Liechtenstein

2013 Year End Notes, Part 3: Offshore Considerations

December 13, 2013 By Asher Rubinstein, Esq.

During 2013, the IRS and U.S. Department of Justice (DOJ) continued to successfully attack offshore banking “secrecy”. The IRS’ success against UBS and other banks eroded Swiss banking secrecy, effectively ending “going offshore” to hide money from the IRS. Going offshore for asset protection from civil creditors, however, is still viable and effective, but must be tax-compliant.Continue Reading

If You Have an Unreported Foreign Account, You Really Should Be Thinking about Tax Compliance

November 21, 2013 By Asher Rubinstein, Esq.

If You Have an Unreported Foreign Account,
You Really Should Be Thinking about Tax Compliance

by Asher Rubinstein, Esq.

If you have a foreign account that you have not declared to the IRS, you really should be giving thought to how to bring the foreign account into compliance now. It will only get more difficult to keep the account open, to access your offshore funds, and to keep the IRS from discovering the account. And, when the IRS does eventually discover the account, it will only get more expensive to correct the non-disclosure and defend against a tax fraud prosecution.

Foreign Banks Are Freezing and Closing Accounts and Limiting Access to Your Money

If you don’t bring the foreign account into IRS compliance, you will have problems trying to access the funds. Many foreign banks are simply freezing the accounts of Americans until the account holders provide signed IRS Forms W-9 or otherwise demonstrate evidence of U.S. tax compliance. If you provide a W-9 to the bank, the bank will likely share your identity and your banking information with the IRS.

We have had many clients tell us that their foreign bank has frozen their account, and they request that we intervene to get the bank to release their money. While we can often assist in that regard, the larger issue is: what are you going to do about the IRS finding the account?

In addition to freezing accounts, many foreign banks are simply closing the accounts of Americans, or of foreign nationals suspected of having a U.S. address or a U.S. tax nexus. These banks do not want to deal with the IRS and with U.S. compliance burdens. These banks are concluding, as a business matter, that it makes better sense for the banks to cease offering banking services to people with a U.S. nexus.

We have assisted clients in keeping open their compliant foreign accounts, and we have assisted other clients in locating new foreign banks to take their compliant foreign funds. If you have an undeclared foreign account, and your bank is telling you to leave, you will have to anticipate the successor bank asking the same sort of “know your client” and source of funds inquiries, and asking you to sign a IRS Form W-9. It is getting harder and harder to simply leave foreign Bank A and move the account to foreign Bank B. Very few foreign banks remain willing to take your non-compliant funds.

You Will Have Difficulty Getting Your Money Back to the U.S.

Wiring the funds back to the U.S. is not advisable. A sudden wire transfer of a large dollar amount into a U.S. account would likely lead to the receiving bank asking questions about the wire transfer, the source of funds, and whether the funds are tax-compliant. Banks will not ignore their due diligence and “know your client” obligations, no matter how friendly you might be with your banker. The compliance and legal risks to the bank are too significant.

Moreover, an inbound wire transfer could cause the bank to file an SAR (Suspicious Activity Report) with the U.S. Treasury Department, and there is no requirement that the bank even let you know that it is filing an SAR. Even if you try to deposit a foreign bank check and avoid a large wire transfer, the U.S. bank will likely ask the same questions.

Finally, even assuming that you can get your foreign funds safely back into the U.S., you still have to worry about the IRS discovering the past non-compliance when the funds were offshore. As discussed below, the IRS is interested in the past history of the non-compliant foreign account, even if that account is now closed.

Your Options Are Limited as to Where to Keep the Funds Outside the U.S.

As noted above, it will not be easy for you to simply find a new foreign bank, one that will overlook the fact that your funds are not U.S. tax compliant, one that will not ask you to sign a Form W-9, one that is not concerned about FATCA (the Foreign Account Tax Compliance Act) which will require the bank to report information to the IRS.

FATCA is a U.S. law, passed in 2010, which reaches overseas and requires all foreign banks and financial institutions to automatically report to the IRS (without IRS subpoena or request) information regarding their American client accounts. Essentially, every foreign bank becomes an agent of the IRS. If a foreign bank or financial institution does not agree to FATCA reporting, then the U.S. will penalize it by withholding significant amounts of U.S.-source income. Recently, many countries have signed on to FATCA, including Spain, Italy, Norway, Germany, Mexico, the UK, Ireland and Switzerland. Many other countries (some seventy five around the world) have announced that they are negotiating FATCA deals with the U.S., including South Africa, Singapore and Liechtenstein.

People suggest to us that foreign jurisdictions still exist which could act as shelters for non-compliant assets. We hear that certain countries are “the next Switzerland”. Since 2008, when UBS became the target of DOJ’s civil and criminal prosecution, the flow of funds exiting Switzerland for Singapore, for example, has been significant.

However, no reputable financial jurisdiction (including Singapore) would risk its financial reputation to harbor non-compliant accounts. Singapore makes a significant amount of money from legitimate international banking and would not jeopardize this by being “blacklisted” as an uncooperative tax haven, as it was a decade ago. To this end, Singapore has recently announced that it is in talks with the U.S. on a FATCA-type of agreement. In addition, a new Singapore regulation requires banks to identify all accounts that may harbor the proceeds of tax evasion, and close them. Failure to abide by this new law will result in criminal charges for the Singaporean bankers.

Virtually all reputable financial institutions around the world – – at least the credible, stable ones, i.e., places one would want to bank because of safety and stability – – will report to the IRS. Nations “off the grid” may welcome dollars, but one must ask whether depositing assets in an unsafe or unstable jurisdiction is a prudent move. Is it worth it to move money from the first world to the third world in order to avoid the IRS, if the risk of losing the money is significant?

