DOJ Is Moving Past Switzerland to Prosecute Financial Institutions - 2 Cayman Banks Plead Guilty (3/8/16 & 3/14/16))

In this press release titled First Conviction of Non-Swiss Financial Institution For Tax Evasion Conspiracy, here, DOJ Tax announces the guilty please of two Cayman banks -- 

Cayman National Securities Ltd. (CNS) and Cayman National Trust Co. Ltd. (CNT), two Cayman Island affiliates of Cayman National Corporation, which provided investment brokerage and trust management services to individuals and entities within and outside the Cayman Islands, including citizens and residents of the United States (U.S. taxpayers).

Readers should note the DOJ Tax's choice of the word "First" in the title.  I think there is a suggesion that there will be a second, third, etc., over time.  Here are some excerpts (emphasis supplied by JAT):

“Today’s convictions make clear that our focus is not on any one bank, insurance company or asset management firm, or even any one country,” said Acting Deputy Assistant Attorney General Goldberg of the Justice Department’s Tax Division. “The Department and IRS are following the money across the globe – there are no safe havens for U.S. citizens engaged in tax evasion or those actively assisting them.” 

* * * * 

From at least 2001 through 2011, CNS and CNT, which are both located in Grand Cayman and organized under the laws of the Cayman Islands, assisted certain U.S. taxpayers in evading their U.S. tax obligations to the IRS and otherwise hiding accounts held at CNS and CNT from the IRS (hereinafter, undeclared accounts).  CNS and CNT did so by knowingly opening and maintaining undeclared accounts for U.S. taxpayers at CNS and CNT.  Specifically, and among other things, in furtherance of a scheme to help U.S. taxpayers hide assets from the IRS and evade taxes: 

CNS and CNT opened, and/or encouraged many U.S. taxpayer-clients to open accounts held in the name of sham Caymanian companies and trusts (collectively, structures), thereby helping U.S. taxpayers conceal their beneficial ownership of the accounts.
CNS and CNT treated these sham Caymanian structures as the account holders and allowed the U.S. beneficial owners of the accounts to trade in U.S. securities. 

 CNS failed to disclose to the IRS the identities of the U.S. beneficial owners who were trading in U.S. securities, in contravention of CNS’s obligations under its Qualified Intermediary Agreement (QI) with the IRS.

 After learning about the investigation of Swiss bank UBS AG (UBS), in or about 2008, for assisting U.S. taxpayers to evade their U.S. tax obligations, CNS and CNT continued to knowingly maintain undeclared accounts for U.S. taxpayer-clients and did not begin to engage in any significant remedial efforts with respect to those accounts until 2011 and 2012. 

The sham Caymanian structures that CNT set up for U.S. taxpayer-clients included trusts, which were nominally controlled by CNT trust officers, but which in fact were controlled by the U.S. taxpayer-clients; managed companies, for which CNT ostensibly provided direction and management services, but which in truth were shell companies that served only to hold the assets of the U.S. taxpayer-clients; and registered office companies, which were shell companies for which CNT simply supplied a Caymanian mailing address.  CNS treated these sham Caymanian structures as the account holders and then permitted the U.S. taxpayer-clients to trade in U.S. securities, without requiring them to submit Form W-9s, which are IRS forms that identify individuals as U.S. taxpayers, as CNS was obligated to do under its QI obligations for accounts held by U.S. persons that held U.S. securities.  CNS and CNT agreed to maintain these structures for U.S. taxpayer-clients after many of them expressed concern that their accounts would be detected by the IRS.

