Belgian Charges Against UBS for Money Laundering and Tax Evasion (2/26/16)

A number of internet articles indicate that UBS has been charged with money laundering and tax evasion.  See e.g., Joshua Franklin, Belgium charges UBS with money laundering, tax fraud (Reuters 2/26/16), here.  Here are some excerpts:

A Belgian judge has charged Swiss bank UBS with money laundering and serious and organized tax fraud, Brussels prosecutors said in a statement on Friday. 

"The Swiss bank is suspected of having directly, and not via its Belgian subsidiary, approached Belgian clients to convince them to set up structures aimed at evading taxes," Brussels prosecutors said in a statement. 

* * * * 

Belgian prosecutors said they were able to firm up the case against UBS through cooperation with French authorities and the work of an inquiry committee. 

I will post more today if I obtain more details.

NPR Planet Money Podcast on a Tax Protestor (2/20/16)

I just listened to this podcast episode of NPR's Planet Money:  Episode 685: Larry vs. The IRS (Planet Money), here.  I recommend it to readers of this blog.  Larry Williams, an admitted risk taker, allegedly received bad advice from a camping buddy lawyer.  Here is the blurb from the web site:

A lot of people dream of not paying their taxes. Larry Williams scoured the fine print of IRS code, talked to lawyers, settled on a plan, then just stopped paying taxes. Today on the show, we tell his story. It starts on a fateful camping trip, it winds through a jail cell in Australia and a courtroom in California, and it ends up in the U.S. Virgin Islands.

The show goes through basic tax and criminal law related to tax protestors / deniers.  There is a brief discussion of the Cheek concept that ignorance of the tax law can be a defense -- a sincerely held belief that the taxpayer does not owe the tax is a defense.  Cheek v. United States, 498 U.S. 192 (1991), here.  Many refer to this as the Cheek or good faith defense.  The podcast does not get into Cheek's exclusion of constitutional defenses from the defense, so that tax protestors / deniers should steer clear of those defenses.  At any rate, it is a short episode (around 20 minutes) and very well presented.  I recommend.  (The comments posted on the web site are interesting, also.)

One interesting point of the Cheek case is that the very late Justice Scalia wrote  a concurring opinion excoriating his colleagues in the majority for creating an artificial distinction allowing the good faith defense for nonconstitutional sincerely held belief but not for constitutional sincerely held belief.  Let's let him speak for himself.  His concurring opinion is short and very well stated. He keys off the longstanding definition of the willfulness element for tax crimes -- repeated in Cheek -- as the intentional violation of a known legal duty.  Here is the dissent:

JUSTICE SCALIA, concurring in the judgment. 

I concur in the judgment of Court because our cases have consistently held that the failure to pay a tax in the good-faith belief that it is not legally owing is not "willful." I do not join the Court's opinion because I do not agree with the test for willfulness that it directs the Court of Appeals to apply on remand. 

As the Court acknowledges, our opinions from the 1930s to the 1970s have interpreted the word "willfully" in the criminal tax statutes as requiring the "bad purpose" or "evil motive" of "intentional[ly] violat[ing] a known legal duty." See, e.g., United States v. Pomponio, 429 U.S. 10, 12 (1976); United States v. Murdock, 290 U.S. 389, 394-395 (1933). It seems to me that today's opinion squarely reverses that long-established statutory construction when it says that a good-faith erroneous belief in the unconstitutionality of a tax law is no defense. It is quite impossible to say that a statute which one believes unconstitutional represents a "known legal duty." See Marbury v. Madison, 1 Cranch 137, 91 Cranch 177177-178 (1803).

Good Article on Pitfalls for Quiet Disclosure in the Offshore Setting (2/20/16)

Many readers of this blog will or should be interested in this article offered by  Frank Agostino and Lawrence A. Sannicandro of Agostino & Associates:  “Gotcha" -- Unanticipated Audit Issues After Quiet Disclosures (Agostino & Associates Monthly Journal of Tax Controversy (February 2016), here.  This firm has been very active in the offshore account area and thus can speak with authority and experience in this context.

I cut and paste from the Introduction and the Conclusion so that those interested will know whether to read the article.

