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

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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.

U.S. & Switzerland Reach Agreement: Almost All Swiss Banks to Provide Account Information to IRS

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We’ve written much about the ability of the IRS to discover unreported Swiss accounts, and we need not repeat warnings about criminal prosecution and onerous fines and penalties in the event that the IRS learns of undisclosed accounts.

What is new, however, is that the IRS will soon have direct, unimpeded, easy access to banking information from hundreds of Swiss banks.  In a statement released by the U.S. Department of Justice (DOJ) and Swiss Federal Department of Finance on August 29, 2013, both sides reached an agreement whereby almost all Swiss banks will soon report to the IRS about Swiss accounts “in which U.S. taxpayers have a direct or indirect interest”, including accounts owned by U.S. persons, or where U.S. persons are beneficiaries, signatories, hold powers of attorney or have other incidents of ownership.  In exchange for the provision of information to the IRS, the DOJ will not prosecute these banks as it did against UBS and Wegelin.Continue Reading

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

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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.

New Banks Revealed to Be Under IRS and DOJ Investigation for “Secret” Foreign Accounts

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Two additional Swiss banks, Bank Frey and Pictet & Cie, are now “officially” under investigation by the U.S. Department of Justice for aiding tax fraud by U.S. taxpayers with Swiss accounts.  These two banks now join the list of banks around the world publicly known to be under IRS and DOJ investigation, which includes Credit Suisse, Julius Baer, Liechtensteinische Landesbank, Bank Leumi, Bank Hapoalim and HSBC.

The two new additions to the list are not a surprise.  Banking secrecy once offered in Switzerland was not confined to big banks like UBS, but was available at banks of all sizes, including the local Cantonal banks and small private banks.  Moreover, the offshore voluntary disclosure programs offered by the IRS in 2009, 2011 and 2012 resulted in over thirty thousand U.S. taxpayers coming forward and, in exchange for lower penalties and no criminal prosecution, revealing the banks, bankers, lawyers and other providers of under-the-tax-radar banking services.  Thus, it was inevitable that the IRS and DOJ would get to Bank Frey and Pictet sooner or later.

What is surprising is that the list of foreign banks “officially” under IRS and DOJ scrutiny is fewer than two dozen.  We believe that there are many, many more banks, around the world, being investigated, yet many investigations remain unpublicized.  That will change with indictments, subpoenas and requests for information under the many Tax Information Exchange (TIE) treaties signed by the U.S. and foreign countries.  With the exception of banking in a handful of countries such as North Korea and Zimbabwe (which we do not recommend), we believe that there is no foreign jurisdiction that is impervious to the reach of the IRS and DOJ.

There is still an opportunity for taxpayers with non-compliant foreign accounts to come into compliance, and the opportunity even exists for those with accounts at Bank Frey and Pictet.  The most recent Offshore Voluntary Disclosure Program (OVDP) is still being offered by the IRS.  However, there are two important points to note.  First, the IRS can close the OVDP at any time.  The IRS has not stated how long the OVDP will continue to be offered.  Second, “the IRS may announce that certain taxpayer groups that have or had accounts at specific financial institutions will be ineligible due to U.S. government actions in connection with the specific financial institution.”  (IRS OVDP FAQ 21).  This means that the IRS could close the OVDP to U.S. taxpayers with unreported accounts at Bank Frey and Pictet, while leaving the program open to people with accounts at other offshore banks.  According to one report, the Swiss Financial Market Supervisory Authority (FINMA), has already communicated with Pictet and Frey regarding transmission of banking information to U.S. investigators.  Of course, once the IRS obtains foreign account information about a taxpayer, then that taxpayer’s OVDP application will be rejected.  The OVDP window may not be open for long.

Wegelin’s US Account Taken by US Treasury: Global Implications and What it Means for Non-Compliant Foreign Accounts

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This week, a US federal judge ordered the seizure of a bank account at UBS in Stamford, Connecticut. This was a “correspondent account” of Swiss bank Wegelin & Co. A correspondent account is a US account utilized by a foreign bank for banking transactions with a US nexus, when the foreign bank does not otherwise have a US banking presence. Wegelin’s correspondent account at UBS was seized and forfeited to the US Treasury because, as prosecutors alleged, the account had been utilized by Wegelin to facilitate tax fraud and money laundering. Specifically, among other charges, Wegelin (and two other banks) assisted the repatriation of undeclared money at its Swiss bank via checks drawn on the correspondent account, rather than wire transfers or checks from Switzerland, which would have been more conspicuous and suspicious.

