According to the press release:
U.S. District Judge William H. Pauley III entered an order authorizing the Internal Revenue Service to issue a summons requiring UBS AG (“UBS”) to produce information about U.S. taxpayers who may hold accounts at the Swiss bank Wegelin & Co. (“Wegelin”) and other banks based in Switzerland to evade federal income taxes. Specifically, the IRS summons seeks records of Wegelin’s United States correspondent account at UBS, which will allow the United States to determine the identity of the U.S. taxpayers who hold or held interests in financial accounts at Wegelin and other Swiss financial institutions that used Wegelin’s UBS account.The following excerpts from the Government's Memorandum of Law in Support of the United States' Ex Parte Petition for Leave to Serve John Doe Summons might be helpful in understanding the use of correspondent accounts for the skullduggery alleged:
1. Wegelin, of course, has pled guitly to conspiring with U.S. taxpayers, among others, to avoid their U.S. tax obligations for income reporting (including correct responses to Schedule B's question about foreign accounts) and correspondending tax payments and for FBAR reporting. Wegelin accomplished this criminal objective in part by use of UBS as a correspondent bank in the U.S.
Wegelin accessed the U.S. financial market through a correspondent bank account, Account No. 101-WA-358967-000, held at UBS in Stamford, Connecticut. Id. ¶ 20. UBS, in turn, maintains its headquarters in the Southern District of New York. n1 Id. Through the UBS Correspondent Account, Wegelin could wire funds [*5] from Switzerland to UBS in Stamford, Connecticut, as well as from Stamford, Connecticut, to Switzerland or other accounts overseas. Id. ¶ 21. Wegelin also had the ability to issue US currency checks drawn on the UBS Correspondent Account. Id. Wegelin used the UBS Correspondent Account to provide offshore banking services to dozens of U.S. taxpayers, who the IRS believes may have failed to report the existence of their Swiss bank accounts to the IRS and the Department of the Treasury. Id. ¶¶ 24-25.
In addition, Wegelin offered nested correspondent services to Other Swiss Banks that also held undeclared accounts for U.S. taxpayer-clients. Id. The Other Swiss Banks were able to have Wegelin issue checks drawn on the UBS Correspondent Account on their behalf. Indeed, one of the Other Swiss Banks used its nested relationship with Wegelin despite the fact that it maintained its own correspondent account with UBS in the United States, through which it could have conducted wire transactions directly. Id. ¶ 22.2. After promising its U.S. customers secrecy from the IRS:
Wegelin then helped certain U.S. taxpayer-clients and the Other Swiss Banks repatriate undeclared funds to the United States by issuing checks drawn on, and executing wire transfers through, its UBS Correspondent Account. Compl. ¶ 24; Kiger Dec. ¶ 21.
According to the Verified Complaint and Indictment, Wegelin and certain of its employees advised and assisted U.S taxpayer-clients in concealing their Swiss accounts from the IRS by:
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f. Issuing checks drawn on, and executing wire transfers through, the UBS Correspondent Account, sometimes in batches of under $10,000 each to minimize the risk of detection by the IRS.
g. Concealing the nature of its transactions on behalf of U.S. taxpayer-clients’ undeclared accounts by commingling funds transferred to or from those undeclared accounts with millions of dollars of additional funds that Wegelin moved through the UBS Correspondent Account.
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Indeed, based on the IRS’s experience, U.S. taxpayers have made use of offshore accounts such as the accounts maintained at Wegelin and the Other Swiss Banks through the UBS Correspondent Account to evade the reporting and payment of income taxes. See Id. ¶¶ 3, 23, 32, 34, 41.
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Because correspondent accounts by their nature are more susceptible to being used for money laundering, the U.S.A. Patriot Act and related regulations imposed obligations on U.S. financial institutions housing correspondent accounts for foreign banks to implement certain policies, procedures and controls, including conducting a periodic review of the correspondent account activity sufficient to determine consistency with information obtained about the type, purpose and anticipated activity in the account. Id. ¶ 26.
