D.C. Circuit Affirms Preparer Convictions Over Ineffective Assistance Claims (7/30/15)

In United States v. Udo, 795 F.3d 24 (DC Cir. 2015), here, the defendant, a CPA, was a return preparer.  He prepared many false returns falling into a pattern.  The IRS was suspicious and conducted a sting operation.  He prepared a false return for the undercover agent.  He was convicted at trial.  He raised several issues on appeal.  I address only a couple here.

Ineffective Assistance From Promise that Defendant Would Testify and Then Not Testifying

Here are the relevant facts from the opinion:

We recount only the events at Udo's trial relevant to this appeal. During his opening statement at trial, Udo's counsel told the jury that the case "comes down to . . . he said, she said." Trial Tr. 168 (Aug. 1, 2012). Counsel went on to promise that the jury would "hear from Mr. Udo," who would explain that he acted in good faith based on what his clients had told him about their expenses. Id. at 173. But Udo never testified. 

Instead, when the government's case came to a close, Udo's counsel asked the court for a ruling limiting any cross-examination of Udo to those issues about which he would testify: his background, his education, and his knowledge of the law and his professional duties. Relying on Brown v. United States, defense counsel argued that a defendant who testifies in his own defense does not waive the Fifth Amendment's protection from self-incrimination to matters unrelated to his testimony. Cf. Brown v. United States, 356 U.S. 148, 154-55 (1958). In response, the government argued that, at the very least, Federal Rule of Evidence 608(b) permitted questioning Udo about his character for truthfulness. n1 Skeptical of Udo's request, the court stated that it would be "very, very, very surprised" if counsel was correct. Trial Tr. 67 (Aug. 3, 2012). After a short break to consider the question, the court announced that it would not limit cross-examination before Udo testified, and that his credibility was fair game for the government to examine. n2 Udo's counsel decided not to call him to testify.
   n1 Rule 608(b) allows a party to inquire on cross-examination into specific instances of a witness's conduct if those instances are probative of the witness's character for truthfulness. See FED. R. EVID. 608(b).
   n2 Udo does not appeal the court's determination that the government would likely be able to cross-examine him about his character for truthfulness. Cf. Brown, 356 U.S. at 154-55 ("If [a defendant] takes the stand and testifies in his own defense his credibility may be impeached and his testimony assailed like that of any other witness, and the breadth of his waiver is determined by the scope of relevant cross-examination.").

The Court started by saying the, normally, ineffective assistance of counsel is not raised on direct appeal because a hearing may be required.  Nevertheless, the Court determined that on the record it could adequately address the claim.  In doing so, the Court said that "the government's case against him was, in a word, overwhelming."  There was cumulative evidence, and "Udo -- a licensed CPA -- never introduced a shred of evidence suggesting that he thought that making up these expenses out of whole cloth was somehow permissible."  That created a high bar for Udo to show prejudice.

Then turning to the claim and resolution.

Moore II - District Court Approves Penalty But Admonishes the IRS and Imposes a Cost for Misleading Taxpayer (7/28/15)

I previously blogged on an earlier decision in Moore v. United States, 2015 U.S. Dist. LEXIS 43979 (W.D. WA 2015).  The blog is Court Approves FBAR NonWillful Penalty Merits But Wants Further Development of APA Issues (4/3/15), here.  The district court required more development of the record.  The district court's final decision was recently released.  Moore v. United States, 2015 U.S. Dist. LEXIS 99804 (W.D. Wash., July 24, 2015) (W.D. WA 2015), here.

The district court summarizes its already short opinion as follows

1) The United States has demonstrated that the IRS's decision to assess Mr. Moore FBAR penalties of $10,000 for each year from 2005 through 2008 was not arbitrary, not capricious, and not an abuse of its discretion. 

2) The IRS's conduct in assessing those FBAR penalties, by contrast, was in several respects arbitrary and capricious. In particular, the IRS disclosed no adequate basis for its decision to assess the penalties until this litigation forced its hand. Even after this litigation began, the IRS refused to disclose the evidence on which it now relies to demonstrate the basis for its decision to impose those penalties. With respect to the 2005 penalty, the IRS broke its own promise not to impose a penalty until Mr. Moore had an opportunity to respond to its "proposed" assessment. 

3) In light of these rulings, the Government is entitled to judgment for $40,000, although that amount will be offset by the more than $10,000 that Mr. Moore has already paid. In light of the arbitrary and capricious conduct described above, the court rules that any interest, late fee, or other supplemental assessment that the IRS or another agency of the United States has attempted to tack on to Mr. Moore's FBAR penalties is void. The United States shall treat the FBAR penalties as if they were first assessed on the date of this order.

I find the most interesting part of the short explanation of the conclusions the following which relates to the IRS assessment of the 2005 penalty after indicating to Mr. Moore that he could appeal first.  Here is what the court said:

As to its bizarre conduct in assessing the 2005 penalty, the IRS explains that it has an internal policy to assess FBAR penalties at least 180 days before the expiration of the statute of limitations for doing so. That policy is well within its discretion. What is not within its discretion is its decision to offer Mr. Moore the opportunity to contest the 2005 FBAR penalty before its assessment, and then to impose the penalty before the deadline the IRS imposed. The IRS offers no explanation for why it allowed rote application of its internal policies to trump the individual assurances it made to Mr. Moore. 

In light of the court's conclusion that the amount of the penalty the IRS imposed was appropriate, there are two apparent harms arising from its arbitrary and capricious conduct in imposing that penalty. First, Mr. Moore was given the unappealing choice to either accept the IRS's unexplained imposition of a $40,000 penalty or to file suit. The court assumes that Mr. Moore's choice to sue cost him a substantial sum. Second, the IRS has assessed interest and other penalties on top of the FBAR penalties. The court expresses no opinion at this time on whether the first harm can be remedied. The court remedies the second harm by preventing the IRS from profiting by imposing penalties without explaining them. The court voids the IRS's assessment of interest and other charges on top of its previously unexplained penalties.

In regular Title 26 cases which go to appeals, the IRS usually requires substantial time on the statute, but it has been my experience that that is always explained to the taxpayer so that he understands that there will be an assessment.  The way the taxpayer avoids the assessment before the appeal is to give a sufficient extension on the statute to permit the appeal to not interfere with the right to assess.  Apparently, that was not explained to the taxpayer or his representative.

Two More Swiss Banks Enter NPAs Under US DOJ Swiss Bank Program (7/24/15)

On July 24, 2015, DOJ announced here two other Swiss Banks have entered NPA resolutions under the DOJ program for Swiss banks.  The Swiss banks are SB Saanen and Privatbank Bellerive AG .  The penalties are  $1.365 million and $57,000, respectively.  Key excerpts from the press release:

SB Saanen Bank AG is headquartered in Saanen, Switzerland.  It was founded in 1874 and has branches in the neighboring villages of Gstaad, Gsteig and Lauenen, as well as a retail office in Schönried.  

Prior to Aug. 1, 2008, and thereafter, SB Saanen accepted accounts from U.S. taxpayers, some of whom had undeclared accounts and wished to take advantage of Swiss bank secrecy laws.  SB Saanen offered a variety of traditional Swiss banking services which could and did assist U.S. clients in concealing assets and income from the Internal Revenue Service (IRS), including numbered or pseudonym accounts and holding mail at the bank.  These services helped U.S. clients to eliminate the presence of documents in the United States that associated the U.S. taxpayer’s name with the undeclared assets and income they held at SB Saanen in Switzerland.  In some instances, SB Saanen permitted accounts to be closed with large cash withdrawals, precious metals or transfers of funds to accounts held by non-U.S. persons.  SB Saanen had reason to believe that such an accountholder was taking that action to avoid detection by U.S. tax authorities.  

