Sunday, October 11, 2015

Great Graphic on U.S. DOJ Swiss Bank Program Results (10/11/15)

BloombergBusiness has an article with a great interactive graphic on the U.S. DOJ Swiss Bank Program results.  David Voreacos and Giles Bloom, U.S. Chases Swiss Bank Secrets to Singapore and Israel (BloombergBusiness 10/8/15), here.  In addition to the graphics, some excerpts are:
Martin Naville, chief executive officer of the Swiss-American Chamber of Commerce, said the settlement process has been difficult for many firms, with some feeling they’ve been “slighted and not treated very well.” But he said the penalties were smaller than what many banks had budgeted for. 
That’s due in part to an unusual aspect of the amnesty program. Penalties are pegged to how many clients banks successfully pushed to reveal secret accounts and the firms that aided them. The more individuals who came forward, the less banks had to pay. 
* * * * 
U.S. agents interviewed taxpayers who used a Singapore money management firm to hide assets from the IRS, said Bryan Skarlatos and Scott Michel, lawyers who separately represent some of those Americans. They wouldn’t identify the firm, and Ciraolo wouldn’t discuss it. 
“Certainly, Singapore would be one of the jurisdictions that we’re looking at,” Ciraolo said. 
Societe Generale SA’s Swiss private banking unit admitted in its settlement that it transferred assets of U.S. customers to “corporate and individual accounts at other banks in Switzerland, Hong Kong, Israel, Lebanon, Liechtenstein and Cyprus,” according to its statement of facts. The unit paid a $17.8 million fine.  A bank spokesman declined to comment. 
In its settlement document, Banque Pasche SA said that client money was transferred to banks located in Israel and Hong Kong “in an attempt to further escape detection.”  An e-mail and phone call to the bank weren't returned. 
Israeli Banks 
Israeli banks have drawn special focus from the Justice Department. Last year then-Deputy Attorney General James M. Cole cited “an ongoing and extensive investigation” into hidden bank accounts in Israel. Bank Leumi Le-Israel Ltd. agreed to pay $400 million to resolve its criminal case. 

Saturday, October 10, 2015

Second Circuit Affirms Application of Crime-Fraud Exception to the Attorney-Client Privilege (10/10/15)

in In re Grand Jury Subpoenas Dated March 2, 2015, 2015 U.S. App. LEXIS 17633 (2d Cir. N.Y. Oct. 6, 2015) (unpublished), here, the Second Circuit affirmed a district court holding applying the crime-fraud exception to the attorney-client privilege.  The opinion is not published, but for students and practitioners, the opinion is good review.  The opinion is short so, I just cut and paste it:
Intervenor-appellant is an investment company (the "Company") whose president and owner (the "Owner") is the subject of an ongoing grand jury investigation into tax fraud. On June 5, 2015, the United States District Court for the Southern District of New York issued an order compelling the Company's attorneys to produce certain attorney-client communications between the attorneys and the Owner. The district court held that the crime-fraud exception to the attorney-client privilege applied to their communications relating to a tax protest because there was probable cause to believe that the Owner was using the lawyers to further his fraudulent scheme. The Company appeals. We assume the parties' familiarity with the facts, procedural history, and issues on appeal. 
First, we consider the issue of subject matter jurisdiction. Our Circuit has not yet determined how Mohawk Industries, Inc. v. Carpenter, 558 U.S. 100 (2009), affects our jurisdiction under the Perlman doctrine to hear a non-party's appeal of a non-final order compelling disclosure of communications protected by the attorney-client privilege in the context of an ongoing grand jury proceeding. See Perlman v. United States, 247 U.S. 7, 13 (1918) (permitting jurisdiction where appellant is "powerless to avert the mischief of the order"). In Mohawk, the Supreme Court held that "collateral order appeals are not necessary to ensure effective review of orders adverse to the attorney-client privilege" because "postjudgment appeals generally suffice to protect the vitality of the attorney-client privilege." 558 U.S. at 108-09. Several courts have noted tension between Perlman and Mohawk. See, e.g., In re Naranjo, 768 F.3d 332, 343 n.14 (4th Cir. 2014); United States v. Punn, 737 F.3d 1, 11 n.8 (2d Cir. 2013); United States v. Copar Pumice Co., 714 F.3d 1197, 1207-08 (10th Cir. 2013). Several of our sister Circuits, meanwhile, conclude that Perlman may continue to permit non-party privilege holders to appeal in particular circumstances. See, e.g., Doe No. 1 v. United States, 749 F.3d 999, 1005-07 (11th Cir. 2014); In re Grand Jury, 705 F.3d 133, 145-46 (3d Cir. 2012); Holt-Orsted v. City of Dickson, 641 F.3d 230, 239 (6th Cir. 2011); United States v. Krane, 625 F.3d 568,573 (9th Cir. 2010). We need not decide whether Perlman would apply in the circumstances of this case, however, because the only restriction on jurisdiction here is a statutory and not a constitutional one, see 28 U.S.C. § 1291, and "the Supreme Court has barred the assumption of 'hypothetical jurisdiction' only where the potential lack of jurisdiction is a constitutional question." Fama v. Comm'r of Corr. Servs., 235 F.3d 804, 816 n.11 (2d Cir. 2000) (quoting Steel Co. v. Citizens for a Better Env't, 523 U.S. 83, 94 (1998)). As both sides urge us to reach the merits and it would be more efficient for us to do so, we assume we have jurisdiction to hear this appeal. 
Second, as to the merits, we review the district court's determination that the crime-fraud exception applies for clear error. United States v. Jacobs, 117 F.3d 82, 87 (2d Cir. 1997), abrogated on other grounds by Loughrin v. United States, 134 S. Ct. 2384 (2014). The crime-fraud exception removes the protection of the attorney-client privilege from "client communications in furtherance of contemplated or ongoing criminal or fraudulent conduct." In re John Doe, Inc., 13 F.3d 633, 636 (2d Cir. 1994) (quoting In re Grand Jury Subpoena Duces Tecum Dated Sept. 15, 1983, 731 F.2d 1032, 1038 (2d Cir. 1984)). A party wishing to invoke the exception must prove (1) "that the client communication or attorney work product in question was itself in furtherance of the crime or fraud" and (2) "probable cause to believe that the particular communication with counsel or attorney work product was intended in some way to facilitate or to conceal the criminal activity." In re Richard Roe, Inc., 168 F.3d 69, 71 (2d Cir. 1999) (internal quotation marks omitted). But "[w]here the very act of litigating is alleged as being in furtherance of a fraud," we adopt a more stringent probable cause standard, that is, "the party seeking disclosure . . . must show probable cause that the litigation or an aspect thereof had little or no legal or factual basis and was carried on substantially for the purpose of furthering the crime or fraud." Id. 
Even assuming, as the district court did, that the heightened probable cause standard applies to communications made in tax protests, we find no error. Based on the facts before it, the district court did not clearly err in finding that there was probable cause to conclude that the tax protest was based on a false, undocumented transaction and that the Owner engaged in the tax protest as part of a strategy to further conceal that tax fraud and shirk his tax liabilities. The district court conducted an in camera review of the privileged communications at issue and concluded that those communications supported its determination that the crime-fraud exception applied. We have examined those privileged communications, the facts in the record, and the parties' ex parte submissions, and hold that the district court did not clearly err. 
We have reviewed the Company's remaining arguments and conclude that they are without merit. Accordingly, we AFFIRM the order of the district court. Because the grand jury investigation is still ongoing, the mandate shall issue forthwith.
The opinion refers to the offending conduct being "tax protests."  It is not clear exactly what that refers to.  The court document retrieval service -- -- indicates that the case is under seal and thus no documents are available.  And, the relevant portions of the record below are under seal because it arose from the grand jury.

