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Archive for the ‘Financial Crimes’ Category

Drivers & Impacts of Derisking

Posted by William Byrnes on June 12, 2016


The FCA is interested in the circumstances around banks closing customers’ accounts, or restricting access for new customers, over the last few years. It wishes to know more about FCA UKwhat is driving account closure and how many customers, of which type, are affected. The FCA is also concerned as to whether ‘wholesale’ derisking and financial exclusion from the withdrawal of banking services is occurring, and if due consideration is being given to the merits of individual cases before a decision is made to terminate an existing account or not to grant a new account.

The FCA wishes to understand which impacted customers have faced difficulties, delays and account closures. The FCA believes these to include Small and Medium-sized Enterprises (SMEs), the FinTech and defence sectors, personal account holders (including minorities and vulnerable groups), and those who are discouraged from using the banking system.

Drivers of Derisking

Many banks told us that they needed to lower their overall risk profile, to realign their businesses and that they are paying closer attention to compliance since the global financial crisis. Further, we heard that derisking is partly a result of the higher costs of compliance and the increased amount of regulatory capital now required, and partly a response to criminal, civil and regulatory actions. These include regulatory settlements, including Deferred Prosecution Agreements (DPAs), especially those reached in response to AML/CFT failings.

There is also no doubt that banks are trying to do what they believe is expected of them under the risk based approach (RBA) to AML/CFT, in reducing the extent to which their services are abused for financial crime purposes, by on occasion exiting relationships that present too high a perceived risk of such abuse, regardless of the costs of compliance. These perceptions of risk stem from their own judgments, in part reflecting the signals emitted (or judged to be emitted) from the range of regulators and prosecutors who are salient to their institutions, and also the global rankings from the commercial agencies involved in risk judgments.

Higher compliance costs may also be reducing incentives for larger banks to maintain many interbank relationships, which previously were seen as providing extra cover or transactional options: a majority of the small and medium-sized banks surveyed reported difficulties, which in some cases have led to them cutting services to customers and to other banks.

We assess that other factors have combined with regulatory actions, higher compliance costs and perceived pressure from correspondent banks, to create a ‘perfect storm’ of changes which have struck banks during this decade. These include much higher capital requirements; higher liquidity thresholds and ultimately a tougher environment in which to achieve profitable relationships.

For the majority of our bank interviewees, this has resulted in a strategic review of business and functions, often in parallel with an over-arching review of compliance risk processes. In turn this has sometimes resulted in slimming down of business, resulting in many exits being driven by the assessment that relationships are ‘non-core’. So we are describing a compound situation in which a range of factors may be involved in many of the exits. Ultimately, banks may feel themselves entitled to do business or notdo business with whomever they like, subject to legal (including regulatory) requirements.

Achieving the perception of legitimacy and fairness of the regulatory system requires consistency and transparency when dealing with each type of customer. Established risk-based approaches to financial crime identify the risk associated with various factors such as sector, occupation, types of business; geography and jurisdiction risk; political risk; distribution channels; and product or services that customer requires or uses. However, by contrast to some other banking risks like consumer credit loss and fraud risks, there is not yet a generally agreed quantitative assessment methodology for assessing financial crime risk and it is difficult to determine to what extent the data are sufficient for this purpose, other than to make a broad subjective assessment.

Banks vary in their ability to ‘score’ particular customers, depending on the bank’s size, resources, geographic coverage and other factors. Decisions on what financial crime residual risks fall within acceptable parameters for a particular bank may be taken through an expression of financial crime risk appetite and/or as an output from customer risk assessment tools, using the broad risk factor categories.

Risk appetite statements often contain broad definitions of acceptable risk, such as ‘minimal tolerance for residual Financial Crime risk’, but we have also found examples where particular sectors are specifically mentioned. If this amounted to a complete prohibition it could be classified as ‘wholesale derisking’, but we have found few examples relating solely to AML/CFT issues. Reputational risk, bribery and corruption concerns and strategic business reasons also factor in to some banks ruling out the banking of certain sectors, for example the defence industry.

Download Drivers-impacts-of-derisking

Money Laundering, Asset Forfeiture and Recovery, and Compliance- A Global Guide (LexisNexis Matthew Bender updated quarterly) is an eBook designed to provide the compliance officer, BSA counsel, and government agent with accurate analyses of the AML/CTF Financial and Legal Intelligence, law and practice in the nations of the world with the most current references and resources.  Special topic chapters will assist the compliance officer design and maintain effective risk management programs.  Over 100 country and topic experts from financial institutions, government agencies, law, audit and risk management firms have contributed analysis to develop this practical compliance guide

Posted in Financial Crimes, Money Laundering | Tagged: , , | Leave a Comment »

EU & US Sign “Umbrella” agreement to protect personal data transferred by law-enforcement authorities for detecting criminal offences, like tax evasion, & terrorism

Posted by William Byrnes on June 9, 2016


The EU-U.S. Ministerial Meeting on Justice and Home Affairs, hosted by the Netherlands Presidency of the Council of the European Union, took place in Amsterdam.  This meeting is EU Commission

Signing of the “Umbrella” agreement represented a major step forward in EU-U.S. relations.  The agreement sets high standards for the protection of personal data transferred by law-enforcement authorities.  It also strengthens legal certainty and enhances the rights of citizens which in turn will facilitate EU-U.S. cooperation to combat crime, including terrorism.  The EU and the U.S. are committed to work together in the implementation of this agreement to ensure that it benefits both citizens and law enforcement cooperation.  The next step will be to seek approval by the European Parliament.

During the ministerial meeting, the delegations focused on ways to address the migration crisis, on their respective visa policies, and on information sharing in the context of security, on counterterrorism policies and terrorist financing, on money laundering, data protection and on practical cooperation to tackle transnational organised crime.  The exchange of views covered issues including the protection of refugees, global resettlement efforts, effective border management and dismantling organised criminal migrant smuggling networks.

The EU and the U.S. first discussed ways to address global migration by developing safe, regular and orderly migration processes whilst ensuring international protection for those who need it.  The discussion focused on opportunities to mutually reinforce and coordinate their actions in this respect while also establishing high security standards.  They agreed that the current migration and refugee challenges require global solutions through increased international cooperation and regional action.  In this respect they reaffirmed their commitment to work together in the lead-up to the upcoming United Nations General Assembly high level meeting addressing large movements of refugees and migrants and to the U.S. hosted Leader-Level Refugee Summit, to be held in September 2016 in New York.

The EU and U.S. exchanged views on visa issues and the respective legal frameworks.  They agreed to maintain their constructive dialogue at all levels to achieve mutually beneficial solutions.

The EU and the U.S. discussed initiatives to improve counterterrorism efforts, including border security, screening of travellers and information sharing, as well as cooperation to better identify terrorist and foreign fighter travel.  They also agreed to reinforce their dialogue on chemical, biological, radioactive and nuclear material and on its possible use by terrorist networks.  They discussed legislative initiatives to improve information sharing, and to streamline efforts to combat terrorist financing and money laundering.

They also discussed a five year review of the 2010 EU-U.S. Mutual Legal Assistance Treaty, a key mechanism for transatlantic criminal justice cooperation.  The EU and the U.S. confirmed that the treaty is working effectively and identified areas for further practical improvement.  The U.S. and the EU committed to implementing those recommendations.  These recommendations include enhancing training and specialisation of practitioners, improving the way joint investigation teams work together, using technology to avoid delays, and making it easier to track criminal proceeds by identifying bank accounts.  Facilitating access to electronic evidence is a particular concern of the review, and the participants committed to improving their practices through which they obtain such evidence.

Following up to the commitment made at the EU–U.S. Summit in March 2014, the EU and the U.S. reiterated their desire to tackle jointly the issue of transnational child sex offenders, acknowledging the operational conclusions of an EU–U.S. expert meeting held in September 2015.  The EU and the U.S. recognized the importance of improving operational cooperation to protect children from transnational sex offenders.

Concluding the discussions, Europol and the U.S. jointly presented the results of a successful EU–U.S. operation that brought together law enforcement authorities from across Europe and the US to dismantle an important drug trafficking network and seize the proceeds of their crimes.

The EU and the U.S. committed to continuing their regular dialogue and to hold another ministerial meeting in the second half of 2016.

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Judge grants FinCEN a “do over” for its FBME Bank determination, but will FinCEN release the evidence?

Posted by William Byrnes on November 10, 2015


Several of my blog readers have been following FinCEN’s first use (and abuse alleges the FBMEFinCEN-logo-shieldbank, defendant of this contentious matter) of the PATRIOT Act’s power allowing FinCEN to block a foreign financial institution from the US financial market.  Over the past year, FinCEN has published a couple press releases referring to its action against FMBE, and that its action is justified based on the nefarious behavior of some of FBME’s clients.  See FinCEN Cuts FBME Bank from Access to U.S. Financial System

But, there are generally two or more perspectives for any story.  FBME has fought back against FinCEN’s determination, and at least convinced a judge that there is more here going on than meet’s the eye.  See FBME Bank Obtains Preliminary Injunction Against FinCEN

On Friday, FinCEN agreed to a “do-over” of its determination with FBME, and to disclose ‘four’ items of the substantial evidence upon which it relied (but not the other evidence).  Of course this heightens the interest in the evidence that FinCEN will not disclose.

At the core of this case for FBME is whether FinCEN must disclose to FBME all the evidence that it relied upon to make a determination to ban FBME from the US financial system.  Who is to determine if such evidence is protected by national security interests?  FinCEN itself, or the judiciary?  Should a defendant have to defend against non-reviewed evidence?  What if the evidence is hearsay, by example – newspaper accounts?

So, now I am curious if the doctrine of due process has been afforded FBME bank?  And if the rules of evidence have been followed?

Some respondents will point out that a civil action, such as FinCEN, does not require the heightened protections of the doctrine of due process and the rules of evidence that apply to an individual’s criminal investigation.  “The government giveth the license to carry on commerce, and the government taketh away that license.”  Though I disagree with that bifurcation from a political philosophy and from a rule of law perspective, the Courts lean in the respondents’ favor.

In FBME’s situation, this FinCEN determination impacts FBME maintaining a correspondent banking relationship in the US, and also implies to other regulators that they should evaluate FBME’s activities in light of FinCEN’s determination.  It is the equivalent of a banking death sentence.

Given the public nature of FinCEN’s allegations, not sure how FBME can obtain a correspondent U.S. banking relationship in the future.  But BNP pled guilty to funding genocidal regimes and Iran, was given a setence of five year probabtion and nearly $10 billion in fines.  No BNP employees went to prison, or even paid a fine.  And BNP is operating in the US.  (see BNP Paribas Criminally Sentenced for Financing Sudan, Iran and Cuba)  A search of this blog will find numerous like situations of criminal activity at banks, a non-prosecution agreement, and the bank continues on.

Why is FBME being treated differently?  Should it be?  Questions that we cannot provide an opinion upon because we have limited information.

In consideration of the many other banks that have been fined for AML and/or OFAC transgressions, the FBME case stands out because of the severity of the sanction and the lack of background information about FinCEN’s action.

FBME states in its press releases that it has been cooperating with FinCEN over the course of FinCEN’s investigation.  However, alleges FBME, FinCEN has not been cooperating with FBME because FinCEN will not present the evidence at the heart of the matter upon which FinCEN bases it allegations against FBME upon.  FBME argues that it cannot defend against “secret” evidence.  FinCEN retorts that the evidence is required to remain secret as a matter of national security.  Sounds reminiscent of a Star Chamber.  I thought we don’t like Star Chambers in America?  

If this is national security protected evidence, should at least the FISA tribunal be presented with it and agree?  It’s not the correct forum, but better than a single executive branch serving as its own prosecutor, judge, and executioner.

Read the court documents and excerpts from the Judgement – Is FinCEN Becoming a Star Chamber? The Curious FBME case

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New Lexis Advance® Tax Platform Now Available to Law School Faculty & Students; Cutting-Edge International Tax Titles

Posted by William Byrnes on October 22, 2015


On June 1, LexisNexis launched its new online tax research platform called Lexis Advance® Tax.

Already available to America’s law school faculty and students, it includes a rich, comprehensive package of nearly 1,400 sources, including tax news, primary law, journals and nearly 300 treatises, practice guides and forms products for both tax and estates lawyers.

Along with news, another strong area for L.A. Tax is its subpage devoted to International Tax. There, users will find a selection01701_11_1_cover of titles examining hot, cutting-edge issues like: Lexis Guide to FATCA Compliance, the Lexis global guide to anti-money laundering laws around the world, and the recently-revised Foreign Tax & Trade Briefs, 2nd Ed, which provides summaries of each country’s tax system and laws.

All of these titles are produced by a team of tax experts led by Professor William H. Byrnes, Associate Dean, International Financial Law, at Texas A&M University Law School, in Fort Worth, the newest law school in Texas. See https://law.tamu.edu/

Looking for Lexis Advance Tax?
Sign in to www.lexisadvance.com, look for the pull-down menu called “Lexis Advance Research” in the upper-left corner. Click the down arrow and select Lexis Advance Tax.

If you have questions or would like to schedule a short training, please contact your LexisNexis® Account Executive.

– See more at: http://www.lexisnexis.com/lextalk/legal-content-insider/f/21/t/2525.aspx?utm_content=2015-10-20+15:00:04#sthash.szct2yk6.dpuf

Posted in BEPS, FATCA, Financial Crimes, Money Laundering, Taxation, Transfer Pricing | Tagged: , , , | Leave a Comment »

UK HMRC Releases New Policy Documents to Tackle Offshore Evasion

Posted by William Byrnes on July 20, 2015


The government announced four consultations as part of its publication Tackling Evasion andHM_Treasury_logo.svgAvoidance.  These take forward HMRC’s strategy for tackling offshore evasion, No Safe Havens.

The four consultations are:  see International Financial Law Prof Blog.

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Several FIFA Executives Plead Guilty to Accepting Bribes, Many More Charged

Posted by William Byrnes on May 27, 2015


http://lawprofessors.typepad.com/intfinlaw/2015/05/fifa-officials-arrested-in-100-million-world-cup-bribery.html

excerpt – The Defendants Include Two Current FIFA Vice Presidents and the Current and Former Presidents of the Confederation of North, Central American and Caribbean Association Football (CONCACAF); Seven Defendants Arrested Overseas; Guilty Pleas for Four Individual Defendants and Two Corporate Defendants Also Unsealed …

read full story at http://lawprofessors.typepad.com/intfinlaw/2015/05/fifa-officials-arrested-in-100-million-world-cup-bribery.html

Posted in Financial Crimes | Tagged: , , | 1 Comment »

New Policy Restricts Use of Asset Forfeiture in Structuring Offenses

Posted by William Byrnes on May 7, 2015


justice logo

Under the new policy, in the absence of criminal charges, judicially authorized warrants to seize bank accounts involved in structuring can only be obtained if the prosecutor first develops probable cause of additional federal criminal activity and that determination is approved by a supervisor.  Otherwise, a prosecutor may ask a judge to issue a seizure warrant only if either the U.S. Attorney or the Chief of the Criminal Division’s Asset Forfeiture and Money Laundering Section personally determines that seizure would serve a compelling law enforcement interest.

In addition, the new policy imposes important protections after a seizure has taken place.  Read the full Attorney General’s Memorandum and the Structuring Policy Directive and story

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Deutsche Bank’s Pleads Guilty, Pay $2.519 billion in Penalties & Disgorgement, for Manipulating LIBOR

Posted by William Byrnes on April 23, 2015


read the full story on International Financial Law Prof Blog.

A wholly owned subsidiary of Deutsche Bank AG (Deutsche Bank) has agreed to plead guilty to wire fraud for its role in manipulating the London Interbank Offered Rate (LIBOR), a leading benchmark interest rate used in financial products and transactions around the world.  In addition, Deutsche Bank entered into a deferred prosecution agreement to resolve wire fraud and antitrust charges in connection with its role in both manipulating U.S. Dollar LIBOR and engaging in a price-fixing conspiracy to rig Yen LIBOR.  Deutsche Bank and its subsidiary will pay $775 million in criminal penalties to the Justice Department.  Together with approximately $1.744 billion in regulatory penalties and disgorgement—$800 million as a result of a Commodity Futures Trading Commission (CFTC) action, $600 million as a result of a New York Department of Financial Services (DFS) action, and $344 million as a result of a U.K. Financial Conduct Authority (FCA) action—the Justice Department’s criminal penalties bring the total amount of penalties to approximately $2.519 billion.

download the documents at International Financial Law Prof Blog

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Holding Financial Institutions Accountable for Fraud

Posted by William Byrnes on April 3, 2015


International Financial Law Prof Blog

Two recent cases show fraudsters have become more sophisticated.  It used to be that fraud schemes depended on the willingness of unwitting consumers to hand over their hard-earned savings in person or through the mail.  Today, the interconnectedness of our electronic banking system means a crook just needs to find a way to acquire one piece of information—a bank account number.  Once he has it, and a means to access the banking system, a bank account—and transfer its money— into his hands.   read about these cases on International Financial Law Prof Blog

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Swiss Asset Manager Peter Amrein Pleads Guilty To Conspiring With U.S. Taxpayers To Evade Tax

Posted by William Byrnes on April 2, 2015


International Financial Law Prof Blog

Peter Amrein worked as a client advisor at a Swiss bank and, later, as an asset manager at a Swiss asset management firm. In those roles, between 1998 and 2012, Peter Amrein helped U.S. taxpayers evade taxes and hide millions of dollars in undeclared accounts at various Swiss banks, including Wegelin & Co., which was charged and pleaded guilty in the Southern District of New York for its conduct in conspiring with U.S. taxpayers to evade taxes. Peter Amrein, among other things, worked with an attorney based in Zurich, Switzerland, to establish sham foundations, which were organized under the laws of non-U.S. countries such as Liechtenstein, so that the undeclared assets of certain of Peter Amrein’s U.S. taxpayer-clients could be maintained in the names of these foreign foundations rather than in the clients’ own names. read the entire case at International Financial Law Prof Blog

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Is HSBC Complying With its Non Prosecution Agreement? Outside Monitor Report is Critical!

Posted by William Byrnes on April 1, 2015


Is HSBC Complying With its Non Prosecution Agreement?  There is much reference within news articles to the 1,000 page report of the outside monitor, former New York prosecutor Michael Cherkasky, and summary letter by Justice.  Read on at International Financial Law Prof Blog.

HSBC’s April 1st DOJ Court Filing About AML Non-Prosecution Available Here

image from www.lexisnexis.comThe International Financial Law Professor Blogger William Byrnes is the author of Money Laundering, Asset Forfeiture and Recovery, and Compliance- A Global Guide is an eBook designed to provide the compliance officer, BSA counsel, and government agent with accurate analyses of the AML/CTF Financial and Legal Intelligence, law and practice in the nations of the world with the most current references and resources.  Special topic chapters will assist the compliance officer design and maintain effective risk management programs.  Over 100 country and topic experts from financial institutions, government agencies, law, audit and risk management firms have contributed analysis to develop this practical compliance guide.

