The battle to defeat money launderers and tax evaders triggered reforms. Now institutions and individuals face stiff penalties for non-compliance with reporting rules, as the world grows more transparent.
A quick scan of almost any global economic news reveals a virtual tsunami of new reporting requirements for individuals, and information exchange agreements between countries. The impetus behind this dramatic escalation is two-fold: a growing desire to combat money laundering, and the recognition that a crackdown on tax evasion may be a primary way to satisfy the urgent need for more government revenue. These trends are especially evident in the more developed countries.
|NON-COMPLIANCE PENALTIES CAN BE STEEP: TWO RECENT CASES|
In June 2014 a federal jury in Miami found Carl Zwerner guilty of willful failure to file FBARs disclosing his Swiss bank account for years 2004-2006. He faces a fine of more than $2 million, on account balances close to $1.5 million, due to the penalty of 50% of the balance for each year of non-disclosure.4
Ty Warner, the creator of Beanie Babies, is a billionaire with a net worth of $2.6 billion. He opened an account in 1996 and moved it to Zucher Kantonal Bank in 2002 under the name Malong Foundation. The balance was believed to be $94 million. He allegedly earned $3.1 million in this investment in 2002 but did not tell his U.S. accountants or report it on his U.S. tax returns, avoiding $885,200 in taxes. He claims to have come forward voluntarily in 2009 to enter the Offshore Voluntary Disclosure Program (OVDP), but was denied entry because he was under government scrutiny. He later agreed to plead guilty to one felony count of tax evasion and paid a penalty of almost $54 million, the largest offshore account penalty ever reported. But this was just the beginning. He also paid $27 million in back taxes and interest. In January, he was sentenced to two years of probation and 500 hours of community service by a U.S. Federal District Court judge.5 Since then, U.S. attorney for Northern Illinois Zachary T. Fardon is seeking Department of Justice approval to appeal Warner’s no-jail sentence — a rare appeal that must also be approved by the U.S. Solicitor General.
The United States was among the first and largest countries to request client information from foreign financial institutions, and has faced considerable resistance. Challenges have ranged from claims of overreaching territoriality to conflicts with local privacy laws. However, in recent years, many countries have gradually accepted and even adopted similar laws and reporting requirements. Led by the historically richer nations in Europe and North America, countries around the globe are proactively exploring and engaging in bilateral exchange agreements.
In addition, the Organization for Economic Cooperation and Development (OECD) is encouraging multilateral cooperation and the automatic exchange of information. In August 2013, China joined 56 other countries in signing the OECD Convention on Mutual Administration Assistance in Tax Matters and is working with other G20 countries to develop a global standard for mutual information exchange. Further, increasing numbers of so-called “tax havens” are acquiescing to sharing various levels of detail regarding accounts and assets belonging to the citizens of other countries.
Although commonly considered a recent development, the United States has had reporting requirements for non-U.S. assets for decades. However, the extent and enforcement of such regulations have grown exponentially in recent years.
U.S. enforcement has extended to pursuing advisors who have helped foreign nationals evade taxes by structuring their investments offshore. The first step in this direction was in 2009 when UBS was forced to turn over the names of more than 4,000 clients to U.S. authorities, and one of the firm’s employees, Bradley Birkenfeld, provided the U.S. government with information about his U.S. clients in the hopes of a reduced prison sentence. The case continued when Raoul Weil, ex-head of wealth management at UBS and Birkenfeld’s former boss, was extradited from Italy to the U.S. to face charges of conspiracy to commit tax fraud.
Later in 2013, Swiss attorney and financial advisor Edgar Paltzer pled guilty in federal court in New York to conspiracy charges for allegedly helping U.S. taxpayers hide money offshore. Mr. Paltzer promised to cooperate fully with the U.S. government in exchange for leniency in his sentencing. By August 2013, 35 advisors had been criminally charged.1 In March 2014, former Credit Suisse AG banker Andreas Bachmann pled guilty to conspiring to defraud the Internal Revenue Service (IRS) through his banking and investment services to U.S. customers. The plea later evolved into a more extensive case against Credit Suisse, culminating in May with the bank agreeing to plead guilty to criminal tax evasion and pay a fine of more than $2.5 billion. Heightened U.S. enforcement is putting more pressure on U.S. persons with undeclared foreign accounts, as their advisors may choose to reveal client information rather than risk harsh penalties themselves. Since the UBS settlement, which cost the bank $780 million in penalties for helping U.S. clients hide assets, criminal charges have been brought against more than 80 U.S. persons.2 Further, the government’s reach has expanded to include assets stored in bank vaults. Five bank vaults in Zurich, controlled by attorney Paltzer, were sealed by court order due to suspicion that they were being used to store “hard assets” such as art and jewelry.
More recently, two U.S. federal courts authorized the IRS to issue summonses to five major U.S. banks, requiring them to furnish information regarding U.S. taxpayers who may be evading U.S. taxes on assets held at certain Swiss banks which maintain correspondent accounts with the U.S. banks.3 By obtaining this information through correspondent accounts in U.S. banks, the IRS is able to gain access to information about a large number of taxpayers, unhindered by bank secrecy laws in Switzerland or other countries.
Additional topics in this paper include:
There is no question that the U.S. is aggressively pursuing undeclared offshore accounts. The long arm of the U.S. government has even extended to financial institutions in other countries. In early 2013, Wegelin & Co., Switzerland’s oldest bank, pled guilty to aiding U.S. persons in hiding more than $1.2 billion offshore. The storied Swiss bank subsequently closed its doors. Since then, under the protection of the Swiss government, Swiss banks are cooperating with the U.S. government in releasing information about its U.S. clients.
