Money Laundering and Foreign Bank Accounts

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1 Money Laundering and Foreign Bank Accounts Robert E. McKenzie, EA, Attorney Arnstein & Lehr LLP Robert E. McKenzie Government Enforcement Money Laundering and BSA Patriot Act Foreign Bank Account Reports Robert E. McKenzie

2 Money Laundering and BSA Governor Spitzer scandal IRS agents working with the Financial Crimes Enforcement Network ( FinCEN) Over 750 agents Many taxpayers have unwittingly run afoul of: Money laundering and Bank Secrecy Act laws. Robert E. McKenzie Foreign Bank Account Reports BSA, U.S. residents or a person in and doing business in the U. S. must file a report the U.S. Treasury if he or she has a financial account in a foreign country with a value exceeding $10,000 any time during the calendar year. Form , the Foreign Bank and Financial Account Report (FBAR) FBARs are due by June 30, 2009 Civil & criminal penalties: Provisions in the USA Patriot Act raised the maximum civil fine to Greater of $100,000 or half of the amount in the account. Criminal penalties are as high as $500,000 or half the account balance, and up to 10 years in jail. Robert E. McKenzie

3 Violation Civil Penalties Criminal Penalties Negligent Violation Up to $500 N/A Non-Willful Violation Pattern of Negligent Activity Willful - Failure to File FBAR or retain records of account Up to $10,000 for each negligent violation In addition to penalty under 5321(a)(6)(A) with respect to any such violation, not more than $50,000 Up to the greater of $100,000, or 50 percent of the amount in the account at the time of the violation. N/A N/A Up to $250,000 or 5 years or both Robert E. McKenzie Foreign Gifts & Trusts Form 3520 Penalty from 35% and up of gift or transfers to and from trusts Gifts of $13,258 or more Foreign trusts Form 3520A Furnish statement to each U. S. beneficiary At least one use owner 3-15 filing deadline Penalty up to 25% of amount in the trust Robert E. McKenzie

4 Foreign Corporations Form 5471 or 5472 Penalties $10,000 to $50,000 per return Report of transfers to foreign corporations Form % of transferred property to a maximum of $100,000 Robert E. McKenzie Foreign Partnership Returns Form 8865 Penalties $10,000 to $50,000 per return Robert E. McKenzie

5 IRS Enforcement Several years ago IRS summonsed MasterCard, Visa & Amex and received the names of over 600K Americans using cash debit cards on foreign accounts Robert E. McKenzie FBAR Authorities Overall Title 31 responsibility is delegated to the Financial Crimes Enforcement Network (FinCEN) IRS has FBAR examination and enforcement authority under a delegation from FinCEN Robert E. McKenzie

6 New FBAR Regulations FinCEN published FBAR regulations in February 2011 Effective March 28, 2011 Applies to reports filed for calendar year 2010 and future calendar years Revised FBAR form released March 2011 Robert E. McKenzie Reportable Accounts Bank accounts (checking, savings, CDs) Securities or brokerage accounts (buying, selling, holding or trading stocks, bonds, etc.) Other financial accounts Mutual funds, or similar pooled funds Other deposit accounts Cash value of insurance or annuities Commodity futures or options accounts Robert E. McKenzie

7 Government Efforts July 2008 Congressional hearings UBS Bank, VP Convicted in Florida Lichtenstein Bank Informant Cayman Islands Ugland House 18K U. S. businesses registered at address of 5 story building In 2009 UBS entered into a deferred prosecution agreement & paid a $780 million criminal fine February, 2009 IRS summonsed UBS for the names of 52K Americans holding accounts with bank and later that year turned over the names of its 4400 largest account holders Robert E. McKenzie Offshore Enforcement president announces crackdown & legislative agenda to reduce tax avoidance by multi-nationals & stop rewarding companies that take jobs offshore Crackdown on individuals hiding money in foreign accounts Proposed laws to require international banks to report like American banks by expanding the qualified intermediaries program and if no reports must w/h Robert E. McKenzie

8 Criminal Charges UBS account holders being indicted Bankers at several foreign banks indicted 2011 TPs with accounts in HSBC India indicted as a result of informants John Doe Summons served on HSBC for 9,000 names of Indian immigrants with HSBC India accounts; only 1,400 have reported Credit Suisse investigation of bankers and account holders indicted 2012 Wegelin Bank indicted Over 35 charged so far and 30 have pled guilty Customers in banks from all over the world under investigation 11 Swiss banks under criminal investigation 3 Israeli banks under criminal investigation Several Indian banks including HSBC under criminal investigation and 2 of its customers have been charged. One of my clients in NY will be charged soon Credit Suisse is now giving IRS names of customers Robert E. McKenzie Robert E. McKenzie