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One of the 10 Largest Swiss Private Banks Enters Into Non-Prosecution Agreement with DOJ

Posted by William Byrnes on March 31, 2015


DOJ announced that BSI SA, one of the 10 largest private banks in Switzerland, is the first bank to reach a resolution under the Department of Justice’s Swiss Bank Program.  106 Swiss banks have sought non-prosecution agreements.  read the details at International Financial Law Prof Blog.

image from www.lexisnexis.comThe International Financial Law Professor Blogger William Byrnes is the author of Money Laundering, Asset Forfeiture and Recovery, and Compliance- A Global Guide is an eBook designed to provide the compliance officer, BSA counsel, and government agent with accurate analyses of the AML/CTF Financial and Legal Intelligence, law and practice in the nations of the world with the most current references and resources.  Special topic chapters will assist the compliance officer design and maintain effective risk management programs.  Over 100 country and topic experts from financial institutions, government agencies, law, audit and risk management firms have contributed analysis to develop this practical compliance guide.

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this week’s financial crimes headlines

Posted by William Byrnes on March 19, 2015


Banca Privada d’Andorra Money Laundering Billions for Corruption and Human Traffickers?

FinCEN’s action also describes the activity of a second high–level manager at BPA in Andorra who accepted exorbitant commissions to process transactions related to Venezuelan third–party money launderers. This activity involved the development of shell companies and complex financial products to siphon off funds from Venezuela’s public oil company Petroleos de Venezuela (PDVSA). BPA processed approximately $2 billion in transactions related to this money laundering scheme.
Former Managing Director of RBS Securities Admits To Multimillion Dollar Securities Fraud of RBS Customers

Katke was a registered broker-dealer and managing director at RBS Securities Inc. As part of the scheme, Katke and his co-conspirators made misrepresentations to induce buying customers to pay inflated prices and selling customers to accept deflated prices for CLO bonds, all to benefit RBS.Commerzbank Admits to Sanctions and Money Laundering Violations, Will Pay $1.45 Billion Penalties!

“If for whatever reason CB New York inquires why our turnover has increase[d] so dramatically, under no circumstances may anyone mention that there is a connection to the clearing of Iranian banks!!!!!!!!!!!!!.”

HSBC’s Whistleblower Leaked Client Information Via Internet

Business Insider reports that “Hervé Falciani, the French-Italian whistleblower who handed over information on 100,000 HSBC client accounts to French authorities in 2009, has published a detailed account on how the transfer of the data actually took place. Also see…
Three Defendants Charged with One of the Largest Reported Data Breaches in U.S. History

Vu was arrested by Dutch law enforcement in Deventer, Netherlands, in 2012 and extradited to the United States in March 2014.

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Commerzbank Admits to Sanctions and Money Laundering Violations, Will Pay $1.45 Billion Penalties! 

Posted by William Byrnes on March 17, 2015


“If for whatever reason CB New York inquires why our turnover has increase[d] so dramatically, under no circumstances may anyone mention that there is a connection to the clearing of Iranian banks!!!!!!!!!!!!!.”  Why did Commerzbank get off with only $1.45 billion in penalties when BNP paid nearly $9 billion for very similar conduct?  See International Financial Law Prof Blog

 

 

 

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The Ghost of Meyer Lansky? Cuba is Back in Business ! But Still Illegal To Have Fun… Analysis of OFAC’s Regulations Released Today

Posted by William Byrnes on January 15, 2015


“Don’t worry, don’t worry. Look at the Astors and the Vanderbilts, all those big society people. They were the worst thieves – and now look at them. It’s just a matter of time.” Meyer Lansky

International Financial Law Prof Blog post … Academics, conference attendees, and business persons may travel to Cuba under blanket authorization to attend conferences, teaching programs, and transact business.

However, the US Treasury Department has left it illegal under the OFAC regulations to undertake tourist activities, including “excessive” free time sitting about puffing cigars and sipping rum.  At least a professor can bring one small box of cigars back home now (not over $100 value). And smart phones will work in the future!  read my analysis of the OFAC Cuba Amendments Released Today – read the full analysis at International Financial Law Prof Blog.

 

 

 

 

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OFAC Focuses on Banks Detecting Persons & Entities on the International Black List With New Global Format

Posted by William Byrnes on January 15, 2015


This new sanctions list format was jointly developed by the United Nations (U.N.) and the Wolfsberg Group of International Banks in an effort to create a universal sanctions list format that can be efficiently used by governments worldwide and enhances sanctions compliance.  The United States is the first U.N. member state to implement this advanced sanctions data model.  In an effort to ensure a greater level of global sanctions compliance the Treasury Department supports the new sanctions list model and appreciates the efforts of the U.N. and the Wolfsberg Group in their creation of a universal format.

The new format incorporates a variety of features that ensure maximum flexibility for sanctions list creators, while also limiting the need for future changes to the underlying data specification due to the standard’s adaptability.  The new capabilities associated with the advanced sanctions list format are discussed are International Financial Law Prof Blog.

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Is HSBC a Bad Actor or Is Argentina About To Go Out of Business (Again)? 

Posted by William Byrnes on January 14, 2015


See the full analysis at International Financial Law Prof Blog.

The Argentina Government has stopped HSBC Argentina from transferring money abroad, for 30 days.  See the Reuters and the Fox Latino articles linked at International Financial Law Prof Blog.  The Central Bank stated the reason for such a drastic action is HSBC’s lack of ability to correctly document such transfers.  The Argentina revenue authority has also recently raided HSBC’s offices, accusing it of assisting Argentina’s wealthy commit tax evasion through Swiss accounts.

Yet, one cannot help but ponder whether this is an isolated move against a bad actor, authorized by the requisite legislation and pursuant to due process, or whether this is politically motivated for other reasons?  Read this article at International Financial Law Prof Blog

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Are HNWI Passports Obtained Through St. Kitts and Nevis Used to Facilitate Terrorism? FinCEN Adds to EDD Lists!

Posted by William Byrnes on January 10, 2015


post from the International Financial Law Prof Blog.

See FinCEN Announcement at http://lawprofessors.typepad.com/intfinlaw/2015/01/passports-obtained-through-st-kitts-and-nevis-citizenship-by-investment-program-used-to-facilitate-financial-crime.html

 

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Should a Congressman Resign After Pleading Guilty to Tax Fraud and Employing Illegals? Or Continue To Receive his Congressional Paycheck while in Prison? Keep His Pension?

Posted by William Byrnes on December 26, 2014


Read about the Congressman who pled guilty this week to tax fraud on the Finance Law Professor Blog!

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Israeli Bank Pays $300 Million, Admits U.S. Tax Evasion by Clients

Posted by William Byrnes on December 23, 2014


A major Israeli international bank admitted that it conspired to aid and assist U.S. taxpayers to prepare and present false tax returns to the Internal Revenue Service (IRS) by hiding income and assets in offshore bank accounts in Israel and elsewhere around the world.

Read the post here ….

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Revised FFIEC Bank Secrecy Act/Anti-Money Laundering Examination Manual

Posted by William Byrnes on December 5, 2014


The Federal Financial Institutions Examination Council (FFIEC) released the revised Bank FFIECSecrecy Act/Anti-Money Laundering (BSA/AML) Examination Manual for 2014.

Statement of Applicability to Institutions With Total Assets Under $1 Billion: This Financial Institution Letter applies to all FDIC-supervised banks and savings associations, including community institutions.  The BSA/AML Examination Manual – see International Financial Law Prof Blog.

Posted in Financial Crimes, Money Laundering | Tagged: , | 1 Comment »

International Financial Law Prof Blog

Posted by William Byrnes on December 2, 2014


read the entire story with links at International Financial Law Prof Blog.

An analysis of the crime of bribery of foreign public officials

FATF logoMost international bribes are paid by large companies, usually with the knowledge of senior management, according to new OECD analysis of the cost of foreign bribery and corruption.

Bribes in the analysed cases equalled 10.9% of the total transaction value on average, and 34.5% of the profits – equal to USD 13.8 million per bribe. But given the complexity and concealed nature of corrupt transactions, this is without doubt the mere tip of the iceberg, says the OECD.

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Credit Suisse Pays $2.8 Billion for Tax Evasion Conspiracy

Posted by William Byrnes on November 25, 2014


Pays a total of $2.8 Billion to DOJ, IRS, SEC, NYDS, and Fed Reserve

Irs_logoCredit Suisse AG was sentenced today for conspiracy to aid and assist U.S. taxpayers in filing false income tax returns and other documents with the Internal Revenue Service (IRS).  Credit Suisse pleaded guilty to conspiracy on May 19.  The sentencing of the Swiss corporation is the result of a years-long investigation by U.S. law enforcement authorities that has also produced indictments of seven Credit Suisse employees and the owner of a trust company since 2011—two of those individuals have pleaded guilty so far—and of U.S. clients of Credit Suisse.  The announcement was made by Deputy Attorney General James M. Cole, Acting Deputy Assistant Attorney General Larry J. Wszalek for the Justice Department’s Tax Division, U.S. Attorney Dana J. Boente for the Eastern District of Virginia and IRS Commissioner John Koskinen.

At sentencing in the U.S. District Court for the Eastern District of Virginia, U.S. District Chief Judge Rebecca Beach Smith entered judgment and conviction and a restitution order requiring Credit Suisse to pay approximately $1.8 billion dollars to the United States by Nov. 28, per the plea agreement.  Credit Suisse will pay the Justice Department’s Crime Victims Fund, through the District Court Clerk’s Office for the Eastern District of Virginia, a fine of approximately $1.136 billion and will pay the IRS $666.5 million in restitution.  The parties agreed that Credit Suisse cannot challenge the restitution amount, which can also provide a basis for an IRS civil tax assessment.

“Today, with its criminal conviction and the payment of $2.6 billion in fines and restitution, Credit Suisse is held fully accountable for helping U.S. taxpayers engage in tax evasion,” said Deputy Attorney General Cole.  “As we expand our offshore investigations, not just in Switzerland, but around the world, the message to banks who engaged in these crimes is clear—step forward, accept responsibility for your past conduct,  and help us hold responsible the U.S. taxpayers who benefitted, and the individuals who assisted them.  Only through full cooperation will you avoid the most severe sanctions.”

The plea agreement, along with agreements made with state and federal agencies, provides that Credit Suisse will pay a total of approximately $2.6 billion—approximately $1.8 billion in a criminal fine and restitution, $100 million to the Federal Reserve and $715 million to the New York State Department of Financial Services.  Earlier this year, Credit Suisse negotiated cease and desist orders with the Federal Reserve and the state of New York requiring the bank to take certain remedial steps to ensure its compliance with U.S. law in its ongoing operations in addition to the civil penalties.  Credit Suisse also paid approximately $196 million in disgorgement, interest and penalties to the Securities and Exchange Commission (SEC) for violating the federal securities laws by providing cross-border brokerage and investment advisory services to U.S. clients without first registering with the SEC.  Together, these actions by U.S. law enforcement and state and federal partners appropriately punish Credit Suisse for its past behavior in these matters.

As part of the plea agreement, Credit Suisse acknowledged that, for decades prior to and through 2009, it operated an illegal cross-border banking business that knowingly and willfully aided and assisted thousands of U.S. clients in opening and maintaining undeclared accounts and concealing their offshore assets and income from the IRS.

According to the statement of facts filed with the plea agreement, Credit Suisse employed a variety of means to assist U.S. clients in concealing their undeclared accounts, including by:

  • Assisting clients in using sham entities to hide undeclared accounts;
  • Soliciting IRS forms that falsely stated, under penalties of perjury, that the sham entities were the beneficial owners of the assets in the accounts;
  • Failing to maintain records in the United States related to the accounts;
  • Destroying account records sent to the United States for client review;
  • Using Credit Suisse managers and employees as unregistered investment advisors on undeclared accounts;
  • Facilitating withdrawals of funds from the undeclared accounts by either providing hand-delivered cash in the United States or using Credit Suisse’s correspondent bank accounts in the United States;
  • Structuring transfers of funds to evade currency transaction reporting requirements; and
  • Providing offshore credit and debit cards to repatriate funds in the undeclared accounts.

As part of the plea agreement, Credit Suisse further agreed to make a complete disclosure of its cross-border activities, cooperate in treaty requests for account information, provide detailed information as to other banks that transferred funds into secret accounts or that accepted funds when secret accounts were closed and to close accounts of account holders who fail to come into compliance with U.S. reporting obligations.  Credit Suisse has also agreed to implement programs to ensure its compliance with U.S. laws, including its reporting obligations under the Foreign Account Tax Compliance Act and relevant tax treaties, in all its current and future dealings with U.S. customers.

“Today’s sentencing of Credit Suisse AG holds the bank responsible for its decades-long pervasive conduct of aiding U.S. taxpayers in the commission of tax crimes,” said Acting Deputy Assistant Attorney General Wszalek.  “The Justice Department will continue to vigorously pursue our global enforcement efforts against individuals who avoid their tax obligations by hiding their assets in foreign bank accounts, and the financial institutions, bankers, and other professionals who facilitate these crimes.”

“Credit Suisse AG ran an illegal cross-border business which willfully aided U.S. clients in concealing their offshore assets and income from the U.S. government,” said U.S. Attorney Boente.  “Simply put, if you are in the business of hiding money from the U.S. government you will be caught, you will be prosecuted and you will pay the price for your crime.  The successful prosecution of Credit Suisse AG, and today’s sentencing is representative of the tireless commitment and hard work of this office and our partners at the Internal Revenue Service.”

“Today’s sentencing is yet another striking example of what happens to those who help offshore tax evaders,” said IRS Commissioner Koskinen.  “We owe it to the vast majority of honest U.S. taxpayers to tirelessly search for and prosecute those who dodge paying their fair share and the unprincipled professionals who assist them.”

On December 5, two former employees of a Credit Suisse subsidiary will be sentenced for their involvement in assisting U.S. customers to evade their taxes.  On March 12, Andreas Bachmann, a former banker at Credit Suisse Fides pleaded guilty to a superseding indictment in connection with his work as a banker at Credit Suisse Fides.  On April 30, Josef Dörig, a former Credit Suisse Fides employee and owner/operator of a trust company, pleaded guilty to conspiring to defraud the IRS in connection with his role managing offshore entities used by U.S. taxpayers to conceal their accounts at Credit Suisse.  The pleas were accepted by U.S. District Judge Gerald Bruce Lee in the Eastern District of Virginia.  Bachmann and Dörig each face a statutory maximum sentence of five years in prison.

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FinCEN Statement on Providing Banking Services to Money Services Businesses

Posted by William Byrnes on November 19, 2014


FinCEN-logo-shieldMoney services businesses (“MSBs”),1 including money transmitters important to the global flow of remittances, are losing access to banking services, which may in part be a result of concerns about regulatory scrutiny, the perceived risks presented by money services business accounts, and the costs and burdens associated with maintaining such accounts.

MSBs play an important role in a transparent financial system, particularly because they often provide financial services to people less likely to use traditional banking services and because of their prominent role in providing remittance services. FinCEN believes it is important to reiterate the fact that banking organizations can serve the MSB industry while meeting their Bank Secrecy Act obligations.2

Read the full Statement at http://lawprofessors.typepad.com/intfinlaw/2014/11/fincen-statement-on-providing-banking-services-to-money-services-businesses.html

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Crackdown on Fashion Industries Money Laundering for Drug Cartels

Posted by William Byrnes on October 3, 2014


read it on International Financial Law Prof Blog

Extensive law enforcement operations have revealed evidence that money laundering activities and Bank Secrecy Act (BSA) violations are pervasive throughout the Los Angeles Fashion District, which includes more than 2,000 businesses. ,,, more than 1,000 federal, state and local law enforcement officials were in the Fashion District, where they executed dozens of search warrants and arrest warrants linked to businesses suspected to be engaged in money laundering schemes and evasions of required BSA reporting.

Posted in Financial Crimes | Tagged: , , , | 1 Comment »

Penny Stock Frauds, Kick Backs Schemes, and FBI Stings

Posted by William Byrnes on September 23, 2014


International Financial Law Prof Blog

… arise out of a fraudulent scheme in which insiders of publicly-traded penny stock companies paid secret kickbacks to a purported corrupt hedge fund manager, who was in fact an undercover agent with the Federal Bureau of Investigation (“Fund Manager”), in exchange for the Fund Manager’s purchase of restricted stock of the penny stock companies on behalf of his purported hedge fund (“the Fund”), which did not actually exist. …

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Mafia Takes Over FirstPlus Financial, Drains it Into Bankruptcy

Posted by William Byrnes on September 21, 2014


International Financial Law Prof Blog.

According to court documents and evidence introduced at the trial of his coconspirators, Scarfo is a made member of the Lucchese organized crime family.  In April 2007, Scarfo, Salvatore Pelullo and others devised a scheme to take over FirstPlus.  Scarfo and Pelullo used threats of economic harm to intimidate and remove the prior management and board of directors and replaced those officers with individuals beholden to Scarfo and Pelullo.   

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Willingness to Pay to Reduce White Collar and Corporate Crime?

Posted by William Byrnes on September 21, 2014


International Financial Law Prof Blog

Utilizing a contingent valuation survey approached that has been used to estimate the cost of street crimes, the average willingness to pay for a 10% reduction in each of these four offenses is estimated to range between $70 and $75 per household. In the case of consumer fraud and financial fraud – where estimates of prevalence are available, this translates into a willingness to pay of $2,700 per consumer fraud and $21,000 for financial fraud. In contrast, the out-of-pocket costs to victims of consumer fraud have been estimated to average about $100, and about $200 to $250 for various types of financial frauds. These figures also compare favorably to the willingness to pay for a reduced household burglary of $18,000.

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Six Indicted For $500 Million FATCA Avoidance Scheme for 100 US Clients

Posted by William Byrnes on September 10, 2014


International Financial Law Prof BlogFor example, in response to a request received by a U.S. corrupt client from a U.S. transfer agent who had to determine whether the proceeds from manipulative stock trading transaction were taxable under U.S. law, the defendant Bandfield forwarded an IRS Form signed by co-defendant Godfrey as the nominee for the shell company which had been set up at the request of the client.  At one point during the government’s investigation, Bandfield boasted to an undercover law enforcement agent that he had specifically designed this “slick” corporate structure to counter President Barack Obama’s new laws, a reference to FATCA….

