The U.S. government shows no sign of easing the pressure on foreign banks and tax haven jurisdictions that are believed to facilitate international tax evasion by U.S. taxpayers through the use of secret bank accounts. Internal Revenue Service Commissioner Douglas H. Shulman has stated publicly that "[c]ombating international tax evasion is a top priority for the IRS," and warned that "[w]e have additional cases and banks under review. The situation will just get worse in the months ahead for those hiding assets and income offshore."

 Making good on that promise, the U.S. opened another front in its global campaign on April 7 with the U.S. Department of Justice filing a lawsuit seeking the names of Americans believed to be hiding funds in bank accounts at HSBC in India. This latest action follows the indictment in February of four Swiss bankers employed by Credit Suisse and the January arrest of a Credit Suisse banker when he attempted to enter the U.S. to visit U.S. clients.

These recent events illustrate the U.S. government's expanding global probe of foreign financial institutions that assist U.S. taxpayers in evading their tax obligations, and demonstrate that the DOJ will not hesitate to criminally charge foreign nationals who facilitate tax evasion by U.S. account holders.

In another major development, the IRS has announced a second amnesty program offering U.S. taxpayers with secret foreign bank accounts the ability, for a limited time, to "come clean" and avoid criminal prosecution.

It is important to recognize that there is nothing illegal about a U.S. citizen maintaining a bank account in a foreign country, even in so-called "bank secrecy" countries such as Switzerland, the Cayman Islands and Singapore. Anyone having such an account is required to report on his or her personal income tax return all income (interest, dividends and capital gains) earned in that account and answer "yes" to a question on Schedule B of the return which asks whether you have a foreign bank account.

Account holders are also required to file an annual Report of Foreign Bank and Financial Accounts (commonly known as the FBAR form) with the U.S. Treasury Department on June 30 of each year. The failure to file the FBAR form and to report income from a foreign account can subject the account holder (and spouse, if a joint tax return is filed) to criminal charges, including tax evasion, as well as substantial civil penalties.

The UBS Case and Subsequent Enforcement Efforts

During the last two years, the public has been treated to revelations that Switzerland was a haven for international tax evasion, catering to high net worth Americans holding secret accounts at Swiss banks. The vast majority of the media attention to date has focused on UBS AG, the country's largest bank, which was alleged to have assisted U.S. citizens in hiding money using numbered accounts, offshore corporations, family foundations and other mechanisms to conceal the true identity of account holders. In court filings, the DOJ estimated that over 52,000 Americans held accounts at UBS in Switzerland.

In February 2009, UBS avoided criminal prosecution by entering into a deferred prosecution agreement with the U.S.1 Under the terms of that agreement, UBS admitted it helped U.S. citizens hide money in secret Swiss accounts, agreed to pay $780 million in penalties, and provided the IRS with the names of more than 250 of its U.S. customers who were suspected of committing tax fraud.

The day after that agreement was signed, the DOJ filed suit against UBS in federal court to enforce a "John Doe" summons seeking to force the bank to turn over the names of U.S. taxpayers believed to be holding secret accounts at UBS.2

Under enormous diplomatic pressure from the U.S. government, Swiss legislators subsequently voted to weaken the country's historic bank secrecy laws, paving the way for the names of nearly 5,000 more UBS depositors to be turned over to the U.S. authorities in subsequent months.

Recognizing that many Americans inherited bank accounts in Switzerland for legitimate reasons — such as from ancestors fleeing Nazi Germany — the IRS announced, in March 2009, a special voluntary disclosure program for U.S. taxpayers holding foreign bank accounts.

Individuals who took advantage of that program were required to pay back taxes and substantial civil penalties, but were generally granted amnesty from criminal prosecution. By all accounts, the 2009 program (which expired in October 2009) was a huge success, with over 15,000 individuals coming forward to confess that they had unreported bank accounts.

In November 2010, the DOJ announced that UBS had complied with the terms of its deferred prosecution agreement and dismissed its case against the bank. At the same time, the IRS withdrew its "John Doe" summons against UBS. While these events closed a significant chapter in the foreign bank account enforcement saga, it is clear that the IRS and the DOJ have no intention of ceasing theirenforcement efforts in the international arena.