Finally, even assuming that you find a new harbor for your foreign assets, there will almost certainly be a paper trail of where your assets went. The last bank statement from your prior account will show an outward transfer. That will be a road map for the IRS once it obtains the statement by subpoena, summons, treaty request or settlement agreement.

Closing the Account May Not be Enough

Merely closing a foreign account is not a viable solution, because DOJ and IRS never limit their investigations to only current accounts. In the case of UBS, DOJ’s John Doe Summons sought banking records back to 2000. In the case of Liechtensteinische Landesbank, DOJ requested records back to 2004. In the case of Julius Baer, the investigation goes back to 2002. DOJ’s request to Liechtenstein trust companies and other fiduciaries sought records back to 2001.

In other words, closing an account today does nothing to remedy the non-compliant past, and DOJ and the IRS focus on past non-compliance. In addition, a wire transfer or bank check from the foreign account to a U.S. account (or account elsewhere) creates an easy trail back to the foreign account, and also gives rise to due diligence, “know your client” and source of funds inquiries by the recipient bank. Using the non-compliant funds to buy real estate or other assets also creates a trail and does nothing to undo the non-compliant past, which will be the focus of the IRS investigation.

The Era of Bank Secrecy is Over

It seems that with every passing year, bank secrecy continues to decrease and the risk of discovery increases. In 2013, the following events occurred:

– Switzerland agreed to a settlement with the U.S. Department of Justice (DOJ) whereby almost all Swiss banks will begin to report bank account data to the U.S. without a need for court orders or government-to-government treaty requests.

– Liechtenstein agreed to sign a global treaty allowing for increased bank transparency and automatic exchange of tax information. It is also expected that Liechtenstein will sign on to FATCA.

– All reputable countries are agreeing to the exchange of information and banking transparency. In 2013, Luxembourg agreed to automatic exchange of bank depositor information beginning in January 2015. Likewise, Austria, the last remaining EU member holdout, agreed in 2013 to share banking data.

– The U.S. Department of Justice has sent summonses and requests for banking information to the following: Bank Julius Baer, the Liechtenstein Foundation Supervisory Authority, CIBC First Caribbean International Bank, Bank of Butterfield, HSBC and others. DOJ is investigating many Swiss banks, Israeli banks, banks in Luxembourg, the Caribbean and elsewhere. IRS and DOJ are not stopping at Switzerland. U.S. investigators are paying particular attention to “leaver accounts”, i.e., the accounts of those people who leave Swiss banks in favor of banks elsewhere, in an attempt to continue to evade the IRS. It should be noted that under the 2013 Swiss-U.S. settlement agreement discussed above, Swiss banks are required to identify “leaver accounts” specifically, and report them to DOJ.

In 2014, foreign banks will begin to report information to the IRS under FATCA.

The Window of Opportunity to Come Into Compliance Could Close Anytime

It is possible to bring your foreign assets into tax compliance by disclosing the assets to the IRS before the IRS learns of those assets, and to participate in a partial amnesty program known as the Offshore Voluntary Disclosure Program (“OVDP”). If the IRS learns about your foreign assets (through any means, including from a foreign bank or foreign government, as a result of an audit or investigation, or even because of a whistle blower such as an ex-spouse or adversary), then the IRS will not accept your disclosure and the full weight of tax fraud penalties will apply, including criminal prosecution. If accepted into the OVDP, such consequences can be avoided, although back taxes, interest and penalties will be due.

However, at any time the IRS can “close the door” on the opportunity to voluntarily disclose a foreign financial asset and to participate in the OVDP. Under the most recent terms of the Voluntary Disclosure Program, the IRS merely has to announce that account holders at any specific bank under investigation are precluded from making a voluntary disclosure. The significance is that U.S. clients can no longer wait for an announcement of a DOJ summons or a treaty request before they decide to come forward. The door to come forward can be closed by the IRS much earlier and without warning. That is a new variable in the opportunity to make a voluntary disclosure. It increases the risk of prosecution and it creates more immediate pressure to come into tax compliance. Timing, once again, is everything, and the IRS can close the door at any time.

Conclusion

The common theme through all of the above is that if you have a foreign account or other asset that is not U.S. tax compliant, it will only get more difficult to keep the IRS from discovering the account, to maintain the account in a safe and secure institution, and to access your funds. Now is the time to consult with U.S. tax counsel on what to do about your offshore assets, how to minimize your exposure, how to bring the assets into compliance, and how to safely access your money.

Offshore Accounts Update: IRS Foreign Account Amnesty Can Close at Any Time

June 7, 2013 By Asher Rubinstein, Esq.

There have been a number of noteworthy developments recently regarding the IRS crackdown on unreported foreign bank accounts. The overwhelming theme to the recent developments is the continued erosion of offshore banking secrecy throughout the world. This is not new a development, but rather the continuance of a trend over the past five years, resulting from the IRS and Department of Justice (DOJ) success against UBS. What is new, however, is that the open door to IRS amnesty for an unreported foreign account can close at any time, with little or no warning. It should also be noted that the IRS is offering a partial amnesty, meaning that back taxes, interest and penalties would be imposed on the foreign assets and foreign income. These amounts would be much less than the penalties, and potential criminal sentences, that would be imposed outside the amnesty, if the IRS learns of the foreign assets.

Continued US Government Investigations and Prosecutions of U.S. Taxpayers with Undeclared Foreign Accounts

Over the last few weeks, the following events have transpired:

The US has issued a treaty request to Bank Julius Baer in Switzerland for information regarding bank accounts utilized by American taxpayers to hide income from the IRS. A “treaty request” refers to the U.S.-Switzerland tax treaty, which allows for information requests without the necessity of a court order. Bankers are advising their US clients that Julius Baer expects to comply with the request and turn over banking information to the US. US clients of Julius Baer have been rushing to voluntarily disclose their accounts to the IRS before Baer reveals their names and account data to the US.