I. Introduction 

Some taxpayers not willing to pay the 27.5% penalty that otherwise applied under the traditional Offshore Voluntary Disclosure Programs have made quiet disclosures or entered into the Streamlined Filing Compliance Procedures (“Streamlined Program”). Many of these taxpayers rejected the protections of the Offshore Voluntary Disclosure Programs in favor of what they perceived to be a more cost-effective quiet or streamlined disclosure. These taxpayers have subjected themselves to criminal liability and audit adjustments which, depending upon the source of the unreported income, could easily eclipse the 27.5% penalty under the traditional program. In this regard, audits of returns submitted as quiet disclosures or under the Streamlined Program have been (and should be) troubling to both practitioners and clients.  

This article discusses common audit adjustments that can apply to returns for taxpayers with international activities, including: the disallowance of deductions and credits for U.S. citizens, resident aliens, and nonresident aliens; the disallowance of the foreign earned income exclusion for U.S. citizens and resident aliens; and the Internal Revenue Service’s ability to recharacterize as ordinary income purported gifts and bequests from a partnership or a foreign corporation under Treas. Reg. § 1.672(f)-4. This article also highlights those taxpayers who are most likely to be negatively affected by each type of adjustment. Finally, for taxpayers who imprudently made a quiet disclosure, this article discusses how to transition the taxpayer from a quiet disclosure to a traditional Offshore Voluntary Disclosure Program.  

*** 

VIII. Conclusion

Practitioners worry about audits of returns submitted as quiet disclosures for good reason. The Service has been far less draconian in submissions under a traditional Offshore Voluntary Disclosure Program or the Streamlined Program, but revenue agents have taken a hard line in disallowing otherwise deductions and credits with respect to quiet disclosures. In this regard, the Service is granted broad authority to deny legitimate deductions, credits, and income exclusions, and to recast transactions to not only prevent the avoidance of U.S. tax but to impute income to U.S. donees and legatees. Practitioners should consider these issues when advising taxpayers to submit  returns as quiet disclosures, pursuant to the Streamlined Program, or under the traditional Offshore Voluntary Disclosure Program. Finally, it is important for practitioners to reevaluate whether the quiet disclosure was in fact a more cost-effective alternative than the traditional Offshore Voluntary Disclosure Program before being contacted by the Service. 

IRS Issues Publication Warning of Abusive Tax Shelters and Scams (2/17/16)

The IRS issued  IR-2016-25 (2/16/16), here, titled Abusive Tax Shelters Again on the IRS “Dirty Dozen” List of Tax Scams for the 2016 Filing Season.  In this announcement, the IRS singles out some particularly abusive kinds that appear to be ripe for criminal investigation and prosecution.  They are:

• Abusive Tax Structures (which I call bullshit tax shelters)
• Misuse of Trusts
• Captive Insurance.

I cut and paste just the discussion on Abusive Tax Structures (bullshit tax shelters):

Abusive Tax Structures 

Abusive tax schemes have evolved from simple structuring of abusive domestic and foreign trust arrangements into sophisticated strategies that take advantage of the financial secrecy laws of some foreign jurisdictions and the availability of credit/debit cards issued from offshore financial institutions. 

IRS Criminal Investigation (CI) has developed a nationally coordinated program to combat these abusive tax schemes. CI's primary focus is on the identification and investigation of the tax scheme promoters as well as those who play a substantial or integral role in facilitating, aiding, assisting, or furthering the abusive tax scheme, such as accountants or lawyers. Just as important is the investigation of investors who knowingly participate in abusive tax schemes. 

Multiple flow-through entities are commonly used as part of a taxpayer's scheme to evade taxes. These schemes may use Limited Liability Companies (LLCs), Limited Liability Partnerships (LLPs), International Business Companies (IBCs), foreign financial accounts, offshore credit/debit cards and other similar instruments. They are designed to conceal the true nature and ownership of the taxable income and/or assets.
Whether something is “too good to be true” is important to consider before buying into any arrangements that promise to “eliminate” or “substantially reduce” your tax liability. 

 If an arrangement uses unnecessary steps or a form that does not match its substance, then that arrangement is an abusive scheme.  Another thing to remember is that the promoters of abusive tax schemes often employ financial instruments in their schemes; however, the instruments are used for improper purposes including the facilitation of tax evasion.

