Asset Protection Blog

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Asset Protection Blog

The Paradise Papers and the New Norm of Offshore “Secrecy”

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Last month, confidential records of the Bermuda law firm Appleby were leaked, exposing the financial affairs of people and corporations around the world, including the use of offshore jurisdictions for tax minimization, asset protection and, in theory, financial privacy.  This recent leak has been dubbed the “Paradise Papers”, and it follows the “Panama Papers” of 2016, another exposure of confidential documents from a Panamanian law firm which revealed the offshore activities of celebrities, politicians and wealthy people across the world.  The recurring theme is that claims of “secrecy” in the offshore realm are not to be believed.  Yet, effective offshore planning is still possible if one’s approach begins with an expectation of tax compliance, which negates the need for secrecy.

Many people around the world use offshore entities (such as trusts and corporations) and offshore banks for a variety of reasons, including cross-border business activities, foreign investments, financial diversification, asset protection and privacy.  These are legitimate reasons, and there is nothing illegal or inherently wrong about them.  To assume that because someone utilizes an offshore jurisdiction, then that person must be committing tax evasion, is hasty and unfounded.  Yet that is what the media suggests in its coverage of the Paradise Papers.  However, it is not a criminal act to form a business in the US as a Limited Liability Company (LLC) in order to limit personal liability and protect one’s personal assets from business liability.  Rather, forming a business as an LLC (or even as a corporation) to limit one’s liability is a proper and wise utilization of one’s rights and is valid under the law.  Likewise, it is not a crime to establish a foreign trust to protect one’s assets from future creditors.  So long as one is complying with all governmental disclosure laws, then establishing foreign structures and engaging in offshore asset protection is not only legal and valid, it is prudent.

Of course, utilization of offshore structures for criminal purposes is illegal.  Most of the people exposed in the Paradise Papers were not criminals, and their wealth was not derived from criminal activity.  Rather, the law firm Appleby advised celebrities, political figures and many other people who legally had assets offshore.  Honorable service providers, whether law firms, trustees or banks, engage in the proper due diligence, source of funds and “know your client” investigations.

In contrast, the Mossack Fonseca firm in the Panama Papers is alleged to have turned a blind eye to criminally derived deposits and is alleged to have assisted, among others, corrupt politicians.  The clients of the Appleby firm of the Paradise Papers, in contrast, appear to be more benign clients, wealthy families (the Queen of England), celebrities (like Bono) and blue chip corporations (including Apple) who utilized the firm to protect legitimately derived assets.  On the one hand, money laundering and tax evasion requires banking secrecy and the cooperation, or at least the “willful blindness”, of foreign bankers and other offshore service providers.  On the other hand, offshore asset protection of legitimately earned and tax compliant money does not require banking secrecy.

A crucial lesson, underscored once again by the Paradise Papers, is that one cannot rely on secrecy in the offshore realm.  In this age of FATCA (the Foreign Account Tax Compliance Act), the CRS (Common Reporting Standard), TIE (tax information exchange) agreements, MLATs (Mutual Legal Assistance Treaties) and other examples of information-sharing among governments, any offshore service provider who promises “secrecy” should immediately be suspect.  Simply put, offshore secrecy does not exist any longer.  Swiss banking secrecy has been decimated by the U.S. Department of Justice and every single Swiss bank offering “secret accounts” has been made to fall in line, pay penalties and reveal its clients (who were then investigated and prosecuted).  All former tax havens, even the most secretive like Liechtenstein and Monaco, now tout their transparency, lest they appear on blacklists and subject to reprisals at the governmental level, including banking isolation (which happened recently to Belize) and punitive economic penalties such as automatic withholding of outflows of funds (30% under FATCA).  “Confidentiality”, as distinct from “secrecy”, is also promised by offshore service providers, but these are merely semantics, and the prevalence of whistleblowers, leaks and hacks makes such promises dubious.  The Panama Papers and Paradise Papers are merely the latest examples, although the most news worthy due to the sizes of these breaches and the fact that the victims (from government officials to international soccer stars) offered “sexy” media reporting.

There is a long chain of offshore breaches of confidentiality completely apart from government-to-government treaties, cooperation and information sharing.  Before the ICIJ (the International Consortium of Investigative Journalists) released the Paradise Papers in 2017 and the Panama Papers in 2016, in 2013 it released a cache of offshore account details based on confidential documents obtained from the British Virgin Islands and Singapore.  In 2008, an HSBC tech employee in France stole banking records and handed them over to the French government, which then shared the information with other Western governments.  In 2006, an employee at LGT Bank in Liechtenstein sold confidential banking records to the German government for millions of Euros.  The German government then shared that data with other governments, including the U.S.  When foreign governments pay millions for stolen banking data (which they have done again and again), it creates an incentive for theft.

Legitimate asset protection clients are those who are not looking to launder money or cheat the IRS.  They are not looking to hide behind sham entities, and they do not rely on banking secrecy, because they understand that sham entities are ineffective and, because disclosure to tax authorities is now routine, bank secrecy has been proven to be extinct.

Instead, one should utilize strong foreign laws for asset protection, rather than supposed “secrecy”.  Effective offshore asset protection is still viable, because it does not rely on secrecy but instead, on the strength of local laws, the degree of difficulty for outsiders to challenge those laws and asset protection structures.  Rather than relying on promises of “secrecy”, one should rely on full compliance with tax and disclosure laws, and achieve effective asset protection from civil creditors through the use of tested asset protection laws in safe and stable jurisdictions.

