Banking Offshore: The Gathering Storm July 29, 2008 Banking Offshore: The Gathering Storm We will be starting momentarily… 2 Audio Portion of Today’s Webinar Listen to the audio portion of today’s webinar by dialing: Toll-Free: 866.322.1348 Toll: 706.679.5933 Conference ID#57515425 3 Technical Support Numbers If you experience technical difficulties, hit *0 on your telephone keypad and an operator will assist you. Or you can dial: For Web Support: For Audio Support: +1.877.812.4520 +1.800.374.2440 or or +1.706.645.8758 +1.706.645.6500 4 Click this icon to view the slide in full screen mode. Hit the ‘Escape’ key to return to the normal view. 5 Feel free to submit text questions throughout the webinar 6 Featured Speaker Frank C. Razzano Partner Pepper Hamilton LLP 7 Featured Speaker Lisa B. Petkun Partner Pepper Hamilton LLP 8 I. UBS SCANDAL A. UBS used offshore accounts to hide as much as $17.9B for 19,000 customers from IRS and dodge $300M in taxes 1. Experts estimate Americans have $1 trillion offshore and evade 100 billion in tax revenues each year 9 A. 1. In the absence of Q.I. agreement, 30% withheld unless foreign financial institution provides the U.S. withholding agent with names of the beneficial owners of the account. 10 II. What Happened At UBS 2. 2001 – Qualified Intermediary Agreement with I.R.S. a. Q.I. program applies to foreign financial institutions that buy and sell U.S. securities accounts opened at U.S. financial institutions i. 7,000 foreign financial institutions have signed Q.I. agreements; with 5,500 currently active ii. All Swiss banks are Q.I. signatories and 13 of 15 Liechtenstein banks 11 3. Q.I. Agreement allows a foreign financial institution trading for clients to limit or entirely forego those withholdings in return for greater reporting obligations 12 4. By signing bank agrees to act as U.S. withholding agent. Bank must have “know your customer” procedures in place that ensure the foreign financial institution verifies and documents the beneficial owner. 13 5. Under Q.I. Agreement – Q.I. assumes primary withholding & 1099 reporting a. W8IMY – Q.I. assumes primary Form 1099 reporting responsibility b. W8BEN – used to claim foreign person exempt from Form 1099 reporting and backup withholding. Q.I. calculates the “reportable amounts” of U.S. source income paid to all of its non-U.S. accounts in Q.I. program and file single 1042 Form for each category of U.S. source income. Also called “pooled reporting”. 14 6. Practical effect was to maintain bank secrecy for non-U.S. accountholders. 15 III. How UBS Avoided Q.I.A. A. In November 2002 UBS sent letters to U.S. clients stating it would not disclose to IRS a Swiss account opened by a U.S. client, so long as that account contains no U.S. securities, even though the accountholder is a U.S. taxpayer required under U.S. law to report B. It counseled client not to hold U.S. securities in a Swiss account 16 B. UBS divided U.S. taxpayer clients into two classes: 1. Those who provide W-9s 2. Those who don’t and thus, can’t buy U.S. securities 17 IV. How It Avoided Q.I.A. C. It further alleged that it counseled taxpayers with accounts offshore in Switzerland that it could trade U.S. securities but avoid reporting 1. By putting a structure between bank and beneficial owners to avoid reporting 2. Bank employees allegedly formed foreign shell entity in third jurisdiction to hold account 18 V. LGT GROUP A. Offshore products sold by 1. LGT Group, Lichenstein bank owned by principality’s royal family 2. LGT employee provided tax authorities around the world with data about 1,400 persons with accounts at LGT Bank. Arrest warrant issued for employee in Liechtenstein. 19 3. LGT advised U.S. clients to open accounts in the names of Liechtenstein foundations to hide beneficial ownership a. Numerous LGT accountholders identified in the Staff Report of the Permanent Subcommittee on Investigations of the U.S. Senate dated July 17, 2008. b. Example – James Albright Marsh – Established four Liechenstein foundations which hid $49M over 20 years. c. Bank alleged to be active participant in assisting clients in breaking link between client and accounts. 20 4. LGT has declined to provide information about accounts opened by U.S. clients because it would violate Liechstein law. 21 VI. REPERCUSSIONS A. Igor Olenicoff, a wealthy California property developer has pled to filing a false 2002 tax return. 