In December 2008, SB Saanen’s board of directors decided that it should continue to manage U.S. clients and open new accounts for U.S. clients on the condition that they had a “link to our region or one of our relationship managers.”  As a result, SB Saanen opened accounts for some U.S. taxpayers who transferred accounts from other Swiss institutions that were closing such accounts.  SB Saanen knew, or had reason to know, that two of those accounts were undeclared.  SB Saanen continued to service U.S. taxpayers even though it had reason to believe that some of them were evading U.S. taxes.  

An SB Saanen procedural manual, dated November 2009 and related to the directive, warned its employees to minimize U.S-related contacts with undeclared U.S. clients.  The manual required relationship managers to obtain an IRS Form W-9 for new U.S. clients and stated, with respect to existing U.S. clients, that “clients who do not want disclosure to the IRS (American tax authority) may not be contacted at all in the U.S.A. and/or other countries!  Contact is only permissible within [Switzerland].”  

In 2009, SB Saanen implemented a policy with respect to foreign travel by its relationship managers.  Pursuant to that policy, travel was permitted to the United States to meet with U.S. clients so long as it was approved in advance by SB Saanen’s chief executive officer and subject to restrictions.  For example, under the policy, SB Saanen declared that “No files may be taken abroad,” relationship managers must “complete a training course,” relationship managers “may not actively acquire” new customers, there was to be “no signing of business documents” or “accepting of orders” or providing “investment advice,” and bank employees were prohibited from “handing over cash, securities, or objects.”  In 2010 and 2011, SB Saanen’s then-head of private banking, who is no longer employed by the bank, traveled to the United States to entertain U.S. clients at the U.S. Open tennis championship in Flushing Meadows, New York.  

Since Aug. 1, 2008, SB Saanen maintained three U.S.-related accounts for individual U.S. taxpayers who opened the account in the name of a non-U.S. entity, such as offshore corporations or trusts.  Those three accounts comprised an aggregate value of approximately $5 million.  SB Saanen was not involved in creating these entities, but it was aware that some U.S. clients created and used such non-U.S. entities to hold Swiss bank accounts to avoid their disclosure to, or otherwise be concealed from, U.S. tax authorities.

Four Family Members Sentenced for Tax Fraud (7/23/15)

DOJ Tax announced here the sentencing of four family members for tax fraud.  Key excerpts are (bold-face supplied by JAT):

In October 2010, following a three-week jury trial, Chester A. Bitterman Jr. and his sons, Craig L. Bitterman, C. Grant Bitterman and Curtis L. Bitterman, were convicted of conspiracy to defraud the United States.  Craig Bitterman was additionally convicted of obstruction of justice.  Prior to sentencing, the defendants paid $437,000 in restitution to the Internal Revenue Service (IRS). 

At sentencing hearings held on July 15, 17 and 22, U.S. District Court Judge James Knoll Gardner imposed the following sentences and stated that the offense was serious and the conspiracy was a long-term, complex and concerted effort by a family to avoid taxation: 

Chester A. Bitterman Jr., 81, was sentenced to serve three years’ probation to include six months of home confinement, due in part to his age and ailing spouse confined to hospice care, and was ordered to pay a $5,000 fine; 

Craig L. Bitterman, 55, was sentenced to serve three years in prison and three years of supervised release with 1,000 hours of community service at a rate of at least 30 hours of service per week, and was ordered to pay a $10,000 fine; 

C. Grant Bitterman, 53, was sentenced to serve 21 months in prison and three years of supervised release with 1,000 hours of community service at a rate of at least 30 hours of service per week, and was ordered to pay a $7,500 fine; and 

Curtis L. Bitterman, 61, was sentenced to serve 21 months in prison and three years of supervised release with 1,000 hours of community service at a rate of at least 30 hours of service per week, and was ordered to pay a $7,500 fine. 

According to the evidence at trial, from 1996 to 2005, the Bittermans owned and operated the Bitterman Scale Company, which now operates as Bitterman Scales LLC.  To conceal their income and assets from the IRS, the Bittermans used aliases, offshore bank accounts and a complex series of sham paper transactions to disguise the income.  The defendants transferred their personal and business assets to sham trusts purchased from the Commonwealth Trust Company, a tax protester organization that marketed trust products to clients for the purpose of avoiding federal income tax payment.  The trusts were used to make it appear as though the defendants had little or no assets or income.  In reality, the defendants retained complete access and control over their funds.  In January 2008, the principal owners of the Commonwealth Trust Company were convicted at trial in the Eastern District of Pennsylvania of tax crimes for causing losses of over $17 million and were sentenced to prison. 

The defendants paid themselves in cash and arranged bogus payments between the numerous trusts that they had created.  These bogus payments were purported to be leases, management fees and fiduciary fees.  The defendants submitted trust tax returns for their business and took fraudulent deductions for these payments to create the appearance of minimal or no taxable business income.  After the IRS levied the business bank account and receivables, the defendants instructed their customers to pay another trust to thwart IRS collection efforts.  The defendants also placed bogus liens and mortgages on their assets to make it appear to the IRS that the defendants had no assets that could be levied or seized as part of the tax collection process.  Some of the defendants used aliases and bank accounts in the names of trusts to make school tuition payments for their children appear as if they were scholarships from third parties.  In addition, to further conceal their assets from the IRS, at least one defendant used offshore bank accounts in the British Virgin Islands and three of the defendants arranged for sham transfers of real estate to their children. 

During the investigation, after Craig Bitterman was served with federal grand jury subpoenas requiring the production of trust records, he failed to produce the records to the grand jury and instead shipped those trust records to Texas and New Mexico in an attempt to conceal them.

I don't yet know how to account for this in my offshore account spreadsheet.  I gather from the wording that there may have been more than one of the defendants who had offshore accounts to conceal assets.  Moreover, I don't know which of the defendants had the one offshore account apparently identified.  If anyone has that information, I would appreciate receiving it.

Three More Swiss Banks Enter NPAs Under US DOJ Swiss Bank Program (7/23/15)

On July 16, 2015, DOJ announced here three other Swiss Banks have entered NPA resolutions under the DOJ program for Swiss banks.  The Swiss banks are Mercantil Bank (Schweiz) AG, Banque Cantonale Neuchâteloise and Nidwaldner Kantonalbank .  The penalties are  $1.172 Million,  $1.123 Million, and $856,000, respectively.  Here are key excerpts (emphasis supplied by JAT):

Mercantil Bank (Schweiz) AG is based in Zurich and initiated operations in 1988.  Its main focus is private banking, which offers wealth management services to individuals and private investment companies.  Mercantil opened, serviced and profited from accounts for U.S. clients and knew or should have known that many of its U.S. clients were likely not complying with their tax obligations.  Its cross-border banking business aided and assisted U.S. clients in opening and maintaining undeclared accounts in Switzerland and concealing the assets and income they held in these accounts.  Until 2010, Mercantil maintained a U.S. toll-free telephone number to service its customers.
Mercantil used a variety of means that could and did assist U.S. clients in concealing their accounts, including hold mail and code name or numbered account services, thereby ensuring that documents reflecting the existence of the accounts could remain outside the United States, beyond the reach of U.S. tax authorities and protected by Swiss banking secrecy laws.  Mercantil also assisted clients in opening and maintaining accounts in the names of sham entities.  For example, Mercantil provided accounts for what were referred to as “Personal Investment Companies” through its private banking unit.  Where there was no active, ongoing business, it was Mercantil’s practice to ignore the form of the structures and to treat the beneficial owners of the entity as the accountholders in substance.  Mercantil provided services to the accounts knowing that they could be used for evasion or avoidance of tax obligations.  On one occasion in March 2008, Mercantil opened an account for a bank executive with U.S. citizenship in the name of a Panamanian holding company.  In that instance, Mercantil accepted and included in account records forms provided by the director of the Panamanian company that falsely represented the ownership of the account for U.S. federal income tax purposes. 

