Offshore Enforcement Remains Top Priority of DOJ

By Sanford Millar of MillarLaw A Professional Corporation On Thursday, August 18, 2016

PRINCIPAL DEPUTY ASSISTANT ATTORNEY GENERAL CAROLINE D. CIRAOLO
DELIVERS REMARKS REGARDING THE TAX DIVISION’S OFFSHORE
TAX ENFORCEMENT EFFORTS AT THE PANAMA BANKERS ASSOCIATION
ANTI-MONEY-LAUNDERING CONFERENCE


WEDNESDAY, AUGUST 17, 2016

Remarks as prepared for delivery

PANAMÁ CITY, PANAMA

Good afternoon. I’m very pleased to be in Panama City at the Panama Bankers Association Anti-Money Laundering Conference. On behalf of the Tax Division of the U.S. Department of Justice, I appreciate the opportunity to meet with all of you to discuss our mutual interest in combatting global tax evasion.

In the last decade, the international financial landscape has changed dramatically. Financial transactions are more complex and frequently involve multiple jurisdictions. Governments are enacting and enforcing laws designed to ensure due diligence and financial transparency as they recognize the important role these efforts play in combatting tax evasion and financial crimes and law enforcement officials around the world are responding to requests for assistance from their foreign counterparts pursuing civil and criminal investigations.

In this time of global cooperation, the United States truly appreciates and values its strong relationship with Panama and commends Panama on its recent efforts to increase fiscal transparency and prevent U.S. citizens from using Panamanian laws to evade U.S. taxes. Panama is one of the most important logistical and financial centers of the Americas. While most of the participants who are with us today are from Panama, we also welcome attendees from Argentina, Costa Rica, Dominican Republic, Mexico, Peru, Paraguay, El Salvador, Mexico and, of course, the United States. As regional neighbors, our hope is that we can all collaborate to combat global tax evasion through the use of secret accounts, shell corporations and nominees and alter egos. We have found success working with our colleagues worldwide to address this conduct, which harms our individual countries and our global economy. Ultimately, robust enforcement and transparency will bring increased stability, security and certainty to the global financial system and will ensure that citizens everywhere pay their fair share of taxes and enjoy a level playing field.

As a litigating component of the U.S. Department of Justice, the Tax Division plays a critical role in these efforts. The mission of the Tax Division is to enforce American tax laws fully, fairly and consistently through civil and criminal litigation in federal and state courts throughout the country in order to promote voluntary compliance with the tax laws, maintain public confidence in the integrity of the tax system and promote the sound development of the law.

The Tax Division employs more than 200 civil trial attorneys, who handle affirmative and defensive civil litigation arising under the U.S. internal revenue laws, including defending the United States in tax refund and civil damages suits, defending against lawsuits testing the validity of federal tax regulations and rulings and bringing suits to collect unpaid tax assessments and obtain judgments against delinquent taxpayers. The Tax Division also employs more than 100 prosecutors who investigate and prosecute individuals and entities that seek to evade taxes, file false tax returns, obstruct the Internal Revenue Service (IRS), or assist others engaged in such criminal conduct.

Among our highest priorities is offshore tax enforcement. When taxpayers fail to produce records related to their offshore assets and activities during a civil tax audit, the IRS can refer the matter to the Justice Department for assistance. The Justice Department’s attorneys will file petitions with federal courts seeking to enforce the IRS requests for these records. In many cases, we are seeking records that exist within the United States, but the Tax Division also can seek to compel U.S. branches of foreign banks to produce records that they control located in foreign jurisdictions, despite claims that such production would violate foreign law.

Recently, in UBS v. Hsiaw, the Tax Division filed suit to compel UBS AG (UBS) to produce account records held by a UBS branch in Singapore, after UBS refused to produce those records in response to an IRS administrative summons. The records related to a Singapore account held by a U.S. taxpayer, believed to be residing in China. UBS initially refused to produce the account records, arguing that doing so would be a violation of Singapore bank secrecy laws. After the suit was filed, UBS produced the records requested. In today’s climate, the Justice Department’s use of such tools expands the IRS’s ability to obtain information in the U.S. government’s continuing efforts to hold U.S. taxpayers accountable for reporting and paying their fair share of taxes.