9 2009 Settlement Offer Voluntarily and timely disclose unreported offshore income. Pay back-taxes and interest for six years, Pay either an accuracy or delinquency penalty on all six years. File Form TD F (FBAR) Also pay 20% penalty on amount in foreign bank accounts in the year with the highest aggregate asset value. Over 16,000 came in to the program Offer expired on Robert E. McKenzie Settlement Offer All those coming into program all were audited Many who tried to get a better deal have been slammed with intensive audits & every potential penalty including the 50% FBAR penalties for 6 years I took in over 100 TPs and about 5 are still pending Robert E. McKenzie

10 2011 Settlement Offer Unreported Offshore Income Voluntarily and timely disclose unreported offshore income. Pay back-taxes and interest for 8 years, Pay either an accuracy or delinquency penalty on all eight years. File Form TD F (FBAR) Pay 25% penalty on highest balance in foreign bank accounts if over $75,000 and 12.5% for smaller accounts & 5% penalty on inherited accounts with minimal activity Offer expired on Robert E. McKenzie Settlement Offer Unreported Offshore Income Voluntarily and timely disclose unreported offshore income. Pay back-taxes and interest for 8 years, Pay either an accuracy or delinquency penalty on all eight years. File Form TD F (FBAR) Pay 27.5% penalty on highest balance in foreign bank accounts if over $75,000 and 12.5% for smaller accounts Opt out option Offer does not have an expiration date Robert E. McKenzie

11 2012 Settlement Offer Unreported Offshore Income Will impose a 27.5% penalty on offshore income producing property and on any property purchased from $$ in the account No facts are allowed to be presented in mitigation All taxpayers will be audited Must file 6-30 FBAR Quiet disclosure Robert E. McKenzie Eligibility The OVDP is open to taxpayers, including individuals, corporations, partnerships and trusts. Taxpayers under examination or under criminal investigation, however, are not ineligible to participate in the program. Robert E. McKenzie

12 Quiet Disclosures Taxpayers that have made quiet disclosures by filing amended returns and paying related tax and interest for previously unreported offshore income without otherwise notifying the IRS are encouraged to participate in the OVDI. Taxpayers that make quiet disclosures without seeking the protection of the OVDI run the risk of being examined and potentially criminally prosecuted for all applicable years. Robert E. McKenzie Timely Disclosure Disclosures are timely if they are received before: The IRS has initiated a civil examination or criminal investigation of the taxpayer, or has notified the taxpayer that it intends to commence such an examination or investigation. The IRS has received information from a third party (e.g., informant, other governmental agency, or the media) alerting the IRS to the specific taxpayer s noncompliance. The IRS has initiated a civil examination or criminal investigation which is directly related to the specific liability of the taxpayer. The IRS has acquired information directly related to the specific liability of the taxpayer from a criminal enforcement action (e.g., search warrant, grand jury subpoena). Robert E. McKenzie

13 USA is insisting they will provide for enhanced recordsharing in order to reinforce a network of global tax treaties. The US is also cooperating with Canada, Australia, Japan and the UK authorities in order to share information about tax shelters and banks, lawyers, accountants that promote them. The proposal, discussed by Shulman, will require coordination between IRS agents and their counterparts at revenue agencies in other countries during conducting audit in multinational companies. It is necessary to resolve some issues that can arise in cross-border transactions. Robert E. McKenzie Ugland House Robert E. McKenzie

14 Foreign Account Tax Compliance Act (FATCA) Foreign Account Tax Compliance Act A 30% w/h tax on certain payments to foreign financial institutions that maintain U. S. accounts, if banks decline to enter into an information reporting agreement. Effective for payments under new obligations not outstanding as of A 30% w/h tax, effective in 2013, on certain payments to any foreign entity with a 10% U. S. owner, if the entity fails to provide the U. S. owner's name, address, and taxpayer identification number. Also applies to payments to foreign entities that decline to state whether they have a substantial U. S. owner. Penalties up to $50,000 for U.S. citizens with unreported foreign financial assets worth $50,000 or more a penalty that would apply in addition to the Foreign Bank Account Reporting ("FBAR") penalty. Effective beginning in Robert E. McKenzie FATCA A minimum penalty of $10,000, effective 2010, for failure to report creating, making transfers to, or receiving distributions from a foreign trust. An enhanced 40% accuracy-related penalty on tax understatements attributable to an undisclosed foreign financial asset that applies to taxable years beginning after the date of enactment; and A six-year statute of limitations on tax understatements if the omitted amount is attributable to a foreign financial asset and exceeds $5,000. The new limitations period applies retroactively to all past-filed tax returns subject to audit and assessment by the IRS. Robert E. McKenzie