Since Aug. 1, 2008, Mercantil held a total of 116 U.S.-related accounts with a maximum aggregate value totaling over $59.8 million.  Mercantil will pay a penalty of $1.172 million. 

Banque Cantonale Neuchâteloise (BCN) was formed in 1883 and is headquartered in the city of Neuchâtel, Switzerland.  BCN opened, serviced and profited from accounts for U.S clients with the knowledge that many likely were not complying with their U.S. tax obligations.  BCN knew or had reasons to know that it was likely that certain U.S. taxpayers were maintaining undeclared accounts at BCN in order to evade their U.S. tax obligations in violation of U.S. law. 

BCN provided traditional Swiss banking services that it knew could assist, and that did in fact assist, certain U.S. taxpayers to evade their U.S. tax obligations and otherwise hide accounts held at BCN from the Internal Revenue Service (IRS).  For example, after it became public that the department was investigating the conduct of UBS, and later other Swiss banks, BCN allowed several U.S. persons to open accounts at BCN and transfer funds into those BCN accounts from the banks under investigation.
BCN provided numbered accounts and agreed to hold bank statements and other mail relating to accounts at BCN, rather than send them to U.S. taxpayers located in the United States, thereby ensuring that documents reflecting the existence of the accounts remained outside the United States and beyond the reach of U.S. tax authorities.  In some instances, BCN permitted accounts to be held by Swiss or, in one case, foreign non-operating entities that were ultimately beneficially owned by U.S. persons.  By permitting U.S. accountholders to hold their accounts in the name of non-operating entities, BCN thus enabled U.S. accountholders to conceal their identity from the U.S. government.  Until 2014, BCN permitted its U.S. accountholders to withdraw funds in cash both by withdrawing sums below $10,000 and, in some cases, withdrawing larger sums of cash when closing their accounts.

Tax Crimes Fugitive for Almost 20 Years Extradited to US (7/23/15)

DOJ Tax announced here the apprehension and extradition of a U.S. person, Gideon Misulovin, convicted in the 1990s for tax and related crimes involving motor fuel excise taxes.  He had been on the lam since conviction.  Here are excerpts from the press release.

A former New York businessman, who disappeared the same day a federal jury sitting in the U.S. District Court in Newark, New Jersey, began deliberating in his tax evasion and fraud trial, was caught while in Greece more than 18 years after his conviction, and appeared in federal court in the District of New Jersey on Friday, July 17. . . .  

Gideon Misulovin, 58, whose last known address was in New York City, was extradited from Greece to the United States to serve his 10-year prison sentence.  He has been incarcerated in the United States since his return on July 16. 

On March 7, 1996, a jury convicted Misulovin of conspiracy to impede and impair the Internal Revenue Service (IRS) in the ascertainment and collection of more than $6.5 million in federal motor fuel excise taxes, wire fraud and money laundering stemming from a scheme to conceal the unpaid diesel fuel excise taxes from state and federal tax authorities. 

During trial, Misulovin was free on $500,000 bail and attended each day of the trial.  He failed to appear in court March 4, 1996, for the parties’ closing arguments.  U.S. Senior District Judge Dickinson R. Debevoise of the District of New Jersey in Newark issued a warrant for his arrest.  On June 25, 1997, Judge Debevoise sentenced Misulovin in absentia to serve 10 years in prison and a three-year term of supervised release, and to pay a $150,000 fine.  The court also ordered Misulovin to pay restitution in the amount of $200,000 to the United States and $100,000 to the state of New Jersey. 

The evidence at trial established that from 1988 through Jan. 31, 1993, Misulovin and his co-conspirators sold untaxed diesel fuel in a series of paper transactions using wholesale companies.  Some of the companies were shams and called “burn” or “butterfly” companies.  As part of the scheme, the sham company would assume the federal and state tax liability and then vanish, allowing the conspirators to keep the excise taxes they collected from truck stops and service stations. 

The case, part of a then-nationwide motor fuel excise tax enforcement effort, was investigated jointly by the Motor Fuel Task Force and the U.S. Attorney’s Office of the District of New Jersey.  In an effort to infiltrate the bootleg gasoline industry, task force agents set up an undercover business called RLJ Management that competed directly with the defendants’ operation. 

At the conclusion of the undercover operation, in November 1992, federal agents seized Misulovin’s assets, including approximately $70,000 in cash from his residence and $277,000 from his business bank account.  

Misulovin’s co-defendant and co-conspirator, Arnold Zeidenfeld, of Brooklyn, New York, pleaded guilty prior to trial and testified for the government.  Gurmit Singh and Manbir Singh, of Matawan, New Jersey, who operated truck stops in southern New Jersey, also pleaded guilty for their roles in the scheme. 

In August 2014, based on an Interpol Red Notice, Misulovin was detained in a Greek airport using an alias and traveling with an Israeli passport.  He was subsequently arrested pursuant to a U.S. request for a provisional arrest, and after contested extradition proceedings, was found extraditable in 2015.  

Of course, he will likely face more charges for going on the lam.  So, it looks like he will be in prison much of the rest of his life, depending upon his longevity.

D.C. Circuit Affirms Upward Variance in Tax Crimes Case to Send Message to Government Officials Who Abuse Their Position (7/18/15)

I blogged just last week on the Seventh Circuit's affirmance of a major downward variance from the sentencing Guidelines.  See Seventh Circuit Affirms No Incarceration Sentence for Ty Warner (Federal Tax Crimes 7/10/15; 7/14/15), here.  Upward variances are not common, but the D.C. Circuit affirmed one just yesterday.  United States v. Saani, 650 F.3d 761 (D.C. Cir. 2015), here.  The was Saani's second appeal, the earlier one resulting in a remand for re-sentencing.  United States v. Saani, 650 F.3d 761 (D.C. Cir. 2011), here.

Saani raised two issues on the second appeal -- (1) failure to credit acceptance of responsibility and (2) Upward variance.  I focus here only on the second.