If, however, the "tax protests" referred to are the usual ones encountered in tax practice, they presumably are the protests that are filed at the end of examination / audit or some other activity permitting an appeal by protest.

The jurisdictional question is also interesting.

Schumacher, UBS Banker Enabler, Sentenced to Probation Only and Fine (10/10/15)

Hansruedi Schumacher, a former UBS banker, who pled guilty to conspiracy was sentenced to no incarceration or home confinement, to five years probation and to fine of $150,000.  See Davod Voreacos, Ex-UBS Banker Schumacher Avoids Prison in U.S. Tax Investigation (BloombergBusiness 10/6/15), here.  My prior post on Schumacher is Schumacher, UBS and Neue Zürcher Bank Enabler, Pleads Guilty (Federal Tax Crimes Blog 4/7/15), here.

Excerpts from the article are:
“Schumacher’s willingness to come forward and subject himself to U.S. jurisdiction and cooperate, when he had no pressure to do so, cannot be overvalued,” U.S. prosecutor Mark Daly wrote in a Sept. 28 memo to the sentencing judge. He cooperated “at great peril to himself,” exposing himself to prosecution in Switzerland under bank secrecy and economic espionage laws, Daly wrote. 
After testifying at Weil’s trial, Schumacher also helped U.S. prosecutors investigating American taxpayers who hid assets from the Internal Revenue Service, Daly wrote. He is the seventh Swiss banking enabler who was convicted and sentenced. He faced as long as five years in prison. 
Only one of the bankers got prison time, former UBS banker Bradley Birkenfeld, who was a whistle-blower. Three others avoided prosecution by cooperating. 
Schumacher attorney Peter Raben said in a sentencing memo on Sept. 28 that his client could have stayed in Switzerland, where he wouldn’t have been extradited, and lived a “peaceful and anonymous existence among family and friends.” 
Instead, he chose to cooperate, which meant he “risked the scorn of his fellow countrymen for betraying their arrogance; he risked ostracism, for himself and his family; he risked expulsion from the financial marketplace, and the loss of his career,” and he risked prosecution in Switzerland, Raben wrote.
In a TNT article, William Hoke, Former UBS Banker Gets 5 Years' Probation, $150,000 Fine, 2015 TNT 194-5 (10/7/15), link not available, the author adds (internal TNT citation omitted):
  Schumacher's lawyer, Peter Raben, told Tax Analysts that his client was facing a maximum prison sentence of five years and a fine of $250,000. The sentencing guidelines call for a prison term of between 57 and 71 months and a fine of $100,000. Raben said Schumacher will be allowed to serve his probation in Switzerland. 
* * * * 
Raben also cited the requirement of 18 U.S.C. section 3553(a)(6) to "avoid unwarranted disparity among defendants with similar records who have been found guilty of similar conduct." Raben said five defendants in similar circumstances received probation and three were not prosecuted. 
The only other relevant case, which Raben described as an "outlier," is that of Bradley Birkenfeld. The former UBS employee was sentenced in 2009 to 40 months in prison for what Raben described in the motion as Birkenfeld's failure to fully cooperate with the prosecution. Birkenfeld, who is out on parole after serving 31 months, received a whistleblower award of $104 million from the U.S. government for his "exceptional cooperation" with the DOJ.  
Birkenfeld was incredulous about Schumacher's light sentence and what he perceives to be the DOJ's incompetence in pursuing individuals involved in the UBS case. 
"The DOJ fails to realize I took the greatest risks when I was the historic whistleblower and I gave them Hansruedi's name in 2007," Birkenfeld told Tax Analysts. "The DOJ failed to call me to Weil's trial in 2014. I have 104 million reasons why I am credible and they are not."

DOJ Tax Enforcement Priority for Employer Trust Fund Taxes (10/10/15)

The IRS and DOJ have been pursuing employment trust fund taxes for some time.  DOJ Tax is making the public aware of increased concerns and efforts in this area, particularly the criminal sanction in Section 7202, here.  See Employers Beware: AAG Ciraolo Emphasizes Employment Taxes as Enforcement Priority (Post & Schell Tax Controvery Posts 10/9/15), here.  For a similar article see Nathan J. Richman, Tax Division Official Gives Insight Into Enforcement Priorities, 2015 TNT 197-7 (10/13/15) [No Link Available].

An excerpt from the P&S Blog entry to whet your appetites:
Acting AAG Ciraolo described the issue of employment and payroll taxes as a “really big area for us right now.” Although employment taxes have been listed as a DOJ Tax Division priority in the past, Acting AAG Ciraolo noted that enforcement in this area has become a “team effort” between DOJ and the civil and criminal sides of IRS. This team effort includes related training of IRS Revenue Officers, Fraud Technical Advisors, and Special Agents, as well as DOJ lawyers. Acting AAG Ciraolo also announced that the Criminal Section of DOJ Tax Division recently updated the section of the DOJ Criminal Tax Manual that pertains to 26 U.S.C. § 7202, a criminal statute which specifically applies to willful failures to collect or pay over employment taxes.
Of course, for most practitioners the trust fund tax issue will be most commonly encountered in the trust fund recovery penalty in Section 6672, here.

Friday, October 9, 2015

One More Bank Obtains NPA under DOJ Swiss Bank Program (10/9/15)

On October 8, 2015, DOJ announced here that Schaffhauser Kantonalbank (SHKB) has entered an NPA under the DOJ program for Swiss banks, here.  The penalties are:

Schaffhauser Kantonalbank (SHKB)
$1.613 million

Here are key excerpts.
SHKB is a regional Swiss bank that was founded in 1883 and operates out of its headquarters in Schaffhausen, Switzerland. All seven of SHKB’s locations are within the Canton of Schaffhausen, and all branches are within a radius of 10 miles of its headquarters. As a cantonal bank, SHKB is obliged to service primarily the residents of the Canton of Schaffhausen and the surrounding areas.

Through its managers, employees and others, SHKB knew or had reason to know that some U.S. taxpayers who had opened and maintained accounts at SHKB were not complying with their U.S. income tax and reporting obligations. SHKB offered a variety of traditional Swiss banking services that it knew could assist, and that did in fact assist, U.S. clients in the concealment of assets and income from the Internal Revenue Service (IRS).  One such service was hold mail, through which SHKB would hold all mail correspondence for a particular client at SHKB. It also offered code name or numbered account services, where SHKB would allow the accountholder to replace his or her identity with a code name or number on bank statements and other documentation sent to the client. These services helped U.S. clients to eliminate the paper trail associated with the undeclared assets and income they held at SHKB in Switzerland. By accepting and maintaining such accounts, SHKB assisted some U.S. taxpayers in evading their U.S. tax obligations.

SHKB opened and maintained accounts for U.S. taxpayers who had left other banks being investigated by the department without ensuring that each such account was compliant with U.S. tax law from the account’s inception at SHKB. SHKB also arranged for the issuance of credit, debit or travel cards to the beneficial owners of some U.S.-related accounts, and offered travel cash cards, on which a client could load up to 10,000 Swiss francs, U.S. dollars or euros from his or her SHKB bank account by instructing SHKB by telephone, mail or e-mail.  The client could then use the card for purchases or remit unused balances back to the SHKB account. Use of these cards by U.S. persons facilitated their access to or use of undeclared funds on deposit at SHKB.

SHKB issued checks, including series of checks, in amounts of less than $10,000 that were drawn on accounts of U.S. taxpayers, even though SHKB knew, or had reason to know, that the withdrawals were made to avoid triggering scrutiny under the U.S. currency transaction reporting requirements.  Furthermore, since Aug. 1, 2008, SHKB processed significant cash withdrawals for at least 15 U.S. taxpayers at or around the time the clients’ accounts were closed, even though SHKB knew, or had reason to know, the accounts contained undeclared assets. For example, in November 2009, SHKB processed a U.S. taxpayer’s cash withdrawal of more than 400,000 euros when SHKB closed the account.