This seizure followed the indictment against Wegelin by the US Department of Justice (DOJ), on February 2, 2012, for facilitating tax fraud by US taxpayers with “secret” bank accounts at Wegelin in Switzerland. This was the first time in history that a foreign bank had been criminally charged by the US for tax fraud. DOJ also personally charged three Wegelin bankers in January 2012. The charges included that Wegelin bankers actively sought US clients of UBS who were concerned that DOJ and the IRS would discover their undisclosed UBS accounts, and convinced these US clients to transfer their accounts to Wegelin. Wegelin promised these clients that it was “under the radar” and immune from US prosecution because, unlike UBS, it did not have US branches. Wegelin’s prosecutors stated that Wegelin was “undeterred by the crystal-clear warning they got when they learned that UBS was under investigation for the identical practices”. The charges also included that Wegelin charged higher fees for the former UBS clients, due to their heightened nervousness at getting caught, thus exploiting their vulnerability. The charges also included use of intermediary entities like Liechtenstein and Panama foundations and corporations, designed to obscure the true ownership of the accounts, as well as account code names and instructions not to mail correspondence and statements to the US. Such tactics to avoid detection by the IRS are by now very familiar to prosecutors (and tax and defense attorneys).

Wegelin did not answer these charges, nor appear in court. The bank was labeled a fugitive. When a defendant does not answer the allegations, it is known as a “default”. Because Wegelin defaulted, the account was seized and forfeited. The account was taken because Wegelin was a “no show”, not because it was found guilty of the charges. In practical terms, there is little difference.

The first question is, why did Wegelin default? One possible answer is that the amount at stake in the account, approximately $16.2 million, while a large amount to most people, was not enough of a concern for Wegelin to hire US lawyers and defend itself in a criminal proceeding that could take years to resolve. “Cut bait and fish elsewhere”, as they say.

However, there is little fishing elsewhere for Wegelin. In January, 2012, on the eve of the DOJ indictment, Wegelin split itself up. Wegelin’s US-client accounts, under IRS and DOJ scrutiny, were kept intact, while the non-US accounts were sold off to another Swiss bank (Notenstein Privatbank, an entity set up specifically for this acquisition, which in turn was bought by Swiss bank Raiffeisen). This was an attempt to separate and contain the liability for the US-client accounts, reminiscent of the way other “toxic” assets like subprime mortgages and failed derivatives are packaged, contained and sold off at a discount. The rationale for the Wegelin split was that legal action by the US would be focused on the US-client accounts, while the other accounts would now be owned by a new entity, immune from US legal challenge. It is unlikely that US legal action would follow to the acquiring bank, as there are no allegations the Raiffeisen participated in Wegelin’s tax fraud. Following the split up and US legal challenges, Wegelin is left greatly diminished and weakened, and the lingering question is whether Wegelin, Switzerland’s oldest private bank (since 1741), can survive.

Another open question is whether Wegelin will give up the names of its US account holders? It is likely that the IRS already has those names, following the trail from UBS. Further, it is likely that the IRS has the names, otherwise DOJ would not have had sufficient evidence for criminal prosecution against Wegelin itself, and its bankers. Of the approximately fifty criminal cases for offshore tax fraud brought by DOJ against US taxpayers in recent years, only one has thus far involved accounts at Wegelin (and in that case, the US owner of the Wegelin account was convicted). By comparison, thirty four such cases have involved UBS accounts. It is almost certainly just a matter of time before DOJ files additional criminal cases involving Wegelin accounts. Additional incriminating information against Wegelin was obtained via information provided to the IRS by the thousands of US taxpayer participating in the three offshore voluntary disclosure programs that the IRS has offered since 2009.

There are lessons to be learned from Wegelin’s prosecution and downfall, and the first might be labeled a matter of hubris. In the summer of 2009, following UBS’ settlement with DOJ and agreement to reveal the identities of 4,500 Americans with undeclared UBS accounts, Wegelin managing partner Konrad Hummler published a “commentary” titled “Farewell America” (Wegelin & Co. Investment Commentary No. 265; August 24, 2009), a scathing attack on the United States, its politics, morality, fiscal and tax policy, which ultimately compared the US economic system to Madoff’s Ponzi scheme. Among the accusations, that the US “causes regular crises in the global financial system” and displays “breathtaking moral duplicity in maintaining enormous offshore tax havens in Delaware, Florida and others of its states.” (The full commentary is available here). This was a blatant, angry reaction to DOJ’s success in bringing UBS to its knees, breaking Swiss banking secrecy and extracting the identities of thousands of Americans with UBS accounts.