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BPI Fined $125,000 for Money Laundering Violations, Shuts Down its MSB Operation

Posted by William Byrnes on September 2, 2014


The Financial Crimes Enforcement Network (FinCEN) today imposed a civil money penalty of $125,000 against BPI, Inc., a New Jersey money services business (MSB), for willful and repeated violations of the Bank Secrecy Act (BSA).  In November 2013, BPI’s parent, Banco BPI, S.A., received approval from the Board of Governors of the Federal Reserve System to establish representative offices in New Jersey and Massachusetts and BPI ceased operations as an MSB in March 2014.  

read the entire article International Financial Law Prof Blog.

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International Financial Law Blog headlines

Posted by William Byrnes on August 21, 2014


 

SEC Charges Golfing Buddy with Insider Trading Ahead of Bank Acquisition

O’Neill tipped Robert H. Bray, a fellow golfer with whom he socialized at a local country club. In the two weeks preceding a public announcement about the planned acquisition, Bray sold his shares in other stocks to accumulate funds he used to purchase Wainwright securities.

Barclays Bank adds to its new global financial crime unit

Joe Smith, Wells Fargo’s deputy money-laundering reporting officer and financial crime reporting officer, will join Barclays as a vice-president in October.

Is the UK elimination of criminal intent for criminal prosecution of tax non-compliance sound ? Is tax non-compliance equal with ‘Cruelty to Animals’ and ‘Illegal Guns’?

The Government has announced its intention to introduce a new strict liability criminal offence. This consultation seeks views on the design of this offence.

S630_HMRC_sign__media_library__960_

The UK Government has announced its intention to introduce a new strict liability criminal offence, similar to the crime of cruelty to animals.

Strict liability offences 

2.5 A strict liability offence is a criminal offence where it is not necessary for the court to ascertain the state of mind of the defendant before convicting.

Box 1: Other strict liability offences 

There are several existing offences which can be construed to imply strict liability, including some carrying custodial sentences. These include, for example: …

Cruelty to animals, including the offences of causing unnecessary suffering while transporting an animal or holding it at a market; ….

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/345370/140819_Tackling_offshore_tax_evasion_-_A_new_criminal_offence.pdf

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/345236/140819_Tackling_offshore_tax_evasion_-_Strengthening_civil_deterrents.pdf

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5 Chinese military indicted for cyber-stealing American nuclear power and other industrial secrets

Posted by William Byrnes on July 30, 2014


FBISealSpeech delivered today link here, the juicy bits excerpted below with emphasis added.

I began my career as a prosecutor handling a wide range of crimes, but I have spent nearly a decade focusing on cyber issues – including as the National Coordinator of the Justice Department’s Computer Hacking and Intellectual Property, or “CHIP,” program. …

But we also emphasized that terrorists are not the only ones seeking to harm us online—there are other dangerous actors out there, including nation-states.   We pointed to the growing use of botnets as a way to attack networks, infect computers, and inject spyware.

I could scarcely have guessed back in 2007 that by today the NCFTA would have aided in successful prosecutions of more than 300 cyber criminals worldwide.   … “John Dillinger couldn’t do a thousand robberies in the same day in all 50 states in his pajamas halfway around the world.   That’s the challenge we now face with the Internet.” …

 

[5 Chinese military indicted for cyber-stealing American nuclear power and other industrial secrets]

Earlier this summer, we announced unprecedented charges against five members of the Chinese military for computer hacking, economic espionage, and other offenses directed at six American victims in the U.S. nuclear power, metals and solar products industries.

What these charges allege is stealing from America’s heartland, literally and figuratively.

The charges allege that cyber thieves grabbed the hard work of companies right here in Pennsylvania.   And they allege that the thieves targeted key American economic sectors, like metals and energy.

This is the true face of cyber economic espionage and of those it targets.   This type of theft hurts American competitiveness by stealing what we work so hard for.

These charges against uniformed members of the Chinese military were the first of their kind.  Some said they could not be brought.   But this indictment alleges, with particularity, specific actions on specific days by specific actors to use their computers to steal valuable information from across our economy.

It alleges that while the men and women of our businesses spent their work-days innovating, creating, and developing strategies to compete in the global marketplace, these members of Unit 61398 spent their work days in Shanghai stealing the fruits of our labor.

It alleges that they stole information particularly beneficial to Chinese companies, and took communications that would provide competitors with key insight into the strategy and vulnerabilities of the victims.

We should not and will not stand idly by, tacitly giving permission to anyone to steal from us.  We will hold accountable those who steal—no matter who they are, where they are, or whether they steal in person or through the Internet.

Because cyber crime affects us all, including those here in Pennsylvania who have suffered at the hands of cyber thieves.

While cases like the one brought here in Pittsburgh are extremely challenging, we proved that they are possible.   The criminal justice system is a critical component of our nation’s cyber security strategy.

At the Justice Department, we follow the facts and evidence where they lead.   Sometimes, the facts and evidence lead us to a lone hacker in the United States, or a sophisticated organized crime syndicate in Russia.   And sometimes, they lead us to a uniformed member of the Chinese military.

Other times, as we recently saw, they may lead us to a foreign businessman alleged to have conspired to hack in and steal information from Boeing and other defense contractors.

Information that included more than six hundred thousand data files of sensitive information related to U.S. military aircraft and other defense matters.

And yet other times, they may lead to other types of criminals, like those investigated and prosecuted by DOJ’s Criminal Division for spyware, botnets, and similar conduct. …

Terrorists are also using cyberspace to further their goals.   They are using it to communicate and plan.   They are using it for propaganda and recruitment.   And they are intent on getting to the point where they can conduct cyber attacks themselves.

That last category is a relatively new one.   But we know that terrorists are looking to launch cyber attacks.   They have that intent now.

Over the past few years, we have seen al-Qaeda issue calls for cyberattacks against networks such as the electric grid, comparing vulnerabilities in the United States’ critical cyber networks to the vulnerabilities in the country’s aviation system before 9/11.

If successful, terrorists could use cyber attacks to bring about economic or physical damage, or even, in extreme cases, serious injury or death. …

[Other Economic Espionage]
As just one example, in March, we successfully obtained a significant conviction against Walter Liew for economic espionage.

What Liew stole was something Americans see and use daily.   Something that does not have a national security implication.   Something that simply brings a profit.

Liew stole the formula for the color white from Dupont and passed it to a large Chinese state-owned company.   Just this month, he was brought to justice — sentenced to 180 months’ incarceration and ordered to pay restitution of about half a million dollars. …

[National Security Cyber Specialists’ Network]
Most significantly, in 2012, we created and trained the National Security Cyber Specialists’ Network to focus on combating cyber threats to the national security.

This Network—known as NSCS—includes prosecutors from every U.S. Attorney’s Office around the country, along with experts from the Department’s Computer Crime and Intellectual Property Section (or “CCIPS”) and attorneys from across all parts of NSD. …

That’s how we were able to indict five members of the Third Department of the People’s Liberation Army.   And now these men stand accused of cyber intrusions targeting a range of U.S. industries.

[GameOver Zeus botnet]
A great example is yet another Pittsburgh story.   Back in June, our colleagues in the Criminal Division, the Western District of Pennsylvania, and the Bureau undertook an operation that disrupted the GameOver Zeus botnet.

This criminal threat was significant – losses attributable to the botnet were estimated to be more than $100 million.   But disruption involved more than just criminal charges – it also involved civil court orders, significant information sharing, and seizures of servers in many foreign countries….

[InfraGard]

Through the FBI’s InfraGard, the FBI works closely with companies that have been the victims of hackers.

That program, which has grown to more than 25,000 active members, continues to bring together individuals in law enforcement, government, the private sector, and academia to talk about how to protect our critical infrastructure.

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DC Appeals rules Stanford’s defrauded investors and not protected by the Securities Investor Protection Corporation (SIPC)

Posted by William Byrnes on July 19, 2014


A three judge U.S. Court of Appeals for the District of Columbia panel unanimously upholding the District Court decision that Stanford International Bank CD Investors do not meet the definition of “customer” under the Securities Investor Protection Act (SIPA).  Thus, the Securities Investor Protection Corporation (SIPC) will not cover the losses of Stanford investors, up to the maximum statutory amount of $500,000 for securities.

What is the SIPC?

SIPC was created under the Securities Investor Protection Act as a non-profit membership corporation. SIPC oversees the liquidation of member broker-dealers that close when the broker-dealer is bankrupt or in financial trouble, and customer assets are missing.

In a liquidation under the Securities Investor Protection Act, SIPC and the court-appointed Trustee work to return customers’ securities and cash as quickly as possible. Within limits, SIPC expedites the return of missing customer property by protecting each customer up to $500,000 for securities and cash (including a $250,000 limit for cash only).

Although created under a federal law, SIPC is not an agency or establishment of the United States Government, and it has no authority to investigate or regulate its member broker-dealers.

SECWhat is the SEC suing the SIPC?

The Securities Investor Protection Act of 1970, 15 U.S.C. § 78ggg SEC functions states that:

(b) Enforcement of actions

In the event of the refusal of SIPC to commit its funds or otherwise to act for the protection of customers of any member of SIPC, the Commission may apply to the district court of the United States in which the principal office of SIPC is located for an order requiring SIPC to discharge its obligations under this chapter and for such other relief as the court may deem appropriate to carry out the purposes of this chapter.

 

What are the facts?

7,000 investors, on the advice of an SEC registered broker dealer Stanford Group Company (Houston, Texas) (“SGC”) that was a member of the SIPC, invested in certificates of deposit (CDs) issued by an Antigua based Stanford International Bank LLC (“SIBL”), not a member of the SIPC.

The CDs are debt assets that promised a fixed rate of return.  The SIBL CD disclosure statements stated that the products are not covered by the investor protection or securities insurance laws of any jurisdiction such as the U.S. Securities Investor Protection Insurance [sic] Corporation.

What is the central issue? 

The central issue in this appeal is whether investors who purchased SIBL CDs at the suggestion of SGC employees qualify as SGC “customers” under the SIPA, that SIPC may be ordered to cover their losses up to the statutory maximum.

What did the SIPC argue to exclude its protection?

In SIPC’s view, the CD investors were not SGC “customers” within the meaning of the Act, a precondition to liquidation of SGC.  SIPC explained that the Act “protects the ‘custody’ function that brokerage firms perform for customers.”  Here, SIPC concluded, the circumstances fell outside the Act’s custody function because SGC itself never held investors’ cash or securities in connection with their purchase of the CDs. Rather, “cash for the purpose of purchasing CDs . . . was sent to SIBL, which is precisely what the customer intended.”  As for the “physical CDs,” they presumably “were issued to, and delivered to” the investors, and SGC did not “maintain[] possession or control of the CDs.” (citation removed)

Why did the SEC seek to extend SIPC protection?

SEC reached the opposite conclusion.  In June 2011, the Commission issued a formal analysis stating that investors who had purchased SIBL CDs at the urging of SGC employees qualified as SGC “customers” under the Act. Citing evidence that Stanford had “structured the various entities in his financial empire . . . for the principal, if not sole,
purpose of carrying out a single fraudulent Ponzi scheme,” the Commission determined that the “separate existence” of SIBL and SGC “should be disregarded.” (citation removed) ….

The Commission grounds its argument for disregarding the corporate separateness of SIBL and SGC in the doctrine of “substantive consolidation,” an equitable doctrine typically applied in bankruptcy proceedings. “In general, substantive consolidation results in the combination of the assets of [two] debtors into a single pool from which the claims of creditors of both debtors are satisfied ratably.” 2 Collier on Bankruptcy ¶ 105.09[3], at 105-110–11…. Courts have employed a “variety” of tests when assessing whether to grant substantive consolidation. (citation removed) ….

The doctrine of substantive consolidation has been applied in SIPA liquidations. In New Times I, for instance, the bankruptcy court substantively consolidated a SIPC-member
broker undergoing liquidation with a related, non-broker entity.  The assets of the related entity were brought into the SIPC member’s liquidation estate, enlarging the available pool for customer recovery. Investors with cash on deposit with the non-broker entity were treated as “customers” in the liquidation, even though the member broker itself never held those investors’ funds.  (citation removed) ….

Who is a customer under the SIPA?

§78lll Definitions (B) Included Persons

The term ‘customer’ includes-

(i) any person who has deposited cash with the debtor for the purpose of purchasing securities;

(ii) any person who has a claim against the debtor for cash, securities, futures contracts, or options on futures contracts received, acquired, or held in a portfolio margining account carried as a securities account pursuant to a portfolio margining program approved by the Commission; and

(iii) any person who has a claim against the debtor arising out of sales or conversions of such securities.

(C) Excluded Persons

The term ‘customer’ does not include any person, to the extent that-

(i) the claim of such person arises out of transactions with a foreign subsidiary of a member of SIPC; or

(ii) such person has a claim for cash or securities which by contract, agreement, or understanding, or by operation of law, is part of the capital of the debtor, or is subordinated to the claims of any or all creditors of the debtor, notwithstanding that some ground exists for declaring such contract, agreement, or understanding void or voidable in a suit between the claimant and the debtor.

What analysis did the District Court lend to the term customer?

In SEC v. Sec. Investor Prot. Corp., 872 F. Supp. 2d 1 (D.D.C. 2012) Judge Robert Wilkins analyzed this definition of customer by looking to leading treatises.

1024px-D.C._Court_of_Appeals_-_view_from_John_Marshall_ParkAs summarized by one leading treatise, the SIPA statute “attempts to protect customer interests in securities and cash left with broker-dealers….” Loss & Seligman, Securities Regulation ¶ 8.B.5.a, p. 3290 (3rd ed.2003) (citing legislative history) (emphasis added). Another prominent treatise states that “SIPA is designed to protect securities investors against losses stemming from the failure of an insolvent or otherwise failed broker-dealer to properly perform its role as the custodian of customer cash and securities.” 1–12 Collier on Bankruptcy, P. 12.01 (16th ed.) (emphasis added). The usage of the phrase “left with” in the first description and of the term “custodian” in the second description is notable—both usages are in accordance with the plain meaning of statutory term “deposit,” which is “to place esp. for safekeeping or as a pledge” or “[to] giv[e] money or other property to another who promises to preserve it or to use it and return it in kind.” (citation omitted)

Accordingly, it is well settled that “the critical aspect of the ‘customer’ definition is the entrustment of cash or securities to the broker-dealer for the purposes of trading securities.” The “customer” definition has therefore been described as “embodying a common-sense concept: An investor is entitled to compensation from the SIPC only if he has entrusted cash or securities to a broker-dealer who becomes insolvent; if an investor has not so entrusted cash or securities, he is not a customer and therefore not entitled to recover from the SIPC trust fund.” To prove entrustment, the claimant must prove that the SIPC member actually possessed the claimant’s funds or securities. (citation omitted)

What did the Appeals Court’s rule?

When a brokerage firm faces insolvency, the cash and securities it holds for its customers can become ensnared in bankruptcy liquidation proceedings or otherwise be put at risk. Congress established the Securities Investor Protection Corporation (SIPC) to protect investors’ assets held on deposit by financially distressed brokerage firms. SIPC can initiate its own liquidation proceedings with the aim of securing the return of customers’ property held by the brokerage. SIPC, however, possesses authority to undertake those protective measures only with respect to member brokerage firms. Its authority does not extend to non-member institutions.

US-CourtOfAppeals-DCCircuit-SealIn this case, the Securities and Exchange Commission seeks a court order compelling SIPC to liquidate a member broker dealer, Stanford Group Company (SGC). SGC played an integral role in a multibillion-dollar financial fraud carried out through a web of companies. SGC’s financial advisors counseled investors to purchase certificates of deposit from an Antiguan bank that was part of the same corporate family. The Antiguan bank’s CDs eventually became worthless. The massive Stanford fraud spawned a variety of legal actions in a number of arenas, the bulk of which are not at issue here. This case involves the authority of a specific entity—SIPC—to take measures within its own statutorily bounded sphere.  As to that issue, because the Antiguan bank, unlike SGC, was not a SIPC member, SIPC had no ability to initiate measures directly against the bank to protect the property of investors who purchased the bank’s CDs.

The question in this case is whether SIPC can instead be ordered to proceed against SGC—rather than the Antiguan bank—to protect the CD investors’ property. It is common ground that SIPC can be compelled to do so only if those investors qualify as “customers” of SGC within the meaning of the governing statute. SIPC concluded that they do not, and the district court agreed.  The court reasoned that the investors obtained the Antiguan bank’s CDs by depositing funds with the bank itself, not with SGC, and they thus cannot be considered customers of the latter. We agree that the CD investors do not qualify as customers of SGC under the operative statutory definition. We therefore affirm the denial of the application to order SIPC to liquidate SGC.

What was the Appeals Court analysis for the term ‘Customer”?

To come within the fold of SIPA’s protections, an investor thus ordinarily must demonstrate both that the broker “actually . . . received, acquired or held the claimant’s property, and that the transaction giving rise to the claim . . . contain[ed] the indicia of a fiduciary relationship” between the investor and the broker. 1 Collier on Bankruptcy ¶ 12.12[2], at 12-50.  An investor’s “customer” status is evaluated on an asset-by-asset basis and may change over time.

Here, insofar as the analysis focuses on the entity that in fact held custody over the property of the SIBL CD investors, the investors fail to qualify as “customers” of SGC under the statutory definition. That is because SGC never “received, acquired, or held” the investors’ cash or securities. With regard to the investors’ cash, it is undisputed that investors at no time deposited funds with SGC to purchase the SIBL CDs. The funds instead went to SIBL. (citation omitted)

What about the SEC’s Argument for group consolidation?

Even if we were to consolidate, however, SIBL CD investors would not be “customers” of a SIPC-member entity under the statutory definition.  The Act specifically excludes from “customer” status “any person, to the extent that . . . such person has a claim for cash or securities which by contract, agreement, or understanding, or by operation of law, is part of the capital of the debtor.” We, like other courts, understand that provision to establish that “a claimant cannot qualify for customer status under SIPA to the extent that he or she is a lender rather than an investor.” As the Eleventh Circuit has explained, “[c]ash that is simply lent to the brokerage cannot form the basis of a SIPA customer claim because the statute’s definition of ‘customer’ excludes individuals whose claims are for ‘cash . . . which . . . is part of the capital of the debtor.’” (citation omitted)

Here, investors who purchased SIBL CDs lent funds to SIBL that became part of SIBL’s capital: Those investors gave cash to SIBL in exchange for a promise to be repaid with a fixed rate of return.  The investors invested “in,” not “through,” SIBL.  … Under a consolidated view, investors who purchased SIBL CDs lent money to the consolidated SIBL/SGC entity, forming a “creditor-debtor arrangement.” The CD proceeds thus became part of the consolidated entity’s “capital,” triggering the statutory exclusion from “customer” status for lenders. (citation omitted)

Relevant Sources and Documents

SECURITIES AND EXCHANGE COMMISSION (SEC) v. SECURITIES INVESTOR PROTECTION CORPORATION (SIPC), No. 12-5286 (July 18, 2014 D.C. Court of Appeals)  The  decision is available here SEC v SPIC (Stanford Fraud) DC Appeals 7-18-2014

SIPC has a website regarding the Stanford case here.  SIPC’s statement about the Appeals Court decision is here.