In the period since Aug. 1, 2008, SHKB held one structured account that was a U.S.-related account with maximum assets under management of approximately $11.5 million. The nominal accountholder was a foundation in Liechtenstein, but the true owner was a U.S. person, which aided and abetted the client’s ability to conceal an undeclared account from the IRS.

In 2001, SHKB entered into a Qualified Intermediary Agreement (QI Agreement) with the IRS.  The QI Agreement was designed to help ensure that, with respect to U.S. securities held in an account at SHKB, non-U.S. persons were subject to the proper U.S. withholding tax rates and that U.S. persons holding U.S. securities were properly paying U.S. tax. In general, if an accountholder wanted to trade in U.S. securities and avoid mandatory U.S. tax withholding, the QI Agreement required SHKB to obtain the consent of the accountholder to disclose the client’s identity to the IRS. The QI Agreement required SHKB to obtain IRS Forms W-9 and to undertake IRS Form 1099 reporting for new and existing U.S. clients engaged in U.S. securities transactions.

Wednesday, October 7, 2015

U.S. Senators on Senate Finance Committee Probe the Tax Aspects of the Volkswagen Debacle (10/7/15)

U.S. Senators Hatch and Wyden, invoking the Senate Finance Committee's authority to investigate "fraud and abuse related to federal tax credits," have notified Volkswagen by letter to the president and CEO that they are investigating its activities.  Diane Bartz and Richard Cowan, UPDATE 1-U.S. senators probe tax credit related to VW "clean-burning" cars (Reuters 10/7/15), here. From the article:

In order for consumers to get the tax credit, car manufacturers had to certify that their vehicles met certain fuel economy requirements and complied with emissions standards. 
* * * * 
Hatch and Wyden noted that in 2008, VW certified to the Internal Revenue Service that its 2009 Volkswagen Jetta TDI Sedan and SportWagen qualified for $1,300 in tax credits per vehicle sale. 
Other models were later certified and the senators said VW sold at least 60,000 of these vehicles by July 1, 2010. "Well over $50 million in tax subsidies went to purchasers of these vehicles, depending on the number of purchasers who claimed the credit," Hatch and Wyden wrote.
Possible tax crimes in the scenario are:

1. Tax evasion, § 7201, here.  A five-year felony offense.  One can commit tax evasion as an enabler for otherwise innocent taxpayers receiving the bogus tax credit.

2.  Tax perjury, § 7206(1), here.  A three-year felony offense.  The certification, a tax certification, was signed under penalty of perjury.  Under aiding and abetting in 18 USC § 2(a), the persons aiding and betting the actual signer under penalty of perjury could be convicted as a principal in the crime of tax perjury.

3. Aiding and assisting, § 7206(2), here.  A three-year felony offense.  This is not the same as aiding and abetting which requires a guilty principal being aided and abetted.  The tax offense of aiding and assisting, however, can be prosecuted with an innocent taxpayer.  But presumably two or more aiders and assisters who are enablers can be guilty of the crime via aider and abettor liability.

4. Fraudulent returns, statements or other documents, § 7207, here.  A one-year misdemeanor offense.  DOJ Tax does not usually authorize prosecute for misdemeanor offenses, but might as to some of the lower level players who could provide valuable assistance in prosecutor people closer to or at the center of the skullduggery.

High Profile Bribery Scheme Involving UN Official with Tax Charges (10/7/15)

We have another high profile criminal case for a tax crime wrapped in larger criminal conduct.  The USAO SDNY filed a criminal complaint, here, against John W. Ashe, former president of the United Nations General Assembly, and others.  See USAO SDNY Press Release, here.  The gravamen of the complaint of criminal conduct relates to bribery of a public official.  As stated in press release, certain individuals "were charged in connection with a multi-year scheme to pay more thann $1.3 million in bribes to ASHE in exchange for official actions in his capacity as UNGA President and Antiguan government official in support of Chinese individuals."   There are the standard conspiracy charges and money laundering for such conduct.  As to Ashe, the only charge is tax perjury, § 7206(1), here.  (See Counts Four and Five.)  As to Ashe's tax counts, the press release states:
ASHE’s Tax Fraud 
As alleged in the Complaint, in 2013 and 2014, while ASHE was UNGA President, he solicited and received payments from LORENZO, NG, YIN, YAN, PIAO, and others, to business accounts he personally created in the name of the President of the General Assembly.  More than $1 million of the money that ASHE solicited to allegedly support his UN Presidency ASHE then transferred to himself, primarily in the form of $25,000 monthly checks written to and by him with the memo line “salary” (notwithstanding the fact that he already received a salary from the Government of Antigua).  During these years, ASHE was also paid approximately $200,000 annually in “consulting” income from LORENZO, NG, PIAO, and YAN.  For tax years 2013 and 2014, ASHE filed tax returns that materially failed to account for the income he was deriving from his purported salary payments and his “consulting” contracts.  Specifically, for year 2013, ASHE and his wife underreported their income by approximately $462,350 and, for year 2014, they underreported his income by approximately $796,329.28.
According to a New York Times Story (Marc Santora, Somini Sengupta and Benjamin Weiser, Former U.N. President and Chinese Billionaire Are Accused in Graft Scheme (NYT 10/6/15), here (bold face supplied by JAT):

The complaint alleges a broad pattern of corruption on the part of Mr. Ashe, 61, who was accused of using the bribes to support a lavish lifestyle: spending $59,000 on hand-tailored suits in Hong Kong in 2013 and 2014, buying two Rolex watches in 2014 for $54,000, and later that year paying $40,000 to lease a new BMW X5. 
He also bought a membership at a South Carolina country club for $69,000, and solicited money to construct a $30,000 basketball court at his home in Dobbs Ferry, N.Y., according to the complaint. 
“If proven, today’s charges will confirm that the cancer of corruption that plagues too many local and state governments infects the United Nations as well,” Preet Bharara, the United States attorney in Manhattan, said at a news conference. He said that the investigation was still in its early stages, adding, “We’re looking at a lot of things, and I wouldn’t be surprised if you would see other people charged.”  
* * * *
Mr. Ashe was arrested on Tuesday morning at his home in Dobbs Ferry; he was not charged in the bribery scheme but was charged with two counts of filing false federal tax returns. The five other defendants, including Francis Lorenzo, the deputy permanent representative to the United Nations for the Dominican Republic, were charged with bribery and conspiracy counts. 
* * * * 

Tuesday, October 6, 2015

Swiss Asset Manager Settles Up with DOJ Tax (10/6/15)

DOJ Tax announced here that Finacor SA, as Swiss asset management firm, has settled its exposure for its misbehavior in its role as asset manager.