Here is my discussion of the features of abusive tax shelters from the current working draft of my Federal Tax Procedure Book (footnotes omitted):

The Revenue Rule: Is It Relevant Any More? Should It Be? (2/16/16)

Keith Fogg has this excellent blog today:  Why is the IRS Collecting Taxes for Denmark? (ProceduralyTaxing 2/16/16), here.  As Keith notes in the blog entry, the general rule -- certainly in the U.S. -- is that one country (the U.S. in this case) does not involve itself in the collection of other countries' taxes.  This is a specific application of the so-called so-called "Revenue Rule."  I explain that rule in my Federal Tax Procedure book as follows (footnotes omitted):

Historically, the “Revenue Rule,” has been a barrier to one country seeking to collect taxes in another country.  According to the most recent Supreme Court foray into the rule, the Revenue Rule “at its core * * * prohibited the collection of tax obligations of foreign nations.”  Although described as a common law rule (suggesting some affiliation with Anglo-American jurisprudence), the Revenue Rule in one form or another is the general rule among countries. 

This means that taxpayers desiring to avoid U.S. tax can put their assets in a foreign jurisdiction and thereby avoid the U.S. being able to collect U.S. tax from those assets.  Similarly, persons subject to foreign country tax (including U.S. persons whose operations are subject to tax in a foreign country) can put or keep their money in the U.S. and avoid the foreign country enforcing those tax liabilities in the U.S.

But, cracks in the rule have developed over the years.  Here is my discussion of those cracks (footnotes omitted):

C. Cracks in the Revenue Rule.

1. Treaties.

As noted above, U.S. tax treaties now have exchange of information requirements which obligate one treaty party, upon a proper request from the other, to use their internal processes to obtain information and share it with the other party.  

Some U.S. treaties go beyond merely the exchange of information and provide for use of each other's legal systems for tax collections.  E.g., the Third Protocol (1995) of the U.S.-Canada Treaty of 1980 provides for reciprocal enforcement of some tax debts of the treaty parties.  The majority decision in Attorney General of Canada indicated that there are only 5 U.S. treaties providing for general assistance in collecting some tax debts of the other treaty partner.  The standard treaty provision requires such assistance in collecting only amounts necessary to protect on the Limitations of Benefits clause. 

Of course, the reason Tax Haven jurisdictions have no such treaty provisions (they wouldn’t be Tax Haven jurisdictions if they did) is to avoid such treaty information sharing provisions and tax debt collection provisions.  Tax Havens typically do not have such treaties with the U.S.  But Tax Havens are under heavy attack to change their ways.  Thus, in response to economic incentives, some of these traditional Tax Haven countries have entered into Tax Information Exchange Agreement (also referred to as a “TIEA”).  How effectively they work is another issue.  But the point here is that a taxpayer may get caught in this ever-expanding net as the developed countries continue their assault on Tax Havens and offer them sufficient incentives to move closer to the global mainstream.  At some point, this could mean not only tax information sharing agreements, but also reciprocal tax debt collection as in the U.S.-Canada Treaty. 

2. Pasquantino and Extensions.

US DOJ Swiss Bank Program Categories 3 and 4 Comments (2/4/16; 2/7/16)

As readers know, DOJ has just announced the final NPA under the DOJ Swiss Bank Program for so-called Category 2 banks.  Category 2 was designed to resolve potential criminal issues for banks who had committed criminal acts with respect to U.S. depositors, provided that they were not under criminal investigation at the time (the latter banks are called Category 1 banks).  The DOJ Swiss Bank Program had two other categories, Categories 3 and 4.  Banks qualifying under Categories 3 and 4 were banks who had not committed criminal acts (thus not being in the scope of Category 2) but who desired to obtain "Non-Target Letters" ("NTLs")

Thus, one condition for a Category 3 bank was (par. III.A.3.):

3. that [it] has not committed any tax-related offenses under Titles 18 or 26, United States Code, or monetary transactions offenses under §§ 5314 or 5322, Title 31, United States Code, in connection with undeclared U.S. Related Accounts held by the Swiss Bank during the Applicable Period (i.e., that is not a Category 2 Bank).

A condition for a Category 4 bank was (par. IV.A.2.):

2. that is a "Deemed Compliant Financial Institution" as a "Financial Institution with Local Client Base" under the FATCA Agreement, Annex II Paragraph II.A.1, as if the FATCA Agreement were in force during the Applicable Period (except that the Swiss Bank must meet the terms of Annex II, Paragraph II.A.1.e on December 31, 2009, and the date of the announcement of this Program),

I won't parse that Category 4 condition; suffice it to say that these banks would not be Category 2 banks because they did not commit criminal acts in the "Applicable Period."

A Swiss bank within the scope of Categories 3 and 4 had until October 31 to provide a letter to DOJ Tax of its intent to seek an NTL and then meet certain requirements as to an Independent Examiner, recordkeeping, and waiver of the defense of the statute of limitations and preindictment delay if DOJ were to discover that they had indeed committed criminal misconduct.