 

 

 

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FedEx corporation criminally indicted for drug trafficking after 9 year DEA investigation

Posted by William Byrnes on July 18, 2014


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After a nine-year criminal investigation by the DEA and FDA, on July 17, 2014 the US Attorney for the Northern District of California filed a criminal indictment by a federal grand jury against FedEx Corporation, FedEx Express, Inc., and FedEx Corporate Services, Inc., for conspiracies to traffic in controlled substances and misbranded prescription drugs for its role in distributing controlled substances and prescription drugs for illegal Internet pharmacies.

If found guilty, the Fed Ex defendants face a maximum sentence of 5 years of probation, and a fine of up to $1.6 billion representing twice the gross gain derived from the offense, alleged in the indictment to be at least $820 million.  FedEx would also be liable for restitution to victims of the crime, as well as forfeiture of the gross proceeds of the offense and any facilitating property.

 

The alleged actions taken by Fed Ex to traffic in controlled substances  include:

  • FedEx established an Online Pharmacy Credit Policy to protect against large balances owed to FedEx.
  • FedEx established a Sales policy to protect its sales professionals commission-based compensation caused by online pharmacies moving shipping locations to avoid detection by the DEA.
  • FedEx adopted a procedure whereby Internet pharmacy packages from problematic shippers were held for pick up at specific stations.
  • FedEx’s employees knew that online pharmacies and fulfillment pharmacies affiliated with both the Chhabra-Smoley organization and Superior Drugs were closed down by state and federal law enforcement agencies and that their owners, operators, pharmacists, and doctors were indicted, arrested and convicted of illegally distributing drugs.

The FedEx indictment is available by link here.  The press release is excerpted below.

… In 2004, FedEx established an Online Pharmacy Credit Policy requiring that all online pharmacy shippers be approved by the Credit Department prior to opening a new account. The stated reason for this policy was that many Internet pharmacies operated outside federal and state regulations over the sale of controlled drugs and many sites had been shut down by the government without warning, leaving a large balance owed to FedEx.  According to the indictment, FedEx also established a Sales policy in which all online pharmacies were assigned to a “catchall” classification to protect the commission-based compensation of its sales professionals from the volatility caused by online pharmacies moving shipping locations often to avoid detection by the DEA.

According to the indictment, as early as 2004, FedEx knew that it was delivering drugs to dealers and addicts. FedEx’s couriers in Kentucky, Tennessee, and Virginia expressed safety concerns that were circulated to FedEx Senior management, including that FedEx trucks were stopped on the road by online pharmacy customers demanding packages of pills, that the delivery address was a parking lot, school, or vacant home where several car loads of people were waiting for the FedEx driver to arrive with their drugs, that customers were jumping on the FedEx trucks and demanding online pharmacy packages, and that FedEx drivers were threatened if they insisted on delivering packages to the addresses instead of giving the packages to customers who demanded them. In response to these concerns, FedEx adopted a procedure whereby Internet pharmacy packages from problematic shippers were held for pick up at specific stations, rather than delivered to the recipient’s address.

FedEx is charged in the indictment with conspiring with two separate but related Internet pharmacy organizations: the Chhabra-Smoley Organization, from 2000 through 2008, and Superior Drugs, from 2002 through 2010. In each case, FedEx is alleged to have knowingly and intentionally conspired to distribute controlled substances and prescription drugs, including Phendimetrazine (Schedule III); Ambien, Phentermine, Diazepam, and Alprazolam (Schedule IV), to customers who had no legitimate medical need for them based on invalid prescriptions issued by doctors who were acting outside the usual course of professional practice.

According to the indictment, FedEx began delivering controlled substances and prescription drugs for Internet pharmacies run by Vincent Chhabra, including RxNetwork and USA Prescription, in 2000. When Chhabra was arrested in December of 2003 for illegally distributing controlled substances based on a doctor’s review of an on-line questionnaire, Robert Smoley took over the organization and continued the illegal distribution of controlled substances and prescription drugs through FedEx.

According to the indictment, FedEx began delivering controlled substances and prescription drugs for Superior Drugs in 2002. FedEx’s employees knew that Superior Drugs filled orders for online pharmacies that sold controlled substances and prescription drugs to consumers without the need for a face-to-face meeting with, or physical examination or laboratory tests by, a physician.

According to the indictment, FedEx’s employees knew that online pharmacies and fulfillment pharmacies affiliated with both the Chhabra-Smoley organization and Superior Drugs were closed down by state and federal law enforcement agencies and that their owners, operators, pharmacists, and doctors were indicted, arrested and convicted of illegally distributing drugs. Nevertheless, FedEx continued to deliver controlled substances and prescription drugs for the Chhabra-Smoley organization and Superior Drugs.

“The advent of Internet pharmacies allowed the cheap and easy distribution of massive amounts of illegal prescription drugs to every corner of the United States, while allowing perpetrators to conceal their identities through the anonymity the Internet provides,” said U.S. Attorney Melinda Haag. “This indictment highlights the importance of holding corporations that knowingly enable illegal activity responsible for their role in aiding criminal behavior.”

“Pharmaceutical drug abuse is a serious problem affecting millions of consumers in the United States,” said DEA Special Agent in Charge Jay Fitzpatrick. “While DEA is committed to ensuring patients receive legitimate prescriptions, today’s action should send a strong message that corporations that participate in illegal activity risk investigation and prosecution.”

“Illegal Internet pharmacies rely on illicit Internet shipping and distribution practices. Without intermediaries, the online pharmacies that sell counterfeit and other illegal drugs are limited in the harm they can do to consumers,” said Philip J. Walsky, Acting Director, FDA’s Office of Criminal Investigations. “The FDA is hopeful that today’s action will continue to reinforce the message that the public’s health takes priority over a company’s profits.”

FedEx responded to the charges as follows:

…We have repeatedly requested that the government provide us a list of online pharmacies engaging in illegal activity. Whenever DEA provides us a list of pharmacies engaging in illegal activity, we will turn off shipping for those companies immediately. So far the government has declined to provide such a list.

FedEx transports more than 10 million packages a day. The privacy of our customers is essential to the core of our business. This privacy is now at risk, based on the charges by the Department of Justice related to the transportation of prescription medications.

We want to be clear what’s at stake here: the government is suggesting that FedEx assume criminal responsibility for the legality of the contents of the millions of packages that we pick up and deliver every day. We are a transportation company – we are not law enforcement. We have no interest in violating the privacy of our customers. We continue to stand ready and willing to support and assist law enforcement. We cannot, however, do the job of law enforcement ourselves.

Both UPS and Google settled their investigations relating to online pharmacy business, $40 million (2013) and $500 million (2011) respectively.   UPS established an Online Pharmacy Compliance Officer pursuant to its settlement with the DEA and DOJ.  The Google investigation had its origins in a separate, multimillion dollar financial fraud investigation unrelated to Google, the main target of which fled to Mexico.  While a fugitive, he began to advertise the unlawful sale of drugs through Google’s AdWords program. After being apprehended in Mexico and returned to the United States by the U.S. Secret Service, he began cooperating with law enforcement and provided information about his use of the AdWords program. During the ensuing investigation of Google, the government established a number of undercover websites for the purpose of advertising the unlawful sale of controlled and non-controlled substances through Google’s AdWords program.

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LexisNexis’ Money Laundering, Asset Forfeiture and Recovery and Compliance: A Global Guide – This eBook with commentary and analysis by hundreds of AML experts from over 100 countries,  is designed to provide the compliance officer accurate analyses of the AML/CTF Financial and Legal Intelligence, law and practice in the nations of the world with the most current references and resources. The eBook is organized around five main themes: 1. Money Laundering Risk and Compliance; 2. The Law of Anti-Money Laundering and Compliance; 3. Criminal and Civil Forfeiture; 4. Compliance and 5. International Cooperation.  As these unlawful activities can occur in any given country, it is important to identify the international participants who are cooperating to develop methods to obstruct these criminal activities.

 

 

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Former Credit Suisse Banker Pleads Guilty

Posted by William Byrnes on May 2, 2014


Former Credit Suisse Banker Pleads Guilty

Josef Dörig, 72, plead guilty on April 30 to conspiring to defraud the IRS in connection with his work as the owner of Dorig Partner AG, a trust company in Switzerland.

In a statement of facts filed with the plea agreement, Dörig admitted that between 1997 and 2011, while owning and operating a trust company, he engaged in a wide-ranging conspiracy to aid and assist U.S. customers in evading their income taxes by concealing assets and income in secret bank accounts held in the names of sham entities at Credit Suisse.  In 1997, the Credit Suisse subsidiary spun off these sham entities into a trust company, Dorig Partner AG, owned and operated by Dorig, the Justice Department said.

Sentencing is set for Aug. 8th and Dörig faces a statutory maximum sentence of five years in prison.

Credit Suisse Agrees to Pay $196 Million and Admits Wrongdoing in Providing Unregistered Services to U.S. Clients

In the February 21, 2014 Press Release by the US Securities and Exchange Commission (SEC) “Credit Suisse Agrees to Pay $196 Million and Admits Wrongdoing in Providing Unregistered Services to U.S. Clients“, Credit Suisse agreed to pay $196 million and admit wrongdoing to settle the SEC’s charges.  According to the SEC’s order instituting settled administrative proceedings, Credit Suisse provided cross-border securities services to thousands of U.S. clients and collected fees totaling approximately $82 million without adhering to the registration provisions of the federal securities laws.  Credit Suisse relationship managers traveled to the U.S. to solicit clients, provide investment advice, and induce securities transactions.  These relationship managers were not registered to provide brokerage or advisory services, nor were they affiliated with a registered entity.  The relationship managers also communicated with clients in the U.S. through overseas e-mails and phone calls.

Credit Suisse Hearing 

The seven hour hearing of the US Senate’s Permanent Subcommittee on Investigations on tax evasion associated with unreported bank accounts of Americans held about Credit Suisse in February 2014 provides a good background to understand the Justice Department indictment and guilty plea.  Below I paraphrase and excerpt the most intriguing statements of the hearing.

Based upon its two-year investigation, the Subcommittee reported that Credit Suisse opened Swiss accounts for over 22,000 U.S. customers with assets that, at their peak, totaled roughly $10 billion to $12 billion.  The Subcommittee stated that the vast majority of these accounts were hidden from U.S. authorities and that U.S. law enforcement officials have been slow to collect the unpaid taxes or hold accountable the tax evaders and bank involved.

Sen. Carl Levin, D-Mich., the subcommittee chairman said “The Credit Suisse case study shows how a Swiss bank aided and abetted U.S. tax evasion, not only from behind a veil of secrecy in Switzerland, but also on U.S. soil by sending Swiss bankers here to open hidden accounts. In response, the Department of Justice has failed to use the U.S. legal tools that won the UBS case and has instead used treaty requests for U.S. client names, relying on Swiss courts with predictably poor results. It’s time to ramp up the collection of taxes due from tax evaders on the billions of dollars hidden offshore.”

“For too long, international financial institutions like Credit Suisse have profited from their offshore tax haven schemes while depriving the U.S. economy of billions of dollars in tax revenues by facilitating U.S. tax evasion,” said Senator John McCain, ranking member of the subcommittee. “As federal regulators begin to crack down on these banks’ illicit practices, it is imperative that they use every legal tool at their disposal to hold these banks fully accountable for willfully deceiving the U.S. government and seek penalties that will deter similar misconduct in the future.”

Amount Recovered Thus Far from Non-Compliant Taxpayers 

According to the GAO Reports and the Subcommittee report, the 2008, 2011, and the ongoing 2012 offshore voluntary disclosure initiative (OVDI) have led to 43,000 taxpayers paying back taxes, interest and penalties totaling $6 billion to date, with more expected.  However, the vast majority of this recovered money is not tax revenue but instead results from the FBAR penalties assessed for not reporting a foreign account.  The Taxpayer Advocate found that for noncompliant taxpayers with small accounts, the FBAR and tax penalties reached nearly 600% of the actual tax due!  The median offshore penalty was about381% of the additional tax assessed for taxpayers with median-sized account balances.

Have These Efforts Substantially Increased Taxpayer Compliance?

The Taxpayer Advocate, replying on State Department statistics,  cited that 7.6 million U.S. citizens reside abroad and many more U.S. residents have FBAR filing requirements, yet the IRS received only 807,040 FBAR submissions as recently as 2012.  The Taxpayer Advocate noted that in Mexico alone, more than one million U.S. citizens reside, and many Mexican citizens reside in the U.S. (and thus are required to file a FBAR for any Mexican accounts of $10,000 or greater).

Thus, at a current rate well below 10% compliance (because nonresident aliens in the US must file a FBAR on their non-US accounts of $10,000 and over), it appears that all the additional enforcement is producing similar results of the War on Drugs.  This is not to say that obtaining a highly level of compliance with the tax law , like compliance with the drug laws and DUI laws, is not a public good in itself – it indeed is a public good that the public has chosen, via Congress (and its investigatory hearings), for resource allocation. But like the War on Drugs, there are many potential strategies to bring about compliance, about which pundits such as law enforcement officials, social libertarians, the medical profession, and all their paid lobbyists, debate.

Credit Suisse Statement to Subcommittee:

Credit Suisse is a global financial services company with operations in more than 50 countries and over 45,000 employees including approximately 9,000 U.S. employees in 19 U.S. locations. In the United States, Credit Suisse is a Financial Holding Company regulated by the Federal Reserve. The Bank has a New York branch, which is supervised by the New York Department of Financial Services, and we have three regulated U.S. broker/dealer subsidiaries. Our primary U.S. broker/dealer has been designated a Systemically Important Financial Institution under the Dodd-Frank law. We have a substantial business presence here in the United States.

Credit Suisse Exit of U.S. Relationships

Following our decision to prohibit former U.S. clients of UBS from transferring their assets to Credit Suisse, in August 2008, Credit Suisse promptly turned to addressing issues highlighted by the UBS situation. In October 2008, Credit Suisse decided to allow relationships with non-U.S. entities that had U.S. beneficial owners only if they demonstrated U.S. tax compliance. We hired a leading Swiss law firm to review the tax status of U.S. clients that wanted to remain. By the end of the first year of review, all but 135 relationships with assets over $10,000 had been reviewed and resolved.

In April 2009, we extended our review to U.S. resident clients. Credit Suisse transferred virtually all U.S. resident accounts to one of the Bank’s U.S.-registered affiliates, or terminated the relationships. Credit Suisse simply shut down those client relationships that were unwilling to move or that did not meet the $1 million requirement for transfer to the Bank’s U.S.-regulated affiliates. By the end of the first full year of review, 2010, we had reviewed and resolved more than 85% of U.S.-resident relationships with assets over $10,000.

To ensure that the review was comprehensive, we also manually searched for accounts that, although not identified in our systems as U.S.-linked, could possibly have some U.S. connection – for example, a U.S. phone number or address in the paper client file, or a notation of a U.S. birthplace on a foreign passport. Credit Suisse also reviewed the private banking activities of its subsidiaries, including Clariden Leu, which was a nearly wholly owned Credit Suisse subsidiary between 2007 and 2012. Clariden Leu’s review and exit projects paralleled the projects at Credit Suisse.

Credit Suisse also engaged one of the Big Four accounting firms to conduct its own review to assess whether the Bank had effectively identified the account relationships with U.S. links. This firm carefully analyzed the Bank’s efforts – with an intense line-by-line analysis of account information – and concluded to an extremely high level of confidence that Credit Suisse had identified the complete population of U.S. account relationships. The results of this substantial effort have been presented to the Subcommittee staff.

Subcommittee “Undeclared Accounts” Methodologies Unreliable

Credit Suisse repeatedly discussed with the Subcommittee staff the fact that it is impossible for us to know the tax status of assets previously held by U.S. clients if those clients did not disclose that information to the Bank. Unfortunately, the Subcommittee has chosen to speculate based on a number of “methodologies,” each of which is problematic and generates results that are, at best, unreliable. The Subcommittee’s need to reference three conflicting “methodologies” is an implicit recognition that accurate estimates of unreported U.S. client assets previously held at Credit Suisse cannot be made based on the actual information available to the Bank and to the Subcommittee.

8,300 Accounts under $10,000 FBAR Reporting Requirement

In any event, the Subcommittee assumes that every U.S. client account held abroad was undeclared. As discussed below, that is a demonstrably inappropriate assumption. Moreover, U.S. Treasury Department regulations required U.S. citizens to report foreign accounts only if the balance exceeded $10,000 at some point during the year. While the Subcommittee staff has mentioned 22,000 accounts, more than 8,300 had balances below $10,000 as of December 31, 2008.

6,400 Accounts for US Expats Residing in Switzerland

Troublingly, these estimates also lump in categories of accounts where there is every reason to believe that the client had a valid reason for holding a Swiss account. For example, the Subcommittee’s estimates of “undeclared” accounts include approximately 6,400 accounts held by all U.S. expats who would ordinarily have a need for some form of local banking services outside of the U.S. Again, it should not be ignored that most expats resided in Switzerland, and therefore had a particularly valid reason for maintaining a bank near their homes.

Finally, each of the three “methodologies” that the Subcommittee staff has raised is problematic for different reasons:

First Methodology No Factual Basis

The first method wrongly suggests that the number of accounts closed during the Bank’s

“Exit Projects” may be a proxy for “undeclared” accounts. The Bank’s “Exit Projects” revealed that U.S. clients left the Bank for various reasons. For example, Credit Suisse decided to simply shut down around 11,000 U.S. resident accounts when the Bank decided to stop having Swiss-based private bankers service U.S. residents and because those clients’ balances did not meet the $1 million requirement for transfer to the U.S. regulated affiliates. Those clients never had the opportunity to demonstrate tax compliance because their accounts were simply terminated. There is no basis factually to assume that all of these clients were not tax compliant.

Second Methodology Unsupported

The second method, the “UBS method,” is simply unsupported. This method proposes to estimate accounts by considering all accounts without Forms W-9 to be “undeclared” U.S. accounts. The absence of a Form W-9 alone in no way supports an inference that a client failed to report the account to the IRS, or that the Bank was aware that the client failed to do so. The Qualified Intermediary Agreement with the IRS required the preparation of a Form W-9 only if the client maintained U.S. securities. If the client did not maintain U.S. securities, a Form W-9 was not required. These are the IRS’s rules. Because this method does not consider whether the client maintained U.S. securities, it is inaccurate to assume that the account was maintained to evade U.S. taxes.