Key excerpts are
Finacor submitted a Letter of Intent to participate as a Category 2 bank in the department’s Swiss Bank Program.  Although it was ultimately determined that Finacor was not eligible for the Swiss Bank Program due to its structure largely as an asset management firm, the firm is required under today’s agreement to fully comply with the obligations imposed under the terms of that program.  Finacor is required to:
  • Make a complete disclosure of its cross-border activities;
  • Provide detailed information on an account-by-account basis for accounts in which U.S. taxpayers have a direct or indirect interest;
  • Cooperate in treaty requests for account information; 
  • Provide detailed information regarding other banks that transferred funds into secret accounts or that accepted funds when secret accounts were closed; 
  • Agree to close accounts of accountholders who fail to come into compliance with U.S. reporting obligations; and 
  • Pay a penalty of $295,000   
Finacor agrees to cooperate in any related criminal or civil proceedings, demonstrate its implementation of controls to stop misconduct involving undeclared U.S. accounts and pay penalties in return for the department’s agreement not to prosecute Finacor for tax-related criminal offenses. 
* * * * 
Finacor was established in Basel, Switzerland, in 1945, and is a corporation organized under the laws of Switzerland.  It operates a small, privately-held asset management business in one office in Basel with five employees.  Finacor is licensed as a broker-dealer by the Swiss Financial Market Supervisory Authority (FINMA).  Although it is not a custodian bank, Finacor manages client assets held at other custodian banks.
For decades prior to and through in or about 2013, Finacor conducted a U.S. cross-border asset management business that aided and assisted U.S. clients in opening and maintaining undeclared accounts in Switzerland and concealing the assets and income they held in these accounts.  Finacor offered two types of accounts: asset management accounts and fiduciary accounts.  For both types of accounts, Finacor managed client assets but held them at custodial banks in Switzerland.  Initially, the majority of client funds were held by Finacor at UBS.  However, after UBS notified Finacor in July 2008 that it would no longer service the accounts of U.S. citizens without an IRS Form W-9, Finacor transferred its undeclared U.S. client accounts to a Swiss Bank Program Category 2 bank.

Saturday, October 3, 2015

Tax Notes Today Article on What Comes Next for Non-Swiss Banks Enabling U.S. Evasion (10/3/15)

Tax Notes today has another article about offshore accounts, this one on the DOJ Swiss Bank Program and speculation about it possible expansion to non-Swiss banks.   Marie Sapirie, What Comes After the Swiss Bank Program in Enforcement?, 149 TAX NOTES 12 (OCT. 5, 2015) [No link available].  I don't see anything particularly new in the article, but simply a re-cap and extension of what is already known.  Of course, although DOJ Tax has not announced an extension beyond Swiss Banks, I and, I think, most practitioners think it is a no-brainer to do so.  Other countries' banks played prominently in enabling U.S. taxpayer evasion, so I think most practitioners think it a logical extension of the Swiss Bank Program to have it apply to banks in other countries.  There will be tweaks because DOJ Tax has learned a lot in implementing the Swiss Bank Program.  But, any such action is speculation and surmise.

IRS Makes FOIA Disclosures to Tax Analysts Regarding OVDP and Streamlined Processing (10/3/15)

Tax Notes today has an article summarizing some comments about documents it received about OVDP (including its OVDI predecessor).  The article is Andrew Velarde, FOIA Response Shows Hints of IRS Thinking on OVDP, TNT 192-1 (10/5/15) [no link available].  The article will also be published in 149 Tax Notes 7 (Oct. 5, 2015).  The article provides certain highlights of the FOIA disclosures and links to the disclosures.  I list the indicated FOIA disclosures at the end of this blog entry.  Subscribers to Tax Notes might want to review the article and the FOIA disclosures.

The FOIA disclosures are internal IRS "job aids" for examiners and others implementing OVDP.  Much of the information was already public or known to practitioners.

There is some discussion of willfulness but nothing that adds to a practitioner's known analysis of the issue.

One point that was already known to practitioners is that rejection of the transition streamlined relief inside OVDP is not a determination of willfulness so that, upon opt out, the willfulness penalty is pre-determined.  Rather, it is simply a statement that, on the submission the taxpayer made in support of streamline transition relief, the IRS is unable to determine nonwillfulness.  The key is that the taxpayer should make a detailed submission in his transition relief narrative supporting his general claim that his tax and FBAR noncompliance was nonwillful.

Now, as to taxpayers making the streamlined submissions (either SFOP or SDOP) outside OVDP, it is noted that the nonwillful certification and narrative are not necessarily given the review that is required for streamlined transition inside OVDP.  The practitioners seem to be inferring that only a portion of the straight streamlined certifications will be audited.  Of course, if that is true, there is no public guidance as to which are selected for audit.  I think all of this was known already to practitioners, so that the FOIA disclosures confirm what they had already inferred.

There is also some helpful guidance offers in compromise, installment agreements and similar issues.

FOIA DISCLOSURES [No Links Available].
Job aid on miscellaneous offshore penalty refunds 2015 TNT 192-63: Other IRS Documents
Job aid on streamlined program transition rules for current OVDP taxpayers living abroad 2015 TNT 192-64: Other IRS Documents
Job aid on calculating the miscellaneous offshore penalty 2015 TNT 192-66: Other IRS Documents
Job aid on calculating the streamlined domestic offshore penalty 2015 TNT 192-67: Other IRS Documents
Job aid on refunds of advance payments for "barred" years 2015 TNT 192-68: Other IRS Documents
Job aid on issues to consider when determining nonwillfulness 2015 TNT 192-69: Other IRS Documents
Job aid outlining options available for U.S. taxpayers with undisclosed foreign financial assets 2015 TNT 192-71: Other IRS Documents
Job aid providing talking points for revenue agents on the OVDP and streamlined compliance program 2015 TNT 192-72: Other IRS Documents
Job aids on IRS Taxpayer Advocate Service's systemic advocacy management system 2015 TNT 192-52: Other IRS Documents
Job aid for IRS field insolvency function 2015 TNT 192-53: Other IRS Documents
Job aids on collection due process hearing requests 2015 TNT 192-54: Other IRS Documents
Job aid on reasonable cause for failure to file foreign corporation information returns 2015 TNT 192-55: Other IRS Documents
Job aid on time reporting for collection employees' international travel 2015 TNT 192-56: Other IRS Documents
Job aid on IRS field collections 2015 TNT 192-59: Other IRS Documents
Job aid on IRS field and office examinations 2015 TNT 192-57: Other IRS Documents
Job aid on offers in compromise 2015 TNT 192-58: Other IRS Documents

Deutsche Bank's Amazing Magnificent Adventure -- Again -- into the Land of Bullshit Tax Shelters (10/3/15)

In United States v. Deutsche Bank, 2015 U.S. Dist. LEXIS 134367 (SD NY 2015), here, Judge Kaplan of SDNY denies Deutsche Bank's motion to dismiss the United States' suit against Deutsche Bank and others arising from what appears to be a bullshit tax shelter gambit from 2000.  Judge Kaplan introduces the context as follows:
The United States brings this action on state law fraudulent conveyance and unjust enrichment theories to recover over $190 million in unpaid tax, penalties and interest allegedly owed by Deutsche Bank A.G. and affiliates (collectively, "DB"). Broadly speaking, it claims that DB in 2000 conducted a series of transactions with the purpose and effect of leaving a special purpose vehicle owing tends of millions of dollars of federal taxes that it was unable to pay while DB profited as a result of the non-payment of the taxes. DB moves to dismiss the complaint on the theory that it is barred by the New York statute of limitations, fails to state a legally sufficient claim, and fails to allege fraud with the particularity required by Fed. R. Civ. P. 9(b). In the alternative, it seeks to limit the government's recovery.
Just for background, this general introduction is reminiscent of the wave of Midco transactions that proliferated in the 1990s and early 2000s.  In those transactions, one or more shareholders in a corporation having substantial built-in gain in assets would have shares that were worth only the value the corporate assets less all liabilities, including the tax on the expected tax on the built-in gain.  Some buyer would buy the stock from the selling shareholders, paying them more than that value.  The buyer could pay more because, supposedly, it had some way to eliminate or mitigate the gain, thus avoiding the corporate level tax.  In effect, to the extent of the excess price paid the selling shareholders, the buyer and the selling shareholders would share the tax benefit of eliminating or mitigating the tax.  The problem in the abusive transactions was that the elimination or mitigation of the tax did not work (often because the buyer sought to eliminate the gain with bullshit tax shelters or some other similar bullshit mechanism).  The IRS and the citizens of the U.S. were left holding the bag with, so the schemers hoped and, in many cases, I am sure, prayed, nowhere to collect the tax. The Midco transactions were structured variously, often with an attempt to obscure the skulldugggery, but that was the essence.

