Tax Enforcement Beyond FATCA

Tax Enforcement Beyond FATCA

AGENDA Before FATCA Qualified Intermediary Program UBS and the Beginning of the End of Bank Secrecy IRS Offshore Voluntary Disclosure Program Application of U.S. Criminal Law to Conduct Occurring Outside of the United States Wegelin & Co. Other Ongoing Enforcement Efforts Department of Justice Program for Swiss Banks Credit Suisse To Infinity and Beyond 2

Before FATCA Qualified Intermediary Program Early attempt to identify and report on U.S. persons Launched in 2000 Limited to U.S. source income (primarily U.S. stock dividends and sales) 1099 Reporting easily avoided by U.S. accountholders by forgoing purchase of U.S. securities or holding accounts in name of foreign entity 3

Before FATCA - UBS and the Beginning of the End of Swiss Banking Secrecy May 2008: UBS discloses it is under investigation by U.S. authorities As originally described by UBS, the investigation concerned: (a) whether some of its U.S. clients sought, with the assistance of UBS, to evade U.S. tax obligations by circumventing restrictions on their securities investments imposed by the QI agreement; and (b) whether Swiss-based UBS client advisors engaged in activities in relation to their U.S.-domiciled clients that triggered an obligation for UBS Switzerland to register with the SEC as a broker-dealer and/or investment advisor. 4

Before FATCA - UBS and the Beginning of the End of Swiss Banking Secrecy June 2008: Bradley Birkenfeld (former UBS private banker) pleads guilty to conspiring to abet tax evasion and sentenced to 40 months in prison Ultimately, paid $104 million by IRS for acting as whistleblower July 2008: U.S. Senate holds hearings accusing UBS (the largest Swiss bank) and LGT (Liechtenstein private bank) of deliberately helping U.S. accountholders evade U.S. taxes November 2008: Raoul Weil (Chairman and CEO of UBS Global Wealth Management and Business Banking) indicted February 2009: UBS enters deferred prosecution agreement and agrees to pay $780 million fine UBS ultimately turns over approximately 4,700 U.S. accounts out of 52,000 undeclared Several other individuals associated with UBS were subsequently indicted 5

Before FATCA - IRS Offshore Voluntary Disclosure Program Offshore tax schemes responsible for estimated $150 billion in lost tax revenues each year OVDP established March 2009 in response to increased disclosures following UBS Opportunity to disclose offshore accounts and resolve tax noncompliance Without threat of criminal prosecution (unless already known to IRS) Pay back taxes plus interest Reduced, standardized set of penalties Subsequent initiatives in 2011 and 2012 based on success of program Over 43,000 participants resulting in collections of approximately $6 billion Ongoing source of information regarding potential targets for U.S. authorities 6

Application of U.S. Criminal Law to Conduct Occurring Outside of the United States Typically, there must be some jurisdictional nexus for the United States to be able to criminally prosecute There is a presumption against the extraterritorial application of U.S. criminal law But it is relatively easy for federal prosecutors to find some use of U.S. jurisdictional means (e.g., telephone call, e-mail, bank account) Example: Practically all U.S. dollar wire transfers pass through the U.S. Example: Effect/harm in the United States 7

Wegelin & Co. In 2012, Wegelin (Switzerland s oldest bank) indicted for conspiring with taxpayers to defraud the United States of tax revenue owed on undeclared assets Unlike UBS, Wegelin had no offices in the United States and employees rarely, if ever, traveled to the U.S. to further the scheme Nonetheless, U.S. prosecuted Wegelin because effect of the crime harm to the U.S. Treasury in the form of evaded taxes was felt in the United States In 2013 Wegelin pled guilty $74 million of fines and penalties, including forfeiture of $16.2 million in correspondent bank account Resulted in Bank closing But no disclosure of any client names 8