The US has also issued a treaty request to the Liechtenstein Foundation Supervisory Authority for similar information; namely, foundations (stiftungs) and bank accounts utilized by American taxpayers to hide income from the IRS. Foundations are legal entities, like corporations, set up in order to obscure the true beneficial ownership of foreign accounts. As we’ve written before, Liechtenstein was quick to amend its internal law to allow for a similar treaty request in 2012 for account records of Liechtensteinische Landesbank (LLB). It is expected that soon, records of Liechtenstein foundations and their bank accounts will be provided to the IRS on a large scale.

A US court has approved a “John Doe Summons” for records of CIBC FirstCaribbean International Bank regarding Americans with undeclared accounts. In this case, even though CIBC FirstCaribbean has no branches or offices in the US, it does maintain a U.S. correspondent account at Wells Fargo. Thus, the court approved service of the summons upon Wells Fargo for records of transactions through CIBC’s correspondent account. This is reminiscent of the seizure by a US court of Swiss bank Wegelin’s correspondent account at a US bank. The fact that a foreign bank lacks a US presence is no longer a bar to US enforcement efforts against the foreign bank. In Wegelin’s case, Switzerland’s oldest private bank was put out of business in January 2013 by the US enforcement action.

DOJ and IRS investigations of foreign accounts have resulted in criminal charges against the account owners who failed to report. To date, there have been dozens of criminal prosecutions of US taxpayers with non compliant foreign accounts. Most recently in 2013, taxpayers with accounts at Swiss banks UBS and Pictet, and Israeli bank Leumi have faced criminal charges. More charges and criminal sentences will be forthcoming; the IRS and DOJ continually bring (and publicize) charges to incentivize others to come forward with voluntary disclosures. Every taxpayer who comes forward means one less taxpayer for whom the government has to allocate resources to investigation and prosecution. In this light, voluntary disclosures can be a win-win for both the taxpayer and the government. The US taxpayer pays back taxes and penalties, avoids criminal prosecution and can now have access to and repatriate the foreign funds if desired. The government gets revenue, brings foreign assets into the US tax system and avoids the resources of investigation and prosecution.

The lessons to be learned from the above are:

1. The US is not stopping in its investigation of banks around the world that facilitated the hiding of assets and income from the IRS. The investigation of CIBC is noteworthy because it indicates that the IRS and DOJ have added the Caribbean to their focus. Previously, banks in Switzerland, Liechtenstein, Israel and India have been named. CIBC is the first Caribbean bank to be added to this list. The IRS recently opened an office in Panama City. We expect other Caribbean jurisdictions to be added.

2. The information request to the Liechtenstein Foundation Supervisory Authority is significant because rather than going bank by bank, the US went to the Liechtenstein governmental authority for information from all Liechtenstein banks. We have previously written about Liechtenstein, formerly the most secretive of tax havens, altering its internal laws in order to allow cooperation with the US. Although the Liechtenstein foundation boards and banks will provide the information to the Liechtenstein government for review, and this procedure may be subject to legal challenges within Liechtenstein, Liechtenstein foundations and their bank accounts are no longer secret vis-a-vis the IRS.

3. US taxpayers with undeclared financial assets, whether at Credit Suisse, Julius Baer, CIBC, HSBC, Leumi, Pictet, or anywhere else, must act swiftly to come into tax compliance. It is no longer a question of whether the foreign banks might comply with IRS or DOJ information requests; compliance must be expected.

However, the additional constraint is that now, the IRS can “close the door” on the opportunity to voluntarily disclose a foreign financial asset. Under the most recent terms of the IRS Voluntary Disclosure Program (OVDP), the IRS merely has to announce that account holders at any specific bank under investigation are precluded from making a voluntary disclosure. The significance is that US clients can no longer wait for an announcement of a John Doe Summons or a treaty request before they decide to come forward. The door to come forward can be closed by the IRS much earlier and without warning. That is a new variable in the opportunity to make a voluntary disclosure. It increases the risk of prosecution and it creates more immediate pressure to come into tax compliance. Timing, once again, is everything, and the IRS can close the door at any time.

Continuing Erosion of Offshore Banking Secrecy

To use a cliché, “it’s a whole new world”. Not that long ago, many foreign banks in many foreign jurisdictions offered confidential and even “secret” banking. That is no longer the case. All the former tax havens have agreed to banking transparency and exchange of information with foreign governments. The following recent developments further illustrate this trend:

Switzerland and the US have agreed to a settlement in the US investigation of multiple Swiss banks. Under the agreement, the Swiss government will allow each bank to settle charges individually, pay a large fine and reveal the identities of Americans with undisclosed accounts. While many Swiss citizens will protest what they view as another infringement on Swiss sovereignty and capitulation to the US, many Swiss banks welcome the opportunity to end the US investigations, pay a fine, reveal their US clients to the IRS, and focus on future, tax-compliant business. Some foreign banks have already announced that they have allocated substantial amounts of money in anticipation of paying a fine to settle US charges of tax fraud. Credit Suisse, Julius Baer and Zurcher Kantonalbank in Switzerland have made such announcements, as have Bank Leumi in Israel and HSBC in India. Such settlements will include not only fines, but also the transmission of account details to the US Government. It has been reported that the settling banks will have a short window to report names to the US and negotiate fines, as soon as one hundred and twenty days. We can anticipate that thousands of additional US taxpayers will now be racing to make voluntary disclosures to the IRS, before the IRS gets their names from the settling banks.

