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’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.”

 

Justice Department Opens 2016 Tax Season With Stern Warning to Taxpayers

The Internal Revenue Service announced that the 2016 individual income tax filing season opened on January 19, 2016, with more than 150 million returns expected to be filed. The IRS expects more than 70 percent of taxpayers to again receive tax refunds this year. Last year, the IRS issued 109 million refunds, with an average refund of $2,797.

Simultaneously sending a stern warning to would-be tax cheats, the Justice Department’s Tax Division announced that a business owner in Alexandria, Virginia, had pleaded guilty to a multi-million dollar conspiracy to defraud the IRS that could land the defendant in jail for four to five years. In that case, the defendant owned and operated a gas station and multiple Subway restaurant franchises. According to court documents, the defendant admitted that between 2008 and 2014, he and his managers failed to deposit all of the gas station and Subway franchises’ gross receipts into corporate bank accounts. Instead, the defendant and his co-conspirators skimmed those receipts and retained them for their personal use, and failed to report those funds to the IRS. IRS investigators built their case by reviewing point-of-sales records for the Subway franchises, which showed total sales of $20 million for this period, but the corporate and partnership tax returns only reflected sales of $14 million. Compounding the problem, certain of the defendant’s businesses did not file returns at all in some years. The defendant also acknowledged filing false individual income tax returns. In his guilty plea, the defendant admitted that his illegal conduct caused a tax loss to the IRS of between $1.5 million and $3.5 million.

Using this defendant’s guilty plea as an opportunity to promote general deterrence and tax compliance, the Justice Department’s press release contains the usual cautionary language typically seen around April 15:

“As we start the 2016 filing season, this case serves as a reminder that the Justice Department, working with its partners at the IRS, remains committed to identifying, investigating and prosecuting businesses and individual taxpayers who willfully fail to file accurate tax returns and pay the taxes due,” said Acting Assistant Attorney General Ciraolo. “Every taxpayer owes a duty to their fellow citizens to pay their fair share and those who choose not to do so will face the consequences.”

“Today’s plea of Obayedul Hoque for conspiracy to defraud the United States sends a clear message to would-be tax cheats,” said Chief Richard Weber of IRS-Criminal Investigation (CI). “Whether you fail to file and pay your corporate taxes or your personal income taxes, IRS-CI special agents work diligently to uncover all kinds of fraud and hold everyone accountable. U.S. citizens expect and deserve a level playing field when it comes to paying taxes and there are no better financial investigators in the world when it comes to following the money.”

It is well-known that the Justice Department’s Tax Division typically increases the frequency of its press releases announcing enforcement activity in the weeks leading up to April 15. Academic research confirms that the DOJ issues a disproportionately large number of tax enforcement press releases as “Tax Day” approaches:

Every spring, the federal government appears to deliver an abundance of announcements that describe criminal convictions and civil injunctions involving taxpayers who have been accused of committing tax fraud. Commentators have occasionally suggested that the government announces a large number of tax enforcement actions in close proximity to a critical date in the tax compliance landscape: April 15, “Tax Day.” These claims previously were merely speculative, as they lacked any empirical support. This article fills the empirical void by seeking to answer a straightforward question: When does the government publicize tax enforcement? To conduct our study, we analyzed all 782 press releases issued by the U.S. Department of Justice Tax Division during the seven-year period of 2003 through 2009 in which the agency announced a civil or criminal tax enforcement action against a specific taxpayer identified by name. Our principal finding is that, during those years, the government issued a disproportionately large number of tax enforcement press releases during the weeks immediately prior to Tax Day compared to the rest of the year and that this difference is highly statistically significant. A convincing explanation for this finding is that government officials deliberately use tax enforcement publicity to influence individual taxpayers’ perceptions and knowledge of audit probability, tax penalties, and the government’s tax enforcement efficacy while taxpayers are preparing their annual individual tax returns.

Joshua D. Blank and Daniel Z. Levin, When Is Tax Enforcement Publicized?, 30 Virginia Tax Review 1 (2010).

With the opening of the 2016 tax filing season, we can expect a steady drumbeat of DOJ press releases with increasingly stronger warnings as April 15 approaches.

Justice Department Announces Historic Conclusion of Swiss Bank Program for Category 2 Institutions

DOJ logoThe Justice Department achieved a historic milestone in its ground-breaking Swiss Bank Program with its announcement today of the final Category 2 bank resolution. The Justice Department executed its 80th and final agreement with HSZH Verwaltungs AG, which agreed to pay a civil penalty of more than $49 million. All told, the 80 Category 2 Swiss banks which resolved their criminal tax exposure with the U.S. government will pay more than $1.36 billion in penalties. Perhaps even more importantly, every Category 2 bank in the Swiss Bank Program is required to cooperate in any future related criminal or civil proceedings, thereby ensuring that the Justice Department will have the complete assistance from each bank as the U.S. government pursues leads throughout the world.