The Tax Division will also file petitions with federal courts seeking authorization to issue what we call “John Doe summonses” to obtain information based on a reasonable belief that a class of individuals whose identities are unknown are engaged in conduct violating the U.S. internal revenue laws. In December 2014, a federal court in New York signed an order authorizing the IRS to issue John Doe summonses requiring Federal Express Corporation aka FedEx Express, FedEx Ground Package System Inc. aka FedEx Ground, DHL Express, United Parcel Service Inc., Western Union Financial Services Inc., the Federal Reserve Bank of New York, Clearing House Payments Company LLC and HSBC Bank USA, National Association, to produce information about U.S. taxpayers who might be evading or have evaded federal taxes by using the services of Sovereign Management & Legal Ltd (Sovereign). Sovereign is a multi-jurisdictional offshore services provider that we alleged offered clients, among other things, the formation and administration of anonymous corporations and foundations. The IRS believed Sovereign’s related services included the maintenance and operation of offshore structures, mail forwarding, the availability of virtual offices, re-invoicing and the provision of professional managers who appoint themselves directors of the client’s entity while the client maintains ultimate control over the assets. Sovereign used Federal Express, UPS and DHL to correspond with U.S. clients and Western Union to transmit funds to and from clients in the United States. In addition, wire services operated by the Federal Reserve Bank and Clearing House and the U.S. correspondent bank accounts that HSBC USA held for Sovereign’s banks in Panama and Hong Kong, were believed to have records of financial transactions between Sovereign and its clients in the United States. With these records, the IRS sought to identify and gather information about Sovereign’s U.S. clients who may be avoiding or evading taxes.

Similarly, in September 2015, a federal court in Miami granted the Justice Department’s petition for an order authorizing the issuance of a John Doe summons to Bank of America and Citibank seeking information about U.S. taxpayers who may hold offshore accounts at Belize Bank International Limited (BBIL) or Belize Bank Limited (BBL). Belize Corporate Services (BCS) is incorporated and based in Belize and offers corporate services including the purchase of “shelf” Belizean international business companies. The Justice Department established a reasonable belief that the customers in the John Doe class failed to report income, evaded income taxes, or otherwise violated U.S. internal revenue laws. The records were sought to identify U.S. taxpayers who hold or held interests in financial accounts at BBIL and BBL, as well as other financial institutions that used the same correspondent accounts.

The Justice Department will continue to enforce IRS administrative summonses, seek the issuance of John Doe summonses and employ all other available and appropriate methods to obtain information regarding potential tax violations and to assist its partners within the IRS with enforcement of the U.S. tax laws. To this end, we appreciate the prompt response and cooperation of financial institutions, both within and outside the United States, in producing the records and information requested.

As noted, the Tax Division also investigates and prosecutes U.S. taxpayers who use foreign accounts or entities in an attempt to evade tax, as well as bankers, account managers, professional service providers and other facilitators, including foreign entities, assisting or conspiring with U.S. persons in evading their tax obligations. Since 2008, the U.S. Department of Justice has charged criminally more than 160 accountholders and over 50 facilitators, many of whom reside outside the United States.

For example, on Aug. 1, Masud Sarshar, a California businessman who owns Apparel Limited Inc., a company that makes and sells clothing, was charged with conspiring to defraud the United States and corruptly endeavoring to impair and impede the due administration of the internal revenue laws. Mr. Sarshar maintained several undeclared bank accounts at Bank Leumi and two other Israeli banks, both in his name and in the names of entities that he created. For decades, with the assistance of at least two bank employees, Mr. Sarshar diverted tens of millions of dollars in untaxed gross business income to these accounts in an effort to conceal income and obstruct the IRS. The bankers frequently visited Mr. Sarshar in Los Angeles and, at his request, delivered account information in person, rather than send account statements by mail. For example, one banker loaded account statements on a USB drive, which she concealed in a necklace worn during her trips to the United States. At the suggestion of the bankers, Mr. Sarshar also used “back-to-back” loans to access his funds offshore without actually withdrawing the funds or creating a paper trail that would reveal the existence of the secret foreign accounts. The bankers also directed Mr. Sarshar to obtain Israeli and Iranian passports in an effort to avoid being flagged as a U.S. citizen by the compliance departments at both banks and later facilitated the transfer of Mr. Sarshar’s remaining funds to yet another Israeli bank.

Mr. Sarshar has agreed to plead guilty and pay more than $8.3 million in restitution to the IRS. If the court accepts the plea agreement, Mr. Sarshar will be sentenced to 24 months in prison. In addition, Mr. Sarshar stipulated to a civil penalty in the amount of 50 percent of the high balance of his undeclared accounts to resolve his civil liability for not disclosing the existence of his Israeli bank accounts.