Much speculation is focused on which bank and/or country will be the next target, particularly as funds flow out of Switzerland in the wake of the UBS affair. The IRS and DOJ have been relentlessly mining the vast data received through the 2009 voluntary disclosure initiative for leads involving banks, advisers and promoters all over the world, including Asia and the Middle East.

To date, the DOJ has brought criminal charges against more than 40 individuals, including U.S. accountholders as well as foreign bankers and advisers.

HSBC and Other Foreign Banks in the Crosshairs

The most recent evidence of the U.S. government's expanding probe was revealed on April 7, when the DOJ filed suit against HSBC.3 The lawsuit, filed in federal court in San Francisco, sought court authorization for the IRS to serve a "John Doe" summons on HSBC's main U.S. affiliate, HSBC Bank USA, seeking details of accounts held by Americans at HSBC in India.

That request was approved by the court on the same day it was filed, paving the way for the IRS to serve its "John Doe" summons on HSBC.

In its suit, the government alleges that HSBC operated offices in New York and California between 2002 and 2010 in order to provide banking services to "nonresident Indians" living in the U.S. It is further alleged that HSBC representatives assured their customers that they could invest in accounts at HSBC India without paying U.S. income tax on interest earned on the accounts and that HSBC would not report income earned on those accounts to the IRS.

The DOJ believes that approximately 9,000 individuals residing in the U.S. maintained accounts at HSBC in India, with deposits totaling nearly $400 million.

The DOJ's focus on HSBC and accounts in India was previewed in January, when a federal grand jury in New Jersey charged an individual named Vaibhav Dahake with conspiracy to defraud the IRS through the use of undeclared bank accounts in the British Virgin Islands and India.4

That indictment charged that a large "international bank" assisted Dahake in opening a bank account in India and transferring funds into that account from accounts in the U.S. and the British Virgin Islands.

The indictment identified five bankers as unindicted conspirators, and alleged that they convinced Dahake to transfer his funds from the British Virgin Islands to India and advised him how to maintain his funds in Indian accounts so as to avoid detection by U.S. authorities.

The indictment further alleged that after the UBS deferred prosecution agreement was announced in February 2009, the bankers advised their customer that they could arrange for transfer of his funds from India to banks in either Singapore or Hong Kong. The government's suit filed against HSBC on April 7confirms that that the international bank referenced in the Dahake indictment is HSBC.

The U.S. government's current focus is not, however, just limited to HSBC. In February, the DOJ announced criminal charges against four bankers at an unidentified "international bank" headquartered in Zurich, which was later identified in press reports as Credit Suisse.5 During that month it was also revealed that federal agents had arrested Christos Bagios, a Greek national employed by Credit Suisse Private Advisors, when he entered the U.S. to meet with U.S. clients.6

The indictment returned against the four Credit Suisse bankers alleges that as of the fall of 2008, Credit Suisse maintained undeclared accounts containing approximately $3 billion. The indictment further alleged that the four charged bankers and other conspirators discouraged U.S. accountholders from disclosing their secret accounts to the IRS and assisted those accountholders in transferring funds to other banks in Switzerland, Israel and Hong Kong in order to avoid detection.

The DOJ's suit against HSBC and the indictment of Credit Suisse bankers confirms the government's widening probe of international tax evasion by U.S. taxpayers through the use of offshore bank accounts. In a press release issued on the day the HSBC suit was filed, IRS Commissioner Douglas Shulman stated that "[t]he IRS continues to focus its attention on international tax evasion," and added, "[a]s I've said all along, our international efforts are not about just one country or one bank — it's about our wider effort to ensure compliance with the nation's tax laws."

