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First Conviction of Non-Swiss Financial Institutions For Tax Evasion Conspiracy

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On March 9, 2016, the IRS announced the first conviction of Non-Swiss Financial Institutions for tax evasion conspiracy. At Sherayzen Law Office, we have been predicting now for years that the IRS would expand its prosecution of financial institutions far beyond the Swiss borders, specifically pointing to tax shelters such as Cayman Islands. Now that our strategic analysis has been confirmed, it is important to analyze this first conviction of Non-Swiss Financial Institutions and its impact on U.S. taxpayers with undisclosed foreign accounts.

Factual Background of the First Conviction of Non-Swiss Financial Institutions

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

According to the IRS and documents filed in Manhattan federal court, from at least 2001 through 2011, CNS and CNT assisted certain U.S. taxpayers in evading their U.S. tax obligations to the IRS and otherwise hiding accounts held at CNS and CNT from the IRS (hereinafter, undeclared accounts). CNS and CNT did so by knowingly opening and maintaining undeclared accounts for U.S. taxpayers at CNS and CNT. Specifically, and among other things, CNS and CNT opened and encouraged many U.S. taxpayer-clients to open accounts held in the name of sham Caymanian companies and trusts (collectively, structures), thereby helping U.S. taxpayers conceal their beneficial ownership of the accounts. Furthermore, CNS and CNT treated these sham Caymanian structures as the account holders and allowed the U.S. beneficial owners of the accounts to trade in U.S. securities without ever requiring these U.S. persons to submit Form W-9. CNS failed to disclose to the IRS the identities of the U.S. beneficial owners who were trading in U.S. securities, in contravention of CNS’s obligations under its Qualified Intermediary Agreement (QIA) with the IRS.

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

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

In or about June 2011, CNT hired a new president, who spearheaded a review of CNT’s files. In the course of that review, not a single file was found to be complete and without tax or other issues. Moreover, with respect to the structures that had U.S. beneficial owners, CNT’s files contained little, if any, evidence of tax compliance.

Guilty Pleas of these Two Non-Swiss Financial Institutions

On March 9, 2016, both Non-Swiss Financial Institutions, CNS and CNT pleaded guilty to a criminal Information charging them with conspiring with many of their U.S. taxpayer-clients to hide more than $130 million in offshore accounts from the IRS and to evade U.S. taxes on the income earned in those accounts. CNS and CNT entered their guilty pleas pursuant to plea agreements.

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

In connection with their guilty pleas, CNS and CNT have also agreed to pay the United States a total of $6 million, which consists of the forfeiture of gross proceeds of their illegal conduct, restitution of the outstanding unpaid taxes from U.S. taxpayers who held undeclared accounts at CNS and CNT, and a fine.

Impact of the Guilty Pleas of Non-Swiss Financial Institutions on U.S. Taxpayers with Undeclared Foreign Accounts

The impact of the guilty pleas of these two Cayman Island Non-Swiss Financial Institutions is difficult to overstate. First, it becomes clear that the IRS feels confident that it can replicate its success in Switzerland in every offshore jurisdiction and there is no limit to their ability to uncover undeclared foreign accounts of U.S. taxpayers.

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

Second, it is evident that the IRS strategy is to first force Non-Swiss Financial Institutions to reveal information about their U.S. clients and, then, using the information provided by these institutions, pursue noncompliant U.S. taxpayers. As part of their guilty pleas, CNS and CNT are required to turn over extensive materials about their U.S. clients and these noncompliant U.S. taxpayers should be preparing to face the full wrath of the IRS.

“The guilty pleas of these two Cayman Island companies today represent the first convictions of financial institutions outside Switzerland for conspiring with U.S. taxpayers to evade their lawful and legitimate taxes,” said U.S. Attorney Bharara. “The plea agreements require these Cayman entities to provide this office with the client files, because we are committed to finding and prosecuting not only banks that help U.S. taxpayers evade taxes, but also individual taxpayers who find criminal ways not to pay their fair share. We will follow them no matter how far they go to hide their accounts, whether it is Switzerland, the Cayman Islands, or some other tax haven.”

In essence, between FATCA and the constant IRS pressure on Non-Swiss Financial Institutions, the noncompliant U.S. taxpayers are in the constant danger of discovery, which now becomes more of a question of “when”, rather than “if”.

What Should U.S. Taxpayers With Undeclared Foreign Accounts Do?

In light of this development, U.S. taxpayers with undeclared foreign accounts in Non-Swiss Financial Institutions should explore their voluntary disclosure options as soon as possible. For this purpose, they should contact an experienced international tax law firm that specializes in this field.