15 Statement of Specified Foreign Financial Assets New Form 8938 Married couple living in the U.S. and filing a joint tax return would not file unless their total specified foreign assets exceed $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year. Robert E. McKenzie Foreign Trusts U.S. person who owns all or part of a foreign trust must not only assure that the trust meets filing obligations, but must also provide a separate return containing information requested by the IRS about the trust, including information about trust investments. Written notice must also be provided to the IRS when any of the following reportable events occur: (1) the creation of a foreign trust by a U.S. person, (2) the transfer of any money or property to a foreign trust by a U.S. person, including a transfer due on death, and (3) the death of a citizen or resident of the U.S. if the decedent was treated as the owner of any portion of a foreign trust under the grantor trust rules or a portion of a foreign trust was included in the decedent's gross estate. Robert E. McKenzie

16 Foreign Trusts Written notice must also be provided to the IRS when any of the following reportable events occur continued: (4) Persons responsible for reporting these events include (a) the grantor in the case of the creation of an inter vivos trust, (b) the transferor in the case of a reportable event that is the transfer of any money to a foreign trust by a U.S. person (other than due to death), and (c) the executor of the decedent's estate in other cases. The new law includes a $10,000 minimum penalty for each failure to report a foreign trust transaction. The maximum penalty for failure to report a transfer to or distribution from a foreign trust is 35%, which can be increased by delinquency fees in $10,000 increments. Robert E. McKenzie Money Services Business Registration Requirements Register if: 1) Currency dealers or exchangers who exchange more than $1,000 for any one customer on any day. 2) Check cashers who cash checks totaling more than $1,000 for any one customer on any day. 3) Issuers of traveler s checks, money orders or stored value who issue more than $1,000 for any one customer on any day. 4) Sellers of traveler s checks, money orders or stored value who sell more than $1,000 for any one customer on any day. 5) Redeemers of traveler s checks, money orders or stored value who redeem more than $1,000 any one customer on any day. 6) Money transmitters. Robert E. McKenzie

17 Compliance Program Program must: Incorporate policies, procedures and internal controls reasonably designed to assure compliance with the Bank Secrecy Act including: Verifying customer identification Filing reports Detecting suspicious activity Creating and retaining records; and Responding to law enforcement requests Designate a compliance officer to assure day-to-day compliance with the program. The responsibilities of such person include assuring that: The business properly files reports and creates and retains records; The compliance program is updated as necessary to reflect current requirements and related guidance issued by the Department of Treasury; and The business provides appropriate training and education. Provide for ongoing training of appropriate personnel concerning their responsibilities under the program, including training in the detection of suspicious transactions. Provide for an independent review to monitor and maintain an adequate program. The scope and frequency of the review should be commensurate with the risk of the financial services provided by the money services business. Robert E. McKenzie MSB Penalties Civil penalty for failure to meet the registration requirement is $5,000 for each violation. Each day that the violation continues represents a separate violation. Reporting false or materially incomplete registration information can trigger a civil penalty of $5,000 per day. Criminal penalties for willful violation of the law can include fines and imprisonment. FinCEN Form 107 filed with IRS Detroit Computing Center Robert E. McKenzie

18 Becoming an MSB Filing FinCEN Form 107 IRS Detroit Computing Center Money Services Business Registration P.O. Box Detroit, Michigan Robert E. McKenzie Cash Transactions CTRs, Report of Cash Payments Over $10,000 Received in a Trade or Business File by 15th day after the date the cash transaction occurs. SARs Structuring: Serial payments or deposits of less than $10,000 Suspicious Activity Report (SAR) Civil & criminal penalties Robert E. McKenzie

19 Transaction Defined Transaction occurs when: Goods, services, or property are sold; Property is rented; Cash is exchanged for other cash; A contribution is made to a trust or escrow account; A loan is made or repaid; or Cash is converted to a negotiable instrument, such as a check or a bond Robert E. McKenzie Person Defined A person includes an individual, a company, a corporation, a partnership, an association, a trust, or an estate. Exempt organizations, including employee plans, are also persons. However, exempt organizations do not have to file Form 8300 for a more-than-$10,000 charitable cash contribution they receive since it is not received in the course of a trade or business. Robert E. McKenzie

20 Foreign Transactions You do not have to file Form 8300 if the entire transaction (including the receipt of cash) takes place outside of: The 50 states, The District of Columbia, Puerto Rico, or A possession or territory of the U. S. However, you must file Form 8300 if any part of the transaction (including the receipt of cash) occurs in Puerto Rico or a possession or territory of the U. S. and you are subject to the Internal Revenue Code. Robert E. McKenzie What Payments Must Be Reported? You must file Form 8300 to report cash paid to you if it is: Over $10,000, Received as: One lump sum of over $10,000, Installment payments that cause the total cash received within 1 year of the initial payment to total more than $10,000, or Other previously unreportable payments that cause the total cash received within a 12-month period to total more than $10,000, Received in the course of your trade or business, Received from the same buyer (or agent), and Received in a single transaction or in related transactions Robert E. McKenzie

