The correspondent account and its use in tax enforcement in the context of offshore banks is described as:
A correspondent account is a bank deposit account maintained by one bank for another bank. Financial transactions involving U.S. dollars flow through U.S. banks. Therefore, foreign banks that do business in U.S. dollars, but have no office in the U.S., obtain a correspondent account at a U.S. bank in order to engage in such transactions. These transactions leave a trail in the U.S. that the IRS can access through the records of the correspondent bank accounts. These correspondent bank accounts have records of money deposited, money paid out through checks and money moved through the correspondent account by wire transfers. All of this information the IRS can obtain through a John Doe summons issued to the U.S. bank holding the correspondent account.As best I understand it, through the correspondent bank, the offshore bank without any other U.S. presence can service U.S. customers for some of their needs. But, the U.S. bank establishing the correspondent relationship -- in this case, Wells Fargo -- has a U.S. presence which means that it is subject to U.S. process, including a John Doe Summons which can be used to ferret out information of the offshore bank's customers using the relationship. The use of such correspondent bank relationships to service U.S. customers needs is the weakness in offshore banks' claims of impregnability to U.S. tax and law enforcement because they have no U.S. presence. A similar JDS was issued to UBS's U.S. branch for records of its correspodent relationship with Wegelin & Co. See prior coverage on the Wegelin related JDS. IRS Issues John Doe Summons to UBS (All Over Again) (1/28/13; updated 2/2/13), here.
The IRS agent's declaration asserts:
the IRS learned that U.S. taxpayers were using FCIB to help them keep their offshore accounts undetected by the IRS and not to pay U.S. federal income tax on money placed in those offshore accounts. Kiger’s declaration describes her review of the information submitted by more than 120 FCIB customers who participated in the IRS’s Offshore Voluntary Disclosure Program. According to the Kiger declaration, many of the FCIB customers in the John Doe class may have been under-reporting income, evading income taxes, or otherwise violating the internal revenue laws of the United States.Addendum: If the investigation is a grand jury investigation rather than an IRS administrative investigation, the grand jury subpoena can be used, although it would be a general grand jury subpoena rather than one specially authorized by statute. The general grand jury subpoena can effectively mimic the John Doe Summons in terms of the information and documents it will flush out and thus might be called a John Doe Grand Jury Subpoena. Here is a discussion from the FBI website from an article y Douglas Leff, Taking the Profit Out of Crime (April 2012), here, footnotes omitted:
9) Correspondent bank accounts: Virtually all foreign banks maintain correspondent accounts, also known as interbank accounts, in the United States to conduct American dollar transactions on behalf of their customers. These simply are accounts opened at U.S. banks in the name of a foreign financial institution. Even without jurisdiction over a foreign bank, investigators can serve a grand jury subpoena and receive records of any checks or wire transfers that cleared through the U.S. correspondent account on behalf of the foreign bank. By learning the senders or beneficiaries of these transactions, the investigator can determine the likely beneficial owners of the foreign account, as well as other foreign and domestic accounts involved in the money laundering cycle. And, where forfeitable funds are traced to a financial institution in a country that will not cooperate with the United States, DOJ can authorize the use of Section 981(k), a Patriot Act provision, which permits the seizure from a U.S. correspondent account of a sum equivalent to the amount of criminal proceeds laundered to the foreign bank. The U.S. correspondent bank relinquishes the money and provides the foreign bank with the seizure warrant so that the foreign bank can recoup the amount seized from its correspondent account by taking the same sum from its account holder. The foreign bank usually is not complicit in the money laundering but is subject to the seizure based on its role in holding the money launderer’s funds overseas. The Section 981(k) seizure authority can often be obtained within a few weeks.The Court documents related to this filing are:
- US Petition for FCIB JDS.pdf, here.
- US Petition for FCIB JDS - Declaration.pdf, here.
- US Memo in Support of FCIB JDS.pdf, here.
- US Notice in FCIB re No Service to Others.pdf, here.
- Order to Serve FCIB JDS.pdf, here.
Correspondent banking is the provision of banking services by one bank to another bank. It is a lucrative and important segment of the banking industry. It enables banks to conduct business and provide services for their customers in jurisdictions where the banks have no physical presence. For example, a bank that is licensed in a foreign country and has no office in the United States may want to provide certain services in the United States for its customers in order [to] attract or retain the business of important clients with U.S. business activities. Instead of bearing the costs of licensing, staffing and operating its own offices in the United States, the bank might open a correspondent account with an existing U.S. bank. By establishing such a relationship, the foreign bank, called a respondent, and through it, its customers, can receive many or all of the services offered by the U.S. bank, called the correspondent.
Today, banks establish multiple correspondent relationships throughout the world so they may engage in international financial transactions for themselves and their clients in places where they do not have a physical presence. Many of the largest international banks located in the major financial centers of the world serve as correspondents for thousands of other banks. Due to U.S. prominence in international trade and the high demand for U.S. dollars due to their overall stability, most foreign banks that wish to provide international services to their customers have accounts in the United States capable of transacting business in U.S. dollars. Those that lack a physical presence in the U.S. will do so through correspondent accounts, creating a large market for those services.
Another practice in U.S. correspondent banking which increases money laundering risks in the field is the practice of foreign banks operating through the U.S. correspondent accounts of other foreign banks. The investigation uncovered numerous instances of foreign banks gaining access to U.S. banks - not by opening a U.S. correspondent account - but by opening an account at another foreign bank which, in tum, has an account at a U.S. bank. In some cases, the U.S. bank was unaware that a foreign bank was "nested" in the correspondent account the U.S. bank had
opened for another foreign bank; in other cases, the U.S. bank not only knew but approved of the practice. In a few instances, the U.S. banks were surprised to learn that a single correspondent account was serving as a gateway for multiple foreign banks to gain access to U.S. dollar accounts, U.S. wire transfer systems and other services available in the United States.
• Determining whether each such foreign correspondent account is subject
to [Enhanced Due Diligence].
• Assessing the money laundering risks presented by each such foreign correspondent
• Applying risk-based procedures and controls to each such foreign correspondent account reasonably designed to detect and report known or suspected money laundering activity, including a periodic review of the correspondent account activity sufficient to determine consistency with information obtained about the type, purpose, and anticipated activity of the account.
- bank statements
- front and back of deposit slips and deposited items
- front and back of checks
- wire transfer orders and confirmations and other similar records of all wire transfers into and out of the account indicating the originator, originator's bank, beneficiary, beneficiary's bank, intermediary banks, ordering party, date and amount, and any reference information for parties to the transfer.