There are numerous threats to banking secrecy, including government-to-government cooperation and information sharing, weakened bank secrecy laws, hackers and renegade bank employees, but these threats are not material if the funds are legitimately earned and the offshore trust or bank account is tax-compliant.  It is completely legal to have funds offshore, for many reasons (e.g., international business transactions, global investment and diversification, asset protection), as long as the foreign accounts are part of a tax compliant strategy.  If the offshore accounts are tax-compliant, then the threat of information sharing – – from whatever source, governmental cooperation, hacks, leaks or otherwise – – is eliminated.  When foreign assets are legitimately earned and tax compliant, there is no need to rely on dubious “secrecy” and one instead can rely on the strength of law.

2016: The Offshore Year in Review

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Further Erosion of Offshore Bank Secrecy and Encouraging Tax Compliance

The year 2016 was an epic year in the offshore world due to the leaks of confidential offshore financial information known as the “Panama Papers”.  In addition, in 2016, more countries began to report offshore financial information to the IRS under FACTA (the Foreign Account Tax Compliance Act).

Also in 2016, the IRS and U.S. Department of Justice (DOJ) continued to successfully attack offshore banking “secrecy”, moving beyond Switzerland to other foreign jurisdictions.  “Going offshore” for the purposes of hiding money from the IRS is now impossible.  Going offshore for asset protection from civil creditors and for tax minimization is still viable and effective, but must be tax-compliant.

Further Erosion of Offshore Bank Secrecy and Encouraging Tax Compliance

  • In 2016, the International Consortium of Investigative Journalists (ICIJ) released a massive amount of once-confidential offshore information known as the “Panama Papers”.  The files included sensitive foreign banking information, including identities of owners of offshore accounts, secretive corporations and other entities established by Panamanian law firm Mossack Fonseca.  Also in 2016, ICIJ released data from the Bahamas including names of directors, shareholders and “nominees” of shell companies, trusts and foundations in the Bahamas.  These most recent breaches of offshore secrecy followed the 2013 release of information, also by ICIJ, regarding offshore accounts in the British Virgin Islands (BVI) and Singapore, the 2008 theft of banking data at HSBC in France, and the 2006 leak at LGT Bank in Liechtenstein.  The lesson, once again, is that hacking, leaks and whistle blowers are as significant a threat to banking secrecy as laws such as FATCA (the Foreign Account Tax Compliance Act) and inter-governmental cooperation and exchange of information.  Another lesson is that offshore asset protection should not — indeed, cannot — be dependent upon “confidentiality” and “secrecy”, simply because offshore “secrecy” no longer exists.
  • During 2016, the IRS and DOJ continued to investigate and prosecute many U.S. taxpayers with undeclared offshore assets. U.S. taxpayers with undeclared foreign accounts in Switzerland, Cayman, Belize, India, Israel, Singapore, Panama and other jurisdictions have been targeted.  In 2016, the IRS collected a $100 million penalty from a U.S. taxpayer who hid his Swiss account.
  • In 2016, most Swiss banks settled with DOJ and reported accounts with a U.S. nexus.  In return for deferred prosecution, these Swiss banks are paying fines to the U.S. and revealing the identities of their American account owners.  Clients of these banks who have not already come into IRS compliance can make a voluntary disclosure of these accounts, but will pay increased penalties in return for no criminal exposure (but not if the IRS already has their names!).  Swiss banking secrecy, seriously weakened since DOJ forced UBS to disclose its U.S. clients in 2009, is now extinct.  Moreover, now the Swiss banks report to the U.S. without advance warning to their U.S. clients.  New legislation in Switzerland imposes penalties on a Swiss bank or bank employee who is aware of a U.S. request for information and then notifies the U.S. account owner prior to transfer of the requested information.
  • All reputable countries are agreeing to the exchange of tax information and banking transparency.  In 2016, Singapore implemented FATCA.  In 2015, Luxembourg began exchange of bank depositor information.   Likewise, Austria, the last remaining EU member holdout, agreed to share banking data.   During 2016, over 100 countries (and hundreds of thousands of foreign banks and other financial institutions)  have agreed to sign on to FATCA and automatically report foreign account and income data to the IRS, including: India, Cyprus, Singapore, Liechtenstein, Switzerland, Barbados, Bahamas, Hong Kong, Brazil, Jersey, Guernsey, Cayman, etc.  If you have financial ties to foreign countries, you must address IRS compliance for foreign accounts and assets.  The fact that a foreign bank has no branches in the U.S. is now irrelevant.
  • The reach of the U.S. Government to foreign banks is undeniable.  In 2016, Bank Julius Baer settled with DOJ, paying a fine of $547 million.  Also in 2016, two Cayman Islands financial institutions pleaded guilty to conspiring to hide millions from the IRS in Cayman accounts.  The IRS is investigating HSBC, the Swiss Kantonal banks, Pictet, Bank HaPoalim, Mizrahi Tefahot and banks in the Caribbean.  During 2016, the IRS focused on Panama, Singapore and the Cayman Islands.  DOJ also issued summonses to U.S. banks for information on U.S. correspondent accounts used by owners of foreign accounts to access funds.  Banks in Switzerland, Israel, India, Singapore and the Caribbean are currently under investigation.  We expect more banks, in other countries, to be targeted in 2017.  Again, the fact that a foreign bank has no branches in the U.S. is now irrelevant.
  • In positive news, the IRS issued recent guidance on FBAR penalties that seems to indicate a trend toward lower penalties for both willful and non-willful failure to file the FBAR.  The new penalty structure allows for a single penalty, rather than multi-year penalties.  In addition, the penalties should not exceed the value of the foreign account.  The new guidance is applicable to cases currently in audit.
  • Recent appellate court cases all uniformly have held that foreign bank statements must be handed over to the IRS regardless of any Fifth Amendment claim against self-incrimination.  This means that the IRS can compel, via Information Document Request (IDR) or subpoena, a taxpayer or his bank to provide his offshore account records even if those records are incriminating.  Prosecutors may then use those records to prove commission of tax crimes, including failure to file bank disclosures, filing false tax returns, tax evasion and tax fraud.
  • In light of the above events, many clients have retained us to make their foreign accounts and other assets tax-compliant.  We have represented many clients in Offshore Voluntary Disclosure Programs (OVDP) introduced by the IRS in 2009, 2011, 2012 and 2014.  The 2014 OVDP is still in effect (although the IRS warns that it may close the program at any time).  We have represented clients with accounts and assets on every continent (except Antarctica), brought them into IRS compliance and avoided prosecution.  In 2014, the IRS changed the terms of its OVDP, and also began new “Streamlined” voluntary disclosure procedures for non-willful conduct.  The Streamlined procedures have greatly reduced penalties (5% for U.S. residents; 0% for non-residents).  We can advise you on which program is best for you.  The penalties within the OVDP are usually less than if the IRS discovers the foreign account via audit, investigation or information the IRS receives from a bank or foreign government.
  • Within the OVDP, the penalty is 27.5% of the highest value of the foreign asset(s).  However, this penalty increases to 50% if the foreign financial institution housing the foreign account is under investigation or is cooperating with DOJ/IRS.  There are approximately one hundred foreign banks on the so-called “naughty bank” list, most but not all in Switzerland.  On November 15, 2016, the “naughty list” increased to approximately one hundred and fifty.  The new additions are foreign “facilitators” of U.S. tax fraud, i.e., the foreign bankers, lawyers, trustees, investment advisors and other service providers who worked with U.S. clients to hide assets and income from the IRS.
  • Clients should bring their accounts into tax compliance on the state level as well.  Some states, such as New York, New Jersey and California, have formal programs for offshore accounts.  Other states, including Connecticut, had a formal program in the past, and we have been successful in applying the favorable terms of the past programs to current clients.  The IRS shares information with state governments, including that a federal tax return was amended to report foreign income.  Please contact us regarding tax compliance on the state and federal levels.
  • Against the background of the U.S. offensive against undisclosed offshore accounts, FATCA and new compliance burdens, many foreign banks have “fired” their U.S. clients and closed even compliant accounts.  In 2016, we assisted clients in keeping open their compliant foreign accounts, or locating new foreign institutions to take their business.  While many foreign banks no longer welcome U.S. account holders, we have relationships with foreign institutions which still service our clients’ tax-compliant accounts.

