients and others to help U.S. taxpayers hide billions of dollars in offshore accounts from the United States Internal Revenue Service (the “IRS”) and to evade U.S. taxes on the income earned in those accounts.

Mr. Bharara also announced a deferred prosecution agreement with JULIUS BAER (the “Agreement”) under which the Company admits that it knowingly assisted many of its U.S. taxpayer-clients in evading their tax obligations under U.S. law.  The admissions are contained in a detailed Statement of Facts attached to the Agreement.  The Agreement requires JULIUS BAER to pay a total of $547 million by no later than February 9, 2016, including through a parallel civil forfeiture action also filed today in the Southern District of New York.

The criminal charge is contained in an Information (the “Information”) alleging one count of conspiracy to (1) defraud the IRS, (2) to file false federal income tax returns and (3) to evade federal income taxes.  If JULIUS BAER abides by all of the terms of the Agreement, the Government will defer prosecution on the Information for three years and then seek to dismiss the charges.

In addition, two Julius Baer client advisers, DANIELA CASADEI and FABIO FRAZZETTO, pled guilty in Manhattan federal court today.  CASADEI and FRAZZETTO were originally charged in 2011 and remained at large until February 2, 2016, when they each made initial appearances before the Honorable Gabriel W. Gorenstein, United States Magistrate Judge for the Southern District of New York.

CASADEI and FRAZZETTO each pled guilty to an Information (collectively, with the JULIUS BAER Information, the “Informations”) before U.S. District Judge Laura Taylor Swain charging them with conspiring with U.S. taxpayer-clients and others to help U.S. taxpayers hide their assets in offshore accounts and to evade U.S. taxes on the income earned in those accounts.

Manhattan U.S. Attorney Preet Bharara said:  “Bank Julius Baer not only turned a blind eye to tax avoiders, but actually conspired with them to break the law.  Together with our partners at the IRS, we will continue to prosecute financial institutions and individuals who facilitate tax evasion.”

Acting Assistant Attorney General Caroline D. Ciraolo said:  “Today’s resolution with Bank Julius Baer and the guilty pleas entered by two bank employees reflect the department’s continued commitment to hold accountable those financial institutions who conspired with U.S. taxpayers to conceal assets abroad and evade U.S. tax obligations, as well as those individuals responsible for such crimes.  The deferred prosecution agreement filed today makes it clear that there is a heavy price to pay for this conduct, and that there is a significant benefit in fully cooperating with the department.”

IRS Chief Richard Weber said:  “In taking responsibility for their actions, Bank Julius Baer has agreed to cooperate and pay a substantial penalty for their role in circumventing offshore disclosure laws.  The agreement – as well as the guilty pleas of client advisors Daniela Casadei and Fabio Frazzetto – sends a strong message to the international banking community as well as U.S. taxpayers who think they can outsmart the system by hiding their money in these international banks.  The consequences of not reporting your foreign accounts and paying the taxes you owe will be significant for those who do not heed the warnings that agreements like this yield.”

According to the Informations, statements made during the proceedings today, and other documents filed in Manhattan federal court, including the Statement of Facts to the Agreement:

The Offense Conduct

From at least the 1990s through 2009, JULIUS BAER helped many of its U.S. taxpayer-clients evade their U.S. tax obligations, file false federal tax returns with the IRS, and otherwise hide accounts held at JULIUS BAER from the IRS (hereinafter, “undeclared accounts”).  JULIUS BAER did so by opening and maintaining undeclared accounts for U.S. taxpayers and by allowing third-party asset managers to open undeclared accounts for U.S. taxpayers at JULIUS BAER.  CASADEI and FRAZZETTO, bankers who worked as client advisers at JULIUS BAER, directly assisted various U.S. taxpayer-clients in maintaining undeclared accounts at JULIUS BAER in order to evade their obligations under United States law.  At various times, CASADEI, FRAZZETTO, and others advised those U.S. taxpayer-clients that their accounts at JULIUS BAER would not be disclosed to the IRS because JULIUS BAER had a long tradition of bank secrecy and no longer had offices in the U.S., making JULIUS BAER less vulnerable to pressure from U.S. law enforcement authorities than other Swiss banks with a presence in the U.S.

In furtherance of the scheme to help U.S. taxpayers hide assets from the IRS and evade taxes, JULIUS BAER undertook, among other actions, the following:

— Entering into “code word agreements” with U.S. taxpayer-clients under which JULIUS BAER agreed not to identify the U.S. taxpayers by name within the bank or on bank documents, but rather to identify the U.S. taxpayers by code name or number, in order to reduce the risk that U.S. tax authorities would learn the identities of the U.S. taxpayers.

