Rubinstein on the State of Offshore Bank Account Compliance (6/12/13)

Asher Rubinstein, here, has posted an article titled, Offshore Update: The Door to Foreign Account Amnesty Can Close At Any Time, here.  Key points that interested me are:

1.  After naming certain Swiss banks in the IRS and DOJ cross-hairs, he says:(par. 3) that IRS may and presumably will "close the door" on U.S. depositors in those banks qualifying for OVDP.

2.  He says the following about Singapore banks becoming targets:

The inclusion of Singapore is significant because of the rise of Singapore as a major international financial center.  The flow of        funds from Switzerland to Singapore when Swiss banking secrecy evaporated was substantial.  According to one report, the amount on deposit in Singapore has grown more than fifty percent over the last five years, which is precisely the period of time since UBS was sued by the DOJ.  Although there have been suggestions that Singapore might be “the next Switzerland”, this is unlikely.  Singapore would not risk its financial reputation (depending on the report, either the fourth or fifth largest world financial center, after New York, London, Tokyo and Hong Kong) to be a harbor for non-compliant accounts.  Singapore makes a significant amount of money from legitimate international banking and would not jeopardize this by being “blacklisted” as an uncooperative tax haven, as it was a decade ago.  To this end, Singapore has recently announced that it is in talks with the US on a FATCA-type of agreement.  In addition, a new regulation requires Singapore banks to identify all accounts that may harbor the proceeds of tax evasion, and close them.  Failure to abide by this new law will result in criminal charges for the Singaporean bankers under Singapore law.

He later says:

Recently, the IRS and tax authorities in the UK and Australia agreed to exchange information regarding offshore trusts and corporations.  In its press release announcing this agreement, the IRS specifically noted that the three countries have already “acquired a substantial amount of data revealing extensive use of such entities organized in a number of jurisdictions including Singapore, the British Virgin Islands, Cayman Islands and the Cook Islands.  The data contains both the identities of the individual owners of these entities, as well as the advisors who assisted in establishing the entity structure.”

He concludes:

           In light of the above, there can be no expectation or even hope of banking secrecy.  US taxpayers with undisclosed foreign assets have little choice but to voluntarily come into tax compliance, before the IRS comes to them. 

            Merely closing a foreign account is not an alternative, because DOJ and IRS never limit their investigations to only current accounts.  In the case of UBS, DOJ’s John Doe Summons sought banking records back to 2000.  In the case of Liechtensteinische Landesbank, DOJ requested records back to 2004.  In the case of Julius Baer, the investigation goes back to 2002.  In other words, closing an account today does nothing to remedy the non-compliant past, and DOJ and the IRS focus on past non-compliance.  In addition, a wire transfer or bank check from the foreign account to a US account (or account elsewhere) creates an easy trail back to the foreign account, and would also give rise to due diligence, “know your client” and source of funds inquiries by the recipient bank.  Using the non-compliant funds to buy real estate or other assets also creates a trail and does nothing to undo the non-compliant past, which will be the focus of the IRS investigation. 

             Moreover, the IRS has taken a particular interest in the transfer of funds from a non-compliant account as an attempt to continue to avoid or keep a step ahead of the IRS.  For instance, once UBS cooperated with the IRS, the IRS followed the flow of funds from UBS to banks such as Wegelin in Switzerland and Leumi in Israel.  Wegelin was criminally indicted for its acceptance of funds from UBS, and Leumi is under investigation for the same reason.  In fact, evidence of such transfers could be used by DOJ prosecutors in building a case that a taxpayer willfully evaded the IRS and, rather than bringing a foreign account into tax compliance, proactively took steps to continue the hiding of assets and income from the IRS.  Such facts would have profound consequences in a criminal tax fraud prosecution, settlement possibilities and punishment. 

            In most cases, the only viable path forward is to take advantage of the current IRS amnesty program and bring the foreign account into tax compliance.  The IRS 2012 Offshore Voluntary Disclosure Program remains open, although the IRS can end the program at any time.  Equally important, the IRS can announce at any time that US clients of a specific foreign bank or banks under investigation are no longer eligible to participate in the OVDP.  Thus, US taxpayers who still own foreign accounts that are not tax compliant must not take a “wait and see” attitude because it might be too late, as the door to amnesty – - and lower penalties – - could be abruptly closed.