The key facts are:  Saani was a U.S. Air Force contract specialist in Kuwait.  An investigation determined that he "Saani spent approximately $2.4 million more than he received from known sources of income."  He was indicted for five counts of tax perjury.  He pled to all five counts.  The sentencing court originally and on the remand varied upward from the Guidelines range.  On this second appeal, Saani raised the issue of whether the upward variance was proper.  The D.C. Circuit's resolution of the issue is short, so I just quote it:

At Saani's initial sentencing, his Sentencing Guidelines range was determined to be 78 to 97 months. Saani I, 650 F.3d at 765. The district court, however, varied upward from that determination, sentencing Saani to 110 months. Saani previously argued to us that the district court varied upward because of Saani's refusal to disclose the source of his unreported income, and that this was a violation of his right against self-incrimination. Although we agreed with Saani that portions of the record could be read to suggest that the district court varied upward in part because Saani refused to disclose the source of his funds, we nevertheless remanded the case to the district court for further clarification on its reason for varying upward. We noted that it was "not evident a constitutional violation occurred . . . because the record makes clear that, in addition to concern about the source of Saani's income, the decision to vary upward was based upon the need to deter tax evasion by persons entrusted with the expenditure of federal funds." Id. at 771. We further noted that if the district court's decision "to vary upward rested solely upon the latter ground [i.e., deterrence], then it would be not only constitutional but also a reasonable exercise of the district court's considerable discretion." Id. At the sentencing hearing on remand the district court again denied that Saani's refusal to reveal the source of his funds was a factor in the sentencing decision. The district court stated: 

With regard to an upward departure, the basis for that decision also had nothing to do, nothing to do with [Saani]'s refusal to discuss or reveal the source of his income, nothing to do with that. It was to put it bluntly an overarching concern on the Court's part of the importance of deterring other Government officials, other Government employees working in foreign countries during a war and having access to large sums of money and having the ability to manipulate that money and manipulate contracts relating to it, was to deter them from engaging in any conduct of this kind in the future. 

Transcript of Resentencing at 4, Aug. 1, 2012.

Third Circuit Applies Required Records Doctrine to Require Taxpayers to Respond to Compulsory Process About Foreign Bank Account (7/18/15)

The Third Circuit yesterday issued an opinion affirming that the Government has the right under the required records doctrine to compel via summons or grand jury subpoena production of foreign bank account records.  United States v. Chabot, 793 F.3d 338 (3d Cir 2015)., here.  The opinion is almost garden-variety by now, so I will just make a few points:

1.  The opinion follows the consistent holdings of all other courts of appeals.  See In re Grand Jury Subpoena Dated Feb. 2, 2012, 741 F.3d 339 (2d Cir. 2013); United States v. Under Seal, 737 F.3d 330 (4th Cir. 2013); In re Grand Jury Proceedings, 707 F.3d 1262 (11th Cir. 2013); In re Grand Jury Subpoena, 696 F.3d 428 (5th Cir. 2012); In re Special Feb. 2011-1 Grand Jury Subpoena Dated Sept. 12, 2011, 691 F.3d 903 (7th Cir. 2012); In re Grand Jury Investigation M.H., 648 F.3d 1067 (9th Cir. 2011).

2.  Chabot involved an IRS summons whereas the early cases involved grand jury subpoenas.  The analysis is the same.

3.  The court, somewhat cryptically, rejected the argument that the shift in Fifth Amendment analysis by such cases as Fisher v. United States, 425 U.S. 391 (1976) and its progeny, all decided after the key required records cases, had affected the analysis.  However, I think that issue is more significant than this court or other courts acknowledge.  Under the Fisher analysis, there is no question that U.S. persons such as the Chabots have a Fifth Amendment privilege via the act of production doctrine.  The question is whether the required records doctrine can overcome the privilege that a fair reading of the Constitution would mean cannot be overcome.  Here, as in other areas (such as doctrine permitting compulsory process if the existence and possession of the documents is a foregone conclusion), the courts seem to be making ad hoc exceptions to the Fifth Amendment, perhaps under the notion that small encroachments of the Fifth Amendment are acceptable.  (In this regard, in a heading, the Third Circuit opinion says:  "The Government's Ability to Use the Required Records Exception to Abrogate the Fifth Amendment Privilege;"  I am not sure how the Fifth Amendment can be abrogated when it is stated that starkly, but that is the practical effect; readers might want to review Justice Thomas' concurring opinion in United States v. Hubbell, 530 U.S. 27 (2000), here, taking a literal approach to the Fifth Amendment.)  Here is the Third Circuit's short analysis:

Fisher, which found no Fifth Amendment privilege because the involved taxpayers were not the persons compelled to produce, appeared to shift the focus away from the private/public distinction in determining whether compelled production of records violates the Fifth Amendment privilege. n3 See 425 U.S. at 397, 400-01. Despite this somewhat altered view of how the Fifth Amendment relates to the production of documents, courts have continued to rely on the required records exception. See, e.g., Balt. City Dep't of Soc. Servs. v. Bouknight, 493 U.S. 549, 555-56 (1990) (recognizing the principle behind the required records exception abrogated respondent's act-of-production privilege even though her compliance with a court order to produce her child would have aided in her prosecution); Doe, 741 F.3d at 342-43, 346 (applying the required records exception to the respondent's act-of-production privilege where his compliance with a grand jury's subpoena for account records would have aided in criminal proceedings against him).
   n3 The degree to which Fisher represents a complete repudiation of the private/public distinction remains unsettled. It has been stated that the general consensus is that Fisher was an attempt to find Fifth Amendment protections applicable to compelled production of documents without relying on the private/public distinction. Doe, 741 F.3d at 343 n.2.

Judge Kozinski's Reflections on the Criminal Law System in the U.S. (7/17/15; 7/23/15)

The Volokh Conspiracy has a series of blog entries serializing a recent law review article by Judge Alex Kozinski in the Annual Georgetown Review of Criminal Procedure.  The article is a preface titled Criminal Law 2.0.  The article in all its splendor (meaning fully populated with footnotes) is here.  The serialization on The Volokh Conspiracy strips out the footnotes and makes some cosmetic changes, so I thought I would offer links here to both the serialization and to the fully footnoted version.

Here is The Volokh Conspiracy serialization (in chronological order):

• 12 reasons to worry about our criminal justice system, from a prominent conservative federal judge (The Volokh Conspiracy 7/17/15), here.  
• Judge Kozinski on wrongful convictions and excessively long sentences (The Volokh Conspiracy 7/15/15), here.
• Judge Kozinski on juries (The Volokh Conspiracy 7/16/15), here.
• Judge Kozinski on prosecutorial misconduct (The Volokh Conspiracy 7/17/15), here.
• Judge Kozinski on reforms that can help prevent prosecutorial misconduct (The Volokh Conspiracy 7/17/15), here.
• Judge Kozinski on what judges can do to improve the criminal justice system (The Volokh Conspiracy 7/20/15), here.
• Judge Kozinski offers two more ways to improve the criminal justice system (The Volokh Conspiracy 7/21/15), here.
• Judge Kozinski with four final ideas on improving the criminal justice system (The Volokh Conspiracy 7/21/15), here.

Judge Kozinski is an important contributor to the law general and to tax crimes law specifically.  I have discussed his offerings on this blog.  (You can search on his name in the upper corner and get all of the blog entries in which he is mentioned.)

I offer Judge Kozinski's opening to pique your interest:

Although we pretend otherwise, much of what we do in the law is guesswork. For example, we like to boast that our criminal justice system is heavily tilted in favor of criminal defendants because we’d rather that ten guilty men go free than an innocent man be convicted. There is reason to doubt it, because very few criminal defendants actually go free after trial. 