This year has been an unprecedented year both domestically and offshore.  We can assist you in navigating through the changing offshore world and advise you regarding offshore (and onshore) assets.

 

The Panama Papers:  Effective Asset Protection Should Not Be Compromised by Lack of Banking Secrecy

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The “Panama Papers” purportedly show how one law firm in Panama City with branches from Switzerland to Hong Kong utilized offshore entities and bank accounts to hide money for a world-wide clientele of wealthy people, including political leaders in various governments.  While foreign entities and bank accounts are legal, it is against the laws of many countries to hide income from taxation, to launder bribe money and other proceeds of corruption and criminal activities.  If the reports are true, the Panamanian law firm of Mossack Fonseca participated in tax evasion and money laundering on a global scale.

The “Panama Papers” raise issues, not for the first time, about foreign tax havens, banking secrecy and offshore asset protection.

In 2012, I visited Panama and met with trustees, attorneys and bankers, all eager for business and client referrals.  While I was witness to the explosion of Panama’s banking industry, and I knew that Panama banks were a gateway for doing business in Central and South America, I have not sent a single client to Panama nor recommended Panama as an asset protection jurisdiction.  Years earlier, we had made the decision that we preferred other jurisdictions for asset protection, for reasons including:  the strength of local laws, the degree of difficulty for outsiders to challenge those laws and asset protection structures, and our contacts and experience with other jurisdictions.

One of the factors that we look for in an asset protection jurisdiction is the social, economic and political stability of that country.  Panama was ruled by a military dictatorship from 1969 to 1989.  In 1989, within recent memory, U.S. troops entered Panama to arrest its president, who was also a military general and drug dealer.  While the Panamanian banking system developed since those years, and Panama City skyscrapers soared, the prior history made us hesitant.  Other jurisdictions offered better laws, a better record of political stability, and lawyers, trustees and bankers who we already knew to be professional and honest.

The “Panama Papers” is apparently the second time that a whistleblower has offered Mossack Fonseca documents to tax authorities.  The first instance resulted in raids and tax fraud prosecutions in Germany, and the information was then shared with the UK and U.S. governments.  The current situation arose as a result of a hacker penetrating Mossack Fonseca’s computer system and transferring millions of documents to the International Consortium of Investigative Journalists (ICIJ), which released the documents earlier this year.

In the “computer age”, nothing is immune from hacking and therefore there is no real secrecy.  Four days before the Panama Papers were made public, the Wall Street Journal reported that elite New York law firms Cravath, Swaine & Moore and Weil, Gothal & Manges were hacked.  J.P. Morgan Chase, the biggest bank in the U.S., was hacked in 2014.

Hacking, leaks and whistleblowers can happen anywhere, not only in Panama.  In 2013, ICIJ, the same group that released the Panama Papers, released a trove of offshore account details based on confidential documents obtained from the British Virgin Islands and Singapore.  In 2008, an HSBC tech employee in France stole banking records and handed them over to the French government, which then shared the information with other governments, leading to investigations and prosecutions of many Europeans for tax fraud.  In 2006, an employee at LGT Bank in Liechtenstein (once the most secret of tax havens) sold confidential banking records to the German government for millions of Euros.  The German government shared that data with other governments, including the U.S.  When foreign governments pay millions for stolen banking data (which they have done again and again), it creates an incentive for theft.

