Friday, December 24, 2010

Rumors that Offshore Bank Inquiry Expands to Other Swiss Banks and even to Wall Street

Lynnley Browning of The New York Times today here passes on rumors -- presumably from a reliable unnamed source -- that

1. "federal authorities are looking at Wall Street banks that provide banking services to the regional companies, known as cantonal banks."

2. "the Wall Street banks might have been used by the regional banks to pool client money so that individual clients could not be identified by the United States authorities." The article does caution that "There is no indication that the Wall Street banks, which the two people declined to identify, have knowingly engaged in wrongdoing."

3. "The new investigation centers on Basler Kantonalbank, one of the larger regional companies, but includes other cantonal banks as well, the people briefed on the investigation said, declining to identify them." Readers will recall that Renzo Gadola worked with (not for, perhaps) Basler Kantonalbank. I blogged previously on his original charge here and on his guilty plea just two days ago here.

4. "Investigators looking at the cantonal banks have been helped in recent months by wealthy Americans who have made detailed voluntary disclosures to the I.R.S. of their hidden offshore accounts in exchange for reduced fines and penalties. The disclosures effectively provide a road map of the banks, trust companies, advisers and other intermediaries who were involved in helping them hide their money. "

5. "Large Swiss banks suffered steep outflows in recent years as the United States cracked down on UBS, and much of the American and European client money was assumed to have fled to the Far East. But the two people said on Thursday that perhaps tens of billions of dollars ended up in cantonal banks."

6. "One new technique that emerged during the UBS crackdown was for American clients to open a small account at a cantonal bank and declare its contents to the I.R.S., while keeping the bulk of their money in hidden, undeclared accounts, the two people said. The Justice Department suspects that scores of private bankers who left UBS and other large Swiss banks to work at smaller banks and trust companies sold this technique, the two people said. " Renjo Gadola was one of the bankers who redeployed from UBS to a smaller bank -- specifically Basler Kantonalbank.

None of this is surprising. Swiss banks' forte for non non-Swiss depositors is to hide money , much of the time when non-Swiss law enforcement has a legitimate reason to know about the money being hidden. It was never just a UBS problem, although UBS may have been the most egregious in terms of its sending operatives into the U.S. for all sorts of skullduggery.

And, I suppose it is not at all surprising that there would be twists on the theme of hiding money so that, for appropriate monetary consideration, U.S. banks would lend a helping hand whether knowingly or unknowingly (wink-wink). But, again, this is rumor from anonymous sources. Things will develop.

I do think the take away from this widening activity is that U.S. depositors into foreign bank accounts -- particularly Swiss bank accounts -- who have not yet joined the voluntary disclosure program should seriously consider joining the program now. Readers will recall that the program continues after its nominal closing date of 10/15/09, subject only to an as yet uncertain higher penalty amount.


  1. From the NYT article: "One new technique that emerged during the UBS crackdown was for American clients to open a small account at a cantonal bank and declare its contents to the I.R.S., while keeping the bulk of their money in hidden, undeclared accounts"

    This is interesting and deserves elaboration. Did the taxpayers have an account at UBS, and then transfer some of the funds to a Kantonal bank and declare those funds, while keeping the funds at UBS undeclared?

    One problem would be the record of the transfer from UBS. Another issue is that, if the taxpayer declared the Kantonal funds within the Voluntary Disclosure Program, but did not include the UBS funds in the disclosure, then the disclosure would be incomplete and the taxpayer risks ejection from the voluntary disclosure program and the full measure of penalties, including criminal consequences.

    Jack, I agree fully that the take away for U.S. taxpayers with non-compliant foreign accounts is to make a voluntary disclosure, even now, after the expiration of the Offshore Voluntary Disclosure Program in 2009. IRS Commissioner Shulman has twice publicly hinted that a new voluntary disclosure program may be announced soon.

    Happy holidays and New Year, Jack.