Does this mean that many guilty men are never charged because the prosecution is daunted by its heavy burden of proof? Or is it because jurors almost always start with a strong presumption that someone wouldn’t be charged with a crime unless the police and the prosecutor were firmly convinced of his guilt? We tell ourselves and the public that it’s the former and not the latter, but we have no way of knowing. They say that any prosecutor worth his salt can get a grand jury to indict a ham sandwich. It may be that a decent prosecutor could get a petit jury to convict a eunuch of rape. 

The “ten guilty men” aphorism is just one of many tropes we assimilate long before we become lawyers. How many of us, the author included, were inspired to go to law school after watching Juror #8 turn his colleagues around by sheer force of reason and careful dissection of the evidence? “If that’s what the law’s about, then I want to be a lawyer!” I thought to myself. 

But is it? We know very little about this because very few judges, lawyers and law professors have spent significant time as jurors. In fact, much of the so-called wisdom that has been handed down to us about the workings of the legal system, and the criminal process in particular, has been undermined by experience, legal scholarship and common sense. Here are just a few examples:

Judge Kozinski then offers 12 myths that we have about our criminal justice system that may or may not be correct.  He discusses each of them.  I offer here the list, but not his discussion.  Click on the links and enjoy a great mind at work.

1. Eyewitnesses are highly reliable. 
2. Fingerprint evidence is foolproof.
3. Other types of forensic evidence are scientifically proven and therefore infallible. 
4. DNA evidence is infallible. 
5. Human memories are reliable.
6. Confessions are infallible because innocent people never confess. 
7. Juries follow instructions. 
8. Prosecutors play fair.
9. The prosecution is at a substantial disadvantage because it must prove its case beyond a reasonable doubt. 
10. Police are objective in their investigations. 
11. Guilty pleas are conclusive proof of guilt.
12. Long sentences deter crime.

US Tax Program Site With Information on Swiss Banks Joining US DOJ Swiss Bank Program (7/11/15)

Andre Weiss, a commenter on this blog, pointed out the following web site:  US Tax Program, here.  It offers descriptions of the U.S. DOJ Swiss Bank Program and key data in spreadsheet format.  I have checked the data against my spreadsheet and have incorporated information into my spreadsheet from this site.  One thing I did not check was whether my spreadsheet includes banks this site does not.  Perhaps I will do that when I have time.  In the meantime, based on my spot checking, it is a site that readers of this blog may find helpful.

Thanks to Andre.

Seventh Circuit Affirms No Incarceration Sentence for Ty Warner (7/10/15; 7/14/15)

The Seventh Circuit today affirmed the no incarceration sentence for billionaire Ty Warner of Beanie Baby fame.  United States v. Warner, 792 F.3d 847 (7/10/15).  The opinion on the Court's site is here; a downloaded bookmarked pdf copy is here.

The essence of the holding is that the Court of Appeals could not -- certainly did not -- conclude that the sentencing judge abused his sentencing discretion.  The panel opinion concludes:

Due deference leads us to the same conclusion here. Considering (1) Warner’s excellent character, as shown by his long history of charity and kindness to others; (2) the isolated and uncharacteristic nature of his tax evasion; (3) his attempt to enter the OVDP; (4) his guilty plea and prompt payment of his liabilities; (5) his $53.6 million FBAR penalty, which is nearly ten times the tax loss; and (6) the fact that the government charged him with only one count and itself sought a well-below-guidelines sentence, we conclude that Warner’s probationary sentence is reasonable.

Addendum 7/11/15 1:30pm:

Bottom-line, the opinion just represents an application of what the panel felt was the the sentencing judge's discretion permitted by United States v. Booker, 543 U.S. 220 (2005), here, as subsequently interpreted, provided the judge can articulate some reasonable -- at least not unreasonable -- basis.  The larger issue, in my mind, is whether that application is consistent with the tension between Booker discretion and the proper application of the Sentencing Guidelines which Congress surely meant to have some meaning.  That is way too large an issue for me to address in this blog, even if I had the ability to do it.  Maybe I will address parts of the issue later; maybe not.

In the meantime, here are some very preliminary thoughts.  My discussion generally follows the presentation in the opinion.

1.  The Government seems to have made a strategic mistake in recommending a sentence well below the Guidelines range,  The Guidelines range was 46 - 57 months, just 3 months shy of the maximum sentence for the count of conviction.  The Court summarized the bidding on the recommendations/requests for sentencing as follows:

In their pre-sentencing submissions, neither side proposed a sentence within the guidelines range. The government requested incarceration “in excess of a year and a day,” a sentence well below the recommended minimum. The probation officer recommended a prison term of 15 months. Warner argued that a sentence of probation with community service would suffice, and that it would provide greater benefit to society.

Of course, as I have noted before, the courts just are not sentencing offshore tax cheats to within Guidelines ranges (the Court says this at p. 27), so the Government's recommendation of a substantially below Guidelines sentenced may have been a recognition of this reality.  Nevertheless, I think the Government has been complicit in sending the signal to the taxpaying community that offshore tax cheats get a better sentencing deal than other tax cheats.  But, although the Government may have played a role in this, ultimately, it is the courts to place tax cheating in its proper place among federal crimes in terms of sentencing and to make the case that offshore account tax cheating is somehow more societally acceptable than other forms of tax cheating.  I don't think that case has been made.

Also, consider the following from DOJ CTM 43.12[1] SENTENCING POLICIES, here:

As for variances, it is general Tax Division policy that sentences within the advisory Guidelines range adequately reflect the seriousness of the offense, promote deterrence, and reduce unwarranted sentencing disparities. Accordingly, Tax Division attorneys should seek supervisory approval before recommending either an upward or downward variance at sentencing.

2.  The Court seems to downplay the role of the Sentencing Guidelines as just another Section 3553(a) factor.  (See pp. 11-12 of the slip opinion.)  In one sense, that is certainly true.  But treating the Guidelines as just another sentencing factor seems to downplay its critical role in the fairness of sentencing, for many of the sentencing factors are already accounted for in the Guidelines.

In Tax Willfulness Crime, Should the Jury Be Instructed that Willfulness Does Not Include Negligence, Inadvertence, Accident, Mistake or Recklessness? (7/10/15)

In United States v. Kupfer, ___ F.3d ___, 2015 U.S. App. LEXIS 11689 (10th Cir. 2015), here, the defendant argued that the Judge had correctly instructed the jury that the willfulness element of Section 7201 required "the voluntary intent to violate a known legal duty."  That formulation of the mens rea element in Section 7201 is virtually straight out of Cheek v. United States, 498 U.S. 192 (1991), here.  The defendant, however, asked for an embellishment that the required intent did not include "negligence, inadvertence, accident, mistake, and recklessness." While the embellishment is a true statement of the law, the Court of Appeals held that the district court had not violated its discretion in instructing the jury because the instruction on intent to violate a known legal duty necessarily informed the jury that "negligence, inadvertence, accident, mistake, and recklessness" would not have met the willfulness intent requirement.  The Court said:

In telling the jury that willfulness was required for guilt and defining the term "willfully," the court implicitly told the jury that any mental state short of willfulness would not have sufficed for a finding of guilt. In similar circumstances, other courts have rejected similar challenges to jury instructions based on a failure to describe mental states falling short of willfulness. E.g., United States v. Collins, 685 F.3d 651, 655-56 (7th Cir. 2012); United States v. Colacurcio, 514 F.2d 1, 8 (9th Cir. 1975).

The Tenth Circuit did not  hold that, had the trial court included the instruction embellishment, it would have erred.  As noted, the embellishment is a correct statement of the law.  All the Tenth Circuit held is that the embellishment is not required.