— Opening and maintaining accounts for many U.S. taxpayer-clients held in the name of non-U.S. corporations, foundations, trusts, or other legal entities (collectively, “structures”) or non-U.S. relatives, thereby helping such U.S. taxpayers conceal their beneficial ownership of the accounts.

JULIUS BAER was aware that many U.S. taxpayer-clients were maintaining undeclared accounts at JULIUS BAER in order to evade their U.S. tax obligations, in violation of U.S. law.  In internal JULIUS BAER correspondence, undeclared accounts held by U.S. taxpayers were at times referred to as “black money,” “non W-9,” “tax neutral,” “unofficial,” or “sensitive” accounts.

JULIUS BAER also advised its bankers to take certain steps to avoid scrutiny from U.S. authorities when travelling to the U.S., as well as steps to avoid U.S. law enforcement identifying JULIUS BAER clients.  In a memo entitled “U.S. Clients Do’s & Don’ts,” circulated internally in 2006, a JULIUS BAER employee provided client advisers with advice regarding travel to the U.S., including:

— “At Immigration . . . When asked by Officer what will you do while in the USA, say Business and of course some leisure, trying to take some time to enjoy your beautiful country. Proud government employees usually love this type of statement.One can throw in skydiving or another fun sport/activity.This tends to shift the questioning away from the business purpose to the ‘fun time’ part of the trip (carrying a tennis racket also puts the emphasis on “fun and games,” and not on business).”

— “In regard to communicating while in the U.S.:“Only use mobile phone[s] registered in and operating from Switzerland.Avoid phone calls from hotel to clients.It is recommended to purchase a telephone calling card from the post office, grocery stores, or electronic shops.This allows you to use practically any phone with no specific link left behind. The best is to pay for the calling card in cash.For ex: a 400 minutes local calling card costs less than $50, but the rates can vary. Most cards can also be used to call anywhere abroad.”

At its high-water mark in 2007, JULIUS BAER had approximately $4.7 billion in assets under management relating to approximately 2,589 undeclared accounts held by U.S. taxpayer-clients.  From 2001 through 2011, JULIUS BAER earned approximately $87 million in profit on approximately $219 million gross revenues from its undeclared U.S. taxpayer accounts, including accounts held through structures.

Julius Baer’s Blocked Effort to Self-Report, Acceptance of Responsibility, and Cooperation in the Government Investigation

Notwithstanding its lucrative criminal conduct, by at least 2008, JULIUS BAER began to implement institutional policy changes to cease providing assistance to U.S. taxpayers in violating their U.S. legal obligations.  For example, by November 2008, the Company began an “exit” plan for U.S. client accounts that lacked evidence of U.S. tax compliance.  In that same month, JULIUS BAER imposed a prohibition on opening accounts for any U.S. clients without an IRS Form W-9.

Additionally, in November 2009, before JULIUS BAER became aware of any U.S. investigation into its conduct, JULIUS BAER decided proactively to approach U.S. law enforcement authorities regarding its conduct relating to U.S. taxpayers.  Prior to self-reporting to the United States Department of Justice, JULIUS BAER notified its regulator in Switzerland of its intention to contact U.S. law enforcement authorities.  This Swiss regulator requested that JULIUS BAER not contact U.S. authorities in order not to prejudice the Swiss government in any bilateral negotiations with the U.S. on tax-related matters.  Accordingly, JULIUS BAER did not, at that time, self-report to U.S. law enforcement authorities.

After ultimately engaging with U.S. authorities, JULIUS BAER has taken exemplary actions to demonstrate acceptance and acknowledgement of responsibility for its conduct.  JULIUS BAER conducted a swift and robust internal investigation, and furnished the U.S. Government with a continuous flow of unvarnished facts gathered during the course of that internal investigation.  As part of its cooperation, JULIUS BAER also, among other things, (1) successfully advocated in favor of a decision provided by the Swiss Federal Council in April 2012 to allow banks under investigation by the United States Department of Justice to legally produce employee and third-party information to the Department, and subsequently produced such information immediately upon issuance of that decision; and (2) encouraged certain employees, including FRAZZETTO and CASADEI, to accept responsibility for their participation in the conduct at issue and cooperate with the ongoing investigation.

*                *                *

CASADEI, 52, a Swiss citizen, and FRAZZETTO, 42, an Italian and Swiss citizen, each pled guilty to one count of conspiracy to defraud the IRS, to evade federal income taxes, and to file false federal income tax returns.  CASADEI and FRAZZETTO each face a maximum sentence of five years in prison.  The statutory maximum sentence is prescribed by Congress and is provided here for informational purposes only, as any sentences imposed on the defendants will be determined by the judge.