I have received inquiries about whether any banks within the scope of Categories 3 and 4 actually completed the requirements and obtained NTLs.  Unlike NPAs for Category 2 banks, DOJ Tax makes no announcement of issuing NTLs under Categories 2 and 3, just as it makes no public announcement when and if it issue such or similar letters in grand jury investigations generally.  So, this raises two questions.

1. Why would any Swiss bank have seen a benefit in obtaining a Non-Target Letter.
2. Did any actually seek and obtain Non-Target Letters.

Why would Any Swiss Bank Seek NTLs?

Bank Julius Baer, a Category 1 Bank, Enters Deferred Prosecution Agreement with Payment of $547 Million (2/4/16)

DOJ announced, here, that Bank Julius Baer (sometimes "BJB") has entered a deferred prosecution Agreement.  I provide certain key excerpts from the press release and deferred prosecution agreement below.  Except for the headings, the bold face is supplied by me to draw the readers attention to the information bold-faced.  Please note that this is a very quick summary due to the press of time.  I may add more later.

Key excerpts from the press release are:

Acting Assistant Attorney General Ciraolo and U.S. Attorney Bharara also announced a deferred prosecution agreement with Julius Baer (the agreement) under which the company admits that it knowingly assisted many of its U.S. taxpayer-clients in evading their tax obligations under U.S. law.  The admissions are contained in a detailed Statement of Facts attached to the agreement.  The agreement requires Julius Baer to pay a total of $547 million by no later than Feb. 9, 2016, including through a parallel civil forfeiture action also filed today in the Southern District of New York. 

* * * *  

The criminal charge is contained in an Information (the information) alleging one count of conspiracy to (1) defraud the IRS, (2) to file false federal income tax returns and (3) to evade federal income taxes.  If Julius Baer abides by all of the terms of the agreement, the government will defer prosecution on the Information for three years and then seek to dismiss the charges. 

In addition, two Julius Baer client advisers, Daniela Casadei and Fabio Frazzetto, pleaded guilty in Manhattan federal court today.   Casadei and Frazzetto were originally charged in 2011 and remained at large until Feb. 1, when they each made initial appearances before the Honorable Gabriel W. Gorenstein, U.S. Magistrate Judge for the Southern District of New York.  

Casadei and Frazzetto each pleaded guilty to an Information (collectively, with the Julius Baer information, the informations) before U.S. District Judge Laura Taylor Swain charging them with conspiring with U.S. taxpayer-clients and others to help U.S. taxpayers hide their assets in offshore accounts and to evade U.S. taxes on the income earned in those accounts.  

* * * * 

The Offense Conduct 

From at least the 1990s through 2009, Julius Baer helped many of its U.S. taxpayer-clients evade their U.S. tax obligations, file false federal tax returns with the IRS and otherwise hide accounts held at Julius Baer from the IRS (hereinafter, undeclared accounts).  Julius Baer did so by opening and maintaining undeclared accounts for U.S. taxpayers and by allowing third-party asset managers to open undeclared accounts for U.S. taxpayers at Julius Baer.  Casadei and Frazzetto, bankers who worked as client advisers at Julius Baer, directly assisted various U.S. taxpayer-clients in maintaining undeclared accounts at Julius Baer in order to evade their obligations under U.S.  law.  At various times, Casadei, Frazzetto and others advised those U.S. taxpayer-clients that their accounts at Julius Baer would not be disclosed to the IRS because Julius Baer had a long tradition of bank secrecy and no longer had offices in the United States, making Julius Baer less vulnerable to pressure from U.S. law enforcement authorities than other Swiss banks with a presence in the United States.    

In furtherance of the scheme to help U.S. taxpayers hide assets from the IRS and evade taxes, Julius Baer undertook, among other actions, the following: 

• Entering into “code word agreements” with U.S. taxpayer-clients under which Julius Baer agreed not to identify the U.S. taxpayers by name within the bank or on bank documents, but rather to identify the U.S. taxpayers by code name or number, in order to reduce the risk that U.S. tax authorities would learn the identities of the U.S. taxpayers.
• Opening and maintaining accounts for many U.S. taxpayer-clients held in the name of non-U.S. corporations, foundations, trusts, or other legal entities (collectively, structures) or non-U.S. relatives, thereby helping such U.S. taxpayers conceal their beneficial ownership of the accounts.