Obviously, defense counsel will usually want to press for the embellishment in most cases.  And, if requested, I think a trial court should give the instruction because it does properly frame the willfulness element for tax evasion (as well as for most other tax crimes).  How does it hurt to give this correct instruction?

I think it is helpful to consider the willfulness element in the offshore account area.  The FBAR criminal and civil penalties require willfulness, and the definition parallels the definition of willfulness for tax crimes.  See IRM 4.26.16.4.5.3  (07-01-2008), FBAR Willfulness Penalty - Willfulness, here ("The test for willfulness is whether there was a voluntary, intentional violation of a known legal duty").  It is interesting that, in the Streamlined Filing Compliance Procedures for nonwillful actors (both as to income tax and FBAR noncompliance), the IRS includes a variation of the embellishment requested by the defendant in Kupfer.  The taxpayer must thus certify:

My failure to report all income, pay all tax, and submit all required information returns, including FBARs, was due to non-willful conduct. I understand that non-willful conduct is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.

Obviously, the IRS thought that in addressing the certification of nonwillfulness to lay people, it was important and helpful to give the embellishment.  I would think that it would be equally important in criminal cases where criminal conviction is being considered by a lay jury.

Two More Swiss Banks Enter NPAs Under US DOJ Swiss Bank Program (7/9/15)

DOJ just announced here two other Swiss Banks have entered NPA resolutions under the DOJ program for Swiss banks.  The Swiss banks are Banque Pasche SA and ARVEST Privatbank AG.  The penalties are  $7.229 Million and $1.044 Million, respectively.  Here are key excerpts (emphasis supplied by JAT):

Banque Pasche SA is headquartered in Geneva, Switzerland, and owns and controls a group of companies in various jurisdictions, including Monaco and the Bahamas.     From at least August 2008 to August 2013, Banque Pasche assisted certain U.S. taxpayers in evading their U.S. taxes and filing obligations, filing false income tax returns with the IRS and hiding offshore assets from the IRS. 

Banque Pasche offered a variety of traditional Swiss banking services that it knew could and did assist U.S. taxpayers in concealing assets and income from the IRS.  For example, Banque Pasche offered hold mail service, as well as code name or numbered account services.  These services allowed certain U.S. taxpayers to minimize the paper trail associated with their undeclared assets and income. 

Banque Pasche also permitted certain U.S. taxpayers to open accounts held in the name of sham, conduit or nominee offshore structures where the U.S. taxpayer’s interest in the account was not reported to the IRS.  With respect to these accounts, Banque Pasche would obtain from the entity’s directors an IRS Form W-8BEN (or equivalent bank document) that falsely declared that the beneficial owner was not a U.S. taxpayer.  As of Dec. 31, 2008, Banque Pasche had U.S.-related accounts held by entities created in Panama or the British Virgin Islands with U.S. beneficial owners.  The majority of these accounts had false IRS Forms W-8BEN in the file. 

Banque Pasche also opened accounts for U.S. taxpayers who had left other Swiss banks that were being investigated by the department, including UBS and Credit Suisse.  Banque Pasche knew or should have known that the beneficial owners of the majority of these accounts were attempting to evade U.S. tax and foreign account reporting requirements.  Many of these accounts were held by Panamanian corporations with U.S. beneficial owners.  Some of these accounts were managed by a particular Geneva-based attorney who held a power of attorney over them.  When these accounts were subsequently closed, the assets were transferred to banks located in Israel and Hong Kong in an attempt to further escape detection from U.S. authorities. 

Banque Pasche has fully cooperated with the department during its participation in the Swiss Bank Program.  For example, it described in detail the structure of its business with U.S. persons, which included the policies concerning U.S. accountholders.  Banque Pasche also provided the names of members of its management committee and information about its relationships with external asset managers. 

Since Aug. 1, 2008, Banque Pasche had 186 U.S.-related accounts, as defined under the Swiss Bank Program, with an aggregate maximum balance of approximately $655 million.  Of these 186 accounts, 110 had U.S. beneficial owners and an aggregate maximum balance of approximately $111 million.  Banque Pasche will pay a penalty of $7.229 million. 

ARVEST Privatbank AG was a private bank headquartered in Pfaffikon, Switzerland.  It provided portfolio management and related private banking services primarily to high net worth clients.  On April 15, 2015, it ceased being a licensed Swiss bank. 

ARVEST opened, maintained and serviced accounts for U.S. persons that it knew or had reason to know were likely not declared to the IRS or the U.S. Department of the Treasury, as required by U.S. law.  The bank helped clients set up entities, including trusts and foundations, in Liechtenstein, St. Kitts and other jurisdictions, with bank representatives serving as officers of certain of these entities, and opened ARVEST accounts in the names of these entities. 

For several U.S. customers, ARVEST gave the accountholders a travel debit card, which did not have a name imprinted on the card.  These cards were tied to accounts that the accountholders held in their names at a third-party Swiss Bank specializing in this service. 

Since Aug. 1, 2008, ARVEST had 52 U.S.-related accounts, with a maximum aggregate asset value of over $134 million.  ARVEST will pay a penalty of $1.044 million. 

In accordance with the terms of the Swiss Bank Program, each bank mitigated its penalty by encouraging U.S. accountholders to come into compliance with their U.S. tax and disclosure obligations.  While U.S. accountholders at these banks who have not yet declared their accounts to the IRS may still be eligible to participate in the IRS Offshore Voluntary Disclosure Program, the price of such disclosure has increased.

Most U.S. taxpayers who enter the IRS Offshore Voluntary Disclosure Program to resolve undeclared offshore accounts will pay a penalty equal to 27.5 percent of the high value of the accounts.  On Aug. 4, 2014, the IRS increased the penalty to 50 percent if, at the time the taxpayer initiated their disclosure, either a foreign financial institution at which the taxpayer had an account or a facilitator who helped the taxpayer establish or maintain an offshore arrangement had been publicly identified as being under investigation, the recipient of a John Doe summons or cooperating with a government investigation, including the execution of a deferred prosecution agreement or non-prosecution agreement.  With today’s announcement of these non-prosecution agreements, noncompliant U.S. accountholders at these banks must now pay that 50 percent penalty to the IRS if they wish to enter the IRS Offshore Voluntary Disclosure Program.

Senate Finance International Tax Bipartisan Tax Working Group Report on CBT, FATCA & FBAR (7/9/15)

The International Tax Bipartisan Tax Working Group Report has been released.  A link to the report is here.  That Working Group is comprised of members of the U.S.  Senate Committee on Finance, the Senate tax writing committee.

The report discusses current taxation and proposals and considerations for reform.  Perhaps most interestingly for many readers of this blog, the last item in the report (on pp. 80 & 81 of 81 pages total) is:

F. Overseas Americans 

According to working group submissions, there are currently 7.6 million American citizens living outside of the United States. Of the 347 submissions made to the international working group, nearly three-quarters dealt with the international taxation of individuals, mainly focusing on citizenship-based taxation, the Foreign Account Tax Compliance Act (FATCA), and the Report of Foreign Bank and Financial Accounts (FBAR). While the co-chairs were not able to produce a comprehensive plan to overhaul the  taxation of individual Americans living overseas within the time-constraints placed on the working group, the co-chairs urge the Chairman and Ranking Member to carefully consider the concerns articulated in the submissions moving forward.