CASADEI and FRAZZETTO are each scheduled to be sentenced before Judge Swain on August 12, 2016.

Mr. Bharara praised the outstanding investigative work of IRS-CI, and thanked the Justice Department’s Tax Division for their significant assistance in the investigation.  Mr. Bharara also thanked the Department of Homeland Security for their assistance with the case.

This case is being handled by the Office’s Complex Frauds and Cybercrime Unit.  Assistant U.S. Attorneys Jason H. Cowley and Sarah E. Paul are in charge of the prosecution.

DOJ’s Latest Offshore Tax Case Shows Expatriates Who Renounce U.S. Citizenship Not Immune From Prosecution

An individual residing in Switzerland since 2007, who apparently renounced his U.S. citizenship four years ago, was convicted today in federal court of one count of filing a false U.S. income tax return. According to a Justice Department press release, Albert Cambata opened a bank account at an unnamed Swiss bank in 2006 in the name of a Hong Kong company, with the assistance of a Swiss banker and a Swiss attorney. Later that year, Mr. Cambata received $12 million from a company based in Belize, which funds in turn originated from a company in Panama.

On his 2007 and 2008 federal income tax returns, Mr. Cambata failed to report interest income earned on his Swiss bank account in the amounts of $77,298 and $206,408, respectively. In April 2008, Mr. Cambata had his Swiss attorney request that 5 million Euros be wired from his Swiss account to a different account controlled by Mr. Cambata located at the Monaco branch of a different Swiss bank. In June 2008, Mr. Cambata closed his original Swiss bank account and moved the funds to an account he controlled at the Singapore branch of a third Swiss bank.

In 2012, Mr. Cambata went to the U.S. Embassy in Bratislava, Slovakia, to renounce his U.S. citizenship. At that time, he notified the U.S. Department of State that he had become a naturalized citizen of St. Kitts and Nevis.

Sentencing is scheduled for April 15, 2016. As part of his plea agreement, Mr. Cambata agreed to pay $84,849 in restitution.

Several interesting conclusions can be drawn from this latest conviction in the U.S. government’s extensive and ongoing crackdown on offshore tax evasion. First, the information that DOJ used to pursue Mr. Cambata and his extensive trail of money transfers likely came from either banks participating in the Swiss Bank Program or Category 1 Swiss banks which have reached resolutions with the U.S. government (like UBS and Credit Suisse), or perhaps both. All three of Mr. Cambata’s accounts – in Switzerland, Monaco, and Singapore – were held at branches of Swiss banks, and although those banks are not identified by name in the DOJ press release, they are likely cooperating with the U.S. government in same fashion. In addition, the funds at issue originated from companies based in Belize and Panama, countries which are squarely in the sights of the Tax Division’s ongoing investigations. In 2015, a federal court authorized issuance of “John Doe” summonses seeking information regarding accounts held at certain Belize banks as well as companies that assisted in the creation of Belizean international business corporations. Today’s conviction presumably was the product of information shared with the U.S. by Swiss banks and through the “John Doe” summons process.

Second, the guilty plea of Mr. Cambata has several interesting features. He only pleaded guilty to filing false tax returns for 2007 and 2008, and it is unclear why his plea did not include subsequent years given that, according to the press release, he moved his funds to a third Swiss bank account in June 2008. It is possible that Mr. Cambata properly reported his foreign accounts beginning in tax year 2009 and thereafter. In February 2009, the U.S. government announced its landmark agreement with Swiss banking giant UBS, and the significant publicly generated by that announcement may have prompted Mr. Cambata (like many others) to properly file U.S. returns and FBARs starting in that year and thereafter. In addition, the tax years of conviction (2007 and 2008) would normally be closed due to operation of the six-year criminal statute of limitations for tax crimes, but that statute does not run when the defendant is “outside the United States.” According to the press release, Mr. Cambata resided outside the United States – in Switzerland – since 2007. The amount of unreported income, and the “tax loss,” are also of note in this case. Mr. Cambata in his guilty plea agreed to pay restitution to the U.S. Treasury in the amount of $84,849. In a criminal tax case, the restitution amount normally corresponds to the “tax loss,” which is the key factor for sentencing purposes. Assuming that the tax loss is $84,849, with appropriate adjustments for “sophisticated means” typically required in offshore tax cases and for pleading guilty, Mr. Cambata is likely facing a sentence of between 12 to 18 months in prison. The tax loss in this is not overwhelming compared to other offshore criminal tax cases brought by the Justice Department, but given the other features present here – the defendant residing outside the United States; use of a complex web of multiple accounts, entities, and countries – the government obviously felt that this was a case worth prosecuting.

