Wegelin & Co. Account Holder Sentenced to Prison Term

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

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.

Former UBS Banker Trial Begins in Florida

Opening statements were heard on Tuesday and the first government witness testified yesterday in the trial of ex-UBS AG banking executive Raoul Weil. Prosecutors have sought to show him as the driving force behind the bank’s tax fraud scheme, and defense counsel has claimed that subordinates were at fault and he had no knowledge of the wrongdoing.

According to reporting from Law360, prosecutors explained to the jury in their opening statements that Mr. Weil was the driving force behind UBS’s tax evasion scheme, had many chances to close the cross-border business division but didn’t because it was profitable, and caused UBS bankers who came to the U.S. to meet with clients to engage in precautions “including storing client statements on a second hard drive that could be deleted instantly or meeting clients away from UBS offices – to avoid detection by federal authorities.” Defense counsel minimized Mr. Weil’s role and knowledge, blaming the tax evasion schemes on “subordinates who never told Weil about it and are now cooperating with the government to avoid prison time.” Carolina Bolado, Ex-UBS Exec Says He Didn’t Know About Tax Evasion Scheme (Law360, 10/14/2014, here).

Government witness Hansruedi Schmacher, who is also under indictment, testified yesterday of the details of how UBS managed its secret banking business for U.S. customers, according to a number of media reports. Meetings with customers were held in hotels, which location changed each trip; bankers carried no documents or business cards with the UBS logo or name; hard drives were encrypted; customers were identified on statements by code name, if statements were made available at all, and bankers utilized their own memory techniques to recall the code name used for each customer; customers were telephoned using U.S.-based phone rather than using a Swiss phone; and codes were used for accounts that were secret (“black” or “simple”) as opposed to ones that were declared to the IRS (“white” or “complex”).  Nathan Hale, Ex-UBS Exec Opens Up About Swiss Tax Shelters in Weil Case (Law360, 10/15/2014, here).

Two other key Swiss witnesses are expected. Martin Leichti, the former head of the cross-border banking at UBS, who may be able to establish Mr. Weil’s knowledge of the business division and tax evasion schemes.  The other is an unnamed former top executive at Neue Zürcher Bank who reportedly has recently turned himself over to the Justice Department in order to testify at Mr. Weil’s trial. Ex-banker heads to Florida to testify in Weil case (swissinfo.ch 10/08/2014, here).

The court is permitting three of Mr. Weil’s defense witnesses to testify through video link from London, because the witnesses will not travel to the U.S. to testify in person for the risk of being arrested. These witnesses have not yet been publicly named.  Matthew Allen, Ex-UBS executive Weil finally faces US court (swissinfo.ch 10/13/2014, here).

Mr. Weil was indicated in 2008 for hiding the tax evasion schemes at UBS for more than 20,000 U.S. citizens and over $20 billion in assets. He had been a fugitive and was arrested in 2013 in Italy and extradited to the U.S.  Mr. Weil pleaded not guilty earlier this year and, if found guilty, faces up to five years’ in prison.

FATCA Notebook: Former IRS Chief, Taxpayer Advocate Criticize FATCA; Switzerland Moves Toward Greater Transparency

This week brings a wealth of news in the FATCA arena, which we summarize in today’s post.

First, former acting IRS Commissioner Steven Miller speaks out against FATCA and suggests that the benefits of the new information reporting regime imposed by FATCA may not outweigh its costs. An article published by TaxAnalysts on October 7 quotes Miller as follows:

“I can’t even say with conviction that I’m sure, looking strictly on a cost-benefit basis, that FATCA’s . . . benefits are going to outweigh the cost,” Miller told a lunch crowd at the Securities Industry and Financial Markets Association FATCA Policy Symposium in Washington. “It’s not clear to me that when you look solely at the burden placed on financial institutions and others, versus the amount of revenue that may come into the treasury, that this is going to be a revenue-positive event for the United States.”

Miller, former deputy commissioner of services and enforcement and a 25-year veteran of the IRS, acknowledged both problems and progress in the implementation of FATCA and said that he believes “offshore evasion is an area in which noncompliance will never be completely eradicated.”