  2. Life is too short. I disclosed in the 2009 initiative and while it was scary and costly I am so thankful its done and I am compliant. My situation was one of inheritance from an immigrant relative as we are immigrants. I have been following these events with keen interest and I am convinced that the IRS is determined to continue crushing the concept of undeclared offshore accounts. To risk the huge financial penalties and even more significantly the potential criminal sanctions is not worth it. I would hope that shortly the IRS will announce terms of the anticipated new VDP and were I still out there in this situation I would run, not walk, towards participation in it. The costs will be significant and the process will probably be slow and frustrating but this is the price that must be paid for peace of mind and compliance.
    Think about all the tools IRS is implementing: Revised QI, FATCA, John Doe Summons, Informant Program, VDP(information source),Tax Information Exchange Agreements. The bottom line is that these undeclared accounts are toxic. How in the world can one rest easy with one of these time bombs unless it is made compliant. We were able to calculate very accurately the costs to clean it up in 2009. If IRS spells out a new program, that benefit will be available again although it will likely be at a higher cost. My advice would be to consult with a practioner experienced in handling these matters. Discuss the fees, the anticipated costs of settlement,the risks of being found untimely or unqualified for VDP and then suck it up and disclose if the diagnosis is right. In the end you will sleep better at night and be able to have unfettered access to the funds that are left. Hopefully the terms of this anticipated new VDP will not be ramped up too high.

  3. While some of the people doing these "partial" voluntary disclosures may the serial tax evaders and the worst of the worst, there is also a good probability that this is a self inflicted wound by the DOJ that is the result of the distrust caused by the prosecution of frustrated VDs and practioner's obligation to discuss these cases. As a result, the unsophisticated man on the street may have simply decided to hedge their bets, do a small VD and see if they were treated fairly by DOJ and IRS. And, they probably figured, if they were prosecuted for any reason, it would be a relatively small portion of their overseas assets and they could always disclose the rest later if they felt the government was trustworthy, they were treated fairly and the penalty structure applied was as promised to them. (I'm not saying this is right or what anyone should do by any means, but that may be how the man in the street reacts to the news stories out there and the risk assessment from his practioner.) Or, if you draw in the comments from Phil Hodgen's blog, others may have simply wanted to buy enough time as an expat to renounce their citizenship or move back to their homeland if they were a non-US citizen.

    The government thought that they could get a bunch of quickie guilty pleas by prosecuting frustrated VDs - and they did. But they never thought about the price of doing that... and in the process they created massive distrust and questions about the advisability of doing a VD in the eyes of the unsophisticated man in the street. So much so that those who had not come forward (and were likely far more willfull) probably decided to hedge their bets. So nobody should be surprised when higher penalties for a doing a VD under a second amnesty program and the prosecution of more VDs on technical grounds leads to more "partial" VDs and an even bigger mess for the IRS to sort out since they don't know what portion of the 16,000 VDs are incomplete and/or are heading back to their native homelands. This is the price the government is paying for all of the asterisks around the VDP - no guarantee of non-prosecution, no certainty about the administration of penalties, and naively calculating the penalty as a percentage of the peak account value rather than it's value on the date of declaration.

    Now they're going to have to start reviewing those 16,000 VDs which may not be so lily white after all and figure out what percentage of those are incomplete...

  4. If one truly understands the Voluntary Disclosure Policy, one would be rather foolish to make a "partial disclosure" which in itself is a fraud that can lead to serious problems. By definition, a valid Voluntary Disclosure must be Timely, Truthful and Complete with total willingness to fully cooperate and pay tax, interest and penalties determined. Otherwise, the Criminal Clearance Letter and or the Closing Agreement can be revoked. It is written so in both documents. To make a "partial disclosure" would be akin to lighting a match to see how much gasoline is in a barrel. I seriously doubt that any reputable tax practioner would have anything to do with such a concept. In my opinion one would be better off not disclosing than to attempt a disclosure based on fraud. This program should be used to clean up a mess as per its guidelines, not to create more problems.
    Am I off base here?

  5. Anonymous, I agree that taxpayers making a partial disclosure are taking on unnecessary risks for themselves. There is a risk that DOJ Tax and/or IRS will be able to obtain directly or indirectly information from other banks and determine that the "voluntary disclosure" was only partial and a further criminal act that, of course, would refresh the statute of limitations.

  6. I agree fully. In one case, a client asked me to represent him in voluntarily disclosing his undeclared account in a Caribbean jurisdiction, but to leave "hidden" his account in Asia. As Anonymous wrote, I wanted no part of that representation. My unwavering advice was that the disclosure had to be complete and truthful and involve all foreign accounts.


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