To further its pending investigation and the identification of U.S. taxpayers who failed to disclose private offshore accounts, the IRS through the Summons is seeking information that will allow it to identify U.S. taxpayer-clients of Wegelin and the Other Swiss Banks who have not disclosed the existence of their Swiss accounts, nor reported income earned on those accounts. The “John Doe” class, therefore, is described as follows:
United States taxpayers, who at any time during the years ended December 31, 2002 through December 31, 2011, directly or indirectly had interests in or signature or other authority (including authority to withdraw funds; trade or give instructions or receive account statements, confirmations, or other information, advice or solicitations) with respect to any financial accounts maintained at, monitored by, or managed through [Wegelin] and financial accounts maintained at, monitored by, or managed through other Swiss financial institutions that [Wegelin] permitted to transact client business through its [UBS Correspondent Account].
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The Verified Complaint and Kiger Declaration explain that Wegelin used the UBS Correspondent Account to facilitate the concealment of its U.S. taxpayer-clients’ undeclared Swiss accounts by, among other things, [*18] routing money to those clients through the UBS Correspondent Account to fictitious corporate entities or third parties and in installments of $8,500 to help avoid detection by the IRS. Compl. ¶¶ 25, 44; Kiger Dec. ¶ 39. Wegelin also allowed the Other Swiss Banks to access its UBS Correspondent Account for similar purposes. Id.
In a TNT article reporting on this development, the author quotes practitioners who raise warnings that this type of action might be a prelude FAQ 21's suggestion of an announcement limiting the universe of taxpayers who can get into the OVDP 2012. See Shamik Trivedi, Federal Judge Authorizes John Doe Summons for UBS Correspondent Account, 2013 TNT 20-1 (1/30/13). FAQ 21 is (emphasis supplied):
21. If the IRS has served a John Doe summons or made a treaty request seeking information that may identify a taxpayer as holding an undisclosed foreign account or undisclosed foreign entity, does that make the taxpayer ineligible to make a voluntary disclosure under this program?
No. The mere fact that the Service served a John Doe summons, made a treaty request or has taken similar action does not make every member of the Joe Doe class or group identified in the treaty request or other action ineligible to participate. However, once the Service or the Department of Justice obtains information under a John Doe summons, treaty request or other similar action that provides evidence of a specific taxpayer's noncompliance with the tax laws or Title 31 reporting requirements, that particular taxpayer will become ineligible for OVDP and Criminal Investigation's Voluntary Disclosure Practice. For this reason, a taxpayer concerned that a party subject to a John Doe summons, treaty request or similar action will provide information about him to the Service should apply to make a voluntary disclosure as soon as possible.
Furthermore, there are two other ways in which a taxpayer will become ineligible. First, if a taxpayer appeals a foreign tax administrator's decision authorizing the providing of account information to the IRS and fails to serve the notice of account information to the IRS and fails to serve the notice as required under existing law, see 18 U.S.C. 3506, of any such appeal and/or other documents relating to the appeal on the Attorney General of the United States at the time such notice of appeal or other document is submitted, the taxpayer will be ineligible to participate. Second, the IRS may announce that certain taxpayer groups that have or had accounts at specific financial instructions will be ineligible due to U.S. government actions in connection with the specific financial institution. Such announcements will provide notice of the prospective date upon which eligibility for specific taxpayer groups will be posted to the 2012 Offshore Voluntary Disclosure Program.The key excerpt from the article is:
For now, the issuance of a John Doe summons is not an event that would render a voluntary disclosure untimely, Michel said, citing FAQ 21 of the current iteration of the IRS's offshore voluntary disclosure program's (OVDP) frequently asked questions . But whether that policy will remain in place is unclear, he said.
FAQ 21 says that the IRS may announce that certain groups of taxpayers "that have or had accounts at specific financial institutions will be ineligible [for the OVDP] due to U.S. government actions in connection with the specific financial institution." Although the government would prefer to funnel account holders into the OVDP, Michel said it would not surprise him if the IRS announced at some point that Wegelin account holders would be barred from the program.
For readers who may be interested in more background on the John Doe Summons process, I offer the statute -- Section 7609(f), here -- and the following from the current draft of my Federal Tax Crimes book (footnotes omitted):
4. John Doe Summons.
The “John Doe Summons” is a summons to a third party that has records that might identify taxpayers with potential U.S. tax liabilities but whose identities are unknown to the IRS. For most of the time that the procedure has been available, the most prominent use of the John Doe Summons was to discover the names of tax shelter investors from the tax shelter promoters to whom the John Doe Summons is issued. Most recently, the most prominent use of the John Doe Summons was to discover the names of U.S. taxpayers with accounts in offshore Tax Haven jurisdictions either from credit card processors or, most recently, the foreign institution itself.