Contact the Experienced International Tax Law Firm of Sherayzen Law Office, Ltd. for Professional Help With Your Undeclared Accounts

If you have undeclared foreign accounts, foreign income or foreign business entities, you are encouraged to contact the international tax law firm of Sherayzen Law Office as soon as possible. Our team of experienced tax professionals specializes in this area of law, including the preparation of all necessary legal documents and tax forms. We have helped hundreds of U.S. taxpayers around the world and we can help You!

Contact Us Today to Schedule Your Confidential Consultation!

UK FATCA Letters

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While the United Kingdom signed its FATCA implementation treaty in 2014, UK FATCA letters (i.e. FATCA letters from UK financial institutions) continue to pour into the mailboxes of U.S. taxpayers. In this article, I would like to discuss the purpose and impact of UK FATCA Letters.

UK FATCA Letters

UK FATCA Letters play an integral role in the FATCA Compliance of UK financial institutions. Under the Foreign Account Tax Compliance Act (FATCA), the UK foreign institutions are obligated to collect certain information regarding U.S. owners of UK bank and financial accounts and provide this information to the IRS. The collected information must include the name, address and social security number (or, EIN number) of U.S. accountholders.

In order to collect the required information and identify who among their clients is a US person for FATCA purposes, the UK financial institutions send UK FATCA Letters to their clients, asking them to provide the information by the required date. If there is no response within the required period of time (which may be extended), the UK financial institutions report the account to the IRS with the classification as a “recalcitrant account”.

UK FATCA Letters and Undisclosed UK Bank and Financial Accounts

While UK FATCA Letters are important to FATCA compliance of UK financial institutions, they also may have important impact on U.S. taxpayers with undisclosed bank and financial accounts in the United Kingdom, particularly on the ability of such U.S. taxpayers to timely disclose their foreign accounts.

Once a U.S. taxpayer receives UK FATCA Letters, he should be aware that the clock has started on his ability to do any type of voluntary disclosure. This is the case because UK FATCA Letters demand a response within certain limited period of time. Then, the UK financial institutions will report the account to the IRS, which may prompt IRS examination which, in turn, may deprive the taxpayer of the ability to take advantage of any type of a voluntary disclosure option.

Furthermore, UK FATCA Letters start the clock for the taxpayers to do their voluntary disclosure in an indirect way. If the taxpayers do not complete their voluntary disclosure within reasonable period of time (which may differ depending on circumstances) after they receive the letters, the IRS may proceed based on the assumption that prior noncompliance with U.S. tax requirements by the still noncompliant taxpayers was willful.

Finally, UK FATCA Letters may impact a U.S. taxpayer’s legal position with respect to current and future tax compliance, because UK FATCA Letters can be used by the IRS as evidence to prove awareness of U.S. tax requirements on the part of noncompliant U.S. taxpayers. This is particularly relevant for taxpayers who receive these letters right before the tax return and FBAR filing deadlines.

Contact Sherayzen Law Office if You Received UK FATCA Letters

If you received one or more UK FATCA Letters from foreign financial institutions, contact Sherayzen Law Office as soon as possible. Attorney Eugene Sherayzen is one of the world’s leading professionals in the area of offshore voluntary disclosures and he will personally analyze your case and create the appropriate voluntary disclosure strategy. Then, under his close supervision, his legal team will implement this strategy, including the preparation of all required tax forms.

Call Us Today to Schedule Your Confidential Consultation!

Mr. Sherayzen Completes Immigration and International Tax Law Seminar

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On February 18, 2016, Mr. Sherayzen, in cooperation with two lawyers (an immigration lawyer and a business lawyer) completed another immigration and international tax law seminar “Foreign Investment in the United States: Key Immigration, Business and Tax Considerations”.

During this immigration and international tax law seminar, the immigration lawyer, Mr. Streff, covered a wide range of topics including investors visas, such as E-2 and EB-5, and alternative options for entrepreneurs, such as L-1 intracompany transferees, EB-1 and O-1 extraordinary ability, and National Interest Waivers’ through the Entrepreneurs Pathways initiative.

While immigration and international tax law issues were at the center of the seminar, a substantial part of the seminar was also devoted to business issues associated with various immigration options. The business lawyer, Mr. Vollmers, covered relevant business issues of appropriate entity formation, business plans, international business relationships, investment due diligence, and funds tracing.

Mr. Sherayzen’s presentation focused on the intersection of immigration and international tax law, especially U.S. tax residency classification, disclosure of foreign income and foreign assets, and foreign business ownership compliance requirements. U.S. tax residency is a concept completely different from U.S. permanent residence or “green card” and it occupies the center of any tax inquiry that involves immigration to the United States.