Julius Baer was aware that many U.S. taxpayer-clients were maintaining undeclared accounts at Julius Baer in order to evade their U.S. tax obligations, in violation of U.S. law.  In internal Julius Baer correspondence, undeclared accounts held by U.S. taxpayers were at times referred to as “black money,” “non W-9,” “tax neutral,” “unofficial,” or “sensitive” accounts.

Another Taxpayer Guilty Plea for Offshore Account Misbehavior (2/3/16)

The DOJ press release is here.

Former U.S. Citizen Pleads Guilty to Tax Fraud Related to Swiss Financial Account 

Used Hong Kong Entity and Foreign Accounts in Switzerland, Monaco and Singapore to Conceal Funds 

A former U.S. citizen residing in Switzerland pleaded guilty today to one count of filing a false income tax return, announced Acting Assistant Attorney General Caroline D. Ciraolo of the Justice Department’s Tax Division and U.S. Attorney Dana J. Boente of the Eastern District of Virginia. 

* * * * 

According to court documents, in 2006, Albert Cambata, 61, established Dragonflyer Ltd., a Hong Kong corporate entity, with the assistance of a Swiss banker and a Swiss attorney.  Days later, he opened a financial account at Swiss Bank 1 in the name of Dragonflyer.  Although he was not listed on the opening documents as a director or an authorized signatory, Cambata was identified on another bank document as the beneficial owner of the Dragonflyer account.  That same year, Cambata received $12 million from Hummingbird Holdings Ltd., a Belizean company.  The $12 million originated from a Panamanian aviation management company called Cambata Aviation S.A. and was deposited to the Dragonflyer bank account at Swiss Bank 1 in November 2006.  

* * * * 

On his 2007 and 2008 federal income tax returns, Cambata failed to report interest income earned on his Swiss financial account in the amounts of $77,298 and $206,408, respectively.  In April 2008, Cambata caused the Swiss attorney to request that Swiss Bank 1 send five million Euros from the Swiss financial account to an account Cambata controlled at the Monaco branch of Swiss Bank 3.  In June 2008, Cambata closed his financial account with Swiss Bank 1 in the name of Dragonflyer and moved the funds to an account he controlled at the Singapore branch of Swiss Bank 2.  

In 2012, Cambata, who has lived in Switzerland since 2007, went to the U.S. Embassy in Bratislava, Slovakia, to renounce his U.S. citizenship and informed the U.S. Department of State that he had acquired the nationality of St. Kitts and Nevis by virtue of naturalization.

Comments:

Two Ex-Julius Baer Bankers Return to U.S. to Face Charges (2/2/16)

There are several articles reporting that Daniela Casadei and Fabio Frazzetto, two former Julius Baier bankers, have voluntarily come to the U.S., have entered not guilty pleas, but, reportedly will enter guilty pleas when Julius Baer resolves its case with a $547 million payment.  E.g., Nate Raymond, Two ex-Julius Baer bankers plead not guilty in U.S. tax case (Reuters 2/2/16), here.  David Voreacos, Patricia Hurtado and Giles Broom, Julius Baer Bankers Said Ready to Plead Guilty in Tax Case (BloombergBusiness 2/2/16), here.

Prior reporting involving their initial indictment is Swiss Bankers / Enablers Indictment; Reputedly Julius Baer Related (Federal Tax Crimes Blog 10/11/11), here.

I recently reported that Julius Baer appeared to be on the verge of settling its criminal tax investigation.  Julius Baer Group Ltd. Expects to Pay $547 Million to US to Conclude Criminal Investigation (Federal Tax Crimes Blog 12/31/15), here.  In that blog I said:

3.  Two Julius Baer employees, Daniela Casadei and Fabio Frazzetto, were indicted in 2011, but have not yet come to the U.S., so the case has not proceeded beyond the indictment stage.  See BloombergBusiness article.  And, they are reported to still be with Julius Baer.  I would not expect that their criminal indictments will be resolved by the resolution with Julius Baer and would expect that their relationship with Julius Baer will be terminated.  (I am surprised that Julius Baer had not already terminate them in an attempt to curry favor with DOJ.)

I surmise that the report identifying them as "Ex-Julius Baer bankers" suggests that they are no longer with Julius Baer.  Perhaps more importantly, It is not clear whether, since they are not extraditable, Julius Baer induced them to come to the U.S. as a component of its appeasement with the U.S.   As to the reputed guilty plea, I can't imagine that they came back without first achieving a plea deal they deemed beneficial.