No Country Off-Limits For DOJ's Tax Evasion Crackdown

Law360, New York (March 23, 2016, 10:39 AM EDT) — In its first-ever conviction of a non-Swiss financial institution for tax evasion conspiracy, the U.S. Department of Justice’s Tax Division announced on March 9, 2016, that two Cayman Islands firms pleaded guilty in a U.S. court to conspiring to hide more than $130 million in Cayman bank accounts. The two financial institutions, Cayman National Securities Ltd. (CNS) and Cayman National Trust Co. Ltd. (CNT), admitted that they helped U.S. clients hide assets in offshore accounts, and agreed to provide files of noncompliant U.S. account holders to the U.S. government.
The Tax Division’s announcement of the conviction of these Cayman Islands financial institutions follows on the heels of the conclusion in January 2016 of its highly successful Swiss Bank Program, pursuant to which 80 banks in Switzerland entered into nonprosecution agreements and paid more than $1.3 billion in penalties, and the announcement, in February 2016, of a deferred prosecution agreement with another Swiss bank, Julius Baer. In a recent speech, Acting Assistant Attorney General Caroline D. Ciraolo of the DOJ Tax Division warned that “[o]ur investigations of both individuals and entities are well beyond Switzerland at this point, and no jurisdiction is off limits.” With the Justice Department actively conducting criminal tax investigations around the globe, speculation has swirled about which country or region would be the next target in the U.S. government’s offshore tax evasion crackdown.
“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 Preet Bharara of the Southern District of New York in a press release. “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.”
“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 Stuart 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.”
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 U.S. 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 requiring the companies to, among other things, produce through the treaty process account files of noncompliant U.S. taxpayers who maintained accounts at CNS and CNT, and pay a total of $6 million in financial penalties.
The Offense Conduct
According to a Justice Department press release, from at least 2001 through 2011, CNS and CNT assisted their U.S. account holders in evading their U.S. tax obligations and otherwise hiding accounts held at CNS and CNT from the IRS. CNS and CNT did so by knowingly opening and maintaining undeclared accounts for U.S. taxpayers at CNS and CNT in the following manner:

  • CNS and CNT opened, and/or encouraged many U.S. taxpayer-clients to open accounts held in the name of sham Caymanian companies and trusts, thereby helping U.S. taxpayers conceal their beneficial ownership of the accounts.


  • 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.


  • 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’ obligations under its qualified intermediary agreement (QI) with the IRS.


  • After learning about the investigation of Swiss bank UBS in 2008 for assisting U.S. taxpayers in evading their U.S. tax obligations, 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.

The sham Caymanian structures that CNT set up for its U.S. clients included trusts, which were nominally controlled by CNT trust officers, but which in fact were controlled by the U.S. clients; managed companies, for which CNT ostensibly provided direction and management services, but were shell companies that served only to hold the assets of the U.S. clients; and registered office companies, which were shell companies for which CNT supplied a Caymanian mailing address. CNS treated these sham Caymanian structures as the account holders and then permitted the U.S. clients to trade in U.S. securities, without requiring them to submit Forms W-9, which are IRS forms that identify individuals as U.S. taxpayers, as CNS was obligated to do under its QI obligations for accounts held by U.S. persons that held U.S. securities. CNS and CNT agreed to maintain these structures for U.S. clients after many of them expressed concern that their accounts would be detected by the IRS.
In April 2008, it became publicly known that the Justice Department was investigating UBS for assisting U.S. taxpayers in evading their U.S. tax obligations. Thereafter, despite the public disclosure of the UBS case, and CNS’ awareness of it, CNS continued to assist its U.S. clients in concealing their accounts from the IRS by, among other things, failing to require them to complete Forms W-9. Likewise, up through at least 2010, CNT continued to rely on account opening documentation that, rather than barring the creation of non-tax-compliant structures, simply assigned higher “risk” points to such structures. In or about June 2011, CNT hired a new president, who ordered 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.
At their highest point in 2009, CNS and CNT had approximately $137 million in assets under management relating to undeclared accounts held by U.S. 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.
Cooperation by CNS and CNT
As part of their plea agreements, CNS and CNT agreed to cooperate fully with the Justice Department’s investigation of their criminal conduct. 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 DOJ 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. clients who maintained accounts at CNS and CNT.
In connection with their guilty pleas, CNS and CNT have 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.
The Tax Division’s announcement of guilty pleas by these two Cayman Islands financial institutions represents yet another milestone in the government’s crackdown on offshore tax evasion, and confirms Ciraolo’s warning that “no jurisdiction is off limits.”  Federal prosecutors and IRS agents are actively pursuing investigations across the globe, in countries such as Belize, the British Virgin Islands, the Cook Islands, India, Israel, Liechtenstein, Luxembourg, the Marshall Islands and Panama, among others.  Foreign banks and financial institutions that serve U.S. customers would be well-advised to heed the lessons of the Swiss Bank Program and other Justice Department enforcement actions commenced to date. Foreign financial institutions with potential U.S. 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 U.S. tax law.  At the same time, U.S. 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 programs, as the window of opportunity for self-reporting is rapidly closing. As the U.S. government’s latest enforcement action involving the Cayman Islands demonstrates, inaction is not an option in the current environment.
—By Matthew D. Lee, Blank Rome LLP
Matthew Lee is a partner in Blank Rome’s white collar defense and investigations practice in Philadelphia. He is a former U.S. Department of Justice trial attorney.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

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