The John Doe Summons procedures require the IRS to first convince a court that the investigation relates to a particular person or ascertainable group or class of persons, that there is reasonable cause to believe that the person or persons so identified may not have complied with the tax laws, and that the information sought is not readily available from other sources. The check in the normal third party summons procedures is that the taxpayer, who must be notified (subject to the rules noted above), will have the incentive to contest any overreaching by the IRS. As to unidentified third parties, however, the IRS cannot provide notice to the taxpayers because it does not know who they are. The requirement for advance court approval for such summonses is a surrogate -- through a check by an objective third party, the district judge -- for notice to the taxpayer.
If the summonsed party refuses to comply with the summons, the Government can bring a summons enforcement proceeding. In that summons enforcement proceeding, the summonsed party can assert the Powell defenses (as noted above, rarely sustained). Also, the unidentified third parties may seek leave to intervene under a legal pseudonym (often John Doe) to assert those defenses. Neither may, however, contest the propriety of the ex parte order allowing the John Doe summons ab initio.
The IRS sometimes finds that the John Doe Summons procedures slow it down. The IRS must first convince DOJ Tax that it is worth pursuing through the procedure. DOJ Tax must gear up and present the matter to a frequently skeptical and almost always overworked District Court who must play devil’s advocate to the Government’s ex parte application for the summons. Obviously, the IRS would much prefer just to use its administrative summons which has no such cumbersome steps.
In United States v. Tiffany Fine Arts, Inc., 469 U.S. 310 (1985), the Supreme Court blessed the IRS’s use of the regular administrative summons rather than the John Doe Summons where the target of the summons was a shelter promoter which had transactions relevant to its tax liability which, if discovered, might also identify otherwise unknown shelter investors and be relevant to their tax liabilities. By allegedly investigating the promoter’s tax liability to support inquiries into whether it reported its income from those unknown shelter investors, the IRS could summons the information under the general administrative summons by meeting the minimal requirements of Powell. The Supreme Court blessed that gambit and refused to require the John Doe Summons procedure. After Tiffany Fine Arts, the IRS saw an escape from the annoyances of the John Doe Summons procedures -- simply find a reason to audit the third party record-keeper and find some pretext that obtaining the names of the third parties is relevant under the Powell standards to the audit of that record-keeper.
The IRS tried that gambit in United States v. Gertner. In Gertner, a client of a law firm paid the firm a large amount of cash which required that the law firm file the CTR reporting the receipt of cash. The client did not want his name divulged to the Government for fear that the Government might use the information as to possession of that amount of cash against the client. The law firm filed the CTR but asserted ethical obligations, attorney-client privilege, and specified constitutional protections against naming the payor (i.e., the client). The John Doe Summons would fit the situation like a glove, assuming of course that a court would have authorized its issuance. Not to be slowed down, the IRS issued a regular summons for records (billing records) and testimony that would identify the client. The law firm declined to comply, asserting the same grounds. The Government moved to enforce the summons.
The district court refused to enforce the summons, finding that the IRS’s use of the regular IRS summons was not in good faith. The Supreme Court in Tiffany Fine Arts had blessed use of a regular summons which might have the collateral effect of identifying unknown taxpayers only if related to an investigation of the person whose records were seized. The Government thus had to represent in the proceeding that it had a legitimate interest in auditing the law firm. The Court found that that representation in Gertner was pretextual – a hoax – designed only to end-run the John Doe Summons procedure.
The Court of Appeals reviewed the agent’s affidavit which it found to be conclusory and with no detail behind the conclusions. Under the burden shifting analysis quoted above, the Court found that the bare-bones affidavit just barely cleared Powell’s first-tier requirement “with little room to spare,” a defect which haunted the Government when the taxpayer scaled the second-tier burden. The affidavit was just boiler-plate from an affidavit successfully used in a prior proceeding. Focusing on the second-tier, the Court of Appeals noted that the law firm documented the allegation that the IRS’s allegations of real interest in the tax liability of the law firm and its partners was pretextual. Having successfully met the requirement of the second-tier, the Government then failed to meet its burden in the third-tier by proving the Powell requirement that the summons be issued for the putative purpose of determining the law firm’s liability rather than as a pretext to obtain the client’s name as an end-run around the John Doe Summons procedure.