It may be said that the entire unraveling of Swiss banking secrecy can be attributed to a single causative event:  UBS employee Bradley Birkenfeld revealing to the U.S. Government how UBS lured wealthy Americans to open accounts in Switzerland, how UBS advised on keeping the accounts secret from the IRS, and how the bank earned high fees for managing the accounts.  So began DOJ’s civil and criminal cases against UBS, UBS paying $780 million in penalties, revealing the names of some 5,000 Americans with non-compliant accounts, and the end of Swiss banking secrecy.

While hacking, theft by bank employees and whistleblowers are universal, Panama is being singled out today due to the size of this latest leak of data, the historical scope (thirty to forty years) as well as the details of illegality.  What makes the “Panama Papers” leak different are the revelations of illegality: banks apparently willing to open accounts for entities without knowing the true beneficial owner of the corporation or trust, or knowing the beneficial owner to be connected to a rogue government but looking the other way; attorneys offering bearer share corporations (which most of the rest of the world no longer does and is illegal in all fifty U.S. states), and attorneys willing to backdate documents.

In better jurisdictions, these practices should not exist.  I personally have not seen a bearer share corporation in about a decade and a half.  Lawyers, banks and trust companies with whom we work around the world have strict “know your client” and due diligence requirements to vet and protect against money laundering and other illegal activities.  We disclose the beneficial owners of foreign accounts, because legitimate banks and U.S. laws require this.  Our asset protection clients are not looking to hide behind sham entities, and our clients do not rely on banking secrecy, because our clients understand that sham entities are ineffective and, where disclosure to tax authorities is involved, bank secrecy has been proven to be extinct.

Of course, another crucial difference is that despots, criminals and tax evaders need a jurisdiction like Panama, where attorneys and bankers look the other way.  Simply put, money laundering and tax evasion requires banking secrecy and the cooperation, or at least the “willful blindness”, of attorneys at Mossack Fonseca.  Asset protection of legitimately earned and tax compliant money does not require banking secrecy.  In that light, Panama is simply offering the very same services that got Switzerland in trouble.

The UBS, HSBC, LGT, Mossack Fonseca and other leaks clearly demonstrate that banking secrecy can be compromised by hackers and renegade bank employees.  Further, the success of the U.S. Department of Justice in penetrating Swiss banks and obliterating Swiss banking secrecy, the adoption of the Foreign Account Tax Compliance Act (FACTA) by banks and governments around the globe, and a host of Mutual Legal Assistance Treaties and Tax Information Exchange Agreements signed between governments, all point toward the conclusion that banking secrecy, at least as it relates to government mandated disclosure, has been effectively destroyed.

Good asset protection does not rely upon banking secrecy.  Foreign banking secrecy has been compromised by hackers, whistleblower employees, investigations and prosecutions of foreign banks and bankers, treaties and governments cooperating with each other and sharing banking information.  In addition, foreign accounts, and foreign trusts and corporations which own foreign accounts, must be disclosed to the IRS.  Even in civil litigation, tax returns are often discoverable by one’s adversaries.  Again, reliance on secrecy to protect offshore assets is no longer a viable strategy in today’s world.

Instead, our clients rely on full compliance with tax and disclosure laws, but they achieve effective asset protection from civil creditors through the use of time-tested asset protection laws in safe and stable jurisdictions.

As we have long-counseled, any of the threats to banking secrecy, whether by governmental agreements, weakened bank secrecy laws, hackers or renegade bank employees, is not material if the funds are legitimately earned and the foreign account is tax-compliant.  It is completely legal to have funds offshore, for many reasons (e.g., international business transactions, global investment and diversification, asset protection), as long as the foreign accounts are part of a tax compliant strategy.  If the offshore accounts are tax-compliant, then the threat of information sharing – – from whatever source, governmental or individual – – is eliminated.  As the window of banking secrecy closes further, those people whose foreign assets do not rely on secrecy and are tax-compliant need not worry.

Revisiting the Threat from Whistleblowers; Are you Protected?

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This week, in an annual report to the US Congress, the IRS announced that last year it paid out 122 whistleblower awards totaling $53 million.  That is an average award of nearly $435,000.

People are thus incentivized to “blow the whistle” and report to the IRS the alleged tax misdeeds of other people.  The report to Congress also revealed that the IRS received 9,268 whistleblower claims last year.   Whistleblowers are not only motivated by the financial awards, but also to “get even” with their adversaries, whether former business partners, spouses, employers and the like.

The IRS is authorized by law (Section 7623 of the Internal Revenue Code, the “Informant Claims Program”) to reward whistle blowers who report tax violators.  If the information provided by the whistle blower is used by the IRS, the whistle blower may receive up to 30 percent of the additional tax, penalty and other amounts collected by the IRS.  In addition, the identity of the whistle blower is protected by the IRS (at least until the whistle blower becomes a necessary witness in a tax prosecution).  Reports to the IRS can also be made anonymously.

In addition, under Section 922(a) of the new Dodd-Frank Act, whistle blowers are now empowered to report information to the SEC. If the whistle blower report leads to enforcement action resulting in sanctions greater than $1 million, the whistle blower may receive a payment of 10 to 30 percent of the sanctions.

Why should you care?

As we wrote, if threats exists from, e.g., a spouse, business associate, employee, etc. who may feel motivated to contact a government authority such as the IRS or SEC, and share potentially damaging information about you, your business, your assets or your finances, you should take preemptive action to mitigate the potential consequences. An asset management attorney can help avoid these problems.

What can you do? Make sure your house is in order.