Third Methodology Inconclusive

Nor is the third method conclusive. The so-called “DOJ Estimate” recounts a figure of $4 billion stated in an indictment of certain Bank relationship managers. Because the grand jury’s proceedings are secret, neither we nor the Subcommittee have any basis to assess the grand jury’s methodologies.

Credit Suisse Assets Under Management

As to Assets under Management (AuM), it should be noted that our exit projects established that an approximate amount of $5 billion of AuM was reviewed and verified for tax compliance over the years. This number includes AuM transferred to our U.S.-registered entities or closed after tax compliance was established. In addition, approximately $2.25 billion AuM lost its U.S. nexus over the years. Finally, of the accounts that were closed over the years we simply have no basis to assume that all of them were undeclared.

It was discussed between the Senators and the representatives of Credit Suisse that the actual amount of AUM compared to Credit Suisse’s AuM was miniscule, and that such AuM contributed less than 1% to Credit Suisse’s profits.  However, Senator John McCain, the minority ranking member, told the Credit Suisse representatives that, while small in the context of the bank, amounts of billions and the profits made therefrom, are large amounts to a American taxpayer if made aware of such conduct.  While listening to the Senator’s assessment (and agreeing), I wondered why in contrast hundreds of billions of annual deficits up to nearly a trillion deficit, and 15, 17, perhaps 20 trillion of national debt don’t seem to phase the same taxpayer referred to?

Internal Investigation

Nor did we turn a blind eye to the past. On the contrary, we invested enormous efforts to achieve as much clarity as possible about whether, and to what extent, Credit Suisse employees had violated U.S. laws or helped clients do so. Credit Suisse asked external counsel to investigate any instances of past improper conduct fully. That investigation was broad and deep.

The U.S. law firm King & Spalding and the Swiss law firm Schellenberg Wittmer led the investigation, with help from a major accounting firm. The investigation reviewed all aspects of the Bank’s Swiss-based private banking business with U.S. customers. It involved more than 100 interviews of Credit Suisse and Clariden Leu personnel, from line-level private bankers to senior leaders of the Bank. The investigation reviewed the conduct of bankers across the Swiss private bank who had a number of U.S. clients or traveled to the United States.

The investigation identified evidence of violations of Bank policy centered on a small group of Swiss-based private bankers. That conduct centered on a group of private bankers within a desk of 15 to 20 private bankers at any given time who were focused on larger accounts of U.S. residents. Most of the improper activity was focused on some private bankers who traveled to the United States once or twice a year; otherwise, the investigation found only scattered evidence of improper conduct.

The investigation did not find any evidence that senior executives of Credit Suisse knew these bankers were apparently helping U.S. customers hide income and assets. To the contrary, the evidence showed that some Swiss-based private bankers went to great lengths to disguise their bad conduct from Credit Suisse executive management.

Cooperation with U.S. Authorities

Credit Suisse has consistently cooperated with the investigations led by the Department of Justice, the SEC, and this Subcommittee, going to the greatest extent permissible by Swiss law to provide information to investigating U.S. authorities.

Since early 2011, Credit Suisse has produced hundreds of thousands of pages of documents, including translations of foreign-language documents. Our representatives have met with the Department of Justice to help them understand the information we provided and to describe the findings of our internal investigation and the Bank’s various compliance efforts.

Credit Suisse has also provided briefings to officials from the U.S. government, including the SEC and this Subcommittee. That includes more than 100 hours briefing the Subcommittee staff on details of the private banking business and the internal investigation and thousands more hours answering written questions from Subcommittee staff. Specifically, Credit Suisse produced over 580,000 pages of documents, provided 11 detailed briefings to the Subcommittee staff in all-day, or multi-day, sessions, provided 12 substantive written submissions, and made 17 witnesses available from both the United States and Switzerland, including the Bank’s General Counsel, co-heads of the Private Bank and Wealth Management Division, and the CEO.

Report Offshore Tax Evasion: The Effort to Collect Unpaid Taxes on Billions in Hidden Offshore Accounts

The 175-page bipartisan staff report released Tuesday February 25 outlines how Credit Suisse engaged in similar conduct from at least 2001 to 2008, sending Swiss bankers into the United States to recruit U.S. customers, opening Swiss accounts that were not disclosed to U.S. authorities, including accounts opened in the name of offshore shell entities, and servicing Swiss accounts here in the United States without leaving a paper trail.  For the complete analysis of the reportm see https://profwilliambyrnes.com/2014/02/26/senate-subcommittee-hearing-and-report-on-offshore-tax-evasion/

 

106 Swiss Banks Seek Non-Prosecution from US Justice Department for Past Tax Evasion by Clients

106 Swiss banks (of approximately 300 total) filed the requisite letter of intent to join the Program for Non-Prosecution Agreements or Non-Target Letters (the “Program“) by the December 31, 2013 deadline.  Renown attorney Jack Townsend reported on his blog on February 14th provided a list of 49 Swiss banks that had publicly announced the intention to submit the letter of intent, as well as each bank’s category for entry: six announced seeking category 4 status, eight for category 3, thirty-five for category 2.  106 was a large jump from the mid-December report by the international service of the Swiss Broadcasting Corporation (“SwissInfo”) that only a few had filed for non prosecution with the DOJ’s program (e.g. Migros Bank, Bank COOP, Valiant, Berner Kantonalbank and Vontobel).

What is the Program for Non-Prosecution Agreements or Non-Target Letters for Swiss Banks?

The Tax Division of the Department of Justice released a statement on December 12, 2013 strongly encouraging Swiss banks wanting to seek non-prosecution agreements to resolve past cross-border criminal tax violations to submit letters of intent by a Dec. 31, 2013 deadline required by the Program for Non-Prosecution Agreements or Non-Target Letters (the “Program“).  The Program was announced on Aug. 29, 2013, in a joint statement signed by Deputy Attorney General James M. Cole and Ambassador Manuel Sager of Switzerland (> See the Swiss government’s explanation of the Program < ).  Switzerland’s Financial Market Supervisory Authority (FINMA) has issued a deadline of Monday, December 16, 2013 for a bank to inform it with its intention to apply for the DOJ’s Program.[2]

The DOJ statement described the framework of the Program for Non-Prosecution Agreements: every Swiss bank not currently under formal criminal investigation concerning offshore activities will be able to provide the cooperation necessary to resolve potential criminal matters with the DOJ.  Currently, the department is actively investigating the Swiss-based activities of 14 banks.  Those banks, referred to as Category 1 banks in the Program, are expressly excluded from the Program.  Category 1 Banks against which the DoJ has initiated a criminal investigation as of 29 August 2013 (date of program publication).

On November 5, 2013 the Tax Division of the DOJ had released comments about the Program for Non-Prosecution Agreements or Non-Target Letters for Swiss Banks.

Swiss banks that have committed violations of U.S. tax laws and wished to cooperate and receive a non-prosecution agreement under the Program, known as Category 2 banks, had until Dec. 31, 2013 to submit a letter of intent to join the program, and the category sought.

To be eligible for a non-prosecution agreement, Category 2 banks must meet several requirements, which include agreeing to pay penalties based on the amount held in undeclared U.S. accounts, fully disclosing their cross-border activities, and providing detailed information on an account-by-account basis for accounts in which U.S. taxpayers have a direct or indirect interest.  Providing detailed information regarding other banks that transferred funds into secret accounts or that accepted funds when secret accounts were closed is also a stipulation for eligibility. The Swiss Federal Department of Finance has released a > model order and guidance note < that will allow Swiss banks to cooperate with the DOJ and fulfill the requirements of the Program.

The DOJ’s November comments responded to such issues as: (a) Bank-specific issues and issues concerning individuals, (b) Choosing which category among 2, 3, or 4, (c) Qualifications of independent examiner (attorney or accountant), (d) Content of independent examiner report, (e) Information required under the Program – no aggregate account data, (f) Penalty calculation – permitted reductions, (g) Category 4 banks – retroactive application of FATCA Annex II, paragraph II.A.1, and (h) Civil penalties.

Which of Four Categories To File for Non-Prosecution Under?

Regarding which category to file under, the DOJ replied: “Each eligible Swiss bank should carefully analyze whether it is a category 2, 3 or 4 bank. While it may appear more desirable for a bank to attempt to position itself as a category 3 or 4 bank to receive a non-target letter, no non-target letter will be issued to any bank as to which the Department has information of criminal culpability. If the Department learns of criminal conduct by the bank after a non-target letter has been issued, the bank is not protected from prosecution for that conduct. If the bank has hidden or misrepresented its activities to obtain a non-target letter, it is exposed to increased criminal liability.”

Category 2

Banks against which the DoJ has not initiated a criminal investigation but have reasons to believe that that they have violated US tax law in their dealings with clients are subject to fines of on a flat-rate basis.  Set scale of fine rates (%) applied to the untaxed US assets of the bank in question:

– Existing accounts on 01.08.2008: 20%
– New accounts opened between 01.08.2008 and 28.02.2009: 30%
– New accounts after 28.02.2009: 50%

Category 2 banks must delivery of information on cross-border business with US clients, name and function of the employees and third parties concerned, anonymised data on terminated client relationships including statistics as to where the accounts re-domiciled.

Category 3

Banks have no reason to believe that they have violated US tax law in their dealings with clients and that can have this demonstrated by an independent third party. A category 3 bank must provide to the IRS the data on its total US assets under management and confirmation of an effective compliance programme in force.

Category 4

Banks are a local business in accordance with the FATCA definition.

Independence of Qualified Attorney or Accountant Examiner

Regarding the requirement of the independence of the qualified attorney or accountant examiner, the DOJ stated that the examiner “is not an advocate, agent, or attorney for the bank, nor is he or she an advocate or agent for the government. He or she must provide a neutral, dispassionate analysis of the bank’s activities. Communications with the independent examiner should not be considered confidential or protected by any privilege or immunity.”  The attorney / accountant’s report must be substantive, detailed, and address the requirements set out in the DOJ’s non-prosecution Program.  The DOJ stated that “Banks are required to cooperate fully and “come clean” to obtain the protection that is offered under the Program.”

In the ‘bottom line’ words of the DOJ: “Each eligible Swiss bank should carefully weigh the benefits of coming forward, and the risks of not taking this opportunity to be fully forthcoming. A bank that has engaged in or facilitated U.S. tax-related or monetary transaction crimes has a unique opportunity to resolve its criminal liability under the Program. Those that have criminal exposure but fail to come forward or participate but are not fully forthcoming do so at considerable risk.”

LexisNexis FATCA Compliance Manual

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The LexisNexis® Guide to FATCA Compliance comprises 34 Chapters by 50 contributors grouped in three parts: compliance program (Chapters 1–4), analysis of FATCA regulations (Chapters 5–16) and analysis of FATCA’s application for certain trading partners of the U.S. (Chapters 17–34), including intergovernmental agreements as well as the OECD’s TRACE initiative for global automatic information exchange protocols and systems. The 34 chapters include many practical examples to assist a compliance officer contextualize the regulations, IGA provisions, and national rules enacted pursuant to an IGA.  Chapters include by example an in-depth analysis of the categorization of trusts pursuant to the Regulations and IGAs, operational specificity of the mechanisms of information capture, management and exchange by firms and between countries, insights as to the application of FATCA and the IGAs within new BRIC and European country chapters.

If you are interested in discussing the Master or Doctorate degree in the areas of financial services or international taxation, please contact me https://profwilliambyrnes.com/online-tax-degree/

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FINCEN Director speaks out on BITCOIN and other virtual currencies

Posted by William Byrnes on March 22, 2014


The director of FINCEN, Jennifer Shasky Calvery, spoke about virtual currencies, specifically naming BITCOIN, in her remarks on March 18, 2014 to a conference on anti money laundering.  I excerpt pertinent remarks related to virtual currency.

The Financial Crimes Enforcement Network (FinCEN) published earlier this year two administrative rulings, providing additional information on whether a person’s conduct related to convertible virtual currency brings them within the Bank Secrecy Act’s (BSA) definition of a money transmitter. The first ruling stated that, to the extent a user creates or “mines” a convertible virtual currency solely for a user’s own purposes, the user is not a money transmitter under the BSA. The second ruling stated that a company purchasing and selling convertible virtual currency as an investment exclusively for the company’s benefit is not a money transmitter.

The rulings further interpret FinCEN’s March 18, 2013 Guidance Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies to address these business models. The Financial Crimes Enforcement Network (“FinCEN”) issued the March 18, 2013 interpretive guidance to clarify the applicability of the regulations implementing the Bank Secrecy Act (“BSA”) to persons creating, obtaining, distributing, exchanging, accepting, or transmitting virtual currencies.

Definition of Currency and Virtual Currency

FinCEN’s regulations define currency (also referred to as “real” currency) as “the coin and paper money of the United States or of any other country that [i] is designated as legal tender and that [ii] circulates and [iii] is customarily used and accepted as a medium of exchange in the country of issuance.” In contrast to real currency, “virtual” currency is a medium of exchange that operates like a currency in some environments, but does not have all the attributes of real currency. In particular, virtual currency does not have legal tender status in any jurisdiction. This guidance addresses “convertible” virtual currency. This type of virtual currency either has an equivalent value in real currency, or acts as a substitute for real currency.

Excerpts of Remarks

“In the case of Bitcoin, it has been publicly reported that its users processed transactions worth approximately $8 billion over the twelve-month period preceding October 2013; however, this measure may be artificially high due to the extensive use of automated layering in many Bitcoin transactions.”

“By way of comparison, according to information reported publicly, in 2012 Western Union made remittances totaling approximately $81 billion; PayPal processed approximately $145 billion in online payments; the Automated Clearing House Network processed $36.9 trillion in transactions; and Bank of America processed $244.4 trillion in wire transfers.”

“This relative volume of transactions becomes important when you consider that, according to the United Nations Office on Drugs and Crime, the best estimate for the amount of all global criminal proceeds available for laundering through the financial system in 2009 was $1.6 trillion.”

“Exactly one year ago today, FinCEN issued interpretive guidance to bring clarity and regulatory certainty for businesses and individuals engaged in money transmitting services and offering virtual currencies.”

“In the simplest of terms, FinCEN’s guidance explains that administrators or exchangers of virtual currencies must register with FinCEN, and institute certain recordkeeping, reporting, and AML program control measures, unless an exception to these requirements applies. The guidance also explains that those who use virtual currencies exclusively for common personal transactions – like buying goods or services online – are users, and not subject to regulatory requirements under the BSA.”

“In all cases, FinCEN employs an activity-based test to determine when someone dealing with virtual currency qualifies as a money transmitter. The guidance clarifies definitions and expectations to ensure that businesses engaged in such activities are aware of their regulatory responsibilities, including registering appropriately.”

“Furthermore, FinCEN closely coordinates with its state regulatory counterparts to encourage appropriate application of FinCEN guidance as part of the states’ separate AML compliance oversight of financial institutions.”

“Earlier this year, FinCEN expanded upon this guidance, issuing two administrative rulings. The rulings provide additional information on our regulatory coverage of certain activities related to convertible virtual currency. In both rulings, the convertible virtual currency at issue was the crypto-currency, Bitcoin, and we were clarifying how users who obtain virtual currency only for their own use or investment are not money transmitters.”

“I am also pleased to report that since FinCEN issued its guidance, dozens of virtual currency exchangers have registered with FinCEN, and some virtual currency exchangers are beginning to comply with reporting requirements and are filing SARs. They appear to be appreciative of the need to develop controls to make themselves resilient to abuse by bad actors.”

And they are also coming to terms with the fact that as administrators and exchangers they must obtain, verify, and store key information about the senders and recipients of virtual currency and, under certain circumstances, pass that information on to other administrators or exchangers involved in the transaction.

“This last issue is key. Simply put, these exchangers and administrators, like other money transmitters, are subject to the so-called Travel Rule. Thus, they have to incorporate into their business models the same transparency with respect to funds transfers as other money transmitters.”

“While we are encouraged by these industry efforts to increase transparency in this space, I do, however, remain concerned that there appear to be many domestic virtual currency exchangers that are not fulfilling their recordkeeping and reporting requirements.  Those who do not comply with these rules should understand that their actions will have  consequences. Not only are they subject to civil monetary penalties, but the knowing failure to register a money transmitting business with FinCEN – or with state authorities where there is a state licensing requirement – is a federal criminal offense.”

book cover

LexisNexis’ Money Laundering, Asset Forfeiture and Recovery and Compliance: A Global Guide – This eBook is designed to provide the compliance officer accurate analyses of the AML/CTF Financial and Legal Intelligence, law and practice in the nations of the world with the most current references and resources. The eBook is organized around five main themes: 1. Money Laundering Risk and Compliance; 2. The Law of Anti-Money Laundering and Compliance; 3. Criminal and Civil Forfeiture; 4. Compliance and 5. International Cooperation.

Each chapter is made up of five parts. Part I, “Introduction,” begins with the analysis of money laundering risks and compliance with the recommendations of the Financial Action Task Force (FATF), and then concludes with the country’s rating based on the International Narcotics Control Strategy Report (INCSR) of the U.S. State Department.  Part II, “Anti-Money Laundering and Combating Terrorist Financing (AML/CTF)” and Part III, “Criminal and Civil Forfeiture,” evaluate the judicial and legislative structures of the country. Given the increasing global dimension of AML/CTF activities, these sections give special attention to how a country has created statutes, decisions, policies and the judicial enforcement procedures needed to combat money laundering and terrorist financing. Part IV, “Compliance,” examines the most critical processes for the prevention and detection of money laundering and terrorist financing. This section reflects on the practical elements that should be in place so that financial institutions can comply with AML/CTF requirements; these are categorized into the development and implementation of internal controls, policies and procedures. Part V, “International Cooperation,” reviews the compilation of international laws and treaties between countries working together to combat money laundering and terrorist financing.  As these unlawful activities can occur in any given country, it is important to identify the international participants who are cooperating to develop methods to obstruct these criminal activities. 

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Senate Subcommittee Hearing and Report on Offshore Tax Evasion: Credit Suisse Investigation

Posted by William Byrnes on February 26, 2014


On March 1st, 8th and 15th I have scheduled a series of FATCA articles to post.  Please “email subscribe” to this blog on the left menu if you want to read the interesting FATCA updates, and other tax related news.

Today’s Hearing 

I have just finished listening to today’s live 7 plus hour > hearing < (Wednesday, February 26) of the US Senate’s Permanent Subcommittee on Investigations on tax evasion associated with unreported bank accounts of Americans held at Credit Suisse.  Below I paraphrase and excerpt the most intriguing statements.

Based upon its two-year investigation, the Subcommittee reported that Credit Suisse opened Swiss accounts for over 22,000 U.S. customers with assets that, at their peak, totaled roughly $10 billion to $12 billion.  The Subcommittee stated that the vast majority of these accounts were hidden from U.S. authorities and that U.S. law enforcement officials have been slow to collect the unpaid taxes or hold accountable the tax evaders and bank involved.

