Page 3 - DOJ And IRS Use “Carrot ‘n Stick” To Enforce Global Tax Laws

The IRS cannot serve a summons outside of the United States. Luckily for the IRS, virtually every major finan- cial institution in the world that has US customers has an Achilles heel: correspondent bank accounts.
American taxpayers who have foreign bank accounts need a convenient way to access their money. Short of hav- ing branches in the United States, foreign banks need a way to provide this access. They do this by opening bank accounts at banks in the United States. The foreign bank is then a customer of the US bank. Once the IRS finds out which US bank hosts the foreign bank’s correspon- dent account, the IRS can simply issue the US bank a John Doe summons for information on the account. This account will have documentation of checks written to US taxpayers, wires sent to US taxpayers’ accounts at other US banks, and the like.
shareholders when deciding whether to indict business entities. For example, on July 30, 2013, the DOJ, through the US Attorney’s Office for the Southern District of New York, announced that it had reached a nonprosecu- tion agreement with Liechtensteinische Landesbank AG, a bank based in Vaduz, Liechtenstein. The bank forfeited $16,316,000, representing a disgorgement of its earnings from maintaining Americans’ undeclared accounts, and paid another $7,525,542 in restitution to the IRS, rep- resenting the approximate resulting unpaid taxes. (Press Release, DOJ, Department of Justice Announces Agree- ment with Liechtenstein Bank to Pay $23.8 Million to Resolve Criminal Tax Investigation (July 30, 2013), http://tinyurl.com/oys5gpv.)
The most recent and noteworthy exception to the DOJ practice of using DPAs was in the case of Credit Suisse.
The Senate’s Permanent Subcommittee on Investigations estimates that Americans illegally evade between $40 billion and $70 billion in US taxes each year.
How does the IRS find out which US bank hosts a foreign bank’s correspondent account? One likely source is the OVDP’s feedback loop. Taxpayers in the OVDP identify their bankers. Bankers who cooperate with the government reveal the location of their banks’ correspon- dent accounts.
On November 12, 2013, the government announced that it had obtained a court order authorizing the IRS to issue John Doe summonses for information on US account holders at the US correspondent banks of Zürcher Kan- tonalbank (ZKB) in Switzerland and the Bank of N.T. Butterfield & Son Ltd. (Butterfield) in the Bahamas, Bar- bados, Cayman Islands, Guernsey, Hong Kong, Malta, Switzerland, and the United Kingdom. The US banks that will receive the John Doe summonses are Bank of New York Mellon, Citibank NA, JPMorgan Chase Bank NA, HSBC Bank USA NA, and Bank of America NA. The gov- ernment appears to have been empowered to seek the John Doe summonses by information that the IRS received from US taxpayers who entered the OVDP. The government announced that as of November 12, 2013, US taxpayers had identified 371 previously undisclosed accounts at ZKB and 81 such accounts at Butterfield. (Press Release, DOJ, Court Authorizes IRS to Issue Summonses for Records Relating to U.S. Taxpayers with Offshore Bank Accounts (Nov. 12, 2013), http://tinyurl.com/pnunqen.)
Criminal Prosecution of Banks and Bankers
Beginning with UBS, the DOJ has typically entered into deferred prosecution agreements (DPAs), and sometimes nonprosecution agreements, with foreign financial insti- tutions instead of indicting them. This is because of the DOJ’s post-Arthur Andersen policy of taking into account the collateral harm to innocent employees and
On May 19, 2014, the DOJ announced that Credit Suisse had entered a plea of guilty to the charge of conspiracy to aid and assist in the preparation and filing of false tax returns. According to a statement of facts filed in federal court, Credit Suisse had 22,000 American accounts (both declared and undeclared) worth as much as $10 billion as of 2006. As part of its guilty plea, Credit Suisse will pay a total of $2.6 billion: $1.8 billion to the Department of Justice for the US Treasury (consisting of a fine of over $1.13 billion and nearly $670 million in restitution to the IRS), $100 million to the Federal Reserve, and $715 million to the New York State Department of Financial Services. Although Credit Suisse is now a convicted felon, it will be spared the worst consequence of a felony con- viction—being barred from conducting business in the United States. The Federal Reserve, the New York attor- ney general, and the Securities and Exchange Commission, are all said to have agreed to stand down from barring Credit Suisse from doing business in their bailiwicks. Many have noted that the plea agreement did not require Credit Suisse to turn over the names of its US account holders. This is likely not a significant issue, though, because the agreement requires Credit Suisse to turn over sufficient information about the accounts to enable the US govern- ment to make a treaty request for all of the names.
The oldest Swiss private bank, Wegelin & Co., was also an exception to the DOJ preference for such agreements. Citing what the DOJ called its egregious behavior, the US attorney for the Southern District of New York indicted Wegelin on February 2, 2012. Wegelin pleaded guilty to conspiracy to defraud the United States by impairing and impeding the IRS, and on March 4, 2013, Wegelin was sentenced to pay a fine of $58 million and agreed to a civil forfeiture of $16 million. At the same time, Wegelin
Published in Criminal Justice, Volume 29, Number 2, Summer 2014. © 2014 by the American Bar Association. Reproduced with permission. All rights reserved. 6 This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system
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