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									  Banking
Offshore: The
 Gathering
    Storm
   July 29, 2008
        Banking Offshore: The
          Gathering Storm


We will be starting momentarily…




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                 Featured Speaker


    Frank C. Razzano
    Partner
    Pepper Hamilton LLP




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                 Featured Speaker


    Lisa B. Petkun
    Partner
    Pepper Hamilton LLP




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       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




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     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.



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         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

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     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




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     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.



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     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”.



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     6. Practical effect was to maintain
        bank secrecy for non-U.S.
        accountholders.




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         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


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     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




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         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
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         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.


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     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.
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     4. LGT has declined to provide
        information about accounts
        opened by U.S. clients because it
        would violate Liechstein law.




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         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.




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     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




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     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

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             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).




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     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



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     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


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        VIII.    Visa/Mastercard

     A. PREVIOUS USE OF “JOHN DOE”
        SUBPOENAS
      1. 1,300 taxpayers
      2. $170M in back taxes




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          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




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     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


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         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




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            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


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     B. Money Laundering Act of 1986
       1. Section 1956
       2. Section 1957
     C. Money Laundering Forfeiture
        18 USC §981-982




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        XII. Treaties & MOU


     A. MLAT

      1. Case Example - Swiss Treaty

     B. MOU

      1. Insider Trading




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         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


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     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

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             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.


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         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


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          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



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          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




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          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.

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         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)


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          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.

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         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


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         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)



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          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


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          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




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           Banking Offshore: The
             Gathering Storm



     Question and Answer Session




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                     Thank You!



     If you would like a copy of the slides,
     please contact Brian Dolan at
     dolanb@pepperlaw.com.




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