Ironically, FATCA may also have the unforeseen effect of calling attention to America’s own transgressions in helping global investors avoid paying taxes in their home countries. The Tax Justice Network, a non-profit, U.K.-based organization that campaigns for transparency and disclosure by international financial services, has called the U.S. “the world’s biggest offshore banking destination.” The group estimates that non-resident aliens in the U.S. have more than $3 trillion in U.S. accounts. Furthermore, the U.S. ranked sixth in the Financial Secrecy Index, which was created in 2013 by TJN to measure the secrecy level of countries around the world.
With IGAs in negotiation or completed in over 70 countries, and many being reciprocal, the U.S. will lose much of the veil of secrecy it has thus far enjoyed in attracting foreign citizen investment. In addition, as a party to most of the IGAs negotiated, the U.S. government (and by extension, U.S. financial institutions) will bear the brunt of the complexity and expense of providing reciprocal reporting that is increased pursuant to these IGAs.
According to repealfatca.com, at least 30 IGAs are needed to consider FATCA a success and along the road to raise the expected $800 million of tax revenue forecast by the Association of Certified Financial Crime Specialists. With close to that amount now signed and even more now deemed to be “agreements in substance” it appears as if the world is well on its way down the road to achieve global transparency.
1 Laura Saunders, “Offshore Advisor Plea Marks a Shift,” The Wall Street Journal, August 24-25, 2013.
2 Laura Sanders, “No Place to Hide?” The Wall Street Journal, Sep 21-22, 2013.
3 Richard Nessler, “United States: IRS Issues John Doe Summons for Hidden Accounts,” Mondaq, April 17, 2014.
4 Matthew Lee, “FBAR Penalty to Face Excessive Fines,” Blank Rome LLP Tax Controversy Watch, June 1, 2014.
5 Laura Saunders and Mark Peters, “Beanie Toy Billionaire Hit With $54 Million Tax Fine,” The Wall Street Journal, September 19, 2013.
Additional reference material mentioned in this publication:
6 Hom (DCA CA 09/30/2013) 112 AFTR 2d Section 2013-839.
7 Association of Certified Financial Crime Specialists (ACFCS), August 6, 2013.
8 Daryl Griffiths, Bloomberg, August 9, 2013.
9 U.S. v. Simon, 11-1837(7th Cir 2013).
10 Although the Q & A to the OVDP states that compliance under the program will “generally eliminate the risk of criminal prosecution”, and that “the IRS will not recommend criminal prosecution to the Department of Justice” [SOURCE: http://www.irs.gov/uac/2009-Offshore-Voluntary-Disclosure-Program], there is no guarantee that participation in the OVDP will insulate a taxpayer from criminal prosecution. Recently, the U. S. government argued that in fact civil relief by another government agency does not prevent the Department of Justice from a criminal prosecution [U. S. v. Simon, 11-1837 (7th Cir 2013)].
11 Laura Saunders, “Offshore Advisor Plea Marks a Shift in Tax Crackdown,” The Wall Street Journal, August 24, 2013.
12 Laura Saunders, “Offshore Disclosure Comes with Hazards,” The Wall Street Journal, June 28, 2014.
13 U.S. v. Michael Schialvo, 31 USC Section 5314 and 5322 (a), May 19, 2011.
14 Sophia Yan, “3,000 Americans ditch their passports,” CNN Money, February 17, 2014.
15 Revenue Procedure 2012-41 and IRC 877(a)(2)(A).
16 The Wall Street Journal, August 27, 2013.
17 “NPAs or Non-Target Letters for Swiss Banks,” Reports, Rulings and Resolutions, Frank Consultancy Services GmbH, May 11, 2013.
18 Ibid, The Wall Street Journal, August 27, 2013.
19 “FATCA – Mainstream Media wakes up to Implications of Disclosure Provisions,” STEP Newsletter, September 23, 2013.
20 “Taxing Times” Letter to the Editor, The Economist, October 26, 2013.
21 U.S. Department of Commerce, as reported September 2011.
22 As discussed on page 7, the U.S. has negotiated “Intergovernmental Agreements” (IGAs) with more than 40 countries. These agreements eliminate the requirement that FFIs enter into an agreement with the IRS, and substantially reduce the obligations of PFFIs.
23 STEP Journal, (September 2013), 19.
24 STEP Wealth Structuring News Digest, (November 25, 2013), 2.
Pursuant to IRS Circular 230, we inform you that any tax information contained in this communication is not intended as tax advice and is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.
This material is provided for illustrative/educational purposes only. This material is not intended to constitute legal, tax, investment or financial advice. Effort has been made to ensure that the material presented herein is accurate at the time of publication. However, this material is not intended to be a full and exhaustive explanation of the law in any area or of all of the tax, investment or financial options available. The information discussed herein may not be applicable to or appropriate for every investor and should be used only after consultation with professionals who have reviewed your specific situation.
BNY Mellon Wealth Management conducts business through various operating subsidiaries of The Bank of New York Mellon Corporation.
Senior Director and Wealth Strategist, BNY Mellon Wealth Management
Senior Director and Wealth Strategist, BNY Mellon Wealth Management
President, BNY Mellon Trust Company (Cayman) Limited and Managing Director, Global Fiduciary Services, BNY Mellon International Wealth Management