Sen. Carl Levin, D-Mich., the subcommittee chairman said “The Credit Suisse case study shows how a Swiss bank aided and abetted U.S. tax evasion, not only from behind a veil of secrecy in Switzerland, but also on U.S. soil by sending Swiss bankers here to open hidden accounts. In response, the Department of Justice has failed to use the U.S. legal tools that won the UBS case and has instead used treaty requests for U.S. client names, relying on Swiss courts with predictably poor results. It’s time to ramp up the collection of taxes due from tax evaders on the billions of dollars hidden offshore.”

“For too long, international financial institutions like Credit Suisse have profited from their offshore tax haven schemes while depriving the U.S. economy of billions of dollars in tax revenues by facilitating U.S. tax evasion,” said Senator John McCain, ranking member of the subcommittee. “As federal regulators begin to crack down on these banks’ illicit practices, it is imperative that they use every legal tool at their disposal to hold these banks fully accountable for willfully deceiving the U.S. government and seek penalties that will deter similar misconduct in the future.”

Amount Recovered Thus Far from Non-Compliant Taxpayers 

According to the GAO Reports and the Subcommittee report, the 2008, 2011, and the ongoing 2012 offshore voluntary disclosure initiative (OVDI) have led to 43,000 taxpayers paying back taxes, interest and penalties totaling $6 billion to date, with more expected.  However, the vast majority of this recovered money is not tax revenue but instead results from the FBAR penalties assessed for not reporting a foreign account.  The Taxpayer Advocate found that for noncompliant taxpayers with small accounts, the FBAR and tax penalties reached nearly 600% of the actual tax due!  The median offshore penalty was about 381% of the additional tax assessed for taxpayers with median-sized account balances.

Have These Efforts Substantially Increased Taxpayer Compliance?

The Taxpayer Advocate, replying on State Department statistics,  cited that 7.6 million U.S. citizens reside abroad and many more U.S. residents have FBAR filing requirements, yet the IRS received only 807,040 FBAR submissions as recently as 2012.  The Taxpayer Advocate noted that in Mexico alone, more than one million U.S. citizens reside, and many Mexican citizens reside in the U.S. (and thus are required to file a FBAR for any Mexican accounts of $10,000 or greater).

Thus, at a current rate well below 10% compliance (because nonresident aliens in the US must file a FBAR on their non-US accounts of $10,000 and over), it appears that all the additional enforcement is producing similar results of the War on Drugs.  This is not to say that obtaining a highly level of compliance with the tax law , like compliance with the drug laws and DUI laws, is not a public good in itself – it indeed is a public good that the public has chosen, via Congress (and its investigatory hearings), for resource allocation. But like the War on Drugs, there are many potential strategies to bring about compliance, about which pundits such as law enforcement officials, social libertarians, the medical profession, and all their paid lobbyists, debate.

Credit Suisse Statement to Subcommittee:

Credit Suisse is a global financial services company with operations in more than 50 countries and over 45,000 employees including approximately 9,000 U.S. employees in 19 U.S. locations. In the United States, Credit Suisse is a Financial Holding Company regulated by the Federal Reserve. The Bank has a New York branch, which is supervised by the New York Department of Financial Services, and we have three regulated U.S. broker/dealer subsidiaries. Our primary U.S. broker/dealer has been designated a Systemically Important Financial Institution under the Dodd-Frank law. We have a substantial business presence here in the United States.

Credit Suisse Exit of U.S. Relationships

Following our decision to prohibit former U.S. clients of UBS from transferring their assets to Credit Suisse, in August 2008, Credit Suisse promptly turned to addressing issues highlighted by the UBS situation. In October 2008, Credit Suisse decided to allow relationships with non-U.S. entities that had U.S. beneficial owners only if they demonstrated U.S. tax compliance. We hired a leading Swiss law firm to review the tax status of U.S. clients that wanted to remain. By the end of the first year of review, all but 135 relationships with assets over $10,000 had been reviewed and resolved.

In April 2009, we extended our review to U.S. resident clients. Credit Suisse transferred virtually all U.S. resident accounts to one of the Bank’s U.S.-registered affiliates, or terminated the relationships. Credit Suisse simply shut down those client relationships that were unwilling to move or that did not meet the $1 million requirement for transfer to the Bank’s U.S.-regulated affiliates. By the end of the first full year of review, 2010, we had reviewed and resolved more than 85% of U.S.-resident relationships with assets over $10,000.

To ensure that the review was comprehensive, we also manually searched for accounts that, although not identified in our systems as U.S.-linked, could possibly have some U.S. connection – for example, a U.S. phone number or address in the paper client file, or a notation of a U.S. birthplace on a foreign passport. Credit Suisse also reviewed the private banking activities of its subsidiaries, including Clariden Leu, which was a nearly wholly owned Credit Suisse subsidiary between 2007 and 2012. Clariden Leu’s review and exit projects paralleled the projects at Credit Suisse.

Credit Suisse also engaged one of the Big Four accounting firms to conduct its own review to assess whether the Bank had effectively identified the account relationships with U.S. links. This firm carefully analyzed the Bank’s efforts – with an intense line-by-line analysis of account information – and concluded to an extremely high level of confidence that Credit Suisse had identified the complete population of U.S. account relationships. The results of this substantial effort have been presented to the Subcommittee staff.

Subcommittee “Undeclared Accounts” Methodologies Unreliable

Credit Suisse repeatedly discussed with the Subcommittee staff the fact that it is impossible for us to know the tax status of assets previously held by U.S. clients if those clients did not disclose that information to the Bank. Unfortunately, the Subcommittee has chosen to speculate based on a number of “methodologies,” each of which is problematic and generates results that are, at best, unreliable. The Subcommittee’s need to reference three conflicting “methodologies” is an implicit recognition that accurate estimates of unreported U.S. client assets previously held at Credit Suisse cannot be made based on the actual information available to the Bank and to the Subcommittee.

8,300 Accounts under $10,000 FBAR Reporting Requirement

In any event, the Subcommittee assumes that every U.S. client account held abroad was undeclared. As discussed below, that is a demonstrably inappropriate assumption. Moreover, U.S. Treasury Department regulations required U.S. citizens to report foreign accounts only if the balance exceeded $10,000 at some point during the year. While the Subcommittee staff has mentioned 22,000 accounts, more than 8,300 had balances below $10,000 as of December 31, 2008.

6,400 Accounts for US Expats Residing in Switzerland

Troublingly, these estimates also lump in categories of accounts where there is every reason to believe that the client had a valid reason for holding a Swiss account. For example, the Subcommittee’s estimates of “undeclared” accounts include approximately 6,400 accounts held by all U.S. expats who would ordinarily have a need for some form of local banking services outside of the U.S. Again, it should not be ignored that most expats resided in Switzerland, and therefore had a particularly valid reason for maintaining a bank near their homes.

Finally, each of the three “methodologies” that the Subcommittee staff has raised is problematic for different reasons:

First Methodology No Factual Basis

The first method wrongly suggests that the number of accounts closed during the Bank’s

“Exit Projects” may be a proxy for “undeclared” accounts. The Bank’s “Exit Projects” revealed that U.S. clients left the Bank for various reasons. For example, Credit Suisse decided to simply shut down around 11,000 U.S. resident accounts when the Bank decided to stop having Swiss-based private bankers service U.S. residents and because those clients’ balances did not meet the $1 million requirement for transfer to the U.S. regulated affiliates. Those clients never had the opportunity to demonstrate tax compliance because their accounts were simply terminated. There is no basis factually to assume that all of these clients were not tax compliant.

Second Methodology Unsupported

The second method, the “UBS method,” is simply unsupported. This method proposes to estimate accounts by considering all accounts without Forms W-9 to be “undeclared” U.S. accounts. The absence of a Form W-9 alone in no way supports an inference that a client failed to report the account to the IRS, or that the Bank was aware that the client failed to do so. The Qualified Intermediary Agreement with the IRS required the preparation of a Form W-9 only if the client maintained U.S. securities. If the client did not maintain U.S. securities, a Form W-9 was not required. These are the IRS’s rules. Because this method does not consider whether the client maintained U.S. securities, it is inaccurate to assume that the account was maintained to evade U.S. taxes.

Third Methodology Inconclusive

Nor is the third method conclusive. The so-called “DOJ Estimate” recounts a figure of $4 billion stated in an indictment of certain Bank relationship managers. Because the grand jury’s proceedings are secret, neither we nor the Subcommittee have any basis to assess the grand jury’s methodologies.

Credit Suisse Assets Under Management

As to Assets under Management (AuM), it should be noted that our exit projects established that an approximate amount of $5 billion of AuM was reviewed and verified for tax compliance over the years. This number includes AuM transferred to our U.S.-registered entities or closed after tax compliance was established. In addition, approximately $2.25 billion AuM lost its U.S. nexus over the years. Finally, of the accounts that were closed over the years we simply have no basis to assume that all of them were undeclared.

It was discussed between the Senators and the representatives of Credit Suisse that the actual amount of AUM compared to Credit Suisse’s AuM was miniscule, and that such AuM contributed less than 1% to Credit Suisse’s profits.  However, Senator John McCain, the minority ranking member, told the Credit Suisse representatives that, while small in the context of the bank, amounts of billions and the profits made therefrom, are large amounts to a American taxpayer if made aware of such conduct.  While listening to the Senator’s assessment (and agreeing), I wondered why in contrast hundreds of billions of annual deficits up to nearly a trillion deficit, and 15, 17, perhaps 20 trillion of national debt don’t seem to phase the same taxpayer referred to?

Internal Investigation

Nor did we turn a blind eye to the past. On the contrary, we invested enormous efforts to achieve as much clarity as possible about whether, and to what extent, Credit Suisse employees had violated U.S. laws or helped clients do so. Credit Suisse asked external counsel to investigate any instances of past improper conduct fully. That investigation was broad and deep.

The U.S. law firm King & Spalding and the Swiss law firm Schellenberg Wittmer led the investigation, with help from a major accounting firm. The investigation reviewed all aspects of the Bank’s Swiss-based private banking business with U.S. customers. It involved more than 100 interviews of Credit Suisse and Clariden Leu personnel, from line-level private bankers to senior leaders of the Bank. The investigation reviewed the conduct of bankers across the Swiss private bank who had a number of U.S. clients or traveled to the United States.

The investigation identified evidence of violations of Bank policy centered on a small group of Swiss-based private bankers. That conduct centered on a group of private bankers within a desk of 15 to 20 private bankers at any given time who were focused on larger accounts of U.S. residents. Most of the improper activity was focused on some private bankers who traveled to the United States once or twice a year; otherwise, the investigation found only scattered evidence of improper conduct.

The investigation did not find any evidence that senior executives of Credit Suisse knew these bankers were apparently helping U.S. customers hide income and assets. To the contrary, the evidence showed that some Swiss-based private bankers went to great lengths to disguise their bad conduct from Credit Suisse executive management.

Cooperation with U.S. Authorities

Credit Suisse has consistently cooperated with the investigations led by the Department of Justice, the SEC, and this Subcommittee, going to the greatest extent permissible by Swiss law to provide information to investigating U.S. authorities.

Since early 2011, Credit Suisse has produced hundreds of thousands of pages of documents, including translations of foreign-language documents. Our representatives have met with the Department of Justice to help them understand the information we provided and to describe the findings of our internal investigation and the Bank’s various compliance efforts.

Credit Suisse has also provided briefings to officials from the U.S. government, including the SEC and this Subcommittee. That includes more than 100 hours briefing the Subcommittee staff on details of the private banking business and the internal investigation and thousands more hours answering written questions from Subcommittee staff. Specifically, Credit Suisse produced over 580,000 pages of documents, provided 11 detailed briefings to the Subcommittee staff in all-day, or multi-day, sessions, provided 12 substantive written submissions, and made 17 witnesses available from both the United States and Switzerland, including the Bank’s General Counsel, co-heads of the Private Bank and Wealth Management Division, and the CEO.

Credit Suisse Agrees to Pay $196 Million and Admits Wrongdoing in Providing Unregistered Services to U.S. Clients

In the February 21, 2014 Press Release by the US Securities and Exchange Commission (SEC) “Credit Suisse Agrees to Pay $196 Million and Admits Wrongdoing in Providing Unregistered Services to U.S. Clients“, Credit Suisse agreed to pay $196 million and admit wrongdoing to settle the SEC’s charges.  According to the SEC’s order instituting settled administrative proceedings, Credit Suisse provided cross-border securities services to thousands of U.S. clients and collected fees totaling approximately $82 million without adhering to the registration provisions of the federal securities laws.  Credit Suisse relationship managers traveled to the U.S. to solicit clients, provide investment advice, and induce securities transactions.  These relationship managers were not registered to provide brokerage or advisory services, nor were they affiliated with a registered entity.  The relationship managers also communicated with clients in the U.S. through overseas e-mails and phone calls.

Report Offshore Tax Evasion: The Effort to Collect Unpaid Taxes on Billions in Hidden Offshore Accounts

The 175-page bipartisan staff report released Tuesday February 25 outlines how Credit Suisse engaged in similar conduct from at least 2001 to 2008, sending Swiss bankers into the United States to recruit U.S. customers, opening Swiss accounts that were not disclosed to U.S. authorities, including accounts opened in the name of offshore shell entities, and servicing Swiss accounts here in the United States without leaving a paper trail.

Senator Carl Levin Statement

In his statement summary of the investigation of Credit Suisse, Senator Levin stated:

“…A bipartisan report we are releasing today cites chapter and verse of the failure to collect the taxes owed and to hold accountable the U.S. persons who evaded their tax obligations and the tax haven banks who helped them.  To lay bare the problems, our report uses a detailed case study involving Credit Suisse.

“What we found was that Credit Suisse had been holding back about how bad the problem was at the bank.  At its peak, in Switzerland, Credit Suisse had over 22,000 U.S. customers with accounts containing more than 12 billion Swiss francs, which translates into $10 to $12 billion U.S. dollars.  Nearly 1,500 accounts were opened in the name of offshore shell companies to hide U.S. ownership.  Another nearly 2,000 were opened at Clariden Leu, Credit Suisse’s own little private bank.  Almost 10,000 were serviced by a special Credit Suisse branch at the Zurich airport which enabled clients to fly in to do their banking without leaving airport grounds.

“Although Credit Suisse policy was to concentrate its U.S. client accounts in Switzerland at a Swiss desk called SALN, which had about 15 bankers trained in U.S. regulatory and tax requirements, that policy was largely ignored.  In 2008, over 1,800 bankers spread throughout the bank in Switzerland handled one or more U.S. accounts.  One U.S. client told the Subcommittee about visiting the bank’s main offices in Zurich.  The client was ushered into a remotely controlled elevator with no floor buttons, and escorted to a bare room with white walls, all dramatizing the bank’s focus on secrecy.  The client opened an account after being told the bank did not require completion of the W-9; without that form, the account was not reported to U.S. authorities.  In later visits, the client was offered cash withdrawals and credit cards to draw from the Swiss account while in the United States, and the client always signed a form ordering that the Credit Suisse account statements be immediately shredded.

“But the Swiss bankers didn’t stay in Switzerland.  Like UBS, Credit Suisse bankers travelled across the United States.  Ten SALN bankers alone took more than 170 U.S. trips from 2001 to 2008, to look for new clients and service existing accounts.  Credit Suisse arranged for them to host tables at the annual Swiss Ball in New York and to host golf tournaments in Florida to prospect for wealthy clients.  Some also met with as many as 30 to 40 existing U.S. clients in a single trip to attend to their banking needs. 

“We learned of one Swiss banker who met with a U.S. client over breakfast at a U.S. luxury hotel, and slipped the client bank account statements in between the pages of a Sports Illustrated magazine.  Although none of the Swiss bankers were registered with the U.S. Securities and Exchange Commission, many provided broker-dealer and investment advisory services for U.S. clients, resulting in the > $196 million fine that Credit Suisse < paid last week.  Some Swiss bankers also advised U.S. clients on how to structure cash transactions to avoid filing reports of cash transactions over $10,000 as required by U.S. law.  Other Swiss bankers helped U.S. clients set up offshore shell corporations to hold their accounts and hide the ownership trail.  Some bankers lied on visa applications when they entered the United States, saying the purpose of their visit was tourism when in fact it was business.

“Once UBS’s misconduct was exposed, Credit Suisse initiated a series of so-called Exit Projects to close its U.S. client accounts in Switzerland.  Those projects took five years, until 2013, to complete.  In the end, the bank verified accounts for about 3,500 out of the 22,000 U.S. clients as compliant with U.S. tax law, meaning they were disclosed to the IRS.  The bank closed accounts for the other 18,900 U.S. customers.  It is clear that the vast majority – up to 95 percent – were undeclared, meaning hidden from Uncle Sam. 

“So where are we now?  Unlike UBS, U.S. enforcement action against Credit Suisse has stalled, even though the bank got a target letter three years ago in 2011.  While seven of its bankers were indicted by U.S. prosecutors in 2011, none has stood trial and none has been the subject of a U.S. extradition request.  Less than a handful of U.S. taxpayers with Credit Suisse accounts have been indicted.

“As you can see on this chart, of the 22,000 U.S. clients with Swiss accounts at Credit Suisse, the total number of accounts with U.S. names disclosed by the Swiss to the United States over five years hits a grand total of 238.  That’s 238 out of 22,000, about one percent.   Other Swiss banks with thousands of U.S. clients in Switzerland have, as far as we know, disclosed no names at all.

“By restricting itself to the treaty process, DOJ essentially handed over control of U.S. information requests to Swiss regulators and Swiss courts that rule on how they will be handled and have regularly elevated bank secrecy over bank disclosures.

“But the Swiss roadblocks didn’t end there.  In 2009, right after the UBS battle, Switzerland agreed to amend the U.S.-Swiss tax treaty to replace its highly restrictive “tax fraud” standard with the somewhat less restrictive “relevance” standard.  But the Swiss also insisted that the less restrictive disclosure standard be used only for information requests regarding Swiss accounts in existence after the amendments were signed on September 23, 2009.  U.S. negotiators went along, and produced a new treaty standard that may be useful prospectively, but can’t be used for potentially tens of thousands of Swiss accounts employed for U.S. tax evasion before 2009.  The end result is that the tax evaders and the Swiss banks who helped them may get away with wrongdoing.

“Here’s another rigged game.  The U.S.-Swiss extradition treaty is supposed to enable each country to obtain the transfer of a criminal defendant from the other country.  But that treaty has an exception giving the Swiss the discretion to deny an extradition request for a person accused of a tax offense.  DOJ has indicted 38 Swiss banking and other professionals for aiding and abetting U.S. tax evasion.  The indictment of the seven Credit Suisse bankers is already three years old.  But 34 of those 38 defendants have yet to stand trial.  Instead, most are openly residing in Switzerland.  One Swiss banker who left Switzerland to vacation in Italy was recently arrested and is here and set to stand trial in October, but he’s the exception.  It is bad enough that the Swiss can deny extradition for persons aiding and abetting U.S. tax evasion; it is inexplicable that the United States hasn’t even made extradition requests.”