More countries have agreed to implement the Foreign Account Tax Compliance Act (FATCA). FATCA is a US law, passed in 2010, which reaches overseas and requires all foreign banks and financial institutions to automatically report to the IRS (without IRS subpoena or request) information regarding their American client accounts. Essentially, every foreign bank becomes an agent for the IRS. If a foreign bank or financial institution does not agree to FATCA reporting, then the US will penalize it by withholding significant amounts of US-source income. Recently, many countries have signed on to FATCA, including: Spain, Italy, Norway, Germany, Mexico, the UK, Ireland and Switzerland. Many other countries (some seventy five around the world) have announced that they are negotiating FATCA deals with the US, including South Africa and Singapore.

The inclusion of Singapore is significant because of the rise of Singapore as a major international financial center. The flow of funds from Switzerland to Singapore when Swiss banking secrecy evaporated was substantial. According to one report, the amount on deposit in Singapore has grown more than fifty percent over the last five years, which is precisely the period of time since UBS was sued by the DOJ. Although there have been suggestions that Singapore might be “the next Switzerland”, this is unlikely. Singapore would not risk its financial reputation (depending on the report, either the fourth or fifth largest world financial center, after New York, London, Tokyo and Hong Kong) to be a harbor for non-compliant accounts. Singapore makes a significant amount of money from legitimate international banking and would not jeopardize this by being “blacklisted” as an uncooperative tax haven, as it was a decade ago. To this end, Singapore has recently announced that it is in talks with the US on a FATCA-type of agreement. In addition, a new regulation requires Singapore banks to identify all accounts that may harbor the proceeds of tax evasion, and close them. Failure to abide by this new law will result in criminal charges for the Singaporean bankers under Singapore law.

Virtually all financial institutions around the world – – at a minimum, credible, stable ones, i.e., places one would want to bank because of safety and stability – – will report to the IRS. Nations “off the grid” may welcome dollars, but one must ask whether depositing assets in a lesser, unsafe or unstable jurisdiction is a prudent move. Is it worth it to move money from the first world to the third world in order to avoid the IRS, if the risk of losing the money is significant?

Some countries are developing their own FATCA-like laws to discover their own citizens evading taxes. These countries include France, Germany, Italy, the UK and Spain. Germany in particular has been as aggressive as the U.S. against undeclared Swiss and Liechtenstein bank accounts, going so far as to pay bounties for secret bank information stolen by bank employee “whistleblowers”. Germany then shared the information with other governments.

Additional countries are agreeing to the exchange of information and banking transparency. Most recently, in 2013 Luxembourg agreed to automatic exchange of bank depositor information beginning in January 2015. Likewise, Austria, the last remaining EU member holdout, agreed in May 2013 to share banking data.

England and its former colonies and territories have agreed to exchange of bank information. Many such colonies and territories are known as tax havens, including the Cayman Islands, Bermuda, British Virgin Islands, Guernsey, Jersey and the Isle of Man. While this would not appear to impact US taxpayers, note that the exchange of information among friendly Western powers including the UK and US is already routine. Recall, for example, that when Germany paid millions of Euros for stolen banking information on “secret” accounts at Liechtensteinische Landesbank, it then shared that information with France, England, Canada and the U.S. Thus, information on an account in BVI or Cayman can easily make its way to the IRS, even without a John Doe summons.

Recently, the IRS and tax authorities in the UK and Australia agreed to exchange information regarding offshore trusts and corporations. In its press release announcing this agreement, the IRS specifically noted that the three countries have already “acquired a substantial amount of data revealing extensive use of such entities organized in a number of jurisdictions including Singapore, the British Virgin Islands, Cayman Islands and the Cook Islands. The data contains both the identities of the individual owners of these entities, as well as the advisors who assisted in establishing the entity structure.”

Breaches of banking secrecy have not been limited to governments. Also in 2013, the International Consortium of Investigative Journalists publicly released a very large cache of offshore banking information that has exposed accounts and their owners, along with details regarding many offshore trusts and corporations, from the British Virgin Islands to the Cook Islands. The amount of information is massive, some 260 gigabytes containing 1.2 million files on 120,000 offshore companies and trusts. According to one report, some 4,000 Americans are included in this information release.

In light of the above, there can be no expectation or even hope of banking secrecy. US taxpayers with undisclosed foreign assets have little choice but to voluntarily come into tax compliance, before the IRS comes to them.

Merely closing a foreign account is not an alternative, because DOJ and IRS never limit their investigations to only current accounts. In the case of UBS, DOJ’s John Doe Summons sought banking records back to 2000. In the case of Liechtensteinische Landesbank, DOJ requested records back to 2004. In the case of Julius Baer, the investigation goes back to 2002. In other words, closing an account today does nothing to remedy the non-compliant past, and DOJ and the IRS focus on past non-compliance. In addition, a wire transfer or bank check from the foreign account to a US account (or account elsewhere) creates an easy trail back to the foreign account, and would also give rise to due diligence, “know your client” and source of funds inquiries by the recipient bank. Using the non-compliant funds to buy real estate or other assets also creates a trail and does nothing to undo the non-compliant past, which will be the focus of the IRS investigation.

Moreover, the IRS has taken a particular interest in the transfer of funds from a non-compliant account as an attempt to continue to avoid or keep a step ahead of the IRS. For instance, once UBS cooperated with the IRS, the IRS followed the flow of funds from UBS to banks such as Wegelin in Switzerland and Leumi in Israel. Wegelin was criminally indicted for its acceptance of funds from UBS, and Leumi is under investigation for the same reason. In fact, evidence of such transfers could be used by DOJ prosecutors in building a case that a taxpayer willfully evaded the IRS and, rather than bringing a foreign account into tax compliance, proactively took steps to continue the hiding of assets and income from the IRS. Such facts would have profound consequences in a criminal tax fraud prosecution, settlement possibilities and punishment.