By all accounts, the Swiss Bank Program appears to have been an incredible success for the Justice Department (and IRS) in its efforts to combat offshore tax evasion. Never before had the U.S. government offered an amnesty program to the entire banking industry in a particular country, and at the time the program was unveiled in 2013, it was not clear that the program would be a success or that Swiss banks would be interested. But given the overwhelming demonstration of interest from Swiss banks, the substantial monetary penalties collected, and the wealth of information shared with the U.S., the program can fairly be declared a significant win for the U.S. government. Given the success of the Swiss Bank Program, it will be interesting to see whether the Justice Department offers a similar program to banks in other countries or regions.

Today’s press release included the following quote from the Attorney General thanking the Swiss government for its efforts in making the Swiss Bank Program so successful:

“The Department of Justice is committed to aggressively pursuing tax evasion, and the Swiss Bank Program has been a central component of that effort,” said Attorney General Loretta E. Lynch. “Through this initiative, we have uncovered those who help facilitate evasion schemes and those who hide funds in secret offshore accounts. We have improved our ability to return tax dollars to the United States. And we have pursued investigations into banks and individuals. I would like to thank the Swiss government for their cooperation in this effort, and I look forward to continuing our work together to root out fraud and corruption wherever it is found.”

Other Justice Department officials echoed the Attorney General’s sentiments, and noted that the Swiss Bank Program has provided the DOJ and IRS with a wealth of information that is being mined for leads that are being pursued civilly and criminally throughout the world:

“The department’s Swiss Bank Program has been a successful, innovative effort to get the financial institutions that facilitated fraud on the American tax system to come forward with information about their wrongdoing – and to ensure that they are held responsible for it,” said Acting Associate Attorney General Stuart F. Delery. “As we have seen over the last year, Swiss banks are paying an appropriate penalty for their misconduct, and the information and continuing cooperation we have required the banks to provide in order to participate in the program is allowing us to systematically attack offshore tax avoidance schemes.”

“The completion of the agreements under Category 2 of the Swiss Bank Program represents a substantial milestone in the department’s ongoing efforts to combat offshore tax evasion, and we remain committed to holding financial institutions, professionals and individual taxpayers accountable for their respective roles in concealing foreign accounts and assets, and evading U.S. tax obligations,” said Acting Assistant Attorney General Caroline D. Ciraolo of the Justice Department’s Tax Division. “Using the flood of information flowing from various sources, the department is investigating this criminal conduct, referring appropriate matters to the Internal Revenue Service for civil enforcement and pursuing leads in jurisdictions well beyond Switzerland. Individuals and entities engaged in offshore tax evasion are well advised to come forward now, because the window to get to us before we get to you is rapidly closing.”

Top officials from the Internal Revenue Service similarly commended today’s announcement, noting that more than 54,000 taxpayers have come forward to voluntarily disclose their previously-undisclosed offshore assets:

“Today’s resolution with HSZH Verwaltungs AG brings to a close this phase of DOJ’s Swiss Bank Program,” said acting Deputy Commissioner International David Horton of the IRS Large Business & International Division. “The comprehensive success of this program sends a powerful message to those who might think they can evade their tax obligations by going offshore. A whole sector of financial institutions, 80 banks in all, has been held accountable for aiding the use of secret accounts and circumventing U.S. law. In addition to the more than $1.3 billion in penalties from these resolutions, more than 54,000 taxpayers have come forward to the IRS to pay more than $8 billion in taxes, interest and penalties.”

“The bank agreement with HSZH announced today may bring an end to one phase of the Swiss Bank Program, but more importantly it brings us closer to our overall goal of compliance and accountability for financial institutions and U.S. taxpayers,” said Chief Richard Weber of IRS-Criminal Investigation. “The data received from each agreement on the accounts, schemes and linkages is extremely valuable in combating international tax evasion. I could not be more proud of the effort of our special agents who worked tirelessly to make this program a success in coordination with the Department of Justice.”

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

Under the program, banks are required to:

  • Make a complete disclosure of their cross-border activities;
  • Provide detailed information on an account-by-account basis for accounts in which U.S. taxpayers have a direct or indirect interest;
  • Cooperate in treaty requests for account information;
  • Provide detailed information as to other banks that transferred funds into secret accounts or that accepted funds when secret accounts were closed;
  • Agree to close accounts of accountholders who fail to come into compliance with U.S. reporting obligations; and
  • Pay appropriate penalties.

Swiss banks meeting all of the above requirements are eligible for a non-prosecution agreement.

Taxpayers who have still not “come clean” and declared their offshore assets may still take advantage of various IRS programs, such as the Offshore Voluntary Disclosure Program or the Streamlined Filing Compliance Procedures, but the price of admission has now increased if they had accounts at HSZH:

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

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.