  1. Run a self-tax audit.  Is there reason to go back and alter past tax returns to disclose previously unreported income, foreign accounts, improper deductions taken, etc.?  Should you file tax forms or reports that should have been filed but were not, e.g., for involvement in foreign accounts, ownership of foreign trusts or offshore corporations?  Preemptively addressing these issues before they are brought to the attention of the IRS could result in lower fines and penalties and avoidance of criminal prosecution.  As we have long-counseled, any of these threats – – whether from weakening bank secrecy laws, exchange of information by governments, from renegade bank employees, or an angry business partner or former spouse – – are harmless if you are tax-compliant.  Correcting past tax non-compliance would serve multiple purposes: make good with the IRS, lower potential penalties and punishment, and eliminate the tax blackmail card that a nasty creditor might play.  If you bring your tax matters into compliance, the threat of a whistle blower or creditor would be pre-emptively mitigated. 
  2. Protect your assets.  Don’t leave your assets exposed to potential claimants and litigants.  Protect your assets proactively, before legal action against you, rather than defensively, in response to an action already commenced, when your asset protection options may be limited.

A second reason why whistle blowers may impact you is if you have any unreported assets offshore, whether bank accounts, real estate, business interests or interests in foreign trusts or other foreign entities.   As we have written before, many foreign accounts have been exposed by bank employees within the banks themselves, who have, in multiple cases over the past few years, stolen internal bank information and handed that bank information over to foreign governments.  In many cases, governments pay millions of euros for that information.  Those governments then use that information for tax investigations and prosecutions, and also share that information with other foreign governments.

As reported in the Wall Street Journal this week, speaking about the arrests of three Cayman investment advisors who were charged with facilitating tax fraud by Americans, “an official at the Justice Department said the sting should serve as a warning about offshore accounts.  ‘The Cayman case illustrates that we have ways of getting information that people don’t know about’ . . . the Government receives account information from many sources, including whistleblowers hoping for monetary rewards.’”  (Wall Street Journal, April 4-5, 2014, “The Next Offshore Target”)

It might be said that the entire unraveling of Swiss banking secrecy over the past few years can be attributed to a single causative event:  UBS employee Bradley Birkenfeld coming forward to the US Government and revealing how UBS lured wealthy American clients to open accounts at UBS in Switzerland and how UBS then advised the clients on how to keep the accounts secret from the IRS, and how the bank earned high fees for managing the accounts.  So began DOJ’s civil and criminal cases against UBS, UBS paying $780 million in penalties, and UBS revealing the names of some 5,000 Americans with non-compliant accounts at UBS.  Dozens of these Americans have since been criminally prosecuted for tax fraud.  Birkenfeld’s whistleblower award was $104 million.  He went to jail for thirty one months, but only Birkenfeld can decide whether those months were worth $104 million.

If you have unreported foreign assets, you must address your risk of being revealed to the IRS by a whistleblower.  Contact us for a confidential consultation.

Please see our related articles:

Theft of HSBC Banking Data Further Exposes Threats to Offshore Banking Secrecy

Renegade Bank Employees Further Erode Offshore Banking Secrecy

Offshore Update: Continued Investigation and Prosecution of Foreign Accounts Amidst a New Opportunity for Pre-emptive Disclosure

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Offshore Update: Continued Investigation and Prosecution of Foreign Accounts Amidst a New Opportunity for Pre-emptive Disclosure
by Asher Rubinstein, Esq.

The U.S. government continues in its offensive against non-compliant offshore banking, targeting both the U.S. taxpayers who failed to declare foreign accounts, as well as the foreign bankers who provided non-compliant banking services.

Last month, a US taxpayer in San Francisco was indicted for failing to declare his UBS account.  Last week, a doctor and medical professor was sentenced by a federal court in New York for failing to declare his account at UBS.  Additional, non-UBS banks were also included in both cases.

At the same time, prosecutors are also charging the foreign bankers who facilitated the foreign accounts and provided foreign banking services.  Bankers at Wegelin & Co., a private Swiss bank, were indicted in early January.  Bankers at Julius Baer were indicted last October.
The indictments detail tactics such as setting up accounts using code names, sham corporate entities and having foreign relatives as the purported owners of the accounts.  The indictments also allege that the bankers told U.S. clients that their accounts were not vulnerable to discovery by the IRS because the banks did not have a U.S. presence such as a U.S. branch office.

In additional to Wegelin and Julius Baer, Credit Suisse, the local Swiss Kantonal banks, as well as banks in Israel, India and Liechtenstein are all under investigation for aiding and abetting tax fraud by US taxpayers.  The IRS and Department of Justice (DOJ) are pursuing these banks because of the purported “money trail” that left UBS as UBS prepared to surrender once-“secret” bank data to the U.S. government.  According to one recent indictment, UBS bankers suggested only transferring Swiss Francs from UBS to a local Kontonal bank in order to minimize detection.
Tracing noncompliant funds to other banks, in Switzerland and elsewhere in the world, is indicative of the expanding global scrutiny and effectiveness of the investigations.

As legal counsel to many taxpayers with foreign accounts, when we read the news reports of new tax investigations, indictments and prosecutions, we note that the names of some foreign bankers appear again and again.  We have been able to observe connections between separate clients who had common foreign bankers.  The IRS, of course, is reaching similar conclusions.  If the name of a banker appears again and again, that banker comes to be “on the radar” at the IRS and DOJ.  If the banker is then criminally charged, the banker is likely to cooperate with prosecutors and divulge bank account information as part of a negotiated settlement.  For instance, Renzo Gadola, a former UBS banker in Switzerland was charged with facilitating US tax fraud.  He pled guilty in December 2010 and has been cooperating with DOJ prosecutors.  He has provided information about U.S. clients and other Swiss bankers who assisted in hiding foreign assets.  As part of Gadola’s settlement, he must return to the U.S. annually to further assist DOJ investigations of foreign banking.

Many of our clients who came forward with timely voluntary disclosures were relieved when they later learned that their foreign bankers had been criminally charged.  If the clients had delayed in coming forward, and the bankers had shared account information with the government, then the clients would not have been accepted into the voluntary disclosure program and might have faced criminal prosecutions themselves!

At the same time that the government is going on an offensive against non-compliant offshore accounts, it is also offering yet another opportunity to come forward and declare such accounts in return for lower penalties and no criminal prosecution.