In most cases, the only viable path forward is to take advantage of the current IRS amnesty program and bring the foreign account into tax compliance. The IRS 2012 Offshore Voluntary Disclosure Program remains open, although the IRS can end the program at any time. Equally important, the IRS can announce at any time that US clients of a specific foreign bank or banks under investigation are no longer eligible to participate in the OVDP. Thus, US taxpayers who still own foreign accounts that are not tax compliant must not take a “wait and see” attitude because it might be too late, as the door to amnesty – – and lower penalties – – could be abruptly closed.

Liechtenstein’s Disclosure of Bank Information to U.S. Department of Justice

June 13, 2012 By Asher Rubinstein, Esq.

My last blog post discussed the disclosure of bank documents from Liechtensteinische Landesbank to the U.S. Department of Justice (DOJ). Today’s post offers additional comments as to why this is a significant event in terms of IRS enforcement and DOJ prosecutions related to offshore accounts.

The 2008 Liechtenstein-USA tax treaty was itself significant, because until that point, Liechtenstein offered very strong banking secrecy laws. However, in light of the events at that time – –

DOJ success against UBS,
erosion of Swiss banking secrecy laws,
the OECD initiative against tax haven jurisdictions,
the proliferation of tax information exchange agreements with many tax havens, and
the theft of “secret” bank documents by an employee of Liechtenstein’s own LGT bank and sale to the German government

– – Liechtenstein saw the writing on the wall, so to speak, and realized that tax secrecy was a thing of the past and was no longer going to be tolerated by countries like the US, UK, Germany, etc.

However, while Liechtenstein agreed to tax information exchange and cooperation, Liechtenstein specifically did NOT agree to IRS “fishing expeditions” – – broad requests for information on a class of unknown taxpayers. Under the 2008 treaty, Liechtenstein was only to provide information if asked about a specific, known taxpayer identified by name. In other words “we are investigating John Smith, who we believe has an account at Bank XYZ” – that was an allowable request that would give rise to cooperation and exchange of bank information. “We want all records on all US taxpayers with accounts at Bank XYZ” – – that is “a fishing expedition” and would not give rise to cooperation and exchange of information under the treaty.

DOJ’s May 11, 2012 request to the Liechtenstein Tax Administration was not a specific request for information about known, named taxpayers. It was a broad request for unnamed, unknown taxpayers. And yet, the Liechtenstein Tax Administration is cooperating with this DOJ request.

Liechtenstein is cooperating with this DOJ request because, under U.S. pressure, and without any publicity, on March 21, 2012, the Liechtenstein Parliament passed an internal law and quietly amended the 2008 treaty, the result of which is that “fishing expeditions” are now allowed.

This is a game changer in terms of IRS/DOJ enforcement. It means that broad requests will now give rise to governmental assistance. It means that DOJ need not issue “John Doe” summonses, which require court approval, as DOJ did against UBS in 2008 and HSBC in 2011. Instead, DOJ can ask for, and presumably get, banking records quickly (in Landesbank’s case, one month), government-to-government. If Liechtenstein, formerly one of the world’s most secretive jurisdictions, can succumb to US pressure, it means that other countries will do so also.

Liechtensteinische Landesbank to Provide Banking Records to U.S. Investigators; Further Erosion of Offshore Secrecy by Tax Havens

June 8, 2012 By Asher Rubinstein, Esq.

Offshore banking secrecy, already weakened in recent years by new tax treaties, changing laws, IRS investigations and legal challenges, is now virtually non-existent. Liechtenstein, once the most secretive of tax havens, will soon provide bank account information to U.S. authorities.

In December 2008, Liechtenstein signed a treaty with the United States to share banking information regarding U.S. tax payers with accounts in Liechtenstein. At the time, the treaty explicitly did not allow for “fishing expeditions”, i.e., broad requests from the IRS for information on a class of unknown U.S. taxpayers. Rather, Liechtenstein was only to provide information if asked about a specific, known taxpayer identified by name.

However, under U.S. pressure, and without any publicity, Liechtenstein recently amended the 2008 treaty and passed an internal law, the result of which is that “fishing expeditions” are now allowed. As a result, the U.S. Department of Justice (DOJ) has already requested, and Liechtenstein will provide, banking information for accounts with a U.S. beneficial owner held in Liechtensteinische Landesbank (LLB). LLB has already provided the banking information to the Liechtenstein government, which will soon provide it to the U.S. Similar requests to other Liechtenstein banks are expected to follow.

Following this amendment and change in law, in May, 2012, the U.S. targeted Liechtensteinische Landesbank with a request for banking information regarding any accounts with a value in excess of $500,000 beneficially owned by U.S. persons. Liechtensteinische Landesbank, like Credit Suisse, HSBC and other Swiss and Israeli banks, is already under examination by DOJ for facilitating U.S. tax fraud by providing non-compliant “secret” accounts. LLB is cooperating with the U.S. request and providing the requested information.

Liechtenstein was once the vanguard of offshore banking secrecy, and it was said that Swiss bankers kept their own money in Liechtenstein. Significantly, if the U.S. pressured the Government of Liechtenstein to amend the 2008 tax agreement to allow for “fishing expeditions”, then it can be expected that other foreign governments will follow suit. In practical terms, DOJ will not have to issue subpoenas or “John Doe Summonses”, as it did with great success against UBS, and more recently HSBC in India. Now, DOJ can avoid going to court, and requests for broad banking information on “secret” accounts can now occur government-to-government.