Judge Kaplan makes short shrift of Deutsche Bank's attempt to avoid justice in this case.  But, I would like in the balance of this blog entry to deal with the Midco-like quality of the transactions based on the allegations in the U.S. complaint, here,  Here is the Introduction from the complaint.

Thursday, October 1, 2015

One More Bank Obtains NPA under DOJ Swiss Bank Program (10/1/15)

On October 1, 2015, DOJ announced here that BHF-Bank (Schweiz) AG (BHF) has entered an NPA under the DOJ program for Swiss banks, here.  The penalties are:

BHF-Bank (Schweiz) AG (BHF)
$1.768 million

Here are key excerpts.
BHF was established in 1974 as a wholly-owned Swiss subsidiary of BHF-BANK Aktiengesellschaft (BHF-BANK AG), a private bank located in Germany.  Deutsche Bank AG purchased BHF-BANK AG in 2010, and in 2014, BHF-BANK AG was sold to a consortium of investors.  BHF is headquartered in Zurich and has a branch in Geneva.  The name of the group is now BHF Kleinwort Benson Group. 
BHF opened and maintained undeclared accounts for U.S. taxpayers.  It chose to continue to service U.S. customers without disclosing their identities to the Internal Revenue Service (IRS) or taking steps to ensure that clients were compliant with U.S. tax laws and without considering the impact of U.S. criminal law on that decision. 
BHF offered a variety of traditional Swiss banking services that it knew could assist, and did assist, U.S. clients in the concealment of assets and income from the IRS, such as “hold mail” services, which minimized the paper trail between the U.S. clients and undeclared assets and income, and debit cards, which allowed U.S. clients to access their undeclared accounts without having to visit BHF. 
In 1982, Plinius Management Limited, Zurich (Plinius), a trust company, was formed as a wholly-owned subsidiary of BHF to provide special services for wealthy clients, which included advice regarding trusts, foundations, fiduciary agreements and holding companies in order to protect assets and minimize tax liability.  Plinius had no employees, and BHF provided it with staff and infrastructure. 
Plinius also assisted with referrals to establish various types of structures, including Liechtenstein Anstalten and Stiftungen, and British Virgin Islands and Panamanian entities.  Plinius did not create the structures; instead, it would contact an external trust company or law firm in Liechtenstein to set up the entity within the agreed-upon jurisdiction.  While Plinius’ relationship managers did not have access to the Forms A held by BHF that identified the beneficial owners, in some cases they were aware of the ultimate beneficial owner(s) of the accounts.  Four subsidiary-related structured accounts were established for U.S. persons, which improperly sheltered U.S. taxpayer-clients and hid their assets from the IRS. 
U.S.-related accounts, including offshore structured accounts, came into BHF through its relationship managers, through external asset managers or otherwise.  For example, one account in the name of an offshore entity was referred to a BHF manager from a U.S.-based structuring lawyer prior to 2008, and transferred to BHF from another Swiss bank.  The file contained a Form W-8BEN and certification of non-U.S. persons for the offshore corporate accountholder.  BHF’s management approved opening the account even though the account also held U.S. securities.  There was no Form W-9 completed or provided to BHF for the U.S. beneficial owner.  BHF did not confirm that the U.S. beneficial owner was compliant with U.S. tax obligations.  
In the fourth quarter of 2000, BHF signed a Qualified Intermediary (QI) Agreement with the IRS.  The QI regime provided a comprehensive framework for U.S. information reporting and tax withholding by a non-U.S. financial institution with respect to U.S. securities.  The QI Agreement was designed to help ensure that, with respect to U.S. securities held in an account at BHF, non-U.S. persons were subject to the proper U.S. withholding tax rates and that U.S. persons were properly paying U.S. tax. 
BHF implemented a policy that every client had to sign either a Form W-9 or a Declaration of Non-U.S. Person Status, which required the customer to declare whether he or she was a U.S. person for tax purposes.  Some U.S. clients who did not want to have their identities disclosed to the IRS could avoid detection by declining U.S. securities.  Approximately five clients refused to sign a Form W-9, but BHF nevertheless continued to service these clients’ accounts and kept them open. 
While participating in the Swiss Bank Program, BHF encouraged existing and prior accountholders and beneficial owners of U.S.-related accounts to provide evidence of tax compliance or of participation in any of the IRS Offshore Voluntary Disclosure Programs or Initiatives or to disclose their accounts to the IRS through such a program.  BHF sought waivers of Swiss bank secrecy from all accountholders and obtained waivers for more than 50 percent of its accounts.  BHF has also provided certain account information related to U.S. taxpayers that will enable the government to make requests under the 1996 Convention between the United States of America and the Swiss Confederation for the Avoidance of Double Taxation with respect to Taxes on Income for, among other things, the identities of U.S. accountholders. 
Since Aug. 1, 2008, BHF held a total of 125 U.S.-related accounts, comprising total assets under management of approximately $202,964,006.  BHF will pay a penalty of $1.768 million.

SD NY Dismisses U.S. Depositor Suit Against UBS Seeking Damages (10/1/15)

In Giordano v. UBS, AG, 2015 U.S. Dist. LEXIS 129828 (SD NY 2015), here, a U.S. person maintained a secret joint account with UBS.  She did not report the income or file the FBAR.  She was ensnared in the offshore account drama and joined OVDP, paying the required taxes and penalties.  The testatrix for her estate sued UBS.  The Court dismissed the suit based principally upon enforcing the forum selection clause in the contract with UBS.  This is fairly standard stuff.

What was interesting was the Court's further discussion about the U.S. person's own complicity and how that might affect a claim for damages:  =
The Plaintiff's Causes of Action Are Inadequately Alleged and Barred as Claims for Indemnification 
Finally, Plaintiff's claims are barred. "On a motion to dismiss under Rule 12(b)(6), a court must assess whether the complaint 'contain[s] sufficient factual matters, accepted as true, to state a claim to relief that is plausible on its face.'" N.J. Carpenters Health Fund v. Royal Bank of Scotland Grp., 709 F.3d 109, 119-20 (2d Cir. 2013) (quoting Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S. Ct. 1937, 173 L. Ed. 2d 868 (2009)). Plaintiff's Complaint fails to satisfy this standard for any of the claims alleged. Plaintiff's Complaint is one of a series of cases brought by former UBS accountholders seeking to hold UBS responsible for their own tax fraud. See, e.g., Thomas, 706 F.3d 846; Olenicoff v. UBS AG, 2012 U.S. Dist. LEXIS 57360, 2012 WL 1192911, at *1 (C.D. Cal. Apr. 10, 2012). UBS has acknowledged its role in facilitating U.S. clients' concealment of their accounts from the IRS but denies that it defrauded those clients. As the Complaint has alleged, Plaintiff's theory of the case is that UBS facilitated its clients' own knowing concealment of their Swiss accounts from the IRS. See, e.g., Compl. ¶ 50 (alleging that UBS "participat[ed] in a scheme to facilitate the evasion of US taxes" by its clients and was "actively assisting or otherwise facilitating a number of U.S. individual taxpayers in establishing accounts at UBS in a manner designed to conceal the U.S. taxpayers' ownership or beneficial interest in said accounts," thereby "allowing such U.S. taxpayers to evade reporting requirements"). 
In dismissing a similar claim, the court in Olenicoff v. UBS AG explained that UBS "only admitted to assisting willing clients with tax fraud, not forcing unsuspecting clients into tax evasion. While its argument is ironic, UBS is right. Even assuming that UBS gave Olenicoff fraudulent tax advice, that makes UBS a co-conspirator, not a defendant in this litigation." 2012 U.S. Dist. LEXIS 57360, 2012 WL 1192911, at * 1. Similarly, in affirming the dismissal of Thomas v. UBS AG on appeal, Judge Posner, writing for the Seventh Circuit, explained the absurdity of the claim, stating that "[t]he plaintiffs are tax cheats, and it is very odd, to say the least, for tax cheats to seek to recover their penalties . . . from the source, in this case UBS, of the income concealed from the IRS." 706 F.3d at 850. Judge Posner went on to call the Thomas negligence and malpractice claims "frivolous squared," and admonished plaintiffs that "[t]his lawsuit, including the appeal, is a travesty. We are surprised that UBS hasn't asked for the imposition of sanctions on the plaintiffs and class counsel." Id. at 854. 
New York's "fundamental concept[]" of in pari delicto, which "has been wrought in the inmost texture of [New York] common law for at least two centuries," bars Plaintiff's claims, which all amount to an attempt to seek reimbursement from UBS for the consequences of her own filing of false tax returns. Kirschner v. KPMG LLP, 15 N.Y.3d 446, 464, 938 N.E.2d 941, 912 N.Y.S.2d 512 (2010). Even assuming for purposes of this motion to dismiss that Plaintiff's allegations of UBS's wrongdoing are correct, "[t]he doctrine of in pari delicto mandates that the courts will not intercede to resolve a dispute between two wrongdoers." Id. As the New York Court of Appeals has explained, "the principle that a wrongdoer should not profit from his own misconduct is so strong in New York" that it should apply even "where both parties acted willfully" and "in difficult cases," and it "should not be 'weakened by exceptions.'" Id. 