In January, 2012, the IRS announced the re-opening of the 2011 Offshore Voluntary Disclosure Initiative (OVDI), which had previously expired in September, 2011.  The 2011 OVDI followed a similar 2009 program that likewise encouraged taxpayers to bring their foreign accounts into tax compliance, in return for lower penalties and avoidance of criminal prosecution. The renewal of the OVDI presents another opportunity for taxpayers to bring their foreign accounts into tax compliance.  The terms of the program are the same as the OVDI, but the penalties have been increased.  Still, the penalties are significantly lower than the penalties that would apply if the IRS discovers the account, and criminal prosecution can also be avoided.

In light of the erosion of foreign banking secrecy, discovery of the account by the IRS is very likely.  Notwithstanding promises to its clients of banking secrecy, UBS revealed the names of almost 5,000 U.S. clients to the U.S. government, in return for the U.S. dropping a civil and criminal tax fraud prosecution against UBS.  Credit Suisse is facing similar charges and is expected to settle these charges by likewise handing over client names.  Negotiations are currently underway between the U.S. and the Swiss for a global settlement that will involve all Swiss banks, including Wegelin, Julius Baer, the Kantonal Banks, and others.  It is expected that the settlement will require the Swiss banks to reveal the names of U.S. account holders to the U.S. government.  The announcement of the re-opening of the OVDI is well-timed to allow another opportunity for such account holders to pre-emptively disclose their accounts to the IRS before the Swiss do so.

Another threat to bank secrecy comes from bank employees who divulge account details of customers, in contravention of bank policy and local (e.g., Swiss) law.  The most recent example is the case of the Central Governor of the Swiss National Bank, Philipp Hildebrand, who last week resigned following allegations of improper currency trades made by his wife.  The allegations resulted from information disclosed by an IT employee “whistle blower” at the Swiss National Bank.

Bank employees handing over supposed “secret” banking data is not new. Back in 1999, John Mathewson, the former owner of Guardian Bank and Trust, a defunct Cayman Islands Bank, was charged in the U.S. with money laundering. When Mr. Mathewson was arrested, he gave U.S. investigators bank records that contained information about American depositors at the bank who had evaded U.S. tax obligations. Mathewson gave up the banking data in return for leniency in his criminal sentencing.

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.  In 2009, an employee of HSBC provided bank account data to the French government.  In 2010, Germany again purchased banking data, stolen by an employee of a Swiss bank.  The DOJ was able to successfully prosecute UBS, and then UBS clients, because of information that had been disclosed by UBS banker Bradley Birkenfeld to the U.S. government.

For our prior articles on banking secrecy undermined by whistle blowers, please see here and here.

Thus, there is no bank secrecy.  The discovery of a “secret” offshore account can be the result of numerous factors:  First, internally at the bank, via whistle blowers, “snitches” and thieves.  Second, due to the vigilance of the U.S. government in pursuing foreign banks and bank accounts, demonstrated by IRS/DOJ success against UBS, and current investigations of numerous other banks (including HSBC, Credit Suisse, Wegelin, Julius Baer, Leumi, Hapoalim, Liechtensteinische Landesbank and others).

A third significant blow to foreign banking secrecy is via the newly implemented Foreign Account Tax Compliance Act (FATCA), which imposes new offshore reporting requirements on account owners and on foreign banks.  New IRS Form 8938 requires disclosure of foreign financial assets with an aggregate value in excess of $50,000, and applies to offshore assets owned during 2011. Form 8938 will be due, along with Form 1040, by April 15, 2012.

In light of the above challenges to offshore secrecy, clearly anyone with a foreign asset that is still not tax compliant must take immediate measures to bring the asset into tax compliance.  As noted, it is widely believed that the renewal of the Offshore Voluntary Disclosure Initiative is purposely timed to incentivize compliance before the next wave of banking data is released to the U.S. government.  Whether through additional prosecutions of banks and bankers, or via a settlement with Swiss banks, each outcome will lead to the revelation of the identities of account owners and other banking data to the U.S. government.  Once the U.S. government has the identities of the account owners, a pre-emptive disclosure is too late, and all penalties, including criminal prosecution, may apply.

The renewal of the OVDI presents an opportunity for those who still have not brought their offshore assets into compliance.  The new penalties are 27.5%, 2.5% greater than the 25% penalty under the 2011 OVDI, yet less than the 50% penalty that the IRS has been imposing in recent criminal tax fraud prosecutions.  In addition to lower penalties, a proper, timely voluntary disclosure can still avoid criminal prosecution.  As we’ve noted repeatedly, the IRS continues to target foreign accounts. We strongly advise taxpayers to 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.

Update on Offshore Banking: Danger of Prosecution Increases

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There have been many important recent developments regarding offshore banking.  The cumulative result of these recent events is the continued eradication of offshore banking secrecy for accounts that are not tax compliant and the consequent increased risk of discovery and prosecution.

1. Additional Criminal Prosecutions For Undeclared Foreign Accounts

The US Department of Justice (DOJ) continues to criminally prosecute taxpayers with undisclosed foreign bank accounts.  Please see our recent post here  for details.  This latest wave of criminal prosecutions appears to be timed to give additional incentive for taxpayers to take advantage of the IRS Offshore Voluntary Disclosure Initiative (OVDI), which runs until August 31, 2011.

Acceptance into the OVDI results in lower penalties and the avoidance of criminal prosecution.  On the government’s side, it brings foreign funds back into the US tax system and avoids using governmental resources for investigating and then prosecuting the tax non-compliance.  Thus, the OVDI can benefit both the government and the taxpayer.