Third, this case should serve as a warning to expatriates that renouncing U.S. citizenship does not confer immunity from criminal prosecution. The rules for renouncing U.S. citizenship are complicated – both from a State Department and IRS perspective – and even those who carefully comply with those rules are not absolved from criminal conduct occurring prior to that time, as Mr. Cambata’s case demonstrates.  This is especially important as the number of U.S. citizens renouncing their citizenship is reaching record levels.

Finally, from a general deterrence perspective, this case serves as a broad warning to taxpayers with undisclosed foreign bank accounts and unreported income like Mr. Cambata – particularly those who are expatriates – that the risk of inaction is grave. For nearly eight full years, the DOJ and IRS have waged a public campaign to crack down on offshore tax evasion, and during that entire time the IRS has offered various voluntary disclosure programs to incentivize non-compliant taxpayers to come forward voluntarily and self-correct their tax issues. Individuals with undisclosed foreign bank accounts who remain on the sidelines at this late stage are very much at risk of discovery (like Mr. Cambata) and will face harsh consequences for failing to take advantage of the various voluntary disclosure options long available to them. Indeed, today’s DOJ press release includes the government’s now-typical language warning non-compliant taxpayers of the dire consequences they face if they fail to take immediate action:

“U.S. taxpayers have been given ample opportunity to come forward, disclose their secret foreign accounts, and come into compliance,” said Acting Assistant Attorney General Ciraolo. “Those individuals and entities who rolled the dice in the hope of remaining anonymous are facing the consequences. The Tax Division remains committed to investigating and prosecuting individual taxpayers with undeclared foreign financial accounts, as well as the financial institutions, bankers, financial advisors and other professionals who facilitate the concealment of income and assets offshore. And as today’s guilty plea clearly indicates, the department’s reach is well beyond Switzerland.”

“IRS Criminal Investigation will continue to pursue those who do not pay the taxes they owe to the United States,” said Special Agent in Charge Thomas Jankowski of the Internal Revenue Service-Criminal Investigation, Washington, D.C. Field Office. “Today’s plea is a reminder that we are committed to following the money trail across the globe and will not be deterred by the use of sophisticated international financial transactions that hide the real ownership of income taxable by the United States.”

 

Swiss Banks Pushing Back on Scope of Agreement with U.S. under Amnesty Program

As reported yesterday by David Voreacos, Giles Broom, and Jeffrey Vogeli, 73 of the over 100 Swiss banks that enrolled in the Justice Department’s amnesty program for Swiss banks have written an 11-page letter requesting changes to the Justice Department’s proposed agreement that would serve to resolve any criminal liability relating to banking activity that facilitated offshore tax evasion. According to this report, the Justice Department is including terms in the agreement that were not included in the original program when it was announced in August 2013, with three new significant demands. First, the Justice Department is requiring all participating Swiss banks to “‘cooperate fully’ with ‘any other domestic or foreign law enforcement agency’ in any investigation.” Second, the Justice Department is requiring each participating Swiss bank to disclose information about any parent companies. Finally, the Justice Department is also requiring the Swiss banks to “share material with governments other than the U.S.” See Swiss Banks Ask U.S. to Amend Proposed Tax Amnesty Deals (Bloomberg Oct. 23, 2014); read the full article here.

The Swiss banks appear to be correct that these terms were not included in the program as announced in August 2013 and, further, go well beyond what was anticipated. The demand to cooperate “fully” in virtually any investigation conducted across the globe is extraordinarily broad, and there is likely no legal basis for the U.S. to demand that Swiss banks cooperate or provide information to any other foreign government.

The Justice Department is likely testing the limits of its carrot-and-stick approach – the formula for this program. Swiss banks that do not participate in the program are at risk of becoming the subject of a U.S. criminal investigation, which has already resulted in the closure of Switzerland’s oldest bank, Wegelin & Co., and the payment of a $2.6 billion fine by Credit Suisse Group AG, all within the last two years. While the penalties to be imposed by participating in the amnesty program are high, the risk of a result like that in Wegelin or Credit Suisse surely impacted the banks’ decisions to enroll in the program in the first place. Any bank choosing to opt out of the amnesty program at this point would risk a criminal investigation. Under these circumstances, it appears that the Swiss banks participating in the program have little bargaining power and are essentially at the mercy of the U.S. government.

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].