On February 17, 2016 we posted The Swiss Bank Program is Over So What Countries are in the DoJ Sites Now? where we discussed that the Department of Justice announced on January 27, 2016 that it reached its final non-prosecution agreement under Category 2 of the Swiss Bank Program, with HSZH Verwaltungs AG (HSZH) and that the DOJ is getting some very valuable information served up on a silver platter as a result of the OVDP program and its non-prosecution agreements with Swiss banks.
We also discussed that following the success of the Swiss Bank Program, the Justice Department is now looking beyond Switzerland to financial institutions in other countries that may be havens for secret offshore accounts or undisclosed assets. Investigators are pursuing the wealth of leads generated through the Swiss Bank Program, and following those leads to countries such as:
- the British Virgin Islands,
- the Cayman Islands,
- the Cook Islands,
- the Marshall Islands,
- Panama and
The US government announced on March 9, 2016 the guilty pleas of Cayman National Securities Ltd. (CNS) and Cayman National Trust Co. Ltd. (CNT), two Cayman Island affiliates of Cayman National Corporation, which 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 (U.S. taxpayers).
CNS and CNT pleaded guilty to a criminal Information charging them with conspiring with many of their U.S. taxpayer-clients to hide more than $130 million in offshore accounts from the U.S. Internal Revenue Service (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 non-compliant U.S. taxpayers who maintained accounts at CNS and CNT, and pay a total of $6 million in financial penalties. The plea proceeding took place today before the Honorable U.S. District Judge Thomas P. Griesa for the Southern District of New York.
“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 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.”
From at least 2001 through 2011, CNS and CNT, which are both located in Grand Cayman and organized under the laws of the Cayman Islands, assisted certain U.S. taxpayers in evading their U.S. tax obligations to the IRS and otherwise hiding accounts held at CNS and CNT from the IRS (hereinafter, undeclared accounts). CNS and CNT did so by knowingly opening and maintaining undeclared accounts for U.S. taxpayers at CNS and CNT. Specifically, and among other things, in furtherance of a scheme to help U.S. taxpayers hide assets from the IRS and evade taxes:
- 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 (collectively, structures), 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’s obligations under its Qualified Intermediary Agreement (QI) with the IRS.I talked to make the downtime in
- After learning about the investigation of Swiss bank UBS AG (UBS), in or about 2008, for assisting U.S. taxpayers to evade 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 U.S. taxpayer-clients included trusts, which were nominally controlled by CNT trust officers, but which in fact were controlled by the U.S. taxpayer-clients; managed companies, for which CNT ostensibly provided direction and management services, but which in truth were shell companies that served only to hold the assets of the U.S. taxpayer-clients; and registered office companies, which were shell companies for which CNT simply supplied a Caymanian mailing address.
CNS treated these sham Caymanian structures as the account holders and then permitted the U.S. taxpayer-clients to trade in U.S. securities, without requiring them to submit Form W-9s, 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. taxpayer-clients after many of them expressed concern that their accounts would be detected by the IRS.
In or about April 2008, it became publicly known that the U.S. Department of Justice was investigating UBS for assisting U.S. taxpayers to evade their U.S. tax obligations. Thereafter, despite the public disclosure of the UBS case, and CNS’s awareness of it, CNS continued to assist U.S. taxpayer-clients in concealing their accounts from the IRS by, among other things, failing to require them to complete Form W-9s.
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 spearheaded 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 high-water mark in 2009, CNS and CNT had approximately $137 million in assets under management relating to undeclared accounts held by U.S. taxpayer-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.
As part of their plea agreements with the U.S. Attorney’s Office for the Southern District of New York (the office), CNS and CNT have agreed to cooperate fully with the office’s investigation of the companies’ criminal conduct.
To date, CNS and CNT have already made substantial efforts to cooperate with that investigation, including by:
- Facilitating interviews that the office conducted of CNS and CNT employees, including top level executives;
- Voluntarily producing documents in response to the office’s requests;
- Providing, in response to a treaty request, un-redacted client files for approximately 20 percent of the U.S. taxpayer-clients who maintained accounts at CNS and CNT; and
- Committing to assist in responding to a treaty request that is expected to result in the production of un-redacted client files for approximately 90 to 95 percent of the U.S. taxpayer-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.
For US taxpayers with undeclared income from foreign accounts, only those taxpayers that request pre-clearance before their bank is discovered by the IRS and listed, will get the 27 1/2% OVDP penalty. The 50% penalty applies to all taxpayers with accounts at financial institutions or with facilitators which are named, are cooperating or are identified in a court filing such as a John Doe summons.