2. Credit Suisse And Other Foreign Banks Under IRS And DOJ Investigation; HSBC and Bank Leumi Warn Clients To Become Tax Compliant

We have known for a long time that Credit Suisse, like UBS before it, has been the target of a US government investigation for assisting US clients in hiding foreign funds from taxation.  This week, Credit Suisse revealed that it received a letter from the US Department of Justice officially alerting the bank that it is the target of a criminal tax investigation.  Credit Suisse, along with Bank Julius Baer, Wegelin Bank and the regional Swiss Cantonal banks, are all under investigation for aiding and abetting US tax fraud.

In February 2011, four Credit Suisse bankers were indicted in the US for assisting Americans to hide income from the IRS.   The Department of Justice stated that “the conspiracy dates back to 1953 and involved two generations of US tax evaders including US customers who inherited secret accounts.”  The allegations also included a charge that a Credit Suisse banker suggested that non-compliant funds be transferred from Switzerland to a bank in Israel in order to avoid detection by the IRS.  Tracing noncompliant funds from Swiss banks to Israeli banks is indicative of the expanding global scrutiny and effectiveness of the investigations.  (For our article on Israeli banks under scrutiny, please click here.)

The investigations are not limited to Swiss banks.  Banks of all sizes, in many other countries, are being targeted.  HSBC is also facing similar allegations, and is the subject of a federal court summons to reveal the identities of account holders with undeclared accounts in India.  (For our articles on Indian banks under scrutiny, please click here and here.)   Also this week, HSBC sent a letter to its US clients urging them to bring their accounts into tax compliance.  The letter provided details about the IRS Offshore Voluntary Disclosure Initiative.  Last year, Bank Leumi, an Israeli bank, sent similar letters to its US clients with foreign accounts.   Liechtensteinische Landesbank in Liechtenstein, Bank Leumi and Bank Hapoalim in Israel are also under investigation by the IRS and US Department of Justice.

Those are the foreign banks whose investigations are public.  We have reason to believe that many additional banks in various foreign countries are also being investigated by the IRS for similar activities.  To facilitate the investigations, the IRS has opened field offices in Australia, Panama, China and Hong Kong.  From the many thousands of voluntary disclosures thus far, the IRS and DOJ have compiled an extensive database of foreign banks and individual bankers, attorneys, trustees and other service providers who are under investigation for facilitating tax fraud.  DOJ prosecutes both the foreign service providers and the US account holders who did not disclose the foreign accounts.

In light of DOJ’s success in obtaining account information from UBS and the eradication of Swiss banking secrecy over the past few years, we anticipate that HSBC and Credit Suisse will have little ability to withstand a DOJ information subpoena and/or criminal indictment.  This is underscored by the decision this week by the Swiss Federal Supreme Court (see 4. below) that the disclosure of secret UBS bank account data to the IRS in 2009 was lawful.

The resulting conclusion is that owners of non-compliant foreign accounts, whether at Credit Suisse or elsewhere, should apply for acceptance into the OVDI before they are discovered.  The OVDI expires on August 31, 2011.

3. FATCA Reporting Requirements For Offshore Assets Are Delayed

The Foreign Account Tax Compliance Act (FATCA), which was signed into law in 2010 as part of the HIRE Act, imposes additional reporting requirements on US taxpayers with foreign holdings, and also obligates foreign banks to report account information to the IRS.  FATCA’s reporting requirements were scheduled to commence in 2013.  This week, the IRS announced a delay in the beginning dates of these new requirements.   The new requirements will be phased in over 2014 and 2015.

It has been reported that these delays reflect the many negative comments received by the IRS on the new reporting requirements.  Foreign banks and taxpayers alike have commented that these disclosure requirements are very burdensome.  Many critics of FATCA predict that the new laws will result in many foreign financial institutions no longer doing business in the US, and a resulting decline in US investments from abroad.

4.  Swiss High Court Affirms That UBS Revealing “Secret” Banking Information Was Lawful

Also this week, the Swiss Federal Supreme Court upheld the 2009 disclosure of UBS bank account information to US authorities, notwithstanding that the disclosure violated Swiss banking secrecy laws.  The Swiss court ruled that the disclosure was lawful because it was necessary to avoid an economic catastrophe that would have ensued if UBS had not disclosed the account information.

Even if the Swiss high court had held the opposite way, i.e., that provision of account information to the IRS was improper, the incriminating information has already been in the possession of the IRS and US prosecutors for months, and has formed the basis for multiple prosecutions (see point 1, above). Had the Swiss court ruled the other way, it would have had no practical effect on these prosecutions or given the US defendants any relief.  It might have, however, given the US account holders a cause of action to sue UBS in Swiss courts.  But now, it appears that even that road is dead.

Further, this ruling should be scary to US taxpayers with accounts at Credit Suisse, Julius Baer, Wegelin, the Kantonal banks and other Swiss banks, because essentially, the Swiss high court has given its blessing to the end of Swiss banking secrecy.

5. No Settlement Between US And Switzerland On Offshore Banking

Last month, we wrote that the United States and Swiss governments were in negotiations toward ending US investigations of numerous Swiss banks for hiding assets from US taxation. Under such an agreement, the US would not prosecute the Swiss banks, and the banks would provide information to the US about Americans with non-compliant accounts and pay large penalties.   This week, we learned that the negotiations have ceased after the US stated its lack of interest in pursuing a settlement.

Given the expanding offensive of the IRS and DOJ against Credit Suisse and other banks (see point 2, above), this latest twist is not surprising.  Clearly, the US has significant leverage against Swiss banks.  From over twenty thousand voluntary disclosures, the US has a mass of information implicating many Swiss banks and individual bankers for their roles in tax fraud.  Credit Suisse has a significant presence in the US – – employees, branches and valuable assets within the US, plus a lucrative US banking license.  The same US presence and vulnerability compelled UBS to settle with the US in 2009 and avoid criminal prosecution.   With such momentum and continued leverage on its side, no wonder the US is flexing its muscles and walking away from a settlement.