Wednesday, September 30, 2015

Court Denies Preliminary Injunction in FATCA and FBAR Challenge (9/30/15)

In Crawford v. United States Dep't of the Treasury, 2015 U.S. Dist. LEXIS 131496 (SD OH 9/29/2015), here, the Court denied a preliminary injunction in the case seeking the following relief:
Plaintiffs seek preliminary injunctive relief on all claims. The first claim challenges the validity of the Canadian, Czech, Israeli, and Swiss IGAs used by the Treasury Department. The second claim addresses the information reporting provisions FATCA and the IGAs impose not on Plaintiffs, but on foreign financial institutions. The third claim aims at the heightened reporting requirements for foreign bank accounts under FATCA, the IGAs, and the FBAR. These reporting requirements require U.S. citizens to report information about their foreign bank accounts. The fourth claim challenges the 30% tax imposed by FATCA on payments to foreign financial institutions from U.S. sources when these foreign institutions choose not to report to the IRS about the bank accounts of their U.S. customers (the "FFI Penalty"). Similarly, the fifth claim challenges the 30% tax imposed by FATCA on account holders who exercise their rights under the statute not to identify themselves as American citizens to their banks and to refuse to waive privacy protections afforded their accounts by foreign law (the "Passthrough Penalty"). The sixth claim challenges the penalty imposed under the Bank Secrecy Act for "willful" failures to file an FBAR for foreign accounts, which can be as much as the greater of $100,000 or 50% of the value of the unreported account (the "Willfulness Penalty").
The case is not particularly noteworthy from a legal perspective.  It just denied a preliminary injunction.  The likelihood of getting any ultimate relief in the case, preliminary or otherwise, is minimal.  (The pursuit of the case is more a way to make a statement and perhaps encourage those who can be encouraged by such futile statements to make contributions to the people and organizations who proclaim such futile statements.)

In a sense, though, the case is interesting.  I cut and paste certain excerpts that I found interesting:

On Claims by Senator Rand Paul (Wikipedia entry here).
Senator Paul seeks to base legal standing for Counts 1 and 2 in his role as a U.S. Senator, charged with the institutional task of advice and consent under the Constitution. He contends that the IGAs exceed the proper scope of Executive Branch power and should have been submitted for Senate approval. ¶¶ 28, 29. Senator Paul's argument that the Executive Branch is usurping Congress's powers by not submitting the IGAs for a vote-that he has a "right to vote"-is a claim that the Executive Branch is not acting in accordance with the law and that he may remedy such violation in his official capacity as a senator. In Raines v. Byrd, several members of Congress challenged the constitutionality of the Line Item Veto Act of 1996, asserting that the statute infringed on their power as legislators. 521 U.S. at 816. The Supreme Court held that they lacked Article III standing. It noted that their claim asserted "a type of institutional injury (the diminution of legislative power), which necessarily damages all Members of Congress and both Houses of Congress equally." Id. at 821. Because Plaintiffs' "claim of standing [was] based on a loss of political power, not loss of any private right," their asserted injury was not "concrete" for the purposes of Article III standing. Id. Raines bars Senator Paul's claims. This is true even if he frames the conduct he challenges as a "usurpation" of congressional authority. See Chenoweth v. Clinton, 181 F.3d 112, 116 (D.C. Cir. 1999) (a claim of usurpation of congressional authority is not sufficient to satisfy the standing requirement); see also Walker v. Cheney, 230 F. Supp. 2d 51, 73 (D.D.C. 2002) ("the role of Article III courts has not historically involved adjudication of disputes between Congress and the Executive Branch based on claimed injury to official authority or power."). 
Senator Paul has not been authorized to sue on behalf of the Senate. This fact also weighs against finding standing. See Raines, 521 U.S. at 829 ("We attach some importance to the fact that appellees have not been authorized to represent their respective Houses of Congress in this action[.]"). Members of Congress possess an adequate remedy (since they may repeal the Act or exempt appropriations bills from funding its implementation). Raines, 521 U.S. at 829. 
Nor can Senator Paul base his standing on a more generalized interest in "vindication of the rule of law." See Steel Co. v. Citizens for a Better Env't, 523 U.S. 83, 106 (1998); see also Hollingsworth v. Perry, 133 S. Ct. 2652, 2662 (2013) ("[A]n asserted right to have the Government act in accordance with law is not sufficient, standing alone[.]" (quotation omitted)). A legislator does not hold any legally protected interest in proper application of the law that is distinct from the interest held by every member of the public. Senator Paul thus fails to allege a particularized, legally cognizable injury by his claim that the Executive Branch is not adhering to the law. See Campbell v. Clinton, 203 F.3d 19, 22 (D.C. Cir. 2000) (Congressional plaintiffs do not "have standing anytime a President allegedly acts in excess of statutory authority"). 
Senator Paul has "not been singled out for specially unfavorable treatment." Raines, 521 U.S. at 821. All Plaintiffs here, including Senator Paul, have an adequate remedy to challenge the reporting requirements and penalties that they oppose: they may work toward repeal of the laws through the legislative process. Id. Of course, FATCA, the IGAs, and the FBAR requirements are not exempt from constitutional challenge, but they must be challenged by an individual who has suffered a judicially cognizable injury. Id. Plaintiffs in this case do not qualify. 
In sum, Paul has alleged no injury to himself as an individual, the institutional injury he alleges is wholly abstract and widely dispersed, and his attempt to litigate this dispute at this time and in this form is contrary to historical experience. Raines, 521 U.S. at 829.
JAT Comment:  Rand Paul's appearance in this futile case is just another instance of congressmen posturing for their base rather than really trying to solve problems.

On the FBAR penalty:

Saturday, September 26, 2015

GE Asks the Supreme Court to Screw Up Again to Bless a BullShit Tax Shelter (9/26/15; 9/28/15)

I have written before about one of GE's adventures into bullshit tax shelters in the case styled TIFD-III-E Inc. v. United States.  After the initial appellate decision, it was clear that the Second Circuit did not buy into GE's nonsense.  But, after multiple ups and downs where a stubborn district court judge enamored of GE just did not get the point, the Second Circuit finally called a halt with summary reversal of the district court on the final negligence penalty issue.  I recount those ups and downs in a number of blogs which I list at the bottom of this blog entry.