I would not even speculate what, if anything, this means in the real world.  It is apparent that Congress is aware of the issues of concern.  I would say, however, that I am a bit surprised that, of 7.6 millions American citizens abroad, only 347 made submissions.  Congress does listen, but usually only after the problem has risen to crisis level.  (Sort of a variation of the quote: "Americans Will Always Do the Right Thing — After Exhausting All the Alternatives."  See Quote Investigator, here)  I infer that the Working Committee is willing to state that these concerns need to be considered but is not yet willing to say there is a crisis.

Thanks to USTax, a regular commenter on the blog, for drawing my attention to this item.  His comment is here.

Another Swiss Bank Enters NPA Under US DOJ Swiss Bank Program (7/2/15)

DOJ just announced here another Swiss Bank NPA resolution under the DOJ program for Swiss banks.  The Swiss bank is Privatbank Von Graffenried AG.  The penalty is $287,700.  Here are key excerpts (emphasis supplied by JAT):

According to the terms of the non-prosecution agreement signed today, Von Graffenried agrees to cooperate in any related criminal or civil proceedings, demonstrate its implementation of controls to stop misconduct involving undeclared U.S. accounts and pay penalties in return for the department’s agreement not to prosecute Von Graffenried for tax-related criminal offenses.  Von Graffenried also has provided certain account information related to U.S. taxpayers that will enable the government to make requests under the 1996 Convention between the United States of America and the Swiss Confederation for the Avoidance of Double Taxation with Respect to Taxes on Income for, among other things, the identities of U.S. accountholders. 

Von Graffenried is a private bank founded in 1992 and based in Bern, Switzerland.  Starting in at least July 1998, Von Graffenried, through certain practices, assisted U.S. taxpayer-clients in evading their U.S. tax obligations, filing false federal tax returns with the Internal Revenue Service (IRS) and otherwise hiding assets maintained overseas from the IRS. 

Von Graffenried opened and maintained undeclared accounts for U.S. taxpayers when it knew or should have known that, by doing so, it was helping these U.S. taxpayers violate their legal duties.  Von Graffenried offered a variety of traditional Swiss banking services that it knew could assist, and that did assist, U.S. clients in the concealment of assets and income from the IRS.  For example, Von Graffenried would hold all mail correspondence, including periodic statements and written communications for client review, thereby keeping documents reflecting the existence of the accounts outside the United States.  Von Graffenried also offered numbered account services, replacing the accountholder’s identity with a number on bank statements and other documentation that was sent to the client.  

In late 2008 and early 2009, Von Graffenried accepted accounts from two European nationals residing in the United States who had been forced to leave UBS and Credit Suisse, respectively.  At the time it accepted the accounts, Von Graffenried knew that UBS was the target of an investigation by the Department of Justice.  It also knew that both individuals had been forced to leave their respective banks because the banks were closing their accounts, and that both individuals had U.S. tax obligations and did not want the accounts disclosed to U.S. authorities.  Senior management at Von Graffenried approved the opening of these accounts.  

When Von Graffenried compliance personnel sought to obtain an IRS Form 8802, Application for U.S. Residency Certification, from one of the accountholders, that accountholder replied that completing the form would be problematic for him and that he believed the relationship manager knew why.  The beneficial owner of the second account was referred by an external fiduciary, who handled the account at Credit Suisse.  The fiduciary told a Von Graffenried relationship manager that Credit Suisse was attempting to exit its U.S. offshore clients to other banks if the clients would not sign an IRS Form W-9.  The relationship manager agreed to take on the account, which was held by a Liechtenstein “stiftung,” or foundation, with the beneficial owner as the primary beneficiary and U.S. citizens as other beneficiaries. 

Between July 1998 and July 2000, Von Graffenried accepted approximately two dozen accounts from a specific external asset manager.  Von Graffenried was aware that the external asset manager seemed to be targeting U.S. clientele.  Sixteen of the accounts were beneficially owned by individuals with U.S. tax and reporting obligations, and most of those accounts were held by U.S. citizens residing in the United States.  At the time, Von Graffenried did not have a policy in place that required U.S. clients to show tax compliance.  Consequently, Von Graffenried accepted these accounts without obtaining IRS Forms W-9 or assurances that the accounts were in fact tax compliant.  By early 2009, Von Graffenried determined that some of the external asset manager’s accountholders likely were attempting to evade U.S. tax requirements.  In 2010, Von Graffenried began to close the existing U.S.-related accounts that originated with the external asset manager.  Von Graffenried did not complete the exit process for these accounts until late 2012. 

Since Aug. 1, 2008, Von Graffenried held a total of 58 U.S.-related accounts with approximately $459 million in assets.  Von Graffenried will pay a penalty of $287,000.
In accordance with the terms of the Swiss Bank Program, Von Graffenried mitigated its penalty by encouraging U.S. accountholders to come into compliance with their U.S. tax and disclosure obligations.  While U.S. accountholders at Von Graffenried who have not yet declared their accounts to the IRS may still be eligible to participate in the IRS Offshore Voluntary Disclosure Program, the price of such disclosure has increased. 

Most U.S. taxpayers who enter the IRS Offshore Voluntary Disclosure Program to resolve undeclared offshore accounts will pay a penalty equal to 27.5 percent of the high value of the accounts.  On Aug. 4, 2014, the IRS increased the penalty to 50 percent if, at the time the taxpayer initiated their disclosure, either a foreign financial institution at which the taxpayer had an account or a facilitator who helped the taxpayer establish or maintain an offshore arrangement had been publicly identified as being under investigation, the recipient of a John Doe summons or cooperating with a government investigation, including the execution of a deferred prosecution agreement or non-prosecution agreement.  With today’s announcement of this non-prosecution agreement, noncompliant U.S. accountholders at Von Graffenried must now pay that 50 percent penalty to the IRS if they wish to enter the IRS Offshore Voluntary Disclosure Program.

Von Graffenried will be added to the IRS's Foreign Financial Institutions or Facilitators, here (not added as of 7/2/15 9:34 pm).

I will not update the statistics since only one bank has been added and the penalty is so low.  I will provide updated statistics on the next DOJ announcement which would likely be next week, given the July 4 holiday.

Addendum 7/2/15 12:30pm:

Another Swiss Bank Enters NPA Under US DOJ Swiss Bank Program (6/26/15)

DOJ just announced here another Swiss Bank NPA resolution under the DOJ program for Swiss banks.  The Swiss bank is Ersparniskasse Schaffhausen AG (EKS).  The penalty is $2.066 million.  Here are key excerpts (emphasis supplied by JAT):

EKS was founded in 1817 and is wholly owned by a Swiss charitable foundation.  It is headquartered in the city and canton of Schaffhausen, Switzerland.  EKS opened, maintained and serviced accounts for U.S. persons that it knew or had reason to know were likely not declared to the Internal Revenue Service (IRS) or the U.S. Department of the Treasury as required by U.S. law. 

From 2004 through 2011, EKS accepted referrals of U.S. persons as new clients from an external asset manager who, until 2009, resided in the United States and conducted some of his business through a corporation organized under the laws of the United States.  The majority of the accounts that came to EKS as a result of these referrals were held in the names of non-U.S. entities that were beneficially owned by U.S. persons.  