1. Igor Olenicoff evaded $7.2M and concealed $200M. 22 B. Former banker Bradley Birkenfeld pled guilty to assisting Olenicoff in concealing $20M 1. Falsified W-8 BEN – claimed sham entities owners 2. No Form 1099 23 C. “JOHN DOE” SUMMONS UNDER SECTION 7602 ISSUED TO UBS, AG AND ITS AFFILIATES AND SUBSIDIARIES D. UBS HAS ANNOUNCED THAT IT WILL NOT MAINTAIN ACCOUNTS FOR U.S. NATIONALS 24 VII OBTAINING RECORDS A. Conflicts of Law 1. Conflicts between American & Foreign Law: Does the “Balance of the Interests” Test Always Equal America’s Interest, by Frank C. Razzano, 37 The International Lawyer 61 (Spring 2003). 25 B. Convention between U.S. and Swiss Confederation for the Avoidance of Double Taxation with Respect to Taxes on Income 1. Treaty historically applied by Swiss to require that a request for records identify the particular taxpayer 2. Allows exchange of information regarding “tax fraud”, which is defined as conduct that causes or is intended to cause an illegal or substantial reduction in the amount of the tax paid 26 C. Treaty of Mutual Assistance 1. No criminal investigations 2. Excludes “violations with respect to taxes,” so is not used for assistance in tax matters 3. Limited to documents and testimony requests and allows multiple appeals in Switzerland 27 VIII. Visa/Mastercard A. PREVIOUS USE OF “JOHN DOE” SUBPOENAS 1. 1,300 taxpayers 2. $170M in back taxes 28 IX. Offshore Banking A. Bank Secrecy 1. Prohibit disclosure under penalty of law a. Swiss - fine/imprisonment b. Except crt. order 2. Anonymous Accounts (Numbered Account) 1. Swiss law now requires banks to determine the identity of customers conducting transactions in excess of $16,000 3. Shell banks a. Patriot Act of 2001 29 B. International Business Corporations 1. Incorporated offshore but not permitted to do business there a. Bearer stock b. Little to no corporate governance i. One director ii. Nominee director(s) iii. Optional director(s) meetings c. Little or no recordkeeping required d. Exemption from tax 30 X. Asset Protection Trusts A. Statute of Elizabeth Spendthrift Trust 1. Trust with grantor as beneficiary a. Immunize against creditors b. Less stringent fraudulent conveyance laws c. Enhanced proof of intent d. Non-recognition of U.S. judgments e. Short statute of limitations 31 XI. U.S. Restrictions A. Bank Secrecy Act 1. CTR – Currency Transaction Report a. $10,000 i. Form 8300 b. Structuring 2. CMIR 3. FBAR – Form 90-22.1 4. Suspicious Activity Reports 5. Know Your Customer 32 B. Money Laundering Act of 1986 1. Section 1956 2. Section 1957 C. Money Laundering Forfeiture 18 USC §981-982 33 XII. Treaties & MOU A. MLAT 1. Case Example - Swiss Treaty B. MOU 1. Insider Trading 34 XIII. Tax Heavens A. OECD – “Uncooperative tax heavens” which refuse to provide tax exchange information with other countries in civil and criminal matters 1. Liechtenstein – in June 2008 it announced that it had concluded negotiations on an anti-fraud agreement with the EU and member states 2. Monaco 3. Andorra 35 B. Significant restrictions on access to bank information for tax purposes remain in Switzerland, Luxemburg, Austria, Cypress, Panama and Singapore C. Some countries despite written commitments failed to provide tax information 36 I. Reporting Obligations • Treasury Form 90-22.1 (FBAR) – Persons subject to U.S. jurisdiction must file if they have an interest in, signature or other authority over, one or more bank, securities, or other financial accounts in a foreign country where the aggregate value at any point in a calendar year exceeds $10,000 (31 CFR § 103.24) • Not filing FBAR carries substantial penalties – Civil penalties for a non-willful violation can range up to $10,000 per violation. 31 US § 5321(a)(5) – Civil penalties for a willful violation can range up to the greater of $100,000 or 50 percent of the amount in the account at the time of the violation. 31 US § 5321(a)(5) – Criminal penalties for violating the FBAR requirements can range from $250,000 to $500,000 in fines, and 5 to 10 years imprisonment, or both. 31 USC § 5322(a). – FBAR violations also can result in violations of the Internal Revenue Code and other laws. – Civil and criminal penalties may be imposed together. 