As reflected in the Sarshar prosecution, U.S. accountholders who use foreign accounts to conceal assets and income and to evade their U.S. tax obligations rely on the assistance of third parties — foreign financial institutions, bankers, accountants and lawyers, just to name a few. Many of these third parties are unwitting participants. Others, like the bankers who assisted Mr. Sarshar, play an active role in the criminal conduct.

For example, on June 22, Michele Bergantino, a citizen of Italy and resident of Switzerland, pleaded guilty to conspiring to defraud the United States by assisting U.S. taxpayers to conceal foreign accounts and evade U.S. taxes during his employment as a banker working for Credit Suisse. Mr. Bergantino admitted that from 2002 to 2009, while working as a relationship manager for Credit Suisse in Switzerland, he participated in a wide-ranging conspiracy to aid and assist U.S. taxpayers in evading their income taxes by concealing assets and income in secret Swiss bank accounts. He oversaw a portfolio of accounts, largely owned by U.S. taxpayers residing on the West Coast of the United States, which grew to approximately $700 million of assets under management.

Mr. Bergantino assisted clients in hiding their Swiss accounts by assuring them that Swiss bank secrecy laws would prevent Credit Suisse from disclosing their undeclared accounts to U.S. law enforcement; discussing business with clients only when they traveled to Zurich; structuring withdrawals from undeclared accounts by sending multiple checks in amounts below $10,000 to clients in the United States; facilitating the withdrawal of large sums of cash by U.S. customers from their Credit Suisse accounts at Credit Suisse offices in the Bahamas, Switzerland and particularly the Credit Suisse branch at the Zurich airport, and at a financial institution in the United Kingdom; holding clients’ mail from delivery to the United States; issuing withdrawal checks from Credit Suisse’s correspondent bank in the United States; and taking actions to remove evidence of a U.S. client’s control over an account because the U.S. client intended to file a false and fraudulent income tax return. Moreover, Mr. Bergantino understood that some of his U.S. clients concealed their ownership and control of foreign financial accounts by holding those accounts in the names of nominee tax haven entities or structures, which were frequently created in the form of foreign partnerships, trusts, corporations or foundations.

Mr. Bergantino also admitted traveling to the United States to meet with clients, taking careful steps to conceal the purpose of his visits from U.S. law enforcement. He used private couriers to send clients’ account statements to the U.S. hotels where he stayed, so that he would not be caught traveling with clients’ statements in his possession, and obtained “travel” account statements for each client he intended to visit which were devoid of Credit Suisse’s logo and account or customer identification information, and used business cards that Credit Suisse provided that contained only his name and office number. On entering the United States, Mr. Bergantino provided misleading information regarding the nature and purpose of his visit to U.S. Customs and Border Protection authorities.

Mr. Bergantino had been a fugitive since 2011, unable to travel outside of Switzerland without risking arrest. He is the third fugitive to come to the United States and plead guilty to charges in this case. Two of Mr. Bergantino’s co-defendants, Andreas Bachmann and Josef Dörig, pleaded guilty to the superseding indictment in 2014 and were sentenced on March 27, 2015.

These cases demonstrate that tax evasion knows no geographic bounds and that the Justice Department will pursue these cases wherever the money travels. Not only will those individuals involved be held responsible, but also the entities that support and facilitate their conduct. The Justice Department remains committed to holding foreign financial institutions, corporate service providers, legal and financial professional firms, insurance companies and other entities accountable for their role in assisting U.S. taxpayers in concealing accounts and evading U.S. tax obligations.

In May 2014, Credit Suisse pleaded guilty to conspiring to aid and assist U.S. taxpayers in filing false returns and was sentenced in November 2014 to pay $2.6 billion in fines and restitution.

In December 2014, Bank Leumi, an international bank based in Israel, entered into a deferred prosecution agreement after the bank admitted to conspiring from at least 2000 until early 2011 to aid and assist U.S. taxpayers to prepare and present false tax returns by hiding income and assets in offshore bank accounts in Israel and other locations around the world. Bank Leumi admitted to helping U.S. clients conceal assets by, among other things, using assumed names or number accounts, providing hold mail service, sending private bankers to the United States to meet secretly with clients at hotels, parks and coffee shops to discuss the clients’ foreign account activity and assisting U.S. clients in using nominee corporations created in the British Virgin Islands, Panama, Belize and other foreign jurisdictions to hide their foreign accounts by concealing the U.S. client as the true beneficial owner. Under the terms of the deferred prosecution agreement, Bank Leumi paid the United States a total of $270 million (in U.S. currency) and continues to cooperate with respect to civil and criminal tax investigations.

