Senate Press Release and Report on Offshore Evasion Through Shell Banks Skirting FATCA (8/28/22)

Senator Wyden led a major Senate Finance Committee investigation that produced a press release and report about use of “shell bank” to avoid the FATCA reporting requirements.  See the press release titled Wyden Investigation Uncovers Major Loophole In Offshore Account Reporting, here, and the report titled The Shell Bank Loophole, here.  The press release offers a good summary of the report (see particularly the “Key Findings” in the press release).

The following are summaries of the key points that readers of this blog may be interested in:

1. The gambit requires that the shell bank be registered with the IRS.  The press release says that establishing a shell bank with foreign accounts that do not get reported to the IRS is simple:

The key steps:

1. Establish a shell company in a FATCA partner jurisdiction, even those in well-known tax haven jurisdictions like Bermuda or the British Virgin Islands.

2. Submit IRS form 8957 to register the shell company as a foreign financial institution and obtain a Global Intermediary Identification Number (GIIN).

3. Open an account at a bank in Switzerland, or other FATCA partner jurisdiction, in the name of the shell company now registered as a financial institution. Use an attorney or other intermediary as the signatory of the account.

4. Invest in private equity firms or other investment vehicles and direct the fund manager to wire proceeds from investment activities in the United States to the shell company’s account in Switzerland or elsewhere.

The results:

•  The Swiss bank is no longer required to report that the account is held by U.S. persons because the account is held in the name of an entity with a valid GIIN number. The Swiss bank is also no longer required to conduct due diligence to determine whether the account has a U.S. nexus.

•  The shell company is now operating as a “shell bank” and can self-certify reporting offshore accounts to IRS for FATCA purposes.

•  In the absence of an audit or other federal investigation, is it highly unlikely the IRS will detect whether these accounts are concealing or underreporting assets held by U.S. persons.

2. The numbers of such shell banks mean that, with limited resources, the IRS cannot check them out for their bona fides.  The press release says: “The $80 billion in funding for the IRS in the Inflation Reduction Act should be used to address this problem.”  [Perhaps there will be significant new work for tax crimes practitioners.]

3. As to the poster child (case study) for the report, the Brockman shell banks, the report relates the following regarding the general background for the Brockman prosecution:

Of additional concern is that it appears Brockman’s scheme may have gone undetected by the IRS and federal prosecutors were it not for evidence provided by a whistleblower and the cooperation of several co-conspirators.5 A former Vista Director of Finance provided extensive information related to the investigation and filed a formal whistleblower claim with the IRS.6 Despite being a central participant in Brockman’s scheme and admitting to engaging in tax evasion by failing to report more than $200 million in partnership income, Vista CEO Robert Smith avoided federal prosecution by paying fines and agreeing to cooperate with the investigation into Brockman.7  (Report pp. 3-4.)
   n5 In re Seizure of All Funds up to $77,888, 782.62 in Mirabaud Bank Account $509951 in the Name of Edge Capital Invs., Ltd., Located in Switz., No. 1:20-mc-00183-MEH (D. Colo. Oct, 22, 2020), (At pgs. 7-8: The Department of Justice in 2018 granted immunity to Bermuda-based attorney Evatt Tamine in exchange for his cooperation with investigations into Robert Brockman and Robert Smith.)
   n6 Search and Seizure Warrant filed in U.S. v. Carlos Kepke, 3:21-cr-00155-JD (Document # 44-3) (S. District of Texas Jun. 3, 2022) (At Exhibit 1 pg. 46: Denise Davis has filed two applications for award for original information, Forms 211 with the IRS; At Exhibit 1 pg. 78: Davis also stated that she learned that Brockman controlled Point Investments from conversations she had with her supervisor at  Vista-Vista CFO John Warnken-Brill. Davis claimed she was instructed by Warnken-Brill to never associate Brockman with Point.)
   n7 Private Equity CEO Enters into Non-prosecution Agreement on International Tax Fraud Scheme and Agrees to Pay $139 Million, to Abandon $182 Million in Charitable Contribution Deductions, and to Cooperate with Government Investigations, U.S. Department of Justice, Oct. 15, 2020,  https://www.justice.gov/opa/pr/privateequity-ceo-enters-non-prosecution-agreement-international-tax-fraud-scheme-and-agrees (U.S. Attorney David Anderson stated that “Smith’s agreement to cooperate has put him on a path away from indictment”); How Billionaire Robert Smith Avoided Indictment in a Multimillion-Dollar Tax Case, Bloomberg, Feb. 3, 2021, https://www.bloomberg.com/news/features/2021-02-03/how-billionaire-robert-smith-avoided-indictment-inmultimillion-dollar-tax-case.

4. The report has the following discussions (described by the titles the report puts on them):

• Robert Brockman’s alleged scheme to hide $2.7 billion in income from the IRS (Report pp. 9-10)
• Due diligence and reporting requirements for Swiss banks under Swiss law and FATCA agreements (Report pp. 10-11.)
• The “shell bank’’ loophole that exempts Swiss banks from reporting accounts held by U.S. persons (Report pp. 12.)
• How Brockman and his associates exploited the “shell bank” loophole (Report pp. 12-14.)
• “Reason to know” provision in the U.S. – Switzerland IGA raises questions as to whether Brockman’s accounts should have been identified and reported to IRS. (Report pp. 14-16.)
• IRS approval of FATCA registrations for foreign financial institutions (Report pp. 16-18 (including a table titled Cheat Sheet: How to turn your shell company into an IRS approved “shell bank”. (Slip Op. 16-18.)
•  The failure to audit partnerships and weak reporting rules create a permissive environment for tax evasion (Report pp. 19-20.)

On this last bullet point, the report notes the extremely low number of audits of partnerships (percentages of partnership returns audited over a three-year period ranges from 0.22% to 0.11%).