LLB account holders have an opportunity to challenge the release of banking information in Liechtenstein courts until June 15th. Similar legal challenges have had mixed results in Switzerland. It is expected that a legal challenge in Liechtenstein will buy some time, but ultimately, the account data will be revealed to the IRS. DOJ will then begin prosecutions of U.S. taxpayers who failed to disclose the LLB accounts and report foreign income. There have been approximately fifty such criminal cases since 2009, involving accounts in Switzerland, Liechtenstein, Jersey, Isle of Man and other former “tax havens”.

Against this background of tax investigation and criminal prosecution, the IRS re-opened its Offshore Voluntary Disclosure Initiative (OVDI) in January 2012 in order to encourage owners of non-compliant foreign accounts to come forward and become tax compliant. The OVDI provides a means to declare the foreign account to the IRS, bring the account into tax compliance and avoid criminal prosecution. Back taxes and penalties will be due, but the penalties would be far lower than the civil and criminal penalties that would ensue if the IRS learns of a foreign account from other sources and the taxpayer is prosecuted.

Owners of accounts at LLB have a very short window to apply for the OVDI. In light of the ongoing erosion of foreign banking secrecy, the inability of foreign governments to withstand U.S. pressure and the willingness of former tax havens to cooperate with the IRS, U.S. taxpayers with non-compliant accounts, in Liechtenstein and anywhere else, should meet with qualified tax counsel immediately to discuss tax compliance.

Kenneth Rubinstein and Asher Rubinstein Will Be Speakers at Asset Protection Conference in Vaduz, Liechtenstein, June 9 and 10, 2011: “Asset Protection In Civil Matters”.

June 2, 2011 By Asher Rubinstein, Esq.

Kenneth Rubinstein and Asher Rubinstein Will Be Speakers at Asset Protection Conference in Vaduz, Liechtenstein, June 9 and 10, 2011: “Asset Protection In Civil Matters”.

Asher Rubinstein will be speaking on June 9 on the topic of “Asset Protection and Tax Compliance: Are they Compatible or Mutually Exclusive?”

Asher will address the following issues:

Can asset protection rely on secrecy?
Issues of control of assets, ownership and tax disclosure;
The need for tax compliance: recent government attacks against offshore structures;
Can one protect assets vis-a-vis creditors and still be tax compliant?

Kenneth Rubinstein will be speaking on June 10 on the topic of “Civil Contempt – The Next Threat to Asset Protection”.

Ken’s talk will include the following issues:

“Bad facts make bad law”, but do “good facts” make good law?
A discussion of the relevant case law, including Anderson, Lawrence, Grant, etc.
The issue of control over the assets
The defense of “impossibility” and self-created impossibility
The solution to self-created impossibility – the Antigua statute

Additional details and a program for the conference, “Asset Protection in Civil Matters” can be found here.

Please contact us with any questions.

Asher Rubinstein published in Indus Business Journal regarding IRS crackdown on Offshore Accounts in India

March 15, 2011 By Asher Rubinstein, Esq.

Asher Rubinstein published in Indus Business Journal regarding IRS crackdown on Offshore Accounts in India

Asher’s article, “IRS Ramps up Focus on Offshore India Accounts” was published in Indus Business Journal in March, 2011

INDUS BUSINESS JOURNAL

IRS Ramps Up Focus on Offshore India Accounts

By Asher Rubinstein

Following the 2009 U.S. prosecution of Swiss bank UBS, the Internal Revenue Service is now targeting other banks in jurisdictions beyond Switzerland. Bank accounts in India appear to be one of the next targets. People with undeclared accounts in India should take action in the face of the IRS crackdown on offshore accounts that are not tax compliant.

Since the summer of 2010, HSBC has been the target of a criminal tax fraud investigation by the U.S. Department of Justice, for facilitating non-compliant offshore accounts. In the summer of 2010, DOJ sent letters to HSBC foreign account holders, advising them that they are the subjects of criminal investigations relating to unreported accounts in India and Singapore. DOJ has also prosecuted a Virginia surgeon and two Miami Beach real estate developers for undeclared foreign accounts with HSBC.

There are also reports that HSBC is implicated in the recent criminal prosecution of Vaibhav Dahake, an Indian-American with undeclared accounts in India and the British Virgin Islands. While the criminal indictment against Dahake does not mention HSBC by name, it alleges that an “unidentified bank” operated a division called “NRI Services” which specifically marketed foreign banking services to Americans of Indian decent. According to the allegations in the indictment, the bank advised that accounts be opened in India because of higher interest rates, no requirement of U.S. tax forms or social security numbers, and no taxation in India. Interestingly, the indictment details transactions with a total value of less than $200,000. This suggests that the U.S. government is sending a message that all noncompliant foreign accounts, large and small alike, are vulnerable to investigation and prosecution.

It was the substantial U.S. presence of UBS, and now HSBC, that made such banks vulnerable to U.S. prosecution. With U.S. banking licenses, multiple branches within the United States, thousands of employees in the United States, and billions of dollars of assets in the United States, these banks are clearly within the jurisdiction of a U.S. court and susceptible to an adverse court judgment or order.

As alleged in the indictment against Vaibhav Dahake, HSBC is reported to have specifically targeted Indian-American clients and offered offshore banking services in India and Singapore. The HSBC-India connection represents a particular tangent of offshore banking that will surely warrant scrutiny. Whereas UBS advised American clients that their accounts may be subject to exposure to the IRS, and therefore suggested pre-emptive disclosure (such as voluntarily disclosing to the IRS and correcting a non-compliant foreign account prior to the IRS taking action), Americans with accounts at HSBC in India received letters from DOJ in 2010, making it clear that DOJ already had their names. In such a case, pre-emptive disclosure is impossible; the IRS will reject a voluntary disclosure if the taxpayer is already under investigation or if the IRS already has the taxpayer’s name (regardless of the source, such as an audit, a whistle blower or an investigation).