21 What Is Cash? Cash is: Coins and currency of the U. S. (and any other country), and Cashier's check, bank draft, traveler's check, or money order you receive, with face amount of $10,000 or less and you receive it in: Designated reporting transaction or Any transaction in which you know the payer is trying to avoid reporting of transaction on Form Cash may include a cashier's check even if it is called a treasurer's check or bank check. Cash does not include a check drawn on an individual's personal account. A cashier's check, bank draft, traveler's check, or money order with a face amount of more than $10,000 is not treated as cash. These items are not defined as cash and you do not have to file Form 8300 when you receive them because, if they were bought with currency, bank or other financial institution that issued them must file a report on FinCEN Form 104 Robert E. McKenzie Examples Example 1. You are a coin dealer. Bob Green buys gold coins from you for $13,200. He pays for them with $6,200 in U.S. currency and a cashier's check having a face amount of $7,000. The cashier's check is treated as cash. You have received more than $10,000 cash and must file Form 8300 for this transaction. Example 2. You are a retail jeweler. Mary North buys an item of jewelry from you for $12,000. She pays for it with a personal check payable to you in the amount of $9,600 and traveler's checks totaling $2,400. Because the personal check is not treated as cash, you have not received more than $10,000 cash in the transaction. You do not have to file Form Example 3. You are a boat dealer. Emily Jones buys a boat from you for $16,500. She pays for it with a cashier's check payable to you in the amount of $16,500. The cashier's check is not treated as cash because its face amount is more than $10,000. You do not have to file Form 8300 for this transaction. Robert E. McKenzie

22 Designated Reporting Transaction A designated reporting transaction is the retail sale of any of the following: A consumer durable, such as an automobile or boat. A consumer durable is property, other than land or buildings, that: Is suitable for personal use, Can reasonably be expected to last at least 1 year under ordinary use, Has a sales price of more than $10,000, and Can be seen or touched (tangible property). For example, a $20,000 car is a consumer durable, but a $20,000 dump truck or factory machine is not. The car is a consumer durable even if you sell it to a buyer who will use it in a business. A collectible (for example, a work of art, rug, antique, metal, gem, stamp, or coin). Travel or entertainment, if the total sales price of all items sold for the same trip or entertainment event in one transaction (or related transactions) is more than $10,000. Robert E. McKenzie SARs Money services businesses and banks are required to report any transactions they deems as suspicious. The MSB's file a Suspicious Activity Report with Detroit Computing Center. A transaction must be reported if the MSB knows, suspects or has reason to suspect that transaction (or a pattern of transactions of which transaction is a part): Involves funds derived from illegal activity or is intended or conducted in order to hide or disguise funds or assets derived from illegal activity, or is Designed to evade requirements of Bank Secrecy Act, whether through structuring or other means, or Serves no business or apparent lawful purpose, and reporting business knows of no reasonable explanation for transaction after examining all available facts. Robert E. McKenzie

23 SARs Filing A SAR must be filed using a SAR MSB form. MSBs have 30 days after becoming aware of a suspicious transaction to complete and file the form. Retention A copy of filed form and supporting documentation must be retained for a period of five years from the date of filing. Disclosure Prohibited MSBs (including MSB employees) are prohibited from disclosing to a person involved in transaction that a suspicious activity report has been filed. Further, each MSB is protected from civil liability for any SAR filed by MSB. Robert E. McKenzie Examples of IRS Enforcement Newly married couple make serial deposits of cash wedding gifts Recently divorced husband makes serial deposits under $10K & IRS forfeits $400K of funds Car dealer convicted of failing to file CTR s & sentenced to over 20 years Contractors under CI investigations for cashing customer checks at currency exchanges & failing to report income Purchaser of a tavern was required to pay in cash. He went to his bank on multiple occasions over a period of weeks to secure cash in amounts of less than $10,000 in order to accumulate the purchase price. Robert E. McKenzie

24 CBRS System Overview Currency and Banking Retrieval System (CBRS) is an on-line database that contains Bank Secrecy Act (BSA) information. IRS field agents in SB/SE, and CID as well as Local, State and Federal law enforcement agencies (Customs, Justice, DEA, etc.) access the database for research in tax cases, tracking money-laundering activities, investigative leads, intelligence for the tracking of currency flows, corroborating information, and probative evidence. Federal Regulatory agencies (Federal Reserve, Securities and Exchange Commission, etc.) also use CBRS for general examination, compliance and enforcement efforts. Robert E. McKenzie