In or about April 2008, it became publicly known that the U.S. Department of Justice was investigating UBS for assisting U.S. taxpayers to evade their U.S. tax obligations.  Thereafter, despite the public disclosure of the UBS case, and CNS’s awareness of it, CNS continued to assist U.S. taxpayer-clients in concealing their accounts from the IRS by, among other things, failing to require them to complete Form W-9s.  Likewise, up through at least 2010, CNT continued to rely on account opening documentation that, rather than barring the creation of non-tax compliant structures, simply assigned higher “risk” points to such structures.  In or about June 2011, CNT hired a new president, who spearheaded a review of CNT’s files.  In the course of that review, not a single file was found to be complete and without tax or other issues.  Moreover, with respect to the structures that had U.S. beneficial owners, CNT’s files contained little, if any, evidence of tax compliance. 

At their high-water mark in 2009, CNS and CNT had approximately $137 million in assets under management relating to undeclared accounts held by U.S. taxpayer-clients.  From 2001 through 2011, CNS and CNT earned more than $3.4 million in gross revenues from the undeclared U.S. taxpayer accounts that they maintained.  

As part of their plea agreements with the U.S. Attorney’s Office for the Southern District of New York (the office), CNS and CNT have agreed to cooperate fully with the office’s investigation of the companies’ criminal conduct.  To date, CNS and CNT have already made substantial efforts to cooperate with that investigation, including by: (1) facilitating interviews that the office conducted of CNS and CNT employees, including top level executives; (2) voluntarily producing documents in response to the office’s requests; (3) providing, in response to a treaty request, unredacted client files for approximately 20 percent of the U.S. taxpayer-clients who maintained accounts at CNS and CNT; and (4) committing to assist in responding to a treaty request that is expected to result in the production of unredacted client files for approximately 90 to 95 percent of the U.S. taxpayer-clients who maintained accounts at CNS and CNT.

These banks will be be added to the IRS's Foreign Financial Institutions or Facilitators, here.  As indicated in the last quoted paragraph, accountholders in the listed banks joining OVDP after one of their banks are listed will be subject to the 50% penalty in OVDP (provided that they do not opt out, in which case, who knows).

I will update my statistics to show the tentacles for financial institutions going past Switzerland and post my opening entries later, hopefully this week.

This announcement raises several questions.

1.  Did these financial institutions decide to approach DOJ Tax to get ahead of the curve as the vise closes on non-Swiss foreign financial institutions with this genre of misbehavior.  Certainly, I speculate (for that is what it is) that foreign financial institutions with this genre of misbehavior might be able to get a much better deal by coming in early.

2.  Note that the bank produced files on certain U.S. persons and will assist in treaty requests for the bulk of the U.S. persons.  The message here is not so much for those persons -- they are cooked -- but for others in other, as yet publicly disclosed foreign banks, to get in line via either OVDP or, should they be so bold as to certify nonwillfulness, one of the streamlined programs.

3.  Under the plea agreements, which I have reviewed but do not have links to, the institutions are required to pay the following:

Institution	Forfeiture	Restitution	Fine *	Total Payment
Cayman National Securities Ltd.	$1,708,735	$906,587	$384,679	$3,000,000
Cayman National Trust Co. Ltd.	$1,708,735	$906,587	$384,679	$3,000,000

 *    This is the fine recommended in the plea agreement.  Under the Guidelines, the fine recommendation is not binding on the judge.  According to the plea agreement, the Guideline Fine Range is $4,128,768 to $8,257,536.  The recommended fine is a substantial downward departure based on substantial assistance and “ability to pay a fine.”

4. Neither company gets any credit or reduction “for payments made to the Government by U.S. taxpayers through the Offshore Voluntary Disclosure Initiative and similar programs before or after the date of this Agreement.”