In May 2008, with the knowledge and approval of EKS management, the external asset manager and an EKS relationship manager visited five U.S. cities to meet with U.S. clients and attorneys who had the potential to refer new clients.  Topics discussed during their meetings included the “crisis” involving Swiss bank UBS AG, client satisfaction with EKS, the performance of client accounts at EKS and the “asset protection” benefits of EKS. 

Until 2009, EKS opened numbered accounts for U.S. persons, including code-name or pseudonym accounts, upon request.  Upon opening this type of account, an EKS employee would  enter the accountholder’s name in a physical register rather than in the bank’s electronic records system.  This action limited the number of EKS personnel who knew the client’s identity.  Holders of these accounts could also provide documents to EKS using only their code names or numbers as their authorized signatures.  

EKS provided all of its clients, including U.S. persons, with the option to request that EKS retain all mail related to a client’s financial accounts in exchange for a standard service fee.  EKS understood that providing such hold-mail agreements upon request could allow U.S. persons to keep evidence of their EKS accounts outside of the United States and thus assist them in concealing assets and income from the IRS.   

EKS also accepted IRS Forms W-8BEN for U.S.-related accounts held in the names of non-U.S. entities, such as foreign corporations, trusts or foundations.  Because Swiss law required EKS to identify the true beneficial owners of the entities on a document called a Form A, EKS knew that these accounts were beneficially owned by U.S. persons.  Nonetheless, EKS accepted Forms W-8BEN that it knew falsely stated that the entities were the beneficial owners of the accounts.  

EKS was aware of the 2009 IRS Offshore Voluntary Disclosure Program for U.S. persons.  Despite knowing of that program and knowing or having reason to know that some of its U.S. clients had likely not declared their EKS accounts to the IRS, EKS made no effort to encourage its U.S. clients to disclose their accounts through that program.
During 2009, consultants reported to EKS, among other things, that EKS had increased risks because of its relationship with the external asset manager; that it was only a matter of time until small banks came into contact with U.S. authorities; and that there was a latent risk that previous revenues from EKS’s “U.S. strategy” could be seized or corresponding fines imposed.  According to minutes of a 2009 meeting of the EKS board of directors, an EKS executive stated, among other things, that “there is practically no risk if U.S. customers travel to Switzerland and a customer account is handled locally,” and that he had been informed that Swiss bank Wegelin & Co. was going to keep its previous U.S. customers. 

In October 2009, the EKS board of directors voted to continue the account relationships with clients of the external asset manager, including his U.S. clients, under certain conditions, including that his business be relocated to Switzerland.  The board also voted to “have the option of entering into new cross-border business relationships.” 

Since Aug. 1, 2008, EKS provided private banking services for 90 U.S.-related accounts with approximately $65 million in assets.  Thirty-seven of these accounts were opened after Aug. 1, 2008.  EKS will pay a penalty of $2.066 million.

Rand Paul and Expatriates to Sue IRS and Treasury Over FBAR and FATCA (6/26/15)

The Isaac Brock Society announces the "stop the presses news"  that Rand Paul and six other plaintiffs, expatriates, will sue the IRS and the Treasury Department to have the court declare the FBAR and FATCA unconstitutional.  Rand Paul to sue US Treasury and IRS over IGA’s (The Isaac Brock Society 6/24/15), here; see also Kristen A. Parillo, Rand Paul Joins Suit Challenging FATCA, FBAR, 2015 TNT 123-8 (6/26/15) [link not available].  The TNT article says:

According to Bopp, Paul will claim he was denied his constitutional right under Article II, section 2, of the Constitution to vote on the intergovernmental agreements implementing FATCA. Treasury has been treating the IGAs as executive agreements that don't require the Senate's advice and consent. Paul is a leading critic of FATCA and has introduced legislation (S. 663 2015 TNT 53-38: Proposed Legislation) to repeal FATCA's reporting and withholding provisions, as well as other reporting requirements and related penalties regarding foreign financial assets. (Related release 2015 TNT 50-95: Congressional News Releases.) 

Bopp said the other plaintiffs will claim that the FATCA and FBAR provisions violate the Fourth Amendment ban on unreasonable search and seizure because they require the collection and reporting of confidential financial information without probable cause or a warrant. They will also claim that the imposition of what Bopp called draconian fines violates the Eighth Amendment ban on cruel and unusual punishment.

The distinction between executive agreements which do not require Senate advice and consent and treaties has recently flared up over the Iran negotiations.  See e.g., Treaties vs. Executive Agreements: When Does Congress Get a Vote? (WSJ Washington Wire 3/10/15), here; for a more scholarly presentation see Glenn S. Kurtz and Jeffrey S. Peake, Treaties and Executive Agreements: A History (from Treaty Politics and the Rise of Executive Agreements: International Commitments in a System of Shared Powers (U Mich Press 2008), here.)

There will likely be a web site that will aggregate and update news related to this adventure, so I will try to post the link to that web site when I learn of it.  Readers are invited to post the web site in comments and I will lift the link up to the main blog.

It is not clear the relationship that this new adventure has to Rand Paul's campaign to become President of the U.S.  See the web site here and the Wikipedia entry here.

By the way, there is one issue that may get fleshed out in the case if it gets past the threshold motions to dismiss.  The claim has been made in many comments on this blog that expatriates are unable to obtain normal banking services as a result of the combination of DOJ's initiatives and FATCA.  The Issaac Brock article says:

The other plaintiffs in the suit Mr. Paul has joined say they have been denied banking and financial services in the foreign countries where they live and work. The foreign banks don’t want to be burdened with the expense and paperwork to comply with FATCA and therefore simply refuse to accept Americans as clients.

The case might present a forum where those claims can be tested to see whether they are anecdotal or systemic affecting large numbers of expatriates.

Julius Baer Reserves $350 Million for U.S. Tax Investigation (6/24/15)

Julius Baer, one of the approximately 14 Swiss Category 1 banks (those under criminal investigation and thus ineligible for Category 2) has created financial reserves for cost of resolving U.S. criminal investigation.  See Julius Baer's media release here.  Key excerpts:

Today, Julius Baer has announced its decision to take a preliminary provision of USD 350 million for its eventual settlement with the U.S. Department of Justice (DOJ) regarding its legacy U.S. cross-border business.\\ 

Zurich, 23 June 2015 – The decision to take a preliminary provision at this time is the result of Julius Baer’s recent discussions with the DOJ regarding its eventual, comprehensive and final settlement of the DOJ’s investigation of Julius Baer’s legacy U.S. cross-border business. These settlement discussions have now sufficiently advanced to enable Julius Baer to make a preliminary assessment of a probable and approximate amount required to reach a settlement with the DOJ.  

* * * *  

Noting that estimates are by their nature based on judgment, currently available information and a variety of other factors, the amount of the provision reflects Julius Baer’s existing understanding and the present state of the preliminary discussions with the DOJ regarding the amount of an eventual settlement and may be subject to change. Whilst there is no defined timetable for a final settlement, Julius Baer continues to work towards closing this regrettable legacy issue as soon as possible.

In a news report, the following points were made (Katharina Bart,  UPDATE 1-Julius Baer to take $350 mln charge as end to U.S. tax probe nears (Reuters 6/23/15), here.)

• "The provision is far less than what most analysts had expected, with some estimates as high as 850 million Swiss francs ($909 million)."  
• "Asked whether Julius Baer would plead guilty to criminal charges like larger rival Credit Suisse did last May, a spokesman for the bank said U.S. officials had not requested it to do so."