According to the Subcommittee report, after the UBS scandal broke, Credit Suisse began a series of Exit Projects, and took five years to close Swiss accounts held by 18,900 U.S. clients, leaving just 3,500 U.S. customers still with the bank. Credit Suisse also conducted an internal investigation, but produced no report and identified no leadership failures that allowed the bank to become involved in tax evasion. Despite, in 2011, indictment of seven of its bankers and a DOJ letter notifying the bank that it was itself an investigation target, Credit Suisse has not been held legally accountable by DOJ, and none of its bankers has stood trial.

Despite earlier testimony pledging to use important U.S. legal tools such as grand jury subpoenas and John Doe summonses to obtain the names of U.S. tax evaders, the investigation found that DOJ had failed to use them, choosing instead to file treaty requests with little success. In the past five years, DOJ has not sought to enforce a single grand jury subpoena against a Swiss bank, has not assisted in the filing of a single John Doe summons to obtain client names or account information in Switzerland, and has prosecuted only one Swiss bank, Wegelin &Co., despite more than a dozen under investigation for facilitating U.S. tax evasion. In addition, over the past five years, DOJ has obtained information, including U.S. client names, for only 238 undeclared Swiss accounts out of the tens of thousands opened offshore.

Subcommittee Findings

The Subcommittee investigation reaches several findings of fact:

(1)      Bank Practices that Facilitated U.S. Tax Evasion. From at least 2001 to 2008, Credit Suisse employed banking practices that facilitated tax evasion by U.S. customers, including by opening undeclared Swiss accounts for individuals, opening accounts in the name of offshore shell entities to mask their U.S. ownership, and sending Swiss bankers to the United States to recruit new U.S. customers and service existing Swiss accounts without creating paper trails.  At its peak, Credit Suisse had over 22,000 U.S. customers with Swiss accounts containing assets that exceeded 12 billion Swiss francs.

(2)      Inadequate Bank Response. Credit Suisse’s efforts to close undeclared Swiss accounts opened by U.S. customers took more than five years, failed to identify how many were undeclared accounts hidden from U.S. authorities, and fell short of identifying any leadership failures or lessons learned from its legally-suspect U.S. cross border business.

(3)      Lax U.S. Enforcement. Despite the passage of five years, U.S. law enforcement has failed to prosecute more than a dozen Swiss banks that facilitated U.S. tax evasion, failed to take legal action against thousands of U.S. persons whose names and hidden Swiss accounts were disclosed by UBS, and failed to utilize available U.S. legal means to obtain the names of tens of thousands of additional U.S. persons whose identities are still being concealed by the Swiss.

(4)      Swiss Secrecy. Since 2008, Swiss officials have worked to preserve Swiss bank secrecy by intervening in U.S. criminal investigations to restrict document production by Swiss banks, pressuring the United States to construct a program for issuing non-prosecution agreements to hundreds of Swiss banks while excusing those banks from disclosing U.S. client names, enacting legislation creating new barriers to U.S. treaty requests seeking U.S. client names, and managing to limit the actual disclosure of U.S. client names to only a few hundred names over five years, despite the tens of thousands of undeclared Swiss accounts opened by U.S. clients evading U.S. taxes.

Subcommittee Recommendations:

(1)      Improve Prosecution of Tax Haven Banks and Hidden Offshore Account Holders. To ensure accountability, deter misconduct, and collect tax revenues, the Department of Justice should use available U.S. legal means, including enforcing grand jury subpoenas and John Doe summons in U.S. courts, to obtain the names of U.S. taxpayers with undeclared accounts at tax haven banks. DOJ should hold accountable tax haven banks that aided and abetted U.S. tax evasion, and take legal action against U.S. taxpayers to collect unpaid taxes on billions of dollars in offshore assets.

(2)      Increase Transparency of Tax Haven Banks That Impede U.S. Tax Enforcement. U.S. regulators should use their existing authority to institute a probationary period of increased reporting requirements for, or to limit the opening of new accounts by, tax haven banks that enter into deferred prosecution agreements, non-prosecution agreements, settlements, or other concluding actions with law enforcement for facilitating U.S. tax evasion, taking into consideration repetitive or cumulative misconduct.

(3)      Streamline John Doe Summons. Congress should amend U.S. tax laws to streamline the use of John Doe summons procedures to uncover the names of taxpayers using offshore accounts and other means to evade U.S. taxes, including by allowing a court to approve more than one John Doe summons related to the same tax investigation.

(4)      Close FATCA Loopholes. To obtain systematic disclosure of undeclared offshore accounts used to evade U.S. taxes, the U.S. Treasury and IRS should close gaping loopholes in FATCA regulations that have no statutory basis, including provisions that allow financial institutions to ignore account information stored on paper, and allow foreign financial institutions to treat offshore shell entities as non-U.S. entities even when beneficially owned and controlled by U.S. persons.

(5)      Ratify Revised Swiss Tax Treaty. The U.S. Senate should promptly ratify the 2009 Protocol to the U.S.-Switzerland tax treaty to take advantage of improved disclosure standards.

What is the Program for Non-Prosecution Agreements or Non-Target Letters for Swiss Banks?

The Tax Division of the Department of Justice > released a statement on December 12, 2013 < strongly encouraging Swiss banks wanting to seek non-prosecution agreements to resolve past cross-border criminal tax violations to submit letters of intent by a Dec. 31, 2013 deadline required by the Program for Non-Prosecution Agreements or Non-Target Letters (the “Program“).  The Program was announced on Aug. 29, 2013, in a > joint statement < signed by Deputy Attorney General James M. Cole and Ambassador Manuel Sager of Switzerland (> See the Swiss government’s explanation of the Program < ).  Switzerland’s Financial Market Supervisory Authority (FINMA) has issued a deadline of Monday, December 16, 2013 for a bank to inform it with its intention to apply for the DOJ’s Program.[2]

The DOJ statement described the framework of the Program for Non-Prosecution Agreements: every Swiss bank not currently under formal criminal investigation concerning offshore activities will be able to provide the cooperation necessary to resolve potential criminal matters with the DOJ.  Currently, the department is actively investigating the Swiss-based activities of 14 banks.  Those banks, referred to as Category 1 banks in the Program, are expressly excluded from the Program.  Category 1 Banks against which the DoJ has initiated a criminal investigation as of 29 August 2013 (date of program publication).

On November 5, 2013 the Tax Division of the DOJ had released > comments about the Program for Non-Prosecution Agreements or Non-Target Letters for Swiss Banks < .

Swiss banks that have committed violations of U.S. tax laws and wished to cooperate and receive a non-prosecution agreement under the Program, known as Category 2 banks, had until Dec. 31, 2013 to submit a letter of intent to join the program, and the category sought.

To be eligible for a non-prosecution agreement, Category 2 banks must meet several requirements, which include agreeing to pay penalties based on the amount held in undeclared U.S. accounts, fully disclosing their cross-border activities, and providing detailed information on an account-by-account basis for accounts in which U.S. taxpayers have a direct or indirect interest.  Providing detailed information regarding other banks that transferred funds into secret accounts or that accepted funds when secret accounts were closed is also a stipulation for eligibility. The Swiss Federal Department of Finance has released a > model order and guidance note < that will allow Swiss banks to cooperate with the DOJ and fulfill the requirements of the Program.

The DOJ’s November comments responded to such issues as: (a) Bank-specific issues and issues concerning individuals, (b) Choosing which category among 2, 3, or 4, (c) Qualifications of independent examiner (attorney or accountant), (d) Content of independent examiner report, (e) Information required under the Program – no aggregate account data, (f) Penalty calculation – permitted reductions, (g) Category 4 banks – retroactive application of FATCA Annex II, paragraph II.A.1, and (h) Civil penalties.

Which of Four Categories To File for Non-Prosecution Under?

Regarding which category to file under, the DOJ replied: “Each eligible Swiss bank should carefully analyze whether it is a category 2, 3 or 4 bank. While it may appear more desirable for a bank to attempt to position itself as a category 3 or 4 bank to receive a non-target letter, no non-target letter will be issued to any bank as to which the Department has information of criminal culpability. If the Department learns of criminal conduct by the bank after a non-target letter has been issued, the bank is not protected from prosecution for that conduct. If the bank has hidden or misrepresented its activities to obtain a non-target letter, it is exposed to increased criminal liability.”

Category 2

Banks against which the DoJ has not initiated a criminal investigation but have reasons to believe that that they have violated US tax law in their dealings with clients are subject to fines of on a flat-rate basis.  Set scale of fine rates (%) applied to the untaxed US assets of the bank in question:

– Existing accounts on 01.08.2008: 20%
– New accounts opened between 01.08.2008 and 28.02.2009: 30%
– New accounts after 28.02.2009: 50%

Category 2 banks must delivery of information on cross-border business with US clients, name and function of the employees and third parties concerned, anonymised data on terminated client relationships including statistics as to where the accounts re-domiciled.

Category 3

Banks have no reason to believe that they have violated US tax law in their dealings with clients and that can have this demonstrated by an independent third party. A category 3 bank must provide to the IRS the data on its total US assets under management and confirmation of an effective compliance programme in force.

Category 4

Banks are a local business in accordance with the FATCA definition.

Independence of Qualified Attorney or Accountant Examiner

Regarding the requirement of the independence of the qualified attorney or accountant examiner, the DOJ stated that the examiner “is not an advocate, agent, or attorney for the bank, nor is he or she an advocate or agent for the government. He or she must provide a neutral, dispassionate analysis of the bank’s activities. Communications with the independent examiner should not be considered confidential or protected by any privilege or immunity.”  The attorney / accountant’s report must be substantive, detailed, and address the requirements set out in the DOJ’s non-prosecution Program.  The DOJ stated that “Banks are required to cooperate fully and “come clean” to obtain the protection that is offered under the Program.”

In the ‘bottom line’ words of the DOJ: “Each eligible Swiss bank should carefully weigh the benefits of coming forward, and the risks of not taking this opportunity to be fully forthcoming. A bank that has engaged in or facilitated U.S. tax-related or monetary transaction crimes has a unique opportunity to resolve its criminal liability under the Program. Those that have criminal exposure but fail to come forward or participate but are not fully forthcoming do so at considerable risk.”

106 Swiss Banks Seek Non-Prosecution from US Justice Department for Past Tax Evasion by Clients

106 Swiss banks (of approximately 300 total) filed the requisite letter of intent to join the Program for Non-Prosecution Agreements or Non-Target Letters (the “Program“) by the December 31, 2013 deadline.  Renown attorney Jack Townsend reported on his blog on February 14th provided a list of 49 Swiss banks that had publicly announced the intention to submit the letter of intent, as well as each bank’s category for entry: six announced seeking category 4 status, eight for category 3, thirty-five for category 2.  106 was a large jump from the mid-December report by the international service of the Swiss Broadcasting Corporation (“SwissInfo”) that only a few had filed for non prosecution with the DOJ’s program (e.g. Migros Bank, Bank COOP, Valiant, Berner Kantonalbank and Vontobel).

See my other articles:

LexisNexis FATCA Compliance Manual

book coverFifty contributing authors from the professional and financial industry provide 600 pages of expert analysis within the LexisNexis® Guide to FATCA Compliance (2nd Edition): many perspectives – one voice crafted by the primary author William Byrnes.

The LexisNexis® Guide to FATCA Compliance (2nd Edition) comprises 34 Chapters grouped in three parts: compliance program (Chapters 1–4), analysis of FATCA regulations (Chapters 5–16) and analysis of FATCA’s application for certain trading partners of the U.S. (Chapters 17–34), including intergovernmental agreements as well as the OECD’s TRACE initiative for global automatic information exchange protocols and systems. The 34 chapters include many practical examples to assist a compliance officer contextualize the regulations, IGA provisions, and national rules enacted pursuant to an IGA.  Chapters include by example an in-depth analysis of the categorization of trusts pursuant to the Regulations and IGAs, operational specificity of the mechanisms of information capture, management and exchange by firms and between countries, insights as to the application of FATCA and the IGAs within new BRIC and European country chapters.

Posted in FATCA, Financial Crimes | Tagged: , , | 3 Comments »

FinCEN Issues Guidance to Financial Institutions Allowing Marijuana Businesses

Posted by William Byrnes on February 14, 2014


FINCEN issued a Valentine today to the marijuana industry that may open the door to financial institutions bank accounts in states where growing and selling marijuana is legal under state law.  

Whether a financial institution will be willing to open such an account is another matter, as each account will require an Suspicious Activity Report (SAR) filing.  However,  FINCEN has created a low level of concern “Marijuana Limited” SAR filing that appears to allow a level of comfort regarding disclosure for the financial institutions and allowing FINCEN to track the number of marijuana business account openings.  

In assessing the risk of providing services to a marijuana-related business, a financial institution should conduct customer due diligence that includes:

  1. verifying with the appropriate state authorities whether the business is duly licensed and registered;
  2. reviewing the license application (and related documentation) submitted by the business for obtaining a state license to operate its marijuana-related business;
  3. requesting from state licensing and enforcement authorities available information about the business and related parties;
  4. developing an understanding of the normal and expected activity for the business, including the types of products to be sold and the type of customers to be served (e.g., medical versus recreational customers);
  5. ongoing monitoring of publicly available sources for adverse information about the business and related parties;
  6. ongoing monitoring for suspicious activity, including for any of the red flags described in this guidance; and
  7. refreshing information obtained as part of customer due diligence on a periodic basis and commensurate with the risk.

With respect to information regarding state licensure obtained in connection with such customer due diligence, a financial institution may reasonably rely on the accuracy of information provided by state licensing authorities, where states make such information available.

“Marijuana Limited” SAR

A financial institution providing financial services to a marijuana-related business that it reasonably believes, based on its customer due diligence, does not implicate one of the Cole
Memo priorities or violate state law should file a “Marijuana Limited” SAR.  U.S. Department of Justice Deputy Attorney General James M. Cole issued a memorandum (the “Cole Memo”) to all United States Attorneys providing updated guidance to federal prosecutors concerning marijuana enforcement under the CSA.

The Cole Memo reiterates Congress’s determination that marijuana is a dangerous drug and that the illegal distribution and sale of marijuana is a serious crime that provides a significant source of revenue to large-scale criminal enterprises, gangs, and cartels. The Cole Memo notes that DOJ is committed to enforcement of the CSA consistent with those determinations. It also notes that DOJ is committed to using its investigative and prosecutorial resources to address the most significant threats in the most effective, consistent, and rational way. In furtherance of those objectives, the Cole Memo provides guidance to DOJ attorneys and law enforcement to focus their enforcement resources on persons or organizations whose conduct interferes with any one or more of the following important priorities (the “Cole Memo priorities”):

• Preventing the distribution of marijuana to minors;
• Preventing revenue from the sale of marijuana from going to criminal enterprises, gangs, and cartels;
• Preventing the diversion of marijuana from states where it is legal under state law in some form to other states;
• Preventing state-authorized marijuana activity from being used as a cover or pretext for the trafficking of other illegal drugs or other illegal activity;
• Preventing violence and the use of firearms in the cultivation and distribution of marijuana;
• Preventing drugged driving and the exacerbation of other adverse public health consequences associated with marijuana use;
• Preventing the growing of marijuana on public lands and the attendant public safety and environmental dangers posed by marijuana production on public lands; and
• Preventing marijuana possession or use on federal property.

FINCEN Guidance http://www.fincen.gov/statutes_regs/guidance/pdf/FIN-2014-G001.pdf

Cole Memo: http://www.justice.gov/iso/opa/resources/3052013829132756857467.pdf

Department of Justice Memorandum: James M. Cole, Deputy Attorney General, U.S. Department of Justice, Memorandum for All United States Attorneys: Guidance Regarding Marijuana Related Financial Crimes (February 14, 2014).

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Application of Anti Money Laundering Regulations to Virtual Currencies like BITCOIN

Posted by William Byrnes on February 1, 2014


The Financial Crimes Enforcement Network (FinCEN) on Thursday published two administrative rulings, providing additional information on whether a person’s conduct related to convertible virtual currency brings them within the Bank Secrecy Act’s (BSA) definition of a money transmitter. The first ruling states that, to the extent a user creates or “mines” a convertible virtual currency solely for a user’s own purposes, the user is not a money transmitter under the BSA. The second states that a company purchasing and selling convertible virtual currency as an investment exclusively for the company’s benefit is not a money transmitter.

The rulings further interpret FinCEN’s March 18, 2013 Guidance Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies to address these business models. The Financial Crimes Enforcement Network (“FinCEN”) issued the March 18, 2013 interpretive guidance to clarify the applicability of the regulations implementing the Bank Secrecy Act (“BSA”) to persons creating, obtaining, distributing, exchanging, accepting, or transmitting virtual currencies.

Currency vs. Virtual Currency

FinCEN’s regulations define currency (also referred to as “real” currency) as “the coin and paper money of the United States or of any other country that [i] is designated as legal tender and that [ii] circulates and [iii] is customarily used and accepted as a medium of exchange in the country of issuance.” In contrast to real currency, “virtual” currency is a medium of exchange that operates like a currency in some environments, but does not have all the attributes of real currency. In particular, virtual currency does not have legal tender status in any jurisdiction. This guidance addresses “convertible” virtual currency. This type of virtual currency either has an equivalent value in real currency, or acts as a substitute for real currency.

FIN-2014-R001: Application of FinCEN’s Regulations to Virtual Currency Mining Operations (http://www.fincen.gov/news_room/rp/rulings/pdf/FIN-2014-R001.pdf)

FIN-2014-R002: Application of FinCEN’s Regulations to Virtual Currency Software Development and Certain Investment Activity (http://www.fincen.gov/news_room/rp/rulings/pdf/FIN-2014-R002.pdf)

book cover

LexisNexis’ Money Laundering, Asset Forfeiture and Recovery and Compliance: A Global Guide – This eBook is designed to provide the reader with accurate analyses of the AML/CTF Financial and Legal Intelligence, law and practice in the nations of the world with the most current references and resources. The eBook is organized around five main themes: 1. Money Laundering Risk and Compliance; 2. The Law of Anti-Money Laundering and Compliance; 3. Criminal and Civil Forfeiture; 4. Compliance and 5. International Cooperation.