6. Whistle Blowers Are Still A Threat To Offshore Accounts

We reported earlier this year that account information from Swiss bank Julius Baer had been copied by a Julius Baer employee and would be made public, via Wikileaks.  This followed the purchase by the German government of supposedly secret account data from an employee of LGT Bank in Liechtenstein, and the provision of stolen HSBC data to the French government.

This week, it emerged that one disc containing the Julius Baer data was blank and the other disc did not contain incriminating bank data.  Nevertheless, we’ve known for months that Julius Baer is already “on the radar” because many Americans accepted into the IRS Voluntary Disclosure Program have disclosed their Julius Baer accounts.  For Americans who did not disclose their Julius Baer accounts, immediate disclosure via the OVDI is strongly advised. Once the IRS gets the name of an account holder from any source (audit, whistleblower, investigation or otherwise) a voluntary disclosure is too late and criminal prosecution is likely.

As a footnote, this week it was also revealed that Hans Kieber, the LGT banker who stole account data, sold it to the German government and has been in hiding ever since, recently testified to authorities in Australia about undeclared offshore bank accounts.  As we’ve written, the revelation of bank account data by whistle blowers remains a serious threat to offshore bank secrecy.

Conclusion

The above developments further highlight the withering of offshore banking secrecy and the serious enforcement efforts by the IRS and DOJ against foreign banks and US taxpayers with noncompliant foreign accounts.  The OVDI deadline is August 31, 2011. Bringing noncompliant foreign accounts into tax compliance is very strongly recommended.

Are you Protected from Whistle Blowers?

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New laws are generous to whistle blowers, who are now incentivized to turn you in, in return for a payout.  The IRS is authorized by law (Section 7623 of the Internal Revenue Code, the “Informant Claims Program”) to reward whistle blowers who report tax violators.  If the information provided by the whistle blower is used by the IRS, the whistle blower may receive up to 30 percent of the additional tax, penalty and other amounts collected by the IRS.  In addition, the identity of the whistle blower is protected by the IRS (at least until the whistle blower becomes a necessary witness in a tax prosecution).  Reports to the IRS can also be made anonymously.

In addition, under Section 922(a) of the new Dodd-Frank Act, whistle blowers are now empowered to report information to the SEC. If the whistle blower report leads to enforcement action resulting in sanctions greater than $1 million, the whistle blower may receive a payment of 10 to 30 percent of the sanctions.

Recent examples directly relevant to our legal practice highlight the power of whistle blowers.  First, the recent IRS success against UBS and the significant erosion of Swiss banking secrecy would not have come about without Bradley Birkenfeld, a UBS banker turned whistle blower, who came forward and exposed internal UBS policies and practices that were designed to facilitate non-reporting of offshore assets by US taxpayers.  Although Birkenfeld is currently in jail because of his own role in facilitating tax fraud, he stands to reap millions of dollars as a result of the nearly $1 billion paid by UBS to the government when it admitted its role in aiding offshore tax fraud.

In addition, bank employees have stolen internal banking documents from HSBC and LGT Bank in Liechtenstein, and have sold this information to foreign tax authorities, resulting in tax fraud investigations and prosecutions in the US, Germany, UK and other countries.

 As we wrote a year ago:
Taxpayers are not only at risk of discovery by the IRS; they face an increased danger of being turned in by private informants seeking recently enlarged rewards. . . . Foreign tax haven banks offer an opportunity for underpaid employees to get rich by becoming IRS informants. Additionally, taxpayers are at risk of being turned in by ex-partners, ex-spouses, ex-companions, ex-employees, litigation/arbitration adversaries, estranged children, or anyone else with a grudge who senses an opportunity to get even and get a reward.

The threat of whistle blowers is not limited to the offshore realm.  If you have a non-compliant foreign bank account, it is vulnerable to a bank employee giving bank account information to the IRS, or to a foreign tax authority which later shares information with the IRS.  The tax authorities of various governments all cooperate with each other.  For instance, the German government shared the LGT information with multiple governments as far as India and New Zealand.  But whistle blowers may also pose a threat much closer to home.

When should you be concerned?  If threats exists from, e.g., a spouse, business associate, employee, etc. who may feel motivated to contact a government authority such as the IRS or SEC, and share potentially damaging information about you, your business, your assets or your finances, you should take preemptive action to mitigate the potential consequences.

What can you do? Make sure your house is in order.

    1. Run a self-tax audit.  Is there reason to go back and alter past tax returns to disclose previously unreported income, foreign accounts, improper deductions taken, etc.?  Should you file tax forms or reports that should have been filed but were not, e.g., for involvement in foreign accounts, ownership of foreign trusts or offshore corporations?  Preemptively addressing these issues before they are brought to the attention of the IRS could result in lower fines and penalties and avoidance of criminal prosecution.  As we have long-counseled, any of these threats  – whether from weakening bank secrecy laws, exchange of information by governments, from renegade bank employees, or an angry business partner or former spouse – are harmless if you are tax-compliant.  Correcting past tax non-compliance would serve multiple purposes: make good with the IRS, lower potential penalties and punishment, and eliminate the tax blackmail card that a nasty creditor might play.  If you bring your tax matters into compliance, a whistle blower or creditor would not be able to threaten to report you.

 

  1. Protect your assets.  Don’t leave your assets exposed to potential claimants and litigants.  Protect your assets proactively, before legal action against you, rather than defensively, in response to an action already commenced, when your asset protection options may be limited.

We must acknowledge the good that some whistle blowers do.  When corporate abuses and criminals are brought to the attention of authorities, we all benefit.  Yet when “telling the government on you” becomes a tactic for harassment or blackmail, we must stand up to the threat by rectifying any non-compliance, eliminating the threat and protecting assets from further vulnerability.