A lot of attention was given to tax compliance requirements with respect to another common intersection of immigration and international tax law issues – business ownership tax compliance issues associated with L-1 visa structures. In particular, Mr. Sherayzen discussed Forms 5471, 5472, 8865 and 8858 as well as PFIC and Subpart F antideferral regimes.

During the seminar, Mr. Sherayzen spent a substantial amount of time to one of the most important points of convergence of immigration and international tax law – reporting of foreign financial assets. Here, he explained the importance of FBAR and Form 8938, as well as FATCA.

Another part of Mr. Sherayzen’s presentation was devoted to the importance of pre-immigration tax planning. It is important for persons who plan to immigrate to the United States to contact a U.S. international tax attorney before they actually become U.S. persons. The international tax attorney should review their existing asset structure and advise on how this structure should be modified in order to avoid the various U.S. tax landmines and maximize favorable treatment under U.S. tax law. Special attention should be paid not only to income tax rules, but also estate and gift tax laws.

Mr. Sherayzen ended his presentation with the emphasis that immigration lawyers are at the forefront of international tax compliance, because they are usually the first to deal with persons who immigrate to the United States. Therefore, it is highly important for the immigration lawyers to be able to identify the most common junctions of immigration and international tax law issues and timely advise their clients to seek professional international tax help.

Berner Kantonalbank Non-Prosecution Agreement

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On June 9, 2015, the Department of Justice announced that Berner Kantonalbank AG (Berner Kantonalbank), signed a Non-Prosecution Agreement with the DOJ pursuant to the department’s Swiss Bank Program.

Swiss Bank Program Background

The Swiss Bank Program, which was announced on August 29, 2013, provided a path for Swiss banks to resolve potential criminal liabilities in the United States. Swiss banks eligible to enter the program were required to advise the department by December 31, 2013, that they had reason to believe that they had committed tax-related criminal offenses in connection with undeclared U.S.-related accounts. Banks already under criminal investigation related to their Swiss-banking activities and all individuals were expressly excluded from the program.

Swiss banks which meet the requirements of the Program are eligible for a non-prosecution agreement.

Berner Kantonalbank Background

Berner Kantonalbank was founded in 1834 as Kantonalbank von Bern, the first Swiss cantonal bank. Berner Kantonalbank is based in the Canton of Bern and presently has 73 branches in Switzerland. Berner Kantonalbank knew or had reason to know that it was likely that some U.S. taxpayers who maintained accounts at Berner Kantonalbank were not complying with their U.S. reporting obligations. Berner Kantonalbank opened, serviced and profited from accounts for U.S. clients who were not complying with their income tax obligations.

Berner Kantonalbank provided services that facilitated some U.S. clients in opening and maintaining undeclared accounts in Switzerland and concealing the assets in those accounts and related income. These services included opening and maintaining numbered accounts, allowing clients to use code names rather than full account numbers and providing hold mail services. Berner Kantonalbank opened accounts for account holders who exited other Swiss banks and accepted deposits of funds from those banks. Berner Kantonalbank also processed standing orders from U.S. persons to transfer amounts under $10,000 from their U.S.-related accounts. In one instance, a relationship manager asked an accountholder, who was a dual Swiss-U.S. citizen living in the United States, about the Foreign Account Tax Compliance Act (FATCA) and voluntary disclosure. When the accountholder failed to execute FATCA-related documents, Berner Kantonalbank took steps to close the account. In connection with that closing, the accountholder withdrew $70,000 and approximately 500,000 Swiss francs in cash.

Berner Kantonalbank: Participation in the DOJ Program for Swiss Banks

Berner Kantonalbank committed to full cooperation with the U.S. government throughout its participation in the Swiss Bank Program. As part of its cooperation, Berner Kantonalbank provided a list of the names and functions of 16 individuals who structured, operated or supervised its cross-border business. These individuals served as the chairman of the board of directors, members of the executive board, regional managers, heads of departments or heads of divisions. Berner Kantonalbank additionally provided information concerning its relationship managers and external asset managers, and it described in detail the structure of its cross-border business with U.S. persons, including narrative descriptions of high-value U.S.-related accounts and U.S.-related accounts held by entities.

Berner Kantonalbank Non-Prosecution Agreement

According to the terms of the non-prosecution agreement, Berner Kantonalbank 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 these banks for tax-related criminal offenses.