37 I. Reporting Obligations • Form 1040, Schedule B, Section III – IRS requires taxpayers to report interests in any foreign accounts where the aggregate value at any point in a calendar year exceeds $10,000 • Information Release 2003-48 (Apr. 10, 2003) – IRS given enforcement authority for Foreign Bank and Financial Account reporting from the Financial Crimes Enforcement Network (FinCEN) – See also, 31 CFR § 103.56 38 I. Reporting Obligations • IRC § 679 – U.S. persons who form a foreign trust (grantor) that has any U.S. beneficiary are treated as the owner of the assets in the trust for income tax purposes • Form 3520 must be filed with grantor’s income tax return in any year of contribution of property to the trust, including formation and subsequent contributions – Form 3520-A information return must be filed with the grantor's tax return each non-contribution year • Any U.S. beneficiary must file a Form 3520 in any year in which the beneficiary receives a distribution from the trust of any kind 39 I. Reporting Obligations • Controlled Foreign Corporation (CFC) – Foreign corporation more than 50% (25%, for insurance companies) of whose stock by vote or value is, on any day in the corporation's tax year, owned (directly or indirectly) by U.S. shareholders • Form 5471 – Reporting obligation if a corporation is a CFC for at least 30 uninterrupted days in a tax year – U.S. citizen or resident (including entities) who owns 10%+ of the CFC’s voting stock must report on Form 5471 his pro rata share of the CFC’s undistributed earnings, if he owns stock on the last day of tax year 40 II. General Criminal Penalties • False Statements (18 USC § 1001) – Three types of forbidden conduct: • (1) falsifying, concealing, or covering up of a material fact by any trick, scheme, or device • (2) making a false, fictitious, or fraudulent statement or representation; and • (3) making or using any false writing or document. – Covers false statements made to the federal government (directly or indirectly) • Covers all statements to Executive Branch and agents thereof (IRS, SEC, etc.) • Also covers certain statements to Legislative and Judicial Branches – A felony, punishable by up to 5 years imprisonment, a fine of up to $250,000 ($500,000 for a corporation), or both. 41 III. Tax Specific Criminal Penalties • IRC § 7201 – Willful attempt to evade or defeat tax – A felony, punishable by fine of $100,000 ($500,000 if a corporation), and up to 5 years in prison, or both • IRC § 7203 – Willful failure to file a return, supply information, or pay tax – A misdemeanor, punishable by fine of $25,000 ($100,000 if a corporation), and up to 1 year in prison, or both – Includes a failure to report interest in a foreign account (Form 1040, Sch. B) 42 III. Tax Specific Criminal Penalties • IRC § 7206 - Fraud and false statements – Five separate categories of fraud: • (1) written declaration known to be false • (2) aid or assistance in preparation of fraudulent return, statement, etc. • (3) fraudulent documents required by internal revenue laws • (4) removal or concealment of property with intent to defeat collection of tax • (5) concealing property or records in connection with any offer in compromise or closing agreement with the IRS – A felony, punishable by up to 3 years imprisonment, a fine of up to $100,000 ($500,000 for a corporation), or both. 43 III. Tax Specific Criminal Penalties • IRC § 7207 - Fraudulent returns, statements, or other documents – A misdemeanor, punishable by up to 1 year imprisonment, a fine of up to $10,000 ($50,000 for a corporation), or both – Distinct from IRC § 7203, where the crime is not filing, this is filing a false return 44 IV. Forfeiture Penalties • Civil & Criminal Forfeiture – The USA PATRIOT Act imposed new sanctions, making violations of the currency-reporting statutes (including structuring) and related Bank Secrecy Act (BSA) violations subject to forfeiture (31 USC § 5317) – Particularly important is the BSA requirement of reporting transport or receipt of more than $10,000 into or out of the U.S. (31 USC § 5316) 45 V. Tax Civil Penalties • Failure to report resulting in tax deficiencies could be considered taxpayer civil fraud • IRC § 6663(a) – If a taxpayer’s civil fraud results in an underpayment of tax, the penalty is 75% of the portion of the underpayment of tax – Determining fraud is fact specific – Burden is on government to show that the tax deficiency was due to fraud with an intent to avoid tax 46 What Do I Do If I Have An Offshore Account? I. Secure Counsel II. Don’t Rely on Offshore Secrecy III. Every Circumstances is Unique 47 Banking Offshore: The Gathering Storm Question and Answer Session 48 Thank You! If you would like a copy of the slides, please contact Brian Dolan at firstname.lastname@example.org. 49
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