“While I have high hopes that the implementation of FATCA will be successful and of great assistance in this regard, I fear that it’s not going to be a panacea,” Miller said. “I also believe that we have yet to see the full breadth of creativity in terms of the types of assets that will be used into the future to store wealth overseas.”

Second, joining Miller in criticizing FATCA is National Taxpayer Advocate Nina Olson, who also spoke at the Securities Industry and Financial Markets Association FATCA Policy Symposium. According to an article published by TaxAnalysts on October 8, Olson made the following points in her remarks:

“This is a piece of legislation that is so big and so far-reaching, and [has] so many different moving pieces, and is rolling out in an incremental fashion . . . that you really won’t be able to know what its consequences are, intended or otherwise,’ Olson said. “I don’t think we’ll know that for years. And by that point we’ll actually be a little too late to go, “Oops, my bad, we shouldn’t have done this,’ and then try to unwind it.”

. . .

The raw numbers so far tell a confusing tale, Olson said. In 2011, 170,000 taxpayers filed Form 8938, “Statement of Specified Foreign Financial Assets”; 187,000 filed Form 8938 in 2012, she said. Forty-one percent of 2011 filers also filed a foreign bank account report, she added. However, in 2012 only 21 percent of Form 8938 filers had a foreign address, Olson noted.

“I really don’t know what people’s assumptions were when they enacted this requirement,” Olson said. “Did we expect to get 7 million? Did we expect to get 10 million? Did we expect to get 500,000? Is this a good result? Is this a bad result?” Just one-half of 1 percent of Form 8938 filers had a balance due account after getting notices, compared with 4 percent for the general taxpayer population, she noted.

Olson further noted in her remarks that a new cottage industry has sprouted as a result of FATCA: after foreign banks expressed reluctance to open accounts for some U.S. taxpayers overseas, some businesses began offering insurance to protect against incomplete FATCA disclosures. “So here we now have created a whole new industry for a risk we have manufactured ourselves,” Olson said.

Finally, Switzerland announced on October 8 that it would move toward automatic exchange of bank account information with other countries, including the EU and the United States. (See articles here and here.) If adopted, the earliest date for automatic exchange of data would be 2018 and the new reporting regime would require Switzerland to notify an account holder’s country of origin if a Swiss bank account is opened. Switzerland also announced that it would seek to negotiate a Model 1 Intergovernmental Agreement (IGA) with the United States to implement FATCA, to replace the Swiss-U.S. Model 2 IGA that was reached in February 2013.  In a press release, the Swiss Federal Council made the following statements regarding its decision to implement greater transparency in its tax dealings: 

The cornerstones of the mandates definitively adopted by the Federal Council today are as follows:

– The introduction of the automatic exchange of information is to be negotiated with the EU.

– Regarding implementation of the Foreign Account Tax Compliance Act (FATCA), a Model 1 FATCA agreement should be with negotiated with the United States. With the new agreement, data would be exchanged automatically between the competent authorities on a reciprocal basis.

– Negotiations on the automatic exchange of information will be initiated with further selected countries. In an initial phase, consideration will be given to countries with which there are close economic and political ties and which, if appropriate, provide their taxpayers with sufficient scope for regularisation.

– The introduction of the automatic exchange of information with foreign countries will be conducted by means of agreements with partner countries. Moreover, implementing legislation will be required in national law. This is currently being prepared by the Federal Department of Finance and will be submitted to parliament together with the negotiated agreements. The existing legislative framework excludes the automatic exchange of information.

Switzerland welcomes the new international standard, to which it contributed actively. It allows for a level playing field in the competition between financial centres, as these regulations apply to all, and is an important instrument in international efforts to combat tax evasion. Domestic bank client confidentiality will not be affected by the implementation of the new global standard.

It is important for the Federal Council that the requirements which it adopted in June 2013 are contained in the new standard. There is to be only one global standard, the exchanged information should be used solely for the agreed purpose (principle of speciality), the information should be reciprocal, i.e. should flow in both directions, data protection must be ensured and the beneficial owners of trusts and other financial constructs should also be identified. Moreover, the Federal Council has stated that the issues of regularisation of the past and market access are to be addressed and solutions sought in negotiations on the automatic exchange of information with the EU and EU member states.