United States’ crackdown on offshore tax evasion: what does the future hold?


Financier Worldwide Magazine

July 2016 Issue

July 2016 Issue

The US Department of Justice (DOJ) marked an historic milestone in its years-long effort to combat offshore tax evasion with its announcement earlier this year of the final nonprosecution agreement for Swiss banks participating in the ground-breaking Swiss Bank Program. In January 2016, the Tax Division announced its 80th, and final, nonprosecution agreement, a major achievement in the US government’s efforts to combat offshore tax evasion. All told, the 80 Swiss banks that resolved their potential criminal tax exposure with the US government paid more than $1.36bn in penalties and agreed to cooperate in future criminal or civil proceedings. The conclusion of the Swiss Bank Program is not, however, the end of the story, as the DOJ, working hand-in-hand with the Internal Revenue Service (IRS), continues its relentless pursuit of offshore tax evaders and their facilitators, including foreign banks and their employees and agents.

The Swiss Bank Program

The Swiss Bank Program, which was announced in August 2013, provided a path for Swiss banks to resolve potential criminal liabilities in the United States. Swiss banks eligible to enter the programme were required to advise the Tax Division that they had reason to believe that they had committed tax-related criminal offences in connection with undeclared US-related accounts. Banks already under criminal investigation related to their Swiss banking activities and all individuals were expressly excluded from the programme. Swiss banks meeting all of the above requirements were eligible for a nonprosecution agreement.

By all accounts, the Swiss Bank Program was an unqualified success for the DOJ and the IRS in their efforts to combat offshore tax evasion. Never before had the US government offered an amnesty programme to the entire banking industry in a particular country, and at the time the programme was unveiled in 2013, it was not clear that the programme would be a success or that Swiss banks would even be interested. But given the overwhelming demonstration of interest from Swiss banks, the substantial monetary penalties collected, and the wealth of information shared with the US, the programme is unquestionably a significant victory for the US government. Given the success of the Swiss Bank Program, it remains to be seen how the DOJ and IRS will make use of the vast bonanza of information disclosed by the participating Swiss banks and, perhaps even more importantly, whether the Tax Division will offer a similar amnesty initiative to banks in other parts of the world.

Foreign banks and financial institutions that serve US customers would be well-advised to heed the lessons of the Swiss Bank Program and other DOJ enforcement actions commenced to date. The Swiss Bank Program demonstrates that foreign financial institutions with potential US criminal tax liability can greatly mitigate their exposure by taking immediate actions, such as making voluntary disclosures of potential illegal activity to the Tax Division and implementing compliance measures to avoid further violations of US tax law. In the current enforcement environment, inaction is not an option. With new enforcement tools and myriad sources of information and data, the US government now has more resources than ever before to uncover, investigate and prosecute violations of US tax laws no matter where they occur globally.

The US government’s data mining efforts

The Swiss Bank Program handed the US government a veritable treasure trove of leads to additional undisclosed bank accounts, and potential tax evaders, as participating Swiss banks were required to disclose information regarding US accounts that were closed since 2008, so as to afford US investigators leads regarding the movement of funds around the world.

DOJ prosecutors and IRS agents will undoubtedly use this valuable data to track the movement of funds in and out of secret offshore accounts and initiate and pursue investigations of other financial institutions and individuals around the world.

Indeed, the DOJ is now looking beyond Switzerland to financial institutions in other countries that may be havens for secret offshore accounts or undisclosed assets. Investigators are pursuing the wealth of leads generated through the Swiss Bank Program, and following those leads to countries such as Belize, the British Virgin Islands, the Cayman Islands, the Cook Islands, India, Israel, Liechtenstein, Luxembourg, the Marshall Islands and Panama, among others. Combining these leads with the wealth of information generated through the other mechanisms, such as the now-effective Foreign Account Tax Compliance Act (FATCA), ‘John Doe’ summonses, treaty requests, and data generated from taxpayers participating in the Offshore Voluntary Disclosure Program and other disclosure programmes, the US government now has an unprecedented, and never before seen, window into the world of offshore tax evasion.

