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.

2014 Opens with More Actions Against Tax Return Preparers

At the end of 2013, we summarized several actions taken by the Justice Department against tax return preparers at the end of the year.  Indeed, on Tuesday, the Justice Department issued a press release touting their enforcement efforts in this area, noting that it obtained over 60 permanent injunctions against tax return preparers in 2013 alone.  Assistant Attorney General Kathryn Keneally for the Tax Division stated that “[d]uring the time when honest taxpayers are preparing their returns, the Tax Division will work tirelessly to challenge those who would abuse the tax laws and take advantage of their customers,” and therefore the DOJ and IRS “are working hard to shut down these abusive schemes and scams and punish the perpetrators where appropriate.”  Since 2014 began, a number of significant actions against tax preparers have occurred, indicating that the trend established at the end of 2013 continues into 2014.

Two tax return preparers in Georgia and one in North Carolina have recently been permanently barred from preparing tax returns for others: 

  • Lakesia Michelle Mills, of Willis Tax Service, was alleged in a complaint to have prepared at least 455 tax returns that claimed $3.6 million in overstated refunds based primarily upon false documentation (settlement statements and proof of insurance) to support the First-Time Homebuyer Credit.  In an injunction, Ms. Mills was permanently barred from the tax return preparation business, must provide the government a list of persons she prepared returns for as of January 1, 2009, notify her customers of the injunction, and publish the injunction in the local newspaper.  [U.S. v. Lakesia Michelle Mills, No. 13-101, Southern District of Georgia]. 
  • Joan Leger, of The 1804 Tax Group Inc. (formerly J & Company) now doing business as Liberty Tax Service, was alleged in a complaint to have fabricated income, deductions and credits in order to claim the earned income tax credit, among others, for her customers.  Ms. Lever also created false losses and expenses for non-existent business or businesses not owned by the taxpayer.  She also filed returns without her tax preparer identification number or with someone else’s number.  The nearly 6,000 returns she prepared resulted in an alleged loss to the government of over $2 million.  In an injunction, Ms. Leger was permanently barred from the tax return preparation business, must provide the government a list of persons she prepared returns for as of December 1, 2012, notify her customers of the injunction, and publish the injunction in the local newspaper.  [U.S. v. Leger, et al., No. 13-3153, Northern District of Georgia].
  • Sharon D. Rhodes, of R&S Freedom Tax Services and Changing Faces Anointed Tax Services, was alleged to have prepared returns that claimed false charitable deductions and other credits.  She also listed fictitious businesses and fabricated expenses and losses for them.  For the over 600 returns she prepared, the government alleged a nearly $3 million loss.  In an injunction, Ms. Rhodes was permanently barred from the tax return preparation business and must provide the government a list of persons she prepared returns for from the 2008 tax year to present.  [U.S. v. Rhodes, No. 13-759, Eastern District of North Carolina].

In addition, within the last month, the DOJ initiated four new civil suits against tax preparers, seeking permanent injunctions: 

  • A complaint against Keisha Stewart and her business, Professional Tax Services, Inc., alleged that returns she prepared contained inflated or fictitious income in order to receive the earned income tax credit.  She also claimed improper and false deductions and credits, head of household status, false dependents.  For the 2,222 tax returns she prepared for tax years 2010, 2011, and 2012, the government estimated a $1.6 million loss.  [U.S. v. Stewart, et al., No. 14-60219, Southern District of Florida]. 
  • A complaint against Barbara L. Garrett alleged that she prepared returns that contained fake business deductions and other improper deductions, including for charitable contributions, child care expenses, property taxes, medical expenses, and education expenses.  In one example, Ms. Garrett included a fake claim for childcare expenses falsely identifying herself as the childcare provider.  She also lists others as having prepared returns that she prepared, and she encouraged one taxpayer to lie during the government investigation.  For nearly all of the tax returns she prepared that were audited, the IRS determined a tax loss of $400,000.  [U.S. v. Garrett, No. 14-859, Northern District of Illinois].
  • Carmen J. Martinez, of CJM Bookkeeping and Taxes, LLC, has been alleged in a complaint to have prepared more than 7,800 tax returns since 2010.  Ms. Martinez allegedly prepared returns with false deductions and credits by improperly claiming children as dependents when they were not U.S. citizens or U.S. residents.  This activity allegedly resulted in a loss to the government of as much as $25 million.  [U.S. v. Martinez, No. 14-165, District of Delaware].
  • Rulon Sandoval and Andrea R. Acosta Hernandez, husband and wife owners of Latinos Office LLC, have been alleged in a complaint to have prepared false returns with false credits and deductions, including improperly claimed business expenses and incorrect filing status, as well as having submitted returns using false or incorrect tax return preparer identification numbers.  Following an audit of only 47 of the 6,514 returns filed, the government estimated that its loss could be at least $1.3 million.  [U.S. v. Sandoval, No. 14-cv-85, District of Utah].

Finally, a 33-count indictment was unsealed that charged Russell Burroughs, of Computer Services, a tax return preparation business, with allegedly preparing and filing 33 false tax returns between tax years 2008 to 2011.  Mr. Burroughs caused to have included false business income, energy credits, American Opportunity credits, education credits, as well as a number of others.  [U.S. v. Burroughs, No. 13-cr-317, Middle District of Alabama;  press release here].