Other Ongoing Enforcement Efforts Since 2008, U.S. Department of Justice (DOJ) initiated criminal investigations into 14 Swiss banks relating to alleged tax evasion Most of these remain open DOJ indicted over 30 Swiss bankers, including from UBS, Credit Suisse, Bank Frey, and Wegelin, for aiding and abetting U.S. tax evasion Majority have not stood trial and remain abroad DOJ charged over 70 U.S. taxpayers with evading U.S. taxes using offshore accounts Over 65 pled or were found guilty Largely unsuccessful treaty requests 9

Department of Justice Program for Swiss Banks Product of over two years of negotiations with the Swiss government Announced August 29, 2013 in joint statement between DOJ and Swiss Federal Department of Finance Voluntary disclosure program for Swiss Banks Opportunity to resolve status in connection with DOJ tax investigations and obtain non-prosecution agreement (NPA) or non-target letter Over 100 of Switzerland s approximately 300 banks are participating 10

Department of Justice Program for Swiss Banks Divides banks into Categories 1 through 4: (1) banks under formal criminal investigation not eligible (2) banks that have reason to believe that they may have committed a tax crime NPA and payment of penalty (3) banks that did not commit a tax crime nontarget letter (4) local banks non-target letter 11

Department of Justice Program for Swiss Banks Search for U.S. Related Accounts beginning from August 1, 2008 using FATCA-based protocol Total number and maximum dollar value In-person presentation to explain how cross-border business for U.S. Related Accounts was structured, operated, and supervised Must provide names of responsible individuals Information on each closed account, including transaction details leaver list Independent examiner must verify search for U.S. Related Accounts and leaver list Information necessary for DOJ to draft treaty requests seeking account information Penalty: 20, 30, 50% of high value of U.S. Related Accounts depending on when accounts were opened Deductions from penalty base: (1) OVDP after notification; (2) not undeclared; and (3) disclosed by bank (1099 reporting) 12

Department of Justice Program for Swiss Banks Program criticized by U.S. Senate for not including accounts closed prior to August 1, 2008 and not requiring disclosure of customer names Political pressure on DOJ to take hard line and demonstrate results quickly Administered by multiple teams with very limited discretion Significant emphasis on obtaining information to support tax treaty requests, notwithstanding Senate findings questioning such requests as opposed to other methods (including grand jury subpoenas, John Doe summons, and extradition treaties) Program leading to significant increase in voluntary disclosures 13

Credit Suisse Switzerland s second largest bank Subject to Senate investigation beginning in 2008 and culminating in February 2014 hearing finding that Credit Suisse facilitated U.S. tax evasion February 2014: Credit Suisse enters $196.5 million settlement with the SEC, admitting to violating federal securities laws by engaging in unregistered brokerage and investment advisory services May 2014: Credit Suisse pleads guilty to conspiring to aid tax evasion in decades long scheme First bank of its size and prominence to plead guilty in over 20 years - end to too big to jail era $2.6 billion in penalties Independent monitor for up to two years Permitted to retain license to operate 14

To Infinity and Beyond Switzerland is only the beginning - United States is determined to pursue offshore tax evaders wherever they may go Tax investigations involving Caribbean, India, Israel, Liechtenstein, and Luxembourg Following leads and tracing funds using information from Swiss Bank Program, voluntary disclosures, and FATCA John Doe summons for U.S. correspondent bank account records: CIBC FirstCaribbean, ZKB, Butterfield Bank Permit request for records when taxpayer is unidentified One way U.S. taxpayers repatriated undeclared money from offshore banks was through U.S. correspondent account Whistleblowers: UBS whistleblower received award of $104MM IRS (along with Australia and United Kingdom) announced that they each have acquired a substantial amount of data revealing extensive use of entities organized in Singapore, British Virgin Islands, and Cayman Islands, among others 15

QUESTIONS Rick Halper McKool Smith One Bryant Park, 47th Floor New York, New York 10036 Tel: 212-402-9413 E-mail: ehalper@mckoolsmith.com 16

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