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On 2013, an extraordinary year for offshore tax enforcement

taxhavenBy Dan Reeves From OffshoreAlert

There was a time when offshore financial secrecy laws were ironclad and impenetrable. Some used those laws to engage in legitimate financial activities directed at investing, increasing wealth and facilitating international trade, but many others used them to hide the proceeds of illegal activities, disguise the ownership of personal assets and, more often than not, avoid or evade payment of required taxes.

This really wasn’t anything new. In a letter to U.S. President Franklin D. Roosevelt in May of 1937, then Secretary of the Treasury Henry Morgenthau, Jr. described one of the primary tactics used by wealthy taxpayers to avoid paying taxes as “… setting up foreign personal holding corporations in the Bahamas, Panama, Newfoundland, and other places where taxes are low and corporation laws lax.” The letter went on to say, “The companies are frequently organized through foreign lawyers, with dummy incorporators and dummy directors, so that the names of the real parties in interest do not appear.” Still, very little could or would be done about the issue for the next 60+ years, and so the demand for tax haven services and their tax related financial products grew.

Things began to change in the year 2000 when the IRS started what came to be known as the Offshore Credit Card Project. Using a little known and rarely used enforcement tool known as the John Doe summons, IRS went to federal court demanding that MasterCard, VISA and American Express turn over records of U.S. taxpayers who were using credit cards issued by banks in certain offshore secrecy countries known to be used by U.S. citizens for tax evasion. It was a watershed moment in offshore tax enforcement that for the first time ripped an opening in the veil of secrecy that historically surrounded offshore accounts.

Things took a historic and unprecedented turn in 2008 when IRS issued a court approved John Doe summons to UBS AG, a Swiss bank that was also under criminal investigation by the U.S. Department of Justice (DOJ) in connection with its U.S. cross-border banking business. Information disclosed in the summons declarations, criminal information filing and deferred prosecution agreement showed that UBS was aggressively seeking out U.S. tax evasion monies and was even sending its Swiss based private bankers into the United States to illegally service its tax evading clients and recruit new ones. The UBS case was another watershed moment in U.S. offshore tax enforcement that sent shock waves through the offshore world that still reverberate today.

Building on the success of the UBS case and three Offshore Voluntary Disclosure Programs that followed in its wake, the IRS and DOJ have continued their campaign against offshore tax evasion but now with an increased emphasis on the banks, bankers, lawyers and financial service providers who are at its heart. And so it was that we entered the year 2013, an extraordinary year for U.S. offshore tax enforcement.


. In January,

– Wegelin Bank, the oldest private bank in Switzerland, pleaded guilty to criminal charges that it had helped wealthy U.S. customers evade taxes by hiding more than $1.2 billion in secret Swiss bank accounts and announced that it was ending all banking operations and closing its doors.

– IRS obtained court approval to issue a John Doe summons for the U.S. correspondent account records of Wegelin Bank, and two other Swiss banks that were using Wegelin’s account, to identify U.S. clients of the banks with undeclared accounts in Switzerland.

. In May, IRS obtained court approval to issue a John Doe summons for the U.S. correspondent account records of FirstCaribbean International Bank (FCIB) to identify U.S. clients of the bank with undeclared offshore accounts in Anguilla, Antigua, Bahamas, Barbados, Belize, BVI, Cayman Islands, Curacao, Dominica, Grenada, Jamaica, St. Eustatius, St. Kitts & Nevis, Saint Lucia, St. Maarten, St. Vincent, Turks & Caicos Islands and Trinidad & Tobago.


. In August,

– DOJ announced that it had active criminal investigations under way related to 14 Swiss banks. While DOJ hasn’t disclosed the names of the banks, various media reports identify them as including Credit Suisse, HSBC and Bank Julius Baer among others.

– DOJ and Switzerland jointly announced a program to encourage Swiss banks that were not under criminal investigation to cooperate in the U.S.’s ongoing offshore tax evasion investigations. Under the program, banks must pay substantial fines, make a complete disclosure of cross-border banking activities and provide specific account details on U.S. taxpayers who held a direct or indirect interest in a Swiss account. As of December 31, more than 100 of the 300+ Swiss banks had signed up for the deal according to the Department of Justice.

– Edgar Paltzer, a Swiss lawyer pleaded guilty in New York federal court to conspiring for more than a decade to commit tax fraud by helping U.S. clients hide millions of dollars.


. In October,

– Zurich based Bank Frey & Co. AG announced that it was ceasing all of its banking operations because of the U.S. crackdown on offshore tax evasion. Bank Frey has been identified in media reports as one of the 14 Swiss banks under criminal investigation by U.S. authorities.

– Martin Lack, a Swiss resident and independent investment adviser, surrendered to U.S. authorities after being indicted in 2011 on charges that he conspired to help wealthy Americans evade taxes by hiding accounts at a bank in Switzerland.

– Raoul Weil, who once headed UBS’s global wealth management division in Switzerland, was arrested while vacationing in Italy based on an Interpol notice requested by U.S. authorities. Weil was extradited to the United States and brought before a federal judge on charges that he provided private banking services to approximately 20,000 U.S. clients concealing approximately $20 billion in assets from the IRS.


. In November,

– IRS obtained court approval to issue a John Doe summons for the U.S. correspondent account records of Zurcher Kantonalbank (ZKB) to identify U.S. clients of the bank with undeclared offshore accounts in Switzerland, and another for the U.S. correspondent account records of the Bank of NT Butterfield & Sons Ltd to identify U.S. clients of the bank with undeclared offshore accounts in the Bahamas, Barbados, Cayman Islands, Guernsey, Hong Kong, Malta, Switzerland and the United Kingdom.

By any estimation, 2013 was a remarkable year for U.S. offshore tax enforcement. Certainly it’s premature to say that offshore tax evasion is a thing of the past, but those who have built their businesses around a model of helping U.S. taxpayers evade their taxes are clearly at a greater personal risk of discovery and jeopardy than ever before. Of the more than 100 persons indicted by the U.S. government in connection with its ongoing offshore tax evasion crackdown since the UBS case broke, more than 30 involve bankers, lawyers and financial advisers.

The old arguments that the “tax avoidance” services provided to U.S. citizens by foreign bankers, attorneys and financial service providers are perfectly legal and legitimate within their own home countries are wearing thin.   Likewise, the belief that in today’s global economy and electronic age, those who aid and abet U.S. taxpayers in committing tax evasion against their own government, even though they are doing so from outside the United States, are immune from prosecution and beyond the reach of U.S. authorities is also proving false.

Those in the offshore financial world who hope to blindly continue on with business as usual clearly do so at their own risk. Continuing analysis of offshore voluntary disclosure data and information gleaned from its various civil and criminal enforcement actions will likely lead to more criminal cases and more John Doe summonses. Like it or not, FATCA will add even more pressure on offshore financial centers and offshore banks to divest themselves of U.S. tax evasion monies in the coming years. Given all this, one can only wonder what additional developments 2014 will bring.

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