5. Neither company gets any U.S. tax benefit by deduction or otherwise from the payments.

6.  The agreement does not provide any immunity or protection for any individual.

7.  The provision for continuing cooperation is:

                It is further understood that, consistent with its obligations under Cayman Island law, including data protection, bank secrecy, or other confidentiality laws (such as Mutual Legal Assistance Treaties or Tax Information Exchange Agreements, the Intergovernmental Agreement (IGA) between the United States and the Cayman Islands, Cayman Islands Monetary Authority's rules and regulations, the direction or order of the courts of the Cayman Islands, or The Royal Cayman Islands Police Service), CNS shall, with respect to the Office's Investigation: (a) truthfully and completely disclose all information with respect to the activities of CNS and its officers, agents, affiliates, and employees concerning all matters about which this Office inquires of it, which information can be used for any purpose; (b) cooperate fully with this Office, the Tax Division, IRS-CI, and any other government agency designated by this Office; (c) attend all meetings at which this Office request its presence and use its reasonable best efforts to secure the attendance and truthful statements or testimony of any past or current officers, agents, or employees at any meeting or interview or before the grand jury or at trial or at any other court proceeding; (d) provide to this Office upon request any document, record, or other tangible evidence relating to matters about which this Office or any designated law enforcement agency inquires of it; (e) assemble, organize, and provide in a responsive and prompt fashion, and upon request, on an expedited schedule, all documents, records, information and other evidence in CNS's possession, custody or control as may be requested by this Office, the Tax Division, IRS-CI, or designated governmental agency, including collecting and maintaining all records that are potentially responsive to United States' requests for documents located abroad so that these requests may be promptly responded to; (f) provide to this Office any information and documents that come to CNS's attention that may be relevant to this Office's Investigation, as specified by this Office; (g) provide testimony or information concerning the conduct set forth in the Information and/or Statement of Facts including but not limited to testimony and information necessary to identify or establish the original location, authenticity, or other basis for admission into evidence of documents or physical evidence in any criminal or other proceeding as requested by this Office, the Tax Division, the IRS-CI, or designated governmental agency; (h) bring to this Office's attention all criminal conduct by CNS or any of its employees acting within the scope of their employment related to the Office's Investigation, as to which CNS's Board of Directors, senior management, or United States legal and compliance personnel are aware; and (i) bring to the Office's attention any administrative, regulatory, civil, or criminal proceeding or investigation of CNS relating to the Office's Investigation. To the extent documents above are in a foreign language, CNS agrees it will provide, at its own expense, fair and accurate translations of any foreign language documents produced by CNS to this Office either directly or through any Mutual Legal Assistance Treaties or Tax Information Exchange Agreements. Nothing in this Agreement shall be construed to require CNS to provide any information, documents, or testimony protected by the attorney-client privilege, work-product doctrine, or other applicable privileges.

Here are my aggregate statistics:

Financial Institution Summary
Treaty requests	15
John Doe Summonses	12
Criminal Matters
Criminal (incl Investigations and Prosecutions)	23
Guilty Plea	5
Forfeiture	5
Deferred Prosecution Agreement ("DPA")	6
NonProsecution Agreement ("NPA")	82
IRS Financial Institution List (OVDP Offshore Penalty Bump to 50%) *	101
Total Costs (Fines, Restitution, Other Penalties, etc.)	$6,000,000
US DOJ Swiss Bank Program	Number	Number Resolved	Total Costs
U.S. / Swiss Bank Initiative Category 1 (Criminal Inv.) *	16	5	$4,017,800,000
U.S. / Swiss Bank Initiative Category 2 **	91	81	$1,363,683,990
U.S. / Swiss Bank Initiative Category 3	14		$0
U.S. / Swiss Bank Initiative Category 4	8		$0
Swiss Bank Program Results	129		$5,381,483,990
* Includes subsidiary or related entities counted as separate entities, so the numbers may exceed the numbers the IRS and DOJ posted numbers which combine some of the entities.
** DOJ says original total was 106 but that it expects about 80 to complete the process.
Foreign Bank & Bank Related Other than Swiss
Bank Leumi & Related			$157,000,000
Liechtensteinische Landesbank AG			$7,525,542
Cayman National Securities Ltd.			$3,000,000
Cayman National Trust Co. Ltd.			$3,000,000
Total			$164,525,542
Sum of Swiss Bank Program and Other			$5,546,009,532