Convictions of two Cayman Islands institutions

The US government’s efforts to ‘follow the money’ were confirmed in March 2016, when the DOJ announced its first-ever conviction of a non-Swiss financial institution for tax evasion conspiracy. In that case, two Cayman Islands firms pleaded guilty in a US court to conspiring to hide more than $130m in Cayman bank accounts. The two financial institutions, Cayman National Securities Ltd. (CNS) and Cayman National Trust Co. Ltd. (CNT), admitted that they helped US clients hide assets in offshore accounts, and agreed to provide files of noncompliant US account holders to the US government.

The two Cayman Islands financial institutions 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. CNS and CNT pleaded guilty to a criminal information charging them with conspiring with their US clients to hide more than $130m in offshore accounts from the IRS and to evade US taxes on the income earned in those accounts. CNS and CNT entered their guilty pleas pursuant to plea agreements requiring the companies to, among other things, produce through the treaty process account files of noncompliant US taxpayers who maintained accounts at CNS and CNT, and pay a total of $6m in financial penalties. As part of their plea agreements, CNS and CNT agreed to cooperate fully with the DOJ’s investigation of their criminal conduct and to pay the US a total of $6, which consists of the forfeiture of gross proceeds of their illegal conduct, restitution of the outstanding unpaid taxes from US taxpayers who held undeclared accounts at CNS and CNT, and a fine.

Guilty pleas in first FATCA prosecution

On May 2016, the DOJ announced that two individuals pleaded guilty to money laundering conspiracy for fraudulently manipulating the stocks of more than 40 US publicly-traded companies and then laundering more than $250m in profits through debit cards and offshore attorney escrow accounts. This prosecution is notable in that it represents the first time the DOJ has brought criminal charges for conspiracy to violate reporting requirements under the FATCA.

The indictment alleges that between 2010 and 2014, the two individuals in question and other co-conspirators together devised three interrelated schemes to: (i) induce US investors to purchase stock in various thinly-traded US public companies through fraudulent promotion of the stock, concealment of their ownership interests in the companies, and fraudulent manipulation of artificial price movements and trading volume in the stocks of those companies; (ii) circumvent the IRS’s reporting requirements under FATCA; and (iii) launder the fraudulent proceeds from the stock manipulation schemes to and from the United States through debit cards and offshore attorney escrow accounts.

According to the indictment, these schemes enabled US clients to evade reporting requirements to the IRS by concealing the proceeds generated by the manipulated stock transactions through the shell companies and their nominees. For example, in response to a request received by a US corrupt client from a US transfer agent who had to determine whether the proceeds from manipulative stock trading transaction were taxable under US law, one of the defendants forwarded an IRS Form signed by a co-defendant as the nominee for the shell company which had been set up at the request of the client. The indictment further alleges that in order to carry out these interrelated schemes, the defendants used shell companies in Belize and Nevis, West Indies, with nominees at the helm. The indictment reveals that law enforcement authorities employed undercover agents and wiretaps to record numerous conversations involving the defendants. In one recorded meeting, two of the defendants bragged that their strategy enabled clients to evade FATCA’s disclosure requirements.


The DOJ’s announcement of guilty pleas by two Cayman Islands financial institutions for tax evasion conspiracy and by two US citizens for money laundering conspiracy represent significant milestones in the government’s crackdown on offshore tax evasion, and demonstrates that no foreign country is ‘off limits’. Federal prosecutors and IRS agents are actively pursuing investigations across the globe. Foreign banks and financial institutions that serve US customers would be well-advised to heed the lessons of the Swiss Bank Program and other DOJ enforcement actions commenced to date. Foreign financial institutions with potential US criminal tax liability can greatly mitigate their exposure by taking immediate actions, such as making voluntary disclosures of potential illegal activity to the Tax Division and implementing compliance measures to avoid further violations of US tax law. At the same time, US citizens and residents with unreported offshore accounts should take immediate action to resolve their noncompliance by taking advantage of one of the IRS voluntary disclosure programmes, as the window of opportunity for self-reporting is rapidly closing. As the US government’s latest enforcement actions demonstrate, inaction is not an option in the current environment.


Matthew D. Lee is a partner at Blank Rome LLP. He can be contacted on +1 (215) 569 5352 or by email: lee-m@blankrome.com.

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