The IRS has opened or will soon open field offices in Panama, Australia and China. Tax Information Exchange Agreements have been signed by all the former “tax havens,” including Liechtenstein and Monaco.

Another way for the IRS to obtain a taxpayer’s offshore banking data is via an internal bank employee stealing confidential data and offering it to a governmental tax authority in return for money. In 2008, a renegade employee of LGT Bank in Liechtenstein stole data about client accounts and sold the data to the German intelligence service in return for millions of Euros. With that data, the German government prosecuted many prominent Germans for tax fraud. The German government also shared the data with other governments around the world, including, apparently, India.

The stolen LGT bank data has now formed the basis for Indian authorities to launch prosecutions of Indian citizens who had undeclared accounts outside of India.

The LGT information is almost certainly in the possession of the IRS as well.

Clearly, against this background of the erosion of banking secrecy and cooperation amongst governments in sharing banking data, taxpayers with undeclared accounts in India must consider bringing such accounts into compliance.

In early February 2011, the IRS announced the Offshore Voluntary Disclosure Initiative, which closely mirrors the 2009 Offshore Voluntary Disclosure Program, with a few refinements. The new penalties are 25 percent, greater than the 20 percent penalty under prior regulations, yet less than the 50 percent penalty that the IRS has been imposing in recent criminal tax fraud prosecutions.

The new voluntary disclosure rules present an opportunity for taxpayers with foreign accounts, in India and elsewhere, who did not come forward under prior regulations, but still want to avoid criminal prosecution and bring their foreign accounts into compliance. It is clear that the IRS is moving past UBS and Switzerland to other banks in other countries, and India appears to be a particular focus. Taxpayers must bring non-compliant foreign accounts into tax compliance, in order to avoid discovery by the IRS, higher penalties and criminal prosecution. In this new era of international transparency, decreased banking secrecy and stronger enforcement efforts, offshore banking compliance is very highly recommended.

Asher Rubinstein is a principal at the law firm of Rubinstein & Rubinstein LLP in New York City. His practice concentration is asset protection, wealth preservation, tax planning and tax compliance. He may be reached at www.assetlawyer.com.

IRS Targeting Undeclared Accounts in India for Tax Fraud

February 22, 2011 By Asher Rubinstein, Esq.

In 2009, U.S. prosecutors achieved a staggering victory against UBS, forcing the largest Swiss bank to settle criminal and civil charges that it aided and abetted tax fraud by assisting Americans to hide funds from U.S. taxation. In a stunning breach of hitherto ironclad Swiss banking secrecy, UBS was also compelled to disclose to the IRS the identities of thousands of Americans with formerly “secret” accounts. The IRS is now targeting other banks in jurisdictions beyond Switzerland. Bank accounts in India appear to be one of the next targets. People with undeclared accounts in India should take action in the face of the IRS crackdown on offshore accounts that are not tax compliant.

The IRS appears to be moving past UBS and targeting other banks, including HSBC which has a sizable presence in India. Since the summer of 2010, HSBC has been the target of a criminal tax fraud investigation by the U.S. Department of Justice (DOJ), for facilitating non-compliant offshore accounts. In the summer of 2010, DOJ sent letters to HSBC foreign account holders, advising them that they are the subjects of criminal investigations relating to unreported accounts in India and Singapore. DOJ has also prosecuted a Virginia surgeon and two Miami Beach real estate developers for undeclared foreign accounts with HSBC.

There are also reports that HSBC is implicated in the recent criminal prosecution of Vaibhav Dahake, an Indian-American with undeclared accounts in India and the British Virgin Islands. While the criminal indictment against Mr. Dahake does not mention HSBC by name, it alleges that an “unidentified bank” operated a division called “NRI Services” which specifically marketed foreign banking services to Americans of Indian decent. According to the allegations in the indictment, the bank advised that accounts be opened in India because of higher interest rates, no requirement of U.S. tax forms or social security numbers, and no taxation in India. Interestingly, the indictment details transactions with a total value of less than $200,000. This suggests that the U.S. government is sending a message that all noncompliant foreign accounts, large and small alike, are vulnerable to investigation and prosecution.

It was the substantial U.S. presence of UBS, and now HSBC, that made such banks vulnerable to U.S. prosecution. With U.S. banking licenses, multiple branches within the U.S., thousands of employees in the U.S., and billions of dollars of assets in the U.S., these banks are clearly within the jurisdiction of a U.S. court and susceptible to an adverse court judgment or order.

As alleged in the indictment against Vaibhav Dahake, HSBC is reported to have specifically targeted Indian-American clients and offered offshore banking services in India and Singapore. The HSBC-India connection represents a particular tangent of offshore banking that will surely warrant scrutiny. Whereas UBS advised American clients that their accounts may be subject to exposure to the IRS, and therefore suggested pre-emptive disclosure (i.e., voluntarily disclosing to the IRS and correcting a non-compliant foreign account prior to the IRS taking action), Americans with accounts at HSBC in India received letters from DOJ in 2010, making it clear that DOJ already had their names. In such a case, pre-emptive disclosure is impossible; the IRS will reject a voluntary disclosure if the taxpayer is already under investigation or if the IRS already has the taxpayer’s name (regardless of the source, e.g., audit, whistle blower, investigation, etc.).

The IRS has opened or will soon open field offices in Panama, Australia and China. Tax Information Exchange Agreements have been signed by all the former “tax havens”, including Liechtenstein and Monaco. While the IRS is intensifying its presence and its available tools around the world, there are other indications that the IRS is concentrating on India more particularly.