Beyond that reaction, Wegelin’s hubris was that it actively solicited UBS account holders and offered the very same non-compliant banking services and tax evasion strategies and tactics that brought the IRS and DOJ against UBS in the first place. Moreover, while knowingly offering these services, Wegelin boasted of its non-vulnerability because, unlike UBS, it did not have a US presence. Thus, whereas UBS bankers had been charged with promoting tax non-compliance by visiting the US and courting wealthy Americans at art shows and elsewhere, and then running back to Switzerland and hiding behind Swiss banking confidentiality laws, Wegelin bankers never had to come to the US to promote. The absence of US branches supposedly made Wegelin impervious to US legal action.

Thus, one conclusion is that even if a foreign bank lacks a US presence, it is still vulnerable to US prosecution and seizure of assets. UBS settled with the US (and Credit Suisse appears to be poised to settle) because of its substantial footprint subject to US jurisdiction: branches in the US, assets in the US, employees in the US and a lucrative US banking license. US assets, such as Wegelin’s correspondent account, can be seized by a US court. Wegelin’s boasting of supposed non-vulnerability because of no US presence failed to take into consideration two things: (1) it was offering the very same tax fraud services as UBS, fully aware that UBS was under criminal investigation for those very services, and (2) it had a correspondent account located in the US (at UBS, coincidentally?).

The seizure of $16.2 million from Wegelin’s correspondent account is a small sum by international banking standards, but this could have far-reaching effects. For instance, there are many banks that do not have a US presence, but in order to transact in international banking and finance, need access to correspondent accounts in the US The Wegelin events may cause foreign banks to consider pulling their correspondent accounts out of US banks and utilize correspondent accounts in London, for example. This could have implications for any US counterparties to an international transaction, perhaps causing delays and requiring many steps to transact around the absence of a US correspondent account.

Moreover, the seizure of Wegelin’s correspondent account, in combination with the new requirements applicable to foreign banks under the Foreign Account Tax Compliance Act (FATCA), including 30% withholding on US investment income for non-compliant banks, may cause foreign banks to consider whether they should leave the US entirely. The US has now demonstrated that it has tremendous leverage over the entire world banking system: virtually every bank invests its reserves in US treasuries and other safe US bonds, thereby earning US investment income, and virtually every foreign bank has a correspondent account with one or more US banks.1
The Wegelin matter also demonstrates that the US has more leverage in the four year old offensive against offshore banking secrecy, that unless the Swiss banks deliver what DOJ wants (i.e., the names of Americans with non-compliant accounts), the US can cripple the Swiss banking system and severely affect the Swiss economy. This is exactly why UBS caved to the US in 2009. For UBS to not have revealed the secret accounts would have resulted in US retaliatory action, with significant negative consequences not only to UBS, but to the Swiss nation and economy. Thus, large banks like UBS and Credit Suisse, with assets in the US, are clearly vulnerable to US legal action. Now, after the Wegelin matter, it is clear that small banks, even those without a US presence, are also vulnerable. And US clients with non-compliant accounts at any foreign bank continue to be exposed to discovery and prosecution, and must consider becoming tax compliant.

1 While Wegelin was clearly wrong about its lack of US presence rendering it impervious to US legal enforcement, in an ironic twist, Konrad Hummler, in “Farewell America”, was correct that “the USA is attempting to exploit its almost unlimited position of strength with regard to the international transaction systems (Swift, clearing systems, custodians) and the fundamental attractiveness of its capital market to impose its ideas on the rest of the world.”

Moreover, even prior to FATCA, Hummler concluded that “it will be simply too dangerous to own US securities, to hold them as custodian for third parties, or to trade them as a bank.”

Asher Rubinstein Interviewed in European Media Regarding Swiss Court Decision Blocking Transfer of Bank Account Information to US Authorities

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Asher Rubinstein was interviewed in various European media outlets regarding the IRS and Department of Justice initiative against undisclosed Swiss bank accounts held by US taxpayers, and the recent Swiss court decision blocking the transfer of Credit Suisse information to US authorities.