Well, one would think that with the thrashing it got in the Second Circuit, GE would just move on to other bullshit tax shelters that it can better hide from the IRS.  (Even bullshit tax shelters work when the IRS is unable to get past the fog to discover them.)  But no, GE seeks vindication in the Supreme Court for its bullshit tax shelter.  On September 17, 2015, a petition for certiorari, here, was filed. [Note to readers, when the link is clicked the document appears but may not be viewable in the browser; download the pdf and it will be viewable; I will try to get a better pdf to post that will be viewable in the browser.] The style of the petition is TIFD III-E, LLC, Tax Matters Partner for Castle Harbour-I Limited Liability Company v. United States (Sup. Ct. No. 15-331).  I will post the Government's brief in opposition when it is filed.

I will make a few comments on the petition for certiorari.

First, I cut and paste the "Questions Presented."  Stating the question presented is an art form, when practiced at a high level is designed to suggest the desired answer (it is in an advocate's brief, after all):
Over 60 years ago, this Court ruled in Commissioner v. Tower, 327 U.S. 280 (1946), and Commissioner v. Culbertson, 337 U.S. 733 (1949), that a partnership must be respected for purposes of federal taxation if a court finds, based on the totality of circumstances, that the parties in good faith and acting with a business purpose intended to join together in the conduct of the enterprise. In light of that longstanding test, the questions presented are:  
1. Whether the Second Circuit erred in ruling that,  even when parties form a partnership with real assets to operate a business for a legitimate purpose, courts may nevertheless deem the interests of some partners invalid, and thus ineligible for recognition under the tax laws, based on a judgment that the partners' interests in the partnership are "more akin to debt than equity." 
2. Whether a taxpayer can be subject to a penalty under 26 U.S.C. § 6662(a) for underpayment of tax attributable to negligence when the tax return raises a question that is unsettled or reasonably debatable. 
GE introduces its argument by stating:  "In this extraordinary case, which has been the subject of three separate appeals...."  Three separate appeals in a single case is unusual, perhaps even extraordinary.  But. in my view, it is only extraordinary because GE was able to smoke its claims past a district judge three times, only to be batted down all three times.  Indeed, any reasonable district judge would have realized on the first remand that the Second Circuit was not buying into GE's nonsense.

On  the merits of its claim, GE quibbles about whether the Second Circuit was remiss in not calling the transaction a sham.  But, what GE did was to  dress a lending transaction up as a partnership.  Is that not a sham even if the word sham is not used?  I don't think use of the word sham is necessary to the Second Circuit's holdings.

While the contours of a tax partnership may be necessarily uncertain with precision, this case does not present a proper vehicle to clarify the contours.  I would be surprised if the Supreme Court wants to re-visit the issue.  The earlier Supreme Court cases properly offer guidance, necessarily general and nonspecific, to the lower courts.  No more is needed or likely to be provided in this case.

Friday, September 25, 2015

Two More Banks Obtain NPAs under DOJ Swiss Bank Program (9/25/15)

On September 25, 2015, DOJ announced here that Migros Bank AG (Migros) and Graubündner Kantonalbank (Graubündner) have entered an NPA under the DOJ program for Swiss banks, here.  The penalties are:

Migros Bank AG (Migros)
$15.037 million
Graubündner Kantonalbank (Graubündner)
$3.616 million

Here are key excerpts.
Migros was founded in 1957 and is headquartered in Zurich.  As of Dec. 31, 2014, Migros Bank had 66 offices (all in Switzerland) and more than 1,300 employees.  In January 2001, Migros Bank entered into a Qualified Intermediary (QI) Agreement with the Internal Revenue Service (IRS).  The QI regime provided a comprehensive framework for U.S. information reporting and tax withholding by a non-U.S. financial institution regarding U.S. securities.  Migros Bank issued several directives to its employees concerning the QI Agreement.  An October 2000 directive stated that persons subject to U.S. taxes who did not want to be disclosed to the “U.S. tax authority” would not be authorized to hold or purchase U.S. securities in their accounts beginning on Jan. 1, 2001.  The directive further stated that persons subject to U.S. taxes who disclosed their identities to the U.S. tax authority via an IRS Form W-9 could purchase and sell U.S. securities without restriction. 
Migros Bank also created a handbook regarding the QI Agreement, which was first issued to its employees in 2003.  The handbook recognized that “the U.S. retains the right to full taxation of its citizens,” but also that a “U.S. person has the option not to disclose to U.S. tax authorities.”  The handbook instructed Migros Bank employees that “[i]f a U.S. person does not wish to disclose to U.S. tax authorities, it is sufficient if the W-9 form is not filled out for Migros Bank,” and that the customer could sign a waiver to forego investing in U.S. securities.  The handbook further instructed Migros Bank employees that clients residing in the United States “who would like to refrain from disclosure” could be “tended to” by, among other things, retaining their mail in Switzerland through hold-mail agreements, not making regular fund transfers  to the United States and not sending payment orders from the United States. 
From 2001 until 2005, Migros Bank accepted referrals of U.S. persons as new clients from an external asset manager based in Switzerland.  The external asset manager brought a total of 165 U.S.-related accounts to Migros Bank during that period, and most of those accountholders were U.S. residents.  The maximum value of these accounts during that period was approximately $62 million.  The external asset manager had full control of his clients’ accounts, and Migros Bank’s relationship managers usually interacted with him rather than with his clients.  In 2005, Migros Bank decided to terminate its relationship with the external asset manager, but it did not end the relationship until the end of 2006 in order to provide the external relationship manager with additional time to contact his clients and possibly move their funds to other depositary banks.  Alternatively, his clients could elect to stay at Migros Bank and give the external asset manager powers of attorney to continue managing their accounts. 
In December 2008, Migros Bank’s executive board established a working group of bank officials to study the situation of U.S.-domiciled clients, whom Migros Bank considered to be the riskiest U.S. persons from a U.S. tax-enforcement perspective, identify any related risks to Migros Bank and propose measures to limit such risks.  The working group assessed the risk of U.S. tax authorities taking actions against additional Swiss banks as moderate and the risk of Migros Bank’s website and e-banking services causing it to fall under U.S. bank supervision as low.  They also assessed the risk of relationship managers’ insufficient legal and linguistic knowledge causing erroneous advice to U.S.-domiciled clients as moderate. 
The working group considered discontinuing business with all U.S.-domiciled clients to be a “low priority” because that business generated earnings with hardly any additional expenditure and had “further potential as various banks are discontinuing the provision of advisory services.”  Instead, the working group considered the creation of a U.S. desk to be a top priority.  The working group presented a business case for this option that envisioned obtaining an additional one percent share of the total U.S.-domiciled clients with more than 1 million Swiss francs in assets then being served by all Swiss banks.  The working group estimated that there were more than 2,500 UBS clients alone in that category.  The business case also envisioned potentially obtaining an additional two percent share of all other U.S.-domiciled clients, “depending on the strategy.”  The working group estimated that this course of action would result in Migros Bank having 250 million Swiss francs under management from U.S.-domiciled clients. 
The executive board ultimately decided, starting in 2009, to create a U.S. desk by re-assigning all U.S.-domiciled clients, whether in premium or retail banking, to a group of premium-banking relationship managers who spoke English and had received specialized regulatory training.  The head of the premium-banking department had ultimate responsibility over this team, which eventually included nine relationship managers.  In May 2009, Migros Bank issued a directive requiring that the head of the premium-banking department approve all new U.S.-domiciled clients, prohibiting Migros Bank employees from sending correspondence to the United States or accepting orders received by telephone, fax or mail from the United States, and prohibiting U.S.-domiciled clients from initiating transactions through the e-banking system.  After issuing the directive, Migros Bank accepted 37 new U.S.-related accounts in the remainder of 2009.  Of these, 17 were funded by transfers from banks with operations already under investigation by the department, or Category 1 banks. 
Since Aug. 1, 2008, Migros Bank provided banking services for 898 U.S.-related accounts, with more than $273 million in assets.  Migros Bank will pay a penalty of $15.037 million. 
Graubündner was founded in 1870.  It is headquartered in Chur, Switzerland, and has 63 branches, all located within the Canton of Graubünden. 