The stolen LGT bank data purchased by the German government has now formed the basis for Indian authorities to launch prosecutions of Indian citizens who had undeclared accounts outside of India. This campaign by Indian authorities against so-called “black money” includes monies hidden in Liechtenstein from the Indian tax authorities, even in the absence of the funds having criminal sources or involvement in money laundering. The issue is now before the Supreme Court of India, which has heard arguments about whether to make public the names of Indian citizens accused of having undisclosed foreign accounts.

In 2010, India signed a tax information exchange treaty with Switzerland, and India is in the process of negotiating tax treaties with 65 countries, including “tax havens” such as the Cayman Islands, Jersey, Monaco, the British Virgin Islands and the Isle of Man. While there is currently no tax treaty between India and Liechtenstein, Liechtenstein has shown its new transparency by promulgating multiple tax treaties with other countries, including the U.S., and a future treaty with India is likely. But even in the absence of such a treaty, India already has names, thanks to the LGT affair. The LGT information is almost certainly in the possession of the IRS as well.

In early February 2011, the IRS announced the Offshore Voluntary Disclosure Initiative (OVDI), which closely mirrors the 2009 Offshore Voluntary Disclosure Program (OVDP), with a few refinements. The new penalties are 25%, greater than the 20% penalty under the prior OVDP, yet less than the 50% penalty that the IRS has been imposing in recent criminal tax fraud prosecutions.

The new OVDI presents an opportunity for taxpayers with foreign accounts, in India and elsewhere, who did not come forward under the former OVDP, but still want to avoid criminal prosecution and bring their foreign accounts into compliance. It is clear that the IRS is moving past UBS and Switzerland to other banks in other countries, and India appears to be a particular focus. Taxpayers must bring non-compliant foreign accounts into tax compliance, in order to avoid discovery by the IRS, higher penalties and criminal prosecution. In this new era of international transparency, decreased banking secrecy and stronger enforcement efforts, offshore banking compliance is very highly recommended.

Recent Updates on Non-Declared Offshore Banking

April 16, 2010 By Asher Rubinstein, Esq.

A few recent updates regarding the crackdown on non-compliant offshore accounts.

On April 15, 2010, the same day income tax returns were due, seven new defendants were charged with criminal tax fraud for failing to declare offshore accounts. The charges included failing to declared monies at UBS and other banks, and using foreign corporations and foundations in Panama, British Virgin Islands, Liechtenstein and Hong Kong to obscure the true beneficial ownership over the accounts. This type of offshore structure has been a particular target of prosecutors, with Hong Kong and Panama entities appearing frequently in the criminal charges. Of course, prosecutors are not limiting themselves to this type of structure, nor to UBS accounts, nor to accounts only in Switzerland. With 15,000 taxpayers coming forward under the Voluntary Disclosure Program, the IRS is now cataloging and linking foreign banks and service providers, and it is safe to say that more prosecutions will ensue, involving other banks and other foreign countries. If you still have a foreign account that is not tax-compliant, it may not be too late to make it compliant and avoid criminal charges.
Second, it appears that the Swiss Parliament will pass a law that will solidify the settlement between the U.S. Justice Department and UBS and thereby allow UBS to hand over to the IRS between 4,500 and 10,000 names of Americans with undeclared UBS accounts. In January, the Swiss Federal Administrative Court ruled that the failure to file an IRS form W-9 regarding a UBS account did not constitute tax fraud, and thus UBS could not disclose account information to the IRS. The ruling was thus at odds with UBS’ obligations under the settlement agreement. However, it now appears that in June, the Swiss Parliament will legislate around that court ruling. (This occurs frequently in our own system of government and its “checks and balances”. If a court rules one way, the legislature can pass a law to reverse the court’s ruling.) In June, the Swiss Parliament will likely pass legislation that will elevate the UBS agreement to the level of international treaty. Tax fraud and tax evasion will become indistinguishable under Swiss law for purposes of disclosure under the settlement agreement and the treaty. The effect will be to neutralize the court’s contrary January ruling, and mandate UBS’ compliance with the settlement agreement.

In addition, on March 31, 2010, Switzerland and the US signed an amended protocol to the settlement agreement. As UBS has advised us, “Under the new protocol, the Treaty Process will continue even before the June [Parliament] sessions.”

Americans with Swiss accounts who have not yet come forward are well-advised to come forward now, before UBS names names, and before other banks receive summonses from the US.

Liechtenstein is also contemplating legislation, which would prevent Liechtenstein from assisting a tax inquiry from a foreign government, if the basis of the investigation is derived from stolen banking data. Earlier this year, the German government paid millions of Euro for banking data stolen by an employee of a Swiss bank. In 2008, a renegade employee of LGT Bank in Liechtenstein stole data about client accounts and sold the data to the German intelligence service in return for more than four million Euros. With that data, the German government prosecuted Germans for tax fraud. The German government also shared the data with other governments around the world. Liechtenstein, which has signed various Tax Information Exchange (TIE) Agreements, including with the US, will continue to provide banking information in response to inquiries by foreign governments, except when the basis of the inquiry is from stolen banking data.

These recent events all point to the continuing erosion of offshore banking secrecy. It is completely legal to have funds offshore, and there are many good reasons for having a foreign account (e.g., international business transactions, global investment and diversification, asset protection), as long as the foreign accounts are part of a tax compliant strategy or are disclosed and taxes are paid on foreign the income. If the offshore accounts are tax-compliant, then the erosion of banking secrecy and revelations by foreign governments to the IRS are not threats. Strategies exist for the minimization of tax on foreign income in a tax compliant manner. The lesson: if you have assets in foreign banks or foreign brokerages, make sure they are tax compliant. As the window of banking secrecy closes further, taxpayers with tax-compliant accounts need not worry. Non-compliant account owners, however, are again advised to see us, before the IRS sees you.