The Government asserted that Tiffany Fine Arts required the enforcement of the summons. The Court of Appeals disagreed, saying that the critical difference was a trial court finding in Tiffany Fine Arts that the Powell requirement had been met as to the summonsee. In Gertner, by contrast, the trial court found that the regular summons was pretextual, and that finding was not reversible on appeal.
As Gertner shows, the IRS is quite enamored with the Tiffany Fine Arts end-run around the hassle of the John Doe Summons procedure. The standard technique is to clone the agent’s affidavit in Tiffany Fine Arts or some other successful case involving the gambit, usually with some diligence to change the names and dates but without much customizing to insure that the “form” fits the circumstances. Gertner establishes that the IRS is at risk if it fails to insure that it really does have a legitimate investigative interest in the summonsee.
Recently, the most prominent instances of the IRS use of the John Doe Summons have been to identify U.S. taxpayers using offshore financial accounts to hide taxable income. For such activity, the expectation of secrecy is the name of the game, so this activity is concentrated in countries that are referred to as “tax havens.” The IRS is often unable to determine whether the U.S. taxpayer has a Tax Haven financial account or the amount in the account if they knew or suspected he or she had one. The John Doe Summons works well in such a case, at least when the party having information that can identify the U.S. taxpayers is within the IRS summons power (meaning that a U.S. court will impose meaningful sufficient pain via the contempt power to compel compliance).
Most Tax Haven financial institutions participating in this offshore evasion service for U.S. taxpayers try to avoid any U.S. presence that would subject them to the IRS summons and U.S. court contempt powers. They are not always successful. So the IRS has used the John Doe Summons in two prominent “waves.”
First, the IRS issued John Doe Summonses to U.S. credit and debit card processors who processed the credit and debit card transactions that U.S. taxpayers used to tap their offshore funds in a way that they and the Tax Haven banks thought would be invisible to the IRS. Once those debit and credit card transaction documents were obtained, the IRS might be able to match names or, in some cases, tie back to charges for U.S. taxpayer accounts at the U.S. vendor. The issuance and approval of the John Doe summonses to the credit and debit card transaction processors were covered with great fanfare in the press. Taking advantage of the press, the IRS created a special voluntary disclosure initiative whereby U.S. taxpayers having offshore accounts could solve their potential criminal exposure. (I will talk more about the special voluntary disclosure initiative later.)
Second, in 2008, the IRS fired the second volley in the offshore financial institution war via the John Doe Summons issued to what appears to have been the worst offender – the giant UBS, a Swiss financial institution. UBS, which had a substantial U.S. presence for other reasons, routinely assisted U.S. taxpayers hide their income from the IRS. Rather than sitting in Switzerland beyond the IRS summons power and U.S. court contempt power, UBS’s bankers made substantial forays into the U.S. to practice the skulduggery. The IRS learned of these activities and issued a John Doe Summons to UBS for it to disclose the names of the estimated 50,000+ U.S. taxpayer maintaining accounts with UBS. UBS claimed that Swiss law prevented it from complying with the summons, the Swiss Government got into the fray in order to assert its sovereign right to assist U.S. taxpayer cheat on their taxes by maintaining their anonymity, and an international crisis was created. Both sides blinked, but not before the U.S. breached the dam of vaunted Swiss bank secrecy. The upshot was that UBS agreed to a deferred prosecution agreement requiring it to pay more than $750 million in fines and, more importantly, the Swiss Government agreed to reinterpret the exchange of information provision of the U.S. / Switzerland double tax treaty to permit UBS to make the disclosures of the names and account information for the taxpayers that the IRS had not identified. So, although the John Doe Summons did not technically produce the information sought, the reinterpretation of the treaty is producing some of the information sought and that reinterpretation was the result, in major part, of the John Doe Summons (as well as the criminal deferred prosecution agreement and other initiatives). The dam was breached, and the expectation is that the hole will get bigger through exchange of information treaty processes.