Since August 1, 2008, Berner Kantonalbank held approximately 720 U.S.-related accounts, which included both undeclared and not undeclared accounts, with total assets of approximately $176.5 million. Berner Kantonalbank will pay a penalty of $4.619 million.

In accordance with the terms of the Swiss Bank Program, Berner Kantonalbank mitigated its penalty by encouraging U.S. accountholders to come into compliance with their U.S. tax and disclosure obligations.

Consequences for US Taxpayers With Bank Accounts At Berner Kantonalbank

While U.S. accountholders at Berner Kantonalbank 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 August 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. This means that the noncompliant U.S. accountholders at Berner Kantonalbank must now pay that 50 percent penalty to the IRS if they wish to enter the IRS Offshore Voluntary Disclosure Program.

Contact Sherayzen Law Office for Professional Help With Undisclosed Foreign Accounts

If you have undisclosed foreign accounts at Berner Kantonalbank or any other bank outside of the United States, please contact Sherayzen Law Office as soon as possible to explore your voluntary disclosure options. Our professional experienced legal team has helped hundreds of US taxpayers worldwide to bring their US tax affairs in order. We can help you!

Contact Sherayzen Law Office NOW to Schedule Your Confidential Consultation!

FATCA Compliance Presents Challenges for Hedge Funds

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The Foreign Account Tax Compliance Act (FATCA) created a worldwide international tax compliance regime that has influenced more industries than simply foreign financial institutions. FATCA compliance presents a formidable challenge even to hedge funds.

FATCA Compliance Challenges for Hedge Funds

The challenges that FATCA compliance poses to hedge funds is best understood by analyzing what FATCA compliance requires of hedge funds – a multi-group coordination effort from various divisions within a business enterprise: business, operations, technology, finance and compliance.

The compliance department, most likely with the cooperation of the in-house counsel (and outside counsel who specializes in FATCA compliance, if in-house counsel lacks such knowledge) should lay out the FATCA compliance goals and make sure that the FATCA compliance process complies with these goals. The operations division should create the framework for the FATCA compliance process, including how this process should be controlled and managed for tax reporting and tax withholding purposes. The technology division needs to build the IT infrastructure to address the technological challenges of FATCA goals in a cost-effective way. The members of the business division (which incorporates the actual customer intake) should be thoroughly educated in the FATCA compliance process as well as the company’s specific IT solutions.

When this FATCA compliance process is applied to the hedge fund industry, one can clearly see the numerous challenges that the hedge funds face in the implementation of their FATCA compliance. The hedge funds need to register their funds for FATCA on the IRS portal, gather various investor data with respect to numerous (and often changing) customers, review and assess such data, and properly report customer data to the IRS.

Another challenge for hedge funds is the required tax withholding. Unlike previous attempts at international tax legislation, FATCA has very effective enforcement mechanisms which forces all US banks, brokers and financial institutions to essentially work for the IRS, including withholding taxes. In fact, the hedge funds that deal in US dollars are likely to be subject to the withholding tax requirement at an increasing rate in the near future.

However, the tax withholding challenge for hedge funds goes far beyond the more straightforward fact that it will need to withhold tax. Rather, the biggest headache for hedge funds is the identification of the beneficial owners and controlling persons of their clients. A lot of investors in hedge funds operate through unregulated legal vehicles or individual agents; this fact makes the FATCA data collection process a much more difficult challenge for hedge funds.

Finally, the variations in IGAs to implement FATCA present an additional challenge. While this problem is not specific to hedge funds, it is the one that they still have to manage.

Impact of FATCA Compliance By Hedge Funds On US Taxpayers

Despite these challenges, many hedge funds are successfully addressing FATCA compliance issues and are incorporating advanced software solutions to make their look-through process more efficient.

These successes of hedge funds in their FATCA compliance make it difficult for US persons investing in mutual funds through foreign entities to conceal their ownership of these entities. This means that one can expect an increase of the IRS discovery of such investors.

If these investors are not in full compliance with their US tax obligations – particularly with respect to FBAR, Form 8938, foreign business ownership reporting, foreign trust ownership and foreign income disclosure – they may be facing catastrophic US tax consequences, including draconian FBAR willful penalties as well as potential imprisonment.

Contact Sherayzen Law Office for Help With Undisclosed Foreign Assets and Income

If you have undisclosed foreign assets or foreign income, please contact Sherayzen Law Office as soon as possible. After reviewing the facts of your case and analyzing the available voluntary disclosure options, Mr. Sherayzen will conduct your voluntary disclosure process from the beginning through the end, including the preparation all of the required legal documents and tax forms.

Contact Us to Schedule Your Confidential Consultation Now!