Each chapter is made up of five parts. Part I, “Introduction,” begins with the analysis of money laundering risks and compliance with the recommendations of the Financial Action Task Force (FATF), and then concludes with the country’s rating based on the International Narcotics Control Strategy Report (INCSR) of the U.S. State Department.  Part II, “Anti-Money Laundering and Combating Terrorist Financing (AML/CTF)” and Part III, “Criminal and Civil Forfeiture,” evaluate the judicial and legislative structures of the country. Given the increasing global dimension of AML/CTF activities, these sections give special attention to how a country has created statutes, decisions, policies and the judicial enforcement procedures needed to combat money laundering and terrorist financing. Part IV, “Compliance,” examines the most critical processes for the prevention and detection of money laundering and terrorist financing. This section reflects on the practical elements that should be in place so that financial institutions can comply with AML/CTF requirements; these are categorized into the development and implementation of internal controls, policies and procedures. Part V, “International Cooperation,” reviews the compilation of international laws and treaties between countries working together to combat money laundering and terrorist financing.

As these unlawful activities can occur in any given country, it is important to identify the international participants who are cooperating to develop methods to obstruct these criminal activities. – See more at: http://www.lexisnexis.com/store/catalog/booktemplate/productdetail.jsp;jsessionid=0AE5A4DFFE9101B2B8254B9E9191D6C7.psc1706_lnstore_001?pageName=relatedProducts&catId=&prodId=prod-us-ebook-01701-epub#sthash.prR4HmVX.dpuf

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106 Swiss Banks seek Non-Prosecution Agreements and Non-Target Letter with the DOJ (but twice that, did not…)

Posted by William Byrnes on January 31, 2014


free chapter download here —> http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2457671   Number of Pages in PDF File: 58

On January 25, Kathryn Keneally, assistant attorney general of the Justice Department’s Tax Division, served as the keynote speaker for the American Bar Association Section of Taxation 2014 Midyear Meeting. to provide agency updates – including on the Switzerland banks non-prosecution agreement program that expired December 31.  

David Voreacos of Bloomberg News reported that Kathryn Keneally, in her keynote remarks, stated that 106 Swiss banks (of approximately 300 total) filed the requisite letter of intent to join the Program for Non-Prosecution Agreements or Non-Target Letters (the “Program“) by the December 31, 2013 deadline.  Renown attorney Jack Townsend reported on his blog on December 31st a list of 47 Swiss banks that had publicly announced the intention to submit the letter of intent, as well as each bank’s category for entry: six announced seeking category 4 status, eight for category 3, thirty-three for category 2.  106 is a large jump from the mid-December report by the international service of the Swiss Broadcasting Corporation (“SwissInfo”) that only a few had filed for non prosecution with the DOJ’s program (e.g. Migros Bank, Bank COOP, Valiant, Berner Kantonalbank and Vontobel). [1]

SwissInfo reported that Migros Bank selected Program Category 2 because “370 of its 825,000 clients, mostly Swiss citizens residing temporarily in the US or clients with dual nationality”, met the criteria of US taxpayer.  Valiant told SwissInfo that “an internal review showed it had never actively sought US clients or visited Americans to drum up business. The bank said less than 0.1% of its clients were American.”   The DOJ reported that in July 2013, Liechtensteinische Landesbank AG, a bank based in Vaduz, Liechtenstein, entered into a non-prosecution agreement and agreed to pay more than $23.8 million stemming from its offshore banking activities, and turned over more than 200 account files of U.S. taxpayers who held undeclared accounts at the bank.

William R. Davis and Lee A. Sheppard of Tax Analysts’ Worldwide Tax Daily reported that “one private practitioner estimated that some 350 banks holding 40,000 accounts have not come in.” (see “ABA Meeting: Keneally Reports Success With Swiss Bank Program”, Jan. 28, 2014, 2014 WTD 18-3.)

Two court orders entered in November 2013 in a New York federal court will further aid the offshore compliance investigations by authorizing the IRS to serve what are known as “John Doe” summonses on five banks to obtain information about possible tax fraud by individuals whose identities are unknown.  The John Doe summonses direct the five banks to produce records identifying U.S. taxpayers holding interests in undisclosed accounts at Zurcher Kantonalbank (ZKB) and its affiliates in Switzerland and at The Bank of N.T. Butterfield & Son Limited (Butterfield) and its affiliates in Switzerland, the Bahamas, Barbados, Cayman Islands, Guernsey, Hong Kong, Malta and the United Kingdom.  The summonses also direct the five banks to produce information identifying foreign banks that used ZKB’s and Butterfield’s correspondent accounts at the five banks to service U.S. clients.

Swiss banks Wegelin ceased operations because of the DOJ investigation and its consequent guilty plea.  Bank Frey followed suit because of the DOJ investigation and costs of future compliance with FATCA (its former head of private banking was indicted, and an > attorney in the same indictment pled guilty to conspiracy to commit tax fraud <).  Frey bank, in a November 28, 2013 statement, defended itself: “In October, the former Bank Frey & Co. AG decided to cease its banking activities and to terminate all of its client relationships. Beforehand, the Bank verified the tax compliance of all its US clients, and an external auditor confirmed so. In addition, the Bank examined all of its other clients to determine whether they had any link to the US. Again, an external auditor checked and confirmed these findings. As a result, it was determined that Bank Frey did not have any clients with potential US tax issues.”

What is the Program for Non-Prosecution Agreements or Non-Target Letters for Swiss Banks?

The Tax Division of the Department of Justice > released a statement on December 12 < strongly encouraging Swiss banks wanting to seek non-prosecution agreements to resolve past cross-border criminal tax violations to submit letters of intent by a Dec. 31, 2013 deadline required by the Program for Non-Prosecution Agreements or Non-Target Letters (the “Program“).  The Program was announced on Aug. 29, 2013, in a > joint statement < signed by Deputy Attorney General James M. Cole and Ambassador Manuel Sager of Switzerland (> See the Swiss government’s explanation of the Program < ).  Switzerland’s Financial Market Supervisory Authority (FINMA) has issued a deadline of Monday, December 16, 2013 for a bank to inform it with its intention to apply for the DOJ’s Program.[2]

The DOJ statement described the framework of the Program for Non-Prosecution Agreements: every Swiss bank not currently under formal criminal investigation concerning offshore activities will be able to provide the cooperation necessary to resolve potential criminal matters with the DOJ.  Currently, the department is actively investigating the Swiss-based activities of 14 banks.  Those banks, referred to as Category 1 banks in the Program, are expressly excluded from the Program.  Category 1 Banks against which the DoJ has initiated a criminal investigation as of 29 August 2013 (date of program publication).

On November 5, 2013 the Tax Division of the DOJ had released > comments about the Program for Non-Prosecution Agreements or Non-Target Letters for Swiss Banks < .

Swiss banks that have committed violations of U.S. tax laws and wished to cooperate and receive a non-prosecution agreement under the Program, known as Category 2 banks, had until Dec. 31, 2013 to submit a letter of intent to join the program, and the category sought. 

To be eligible for a non-prosecution agreement, Category 2 banks must meet several requirements, which include agreeing to pay penalties based on the amount held in undeclared U.S. accounts, fully disclosing their cross-border activities, and providing detailed information on an account-by-account basis for accounts in which U.S. taxpayers have a direct or indirect interest.  Providing detailed information regarding other banks that transferred funds into secret accounts or that accepted funds when secret accounts were closed is also a stipulation for eligibility. The Swiss Federal Department of Finance has released a > model order and guidance note < that will allow Swiss banks to cooperate with the DOJ and fulfill the requirements of the Program.

The DOJ’s November comments responded to such issues as: (a) Bank-specific issues and issues concerning individuals, (b) Choosing which category among 2, 3, or 4, (c) Qualifications of independent examiner (attorney or accountant), (d) Content of independent examiner report, (e) Information required under the Program – no aggregate account data, (f) Penalty calculation – permitted reductions, (g) Category 4 banks – retroactive application of FATCA Annex II, paragraph II.A.1, and (h) Civil penalties.

Regarding which category to file under, the DOJ replied: “Each eligible Swiss bank should carefully analyze whether it is a category 2, 3 or 4 bank. While it may appear more desirable for a bank to attempt to position itself as a category 3 or 4 bank to receive a non-target letter, no non-target letter will be issued to any bank as to which the Department has information of criminal culpability. If the Department learns of criminal conduct by the bank after a non-target letter has been issued, the bank is not protected from prosecution for that conduct. If the bank has hidden or misrepresented its activities to obtain a non-target letter, it is exposed to increased criminal liability.”

Category 2 Banks against which the DoJ has not initiated a criminal investigation but have reasons to believe that that they have violated US tax law in their dealings with clients are subject to fines of on a flat-rate basis.  Set scale of fine rates (%) applied to the untaxed US assets of the bank in question:

– Existing accounts on 01.08.2008: 20%
– New accounts opened between 01.08.2008 and 28.02.2009: 30%
– New accounts after 28.02.2009: 50%

Category 2 banks must delivery of information on cross-border business with US clients, name and function of the employees and third parties concerned, anonymised data on terminated client relationships including statistics as to where the accounts re-domiciled.

Category 3 banks have no reason to believe that they have violated US tax law in their dealings with clients and that can have this demonstrated by an independent third party. A category 3 bank must provide to the IRS the data on its total US assets under management and confirmation of an effective compliance programme in force.

Category 4 banks are a local business in accordance with the FATCA definition.

Regarding the requirement of the independence of the qualified attorney or accountant examiner, the DOJ stated that the examiner “is not an advocate, agent, or attorney for the bank, nor is he or she an advocate or agent for the government. He or she must provide a neutral, dispassionate analysis of the bank’s activities. Communications with the independent examiner should not be considered confidential or protected by any privilege or immunity.”  The attorney / accountant’s report must be substantive, detailed, and address the requirements set out in the DOJ’s non-prosecution Program.  The DOJ stated that “Banks are required to cooperate fully and “come clean” to obtain the protection that is offered under the Program.”

In the ‘bottom line’ words of the DOJ: “Each eligible Swiss bank should carefully weigh the benefits of coming forward, and the risks of not taking this opportunity to be fully forthcoming. A bank that has engaged in or facilitated U.S. tax-related or monetary transaction crimes has a unique opportunity to resolve its criminal liability under the Program. Those that have criminal exposure but fail to come forward or participate but are not fully forthcoming do so at considerable risk.”

[1] See Mathew Allen, US tax deal could prove deadly for small banks, SwissInfo, December 10, 2013, available at http://www.swissinfo.ch/eng/politics/US_tax_deal_could_prove_deadly_for_small_banks.html?cid=37506872

[2] See Supermarket banks sign up to US tax probe, SwissInfo, December 11, 2013, available at http://www.swissinfo.ch/eng/business/Supermarket_banks_sign_up_to_US_tax_probe.html?cid=37516028 (accessed December 12, 2013).

FATCA Compliance Program and Manual

book coverFifty contributing authors from the professional and financial industry provide 600 pages of expert analysis within the LexisNexis® Guide to FATCA Compliance (2nd Edition): many perspectives – one voice crafted by the primary author William Byrnes.

The LexisNexis® Guide to FATCA Compliance (2nd Edition) comprises 34 Chapters grouped in three parts: compliance program (Chapters 1–4), analysis of FATCA regulations (Chapters 5–16) and analysis of FATCA’s application for certain trading partners of the U.S. (Chapters 17–34), including intergovernmental agreements as well as the OECD’s TRACE initiative for global automatic information exchange protocols and systems. The 34 chapters include many practical examples to assist a compliance officer contextualize the regulations, IGA provisions, and national rules enacted pursuant to an IGA.  Chapters include by example an in-depth analysis of the categorization of trusts pursuant to the Regulations and IGAs, operational specificity of the mechanisms of information capture, management and exchange by firms and between countries, insights as to the application of FATCA and the IGAs within new BRIC and European country chapters.

Posted in Compliance, FATCA, Financial Crimes, information exchange | Tagged: , , , , | 2 Comments »

LexisNexis® Guide to FATCA Compliance release …

Posted by William Byrnes on May 3, 2013


Over 400 pages of compliance analysis !! now available with the 20% discount code link in this flier –> LN Guide to FATCA_flier.

The LexisNexis® Guide to FATCA Compliance was designed in consultation, via numerous interviews and meetings, with government officials, NGO staff, large financial institution compliance officers, investment fund compliance officers, and trust companies,  in consultation with contributors who are leading industry experts. The contributors hail from several countries and an offshore financial center and include attorneys, accountants, information technology engineers, and risk managers from large, medium and small firms and from large financial institutions.  A sample chapter from the 25 is available on LexisNexis: http://www.lexisnexis.com/store/images/samples/9780769853734.pdf

book coverContributing FATCA Expert Practitioners

Kyria Ali, FCCA is a member of the Association of Chartered Certified Accountants (“ACCA”) of Baker Tilly (BVI) Limited.

Michael Alliston, Esq. is a solicitor in the London office of Herbert Smith Freehills LLP.

Ariene d’Arc Diniz e Amaral, Adv.  is a Brazilian tax attorney of Rolim, Viotti & Leite Campos Advogados.

Maarten de Bruin, Esq. is a partner of Stibbe Simont. 

Jean-Paul van den Berg, Esq.  is a tax partner of Stibbe Simont.

Amanda Castellano, Esq. spent three years as an auditor with the Internal Revenue Service.

Luzius Cavelti, Esq. is an associate at Tappolet & Partner in Zurich.

Bruno Da Silva, LL.M.  works at Loyens & Loeff, European Direct Tax Law team and is a tax treaty adviser for the Macau special administrative region of the People’s Republic of China.

Prof. J. Richard Duke, Esq. is an attorney admitted in Alabama and Florida specializing over forty years in income and estate tax planning and compliance, as well as asset protection, for high net wealth families.  He served as Counsel to the Ludwig von Mises Institute for Austrian Economics 1983-1989.

Dr. Jan Dyckmans, Esq. is a German attorney at Flick Gocke Schaumburg in Frankfurt am Main.

Arne Hansen is a legal trainee of the Hanseatisches Oberlandesgericht (Higher Regional Court of Hamburg), Germany.

Mark Heroux, J.D. is a Principal in the Tax Services Group at Baker Tilly who began his career in 1986 with the IRS Office of Chief Counsel.

Rob. H. Holt, Esq. is a practicing attorney of thirty years licensed in New York and Texas representing real estate investment companies.

Richard Kando, CPA (New York) is a Director at Navigant Consulting and served as a Special Agent with the IRS Criminal Investigation Division where he received the U.S. Department of Justice – Tax Division Assistant Attorney General’s Special Contribution Award.

Denis Kleinfeld, Esq., CPA. is a renown tax author over four decades specializing in international tax planning of high net wealth families.  He is Of Counsel to Fuerst Ittleman David & Joseph, PL, in Miami, Florida and was employed as an attorney with the Internal Revenue Service in the Estate and Gift Tax Division.

Richard L. Knickerbocker, Esq.  is the senior partner in the Los Angeles office of the Knickerbocker Law Group and the former City Attorney of the City of Santa Monica.

Saloi Abou-Jaoude’ Knickerbocker Saloi Abou-Jaoude’ Knickerbocker is a Legal Administrator in the Los Angeles office of the Knickerbocker Law Group concentrated on shari’a finance.

Jeffrey Locke, Esq.  is Director at Navigant Consulting.

Josh Lom works at Herbert Smith Freehills LLP.

Prof. Stephen Polak is a Tax Professor at Thomas Jefferson School of Law’s International Tax & Financial Services Graduate Program where he lectures on Financial Products, Tax Procedure and Financial Crimes. As a U.S. Senior Internal Revenue Agent, Financial Products and Transaction Examiner he examined exotic financial products of large multi-national corporations. Currently, Prof. Polak is assigned to U.S. Internal Revenue Service’s three year National Research Program’s as a Federal State and Local Government Specialist where he examines states, cities, municipalities, and other governmental entities.

Dr. Maji C. Rhee is a professor of Waseda University located in Tokyo.

Jean Richard, Esq.  a Canadian attorney, previously worked for the Quebec Tax Department, as a Senior Tax Manager with a large international accounting firm and as a Tax & Estate consultant for a pre-eminent Canadian insurance company.  He is currently the Vice President and Sr. Wealth Management Consultant of the BMO Financial Group.

Michael J. Rinaldi, II, CPA. is a renown international tax accountant and author, responsible for the largest independent audit firm in Washington, D.C.

Edgardo Santiago-Torres, Esq., CPA, is also a Certified Public Accountant and a Chartered Global Management Accountant, pursuant to the AICPA and CIMA rules and regulations, admitted by the Puerto Rico Board of Accountancy to practice Public Accounting in Puerto Rico, and an attorney.

Hope M. Shoulders, Esq. is a licensed attorney in the State of New Jersey whom has previously worked for General Motors, National Transportation Safety Board and the Department of Commerce.

Jason Simpson, CAMS is the Director of the Miami office for Global Atlantic Partners, overseeing all operations in Florida, the Caribbean and most of Latin America. He has worked previously as a bank compliance employee at various large and mid-sized financial institutions over the past ten years.  He has been a key component in the removal of Cease and Desist Orders as well as other written regulatory agreements within a number of Domestic and International Banks, and designed complete AML units for domestic as well as international banks with over three million clients.

Dr. Alberto Gil Soriano, Esq.  worked at the European Commission’s Anti-Fraud Office in Brussels, and most recently at the Legal Department of the International Monetary Fund’s Financial Integrity Group in Washington, D.C. He currently works at the Fiscal Department of Uría Menéndez Abogados, S.L.P in Barcelona (Spain).

Lily L. Tse, CPA. is a partner of Rinaldi & Associates (Washington, D.C.).

Dr. Oliver Untersander, Esq. is partner at Tappolet & Partner in Zurich.

Mauricio Cano del Valle, Esq. is a Mexican attorney who previously worked for the Mexican Ministry of Finance (Secretaría de Hacienda) and Deloitte and Touche Mexico.  He was Managing Director of the Amicorp Group Mexico City and San Diego offices, and now has his own law firm. 

John Walker, Esq. is an accomplished attorney with a software engineering and architecture background.

Bruce Zagaris, Esq. is a partner at the Washington, D.C. law firm Berliner, Corcoran & Rowe, LLP. 

Prof. William Byrnes was a Senior Manager then Associate Director at Coopers & Lybrand, before joining academia wherein he became a renowned author of 38 book and compendium volumes, 93 book & treatise chapters and supplements, and 800+ articles.  He is Associate Dean of Thomas Jefferson School of Law’s International Taxation & Financial Services Program.

Dr. Robert J. Munro is the author of 35 published books is a Senior Research Fellow and Director of Research for North America of CIDOEC at Jesus College, Cambridge University, and head of the anti money laundering studies of Thomas Jefferson School of Law’s International Taxation & Financial Services Program.

Posted in Compliance, Estate Tax, Financial Crimes, information exchange, Money Laundering, OECD, Reporting, Tax Policy, Taxation, Wealth Management | Tagged: , , , , , , | 1 