The DOJ Tax Division's website similarly states that its "top litigation priority is the concerted civil and criminal effort to combat the serious problem of noncompliance with our tax laws by U.S. taxpayers using secret offshore bank accounts — a problem that a 2008 Senate report concluded costs the U.S. Treasury at least $100 billion annually." According to the DOJ, its enforcement efforts in the offshore area have been highly successful to date:

  • 150 grand jury investigations of UBS clients have been initiated, of which 26 cases have been charged, with 4 awaiting trial and 22 guilty pleas having been entered.
  • a number of foreign nationals who helped clients hide assets offshore at UBS and other banks have been indicted, resulting in four clients and one adviser being charged and convicted, and another eight bankers, lawyers, and financial advisers being charged and awaiting trial.
  • grand jury investigations have been opened into eight additional offshore banks across the world.

The 2011 Offshore Voluntary Disclosure Initiative

Meanwhile, in another significant development, the IRS unveiled its 2011 Offshore Voluntary Disclosure Initiative (OVDI) on Feb. 8. The 2011 OVDI is a long-awaited second amnesty program designed to encourage taxpayers with undisclosed foreign bank accounts to come into compliance with U.S. tax laws and avoid possible criminal prosecution. This program follows the highly successful 2009 amnesty, but it will be available only through Aug. 31.

In announcing the new amnesty program, IRS Commissioner Doug Shulman stated that "*a+s we continue to amass more information and pursue more people internationally, the risk to individuals hiding assets offshore is increasing. This new effort gives those hiding money in foreign accounts a tough, fair way to resolve their tax problems once and for all. And it gives people a chance to come in before we find them."

As expected, taxpayers who come forward under the new amnesty program face more stringent penalties than those who took advantage of the prior 2009 initiative. The framework for the 2011 OVDI includes the following:

  • Participants generally must pay a penalty of 25 percent of the highest aggregate balance in their foreign bank accounts during the 2003 to 2010 time period. Under limited circumstances, this penalty may be reduced to either 12.5 or 5 percent.
  • Participants must pay back-taxes and interest for the period 2003 through 2010, as well as penalties of 20 percent of the taxes due.
  • Participants must also file all original and amended tax returns, and pay all taxes, interest and penalties by the Aug. 31 deadline.

Time is of the essence, however, because an individual will be disqualified from participation in this new program if the IRS learns of the foreign account or starts an inquiry before the account holder enrolls in the program. This means that amnesty is not available if the IRS starts an audit, serves a subpoena or receives account information from a foreign bank before the account holder approaches the IRS.

Importantly for HSBC account holders, the mere service of a "John Doe" summons on a foreign bank does not render account holders at that institution ineligible for amnesty. However, as soon as the IRS receives information regarding specific account holders pursuant to a "John Doe" summons, amnesty is no longer available.

In short, taxpayers must get to the IRS before the IRS finds them. And the window of opportunity for amnesty under the new program is limited: the program will end on Aug. 31. As Shulman has stated, "[t]his new disclosure initiative is the last, best chance for people to get back into the system."

Conclusion

Despite the large number of individuals who participated in the 2009 voluntary disclosure program, it is nonetheless widely believed that many more U.S. taxpayers holding foreign accounts in Switzerland and other countries have failed to "come in from the cold," largely due to the belief that the U.S. government will never discover the existence of their accounts.

Account holders who continue to hide assets offshore and choose not to participate in the 2011amnesty program can face substantial civil penalties as well as the possibility of criminal prosecution for tax evasion.

The new IRS amnesty program offers a relatively easy way for U.S. citizens holding secret accounts to avoid criminal prosecution and to come back into compliance with U.S. tax laws. With both the IRS and DOJ ramping up their efforts to curtail offshore tax avoidance and evasion, individuals with undeclared foreign accounts can no longer assume that they will remain undetected or protected by foreign banking secrecy laws.

Footnotes

1. See United States v. UBS AG, No. 09-60033 (S.D. Fla.).

2. See United States v. UBS AG, No. 09-20423 (S.D. Fla.).

3. In the Matter of the Tax Liabilities of John Does, No. 11-cv-1686 (N.D. Cal.).

4. See United States v. Vaibhav Dahake, No. 11-42 (D.N.J.).

5. See United States v. Marco Parenti Adami et al., No. 1:11-cr-95 (E.D. Va.).

6. See United States v. Christos Bagios, No. 11-6030 (S.D. Fla.).

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