In February 2016, the Justice Department entered into a deferred prosecution agreement with Bank Julius Baer, which admitted to conspiring with and knowingly assisting U.S. accountholders to hide billions of dollars in offshore accounts and evade U.S. taxes. Julius Baer admitted that it identified certain U.S. taxpayers only by code name or number and opened accounts for U.S. taxpayer-clients in the name of non-U.S. corporations, foundations, trusts, or other legal entities or non-U.S. relatives. As part of the deferred prosecution agreement, Julius Baer agreed to pay $547 million (in U.S. currency), including restitution for tax loss arising from the undeclared U.S. related accounts, disgorgement of gross fees paid with respect to these accounts, and a fine for its illegal conduct. In addition to the deferred prosecution agreement, two Julius Baer bankers, both of whom had been fugitives since 2011, pleaded guilty to conspiracy to defraud the IRS, to evade federal income taxes and to file false federal income tax returns.

In addition to our ongoing criminal tax investigations, in August 2013, the Justice Department announced the Swiss Bank Program, which provided a path for Swiss banks to resolve potential criminal liabilities in the United States. Banks already under criminal investigation related to their Swiss-banking activities, identified as Category 1 banks and all individuals were expressly excluded from the program. Under the program, Swiss banks about which we had little or no information came forward and self-identified as having helped U.S. taxpayers to hide foreign accounts and evade their U.S. tax obligations. In exchange for a non-prosecution agreement, these institutions, identified as Category 2 banks, made a complete disclosure of their cross-border activities, provided detailed information on accounts in which U.S. taxpayers have a direct or indirect interest, are cooperating in treaty requests for account information, are providing detailed information as to other banks that transferred funds into secret accounts or that accepted funds when secret accounts were closed and must cooperate in any related criminal and civil proceedings for the life of those proceedings. The banks were also required to pay appropriate penalties.

From March 30, 2015, through Jan. 27, 2016, the Justice Department executed 78 agreements with 80 Category 2 banks and imposed more than $1.3 billion in penalties. The Justice Department also signed a non-prosecution agreement with Finacor, a Swiss asset management firm, reflecting the Justice Department’s willingness to reach fair and appropriate resolutions with entities that come forward in a timely manner, disclose all relevant information regarding their illegal activities and cooperate fully and completely, including naming the individuals engaged in criminal conduct.

The banks participating in the program have revealed the names of thousands of U.S. accountholders, a substantial number of whom have voluntarily disclosed their accounts to the IRS and are providing information for treaty requests to obtain the names and account records of those individuals who have refused to waive Swiss bank secrecy. The program has driven thousands of taxpayers into the IRS voluntary disclosure programs. In October 2015, the IRS reported more than 54,000 voluntary offshore disclosures and the collection of more than $8 billion in taxes, penalties and interest. These figures have substantially increased since the program was announced in August 2013, due in part to the pressure applied by the Swiss banks on their accountholders to come into compliance. In addition, the number of Reports of Foreign Bank and Financial Accounts filed by U.S. taxpayers increased from just over 332,000 for calendar year 2007 to more than 1.1 million for calendar year 2015.

Tax Division attorneys and IRS agents are reviewing the tremendous volume of information received from banks participating in the Swiss Bank Program and those cooperating pursuant to the terms of other resolutions, as well as information received in response to our treaty requests and from whistleblowers, to pursue ongoing and new criminal tax investigations and to support civil enforcement efforts.

In conclusion, the Justice Department appreciates the strong working relationships with Panama and other countries around the world and looks forward to maintaining and strengthening these relationships as we continue to use all tools at our disposal and work together to combat global tax evasion, even as it acquires new and more challenging forms. We will continue to pursue information and records located within and outside the United States to support our civil and criminal tax investigations, to engage with individuals and entities seeking to cooperate with the United States, and to identify, investigate and prosecute U.S. accountholders who use foreign accounts and assets to evade their U.S. tax obligations and those individuals and entities that facilitate these crimes.

Thank you for your time this afternoon and the opportunity to speak to you about the Justice Department’s offshore tax enforcement efforts.

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