Friday, September 18, 2015

Wyly Brothers Seek Bankruptcy Relief from Disgorgement Order from Offshore Shenanigans (9/18/15)

Keith Fogg, here, a professor at Villanova Law School, has this great posting on the Wyly brothers, one of whom is now deceased.  Issue Preclusion in Bankruptcy Case Where SEC Securities Enforcement Action Aids the IRS in Establishing a $2 Billion Claim (Procedurally Taxing Blog 9/18/15), here. I previously posted (blog postings listed below) about the SEC's novel theory on disgorgement to include the tax loss in the securities litigation.  The Wyly brothers now seek to contest the actual tax liability in bankruptcy and, presumably, thereby obtain relief from the restitution order.  I do recommend Keith's entire discussion but do "cut and paste" certain excerpts below.
The tax merits of the Wyly’s liability ends up being litigating in bankruptcy court because B.C. 505(a) permits debtors to litigate the merits of their tax liability while in bankruptcy if the merits have not been previously litigated. Even though the Wyly brothers did not previously litigate the merits of their tax liability, they did litigate about many of the underlying issues during the disgorgement phase of the SEC litigation. The findings of the court in the SEC litigation and how those findings impact the actual tax merits litigation becomes the focus of the tax merits case heard before the bankruptcy court. The SEC suit had two phases, the violation phase and the disgorgement phase. The bankruptcy court here notes that the opinion issued in the disgorgement phase “carefully sets forth the details of the creation and direction the Offshore Trusts based on the jury verdict (the violation phase), the undisputed facts, and the District Court’s own factual findings.” 
Between 1992 and 1996 Sam and Charles Wyly caused the establishment of offshore trusts and various subsidiary entities. Some of the trusts were settled for the benefit of their families and some charitable organizations (the Bulldog trusts) and some were nominally settled by a foreign citizen (the Bessie trusts). Between 1992 and 1999, Sam and Charles transferred securities to these trusts. “These securities were in the form of options and warrants in public companies for which Sam and Charles served as directors during part or all of the relevant time period.” The trusts and subsidiary companies exercised options and warrants and engaged in other activities regarding the securities between 1995 and 2005. The bankruptcy court, following on the district court opinion, found that the trusts could have lawfully deferred taxation on the income related to the securities if Sam and Charles had given up beneficial ownership of the securities. During this period Sam and Charles never disclosed beneficial ownership of the securities in the offshore trusts to the SEC making their actions toward the IRS and the SEC consistent. 
The jury found that, in fact, Sam and Charles controlled the securities throughout this period and beneficially owned the securities. Consequently, the jury found them liable on nine counts of securities fraud. “Disgorgement serves to remedy securities law violations by depriving violators of the fruits of the illegal conduct.” In the disgorgement phase the district court found that Sam and Charles maintained a consistent position with respect to the IRS and the SEC regarding the securities for the purpose of avoiding taxation and that the appropriate measure of damages should look to the income tax not paid as a result of the securities fraud. Because of the link between the securities case and the issues presented in the 505(a) litigation over the amount of the tax liability related to the offshore trusts, the government sought issue preclusion (collateral estoppel) on 64 issues decided during the securities litigation. Because the debtors did not point to any distinctions among the 64 issues, the bankruptcy court treated them as a unit.
Keith Then discusses the issue preclusion issue.

My previous blogs on the disgorgement proceedings are:

  • Wylys Ordered to Disgorge Hundreds of Millions of Tax Benefits With Interest (Federal Tax Crimes Blog 9/27/14), here.
  • Wyly Brothers' Use and Tax Abuse of Offshore Banks and Entities (Federal Tax Crimes Blog 8/5/14), here.
  • SEC Suit for Disgorgement of Federal Income Tax Related to Securities Fraud (Federal Tax Crimes Blog 6/16/13), here.

Thursday, September 17, 2015

Two More Banks Obtain NPAs under DOJ Swiss Bank Program (9/17/15)

On September 17, 2015, DOJ announced here that St. Galler Kantonalbank AG (SGKB) and E. Gutzwiller & Cie, Banquiers (Gutzwiller) have entered an NPA under the DOJ program for Swiss banks, here.  The penalties are:

St. Galler Kantonalbank AG (SGKB)
$9.481 million
E. Gutzwiller & Cie, Banquiers (Gutzwiller)
$1.556 million

Here are key excerpts.
St. Galler Kantonalbank AG (SGKB) has its headquarters in the Canton of St. Gallen, Switzerland.  It was founded in 1868 to provide credit services to Cantonal residents and to assist in the development of the regional economy.  By Cantonal law, the Canton of St. Gallen is SGKB’s majority shareholder, owning 54.8 percent of SGKB’s shares.
SGKB offered a variety of traditional Swiss banking services that it knew could assist, and that did in fact assist, U.S. clients in the concealment of assets and income from the Internal Revenue Service (IRS).  These services included hold mail, as well as code name or numbered account services.  These services helped U.S. clients eliminate the paper trail associated with the undeclared assets and income they held at SGKB in Switzerland.  By accepting and maintaining such accounts, SGKB assisted some U.S. taxpayers in evading their U.S. tax obligations. 
SGKB agreed to open accounts for at least 58 U.S. taxpayers who had left other banks being investigated by the department without ensuring that each such account was compliant with U.S. tax law from their inception at SGKB.  SGKB also issued checks, including series of checks, in amounts of less than $10,000 that were drawn on accounts of U.S. taxpayers or structures in at least nine cases, totaling $3 million.  For example, one U.S. taxpayer made 31 wire transfers for just less than $10,000 between June 2012 and December 2012.  SGKB further processed large cash withdrawals totaling approximately $5.8 million for at least 14 U.S. taxpayers at or around the time the clients’ accounts were closed, even though SGKB knew, or had reason to know, the accounts contained undeclared assets. 
Since Aug. 1, 2008, SGKB held accounts for 41 entities or structured accounts.  Eight of these accounts came to SGKB as part of the acquisition of business from Hyposwiss Privatbank AG, of which SGKB formerly was the parent company.  Of the remaining 33 entities, 18 were incorporated at or around the time their SGKB accounts were opened.  These entities were incorporated in Switzerland, Liechtenstein, St. Vincent and the Grenadines, the United States, Ireland, Panama, Haiti and Belize. 
In August 2008, SGKB mandated that no new funds would be accepted from U.S. residents without a signed IRS Form W-9.  However, certain executives had full discretion and authority to make exceptions to this policy, in keeping with SGKB’s general bank policy of permitting flexibility in its directives.  One executive first requested the authority to make a specific exception because he already had agreed to accept a “pipeline” of problematic U.S.-related accounts from UBS and wanted to keep his word to his former UBS colleague.  This “pipeline” consisted of six U.S.-related accounts with approximately $9.2 million in assets under management.  This executive granted another significant exception from this policy in connection with clients of an external asset manager.  At least 72 accounts with approximately $150 million in assets under management were opened at an SGKB subsidiary between late October and December 2008 without a Form W-9 as an exception to SGKB’s policy.  The majority of these accounts were transferred from UBS. 
Since Aug. 1, 2008, SGKB held a total of 626 U.S.-related accounts with approximately $303 million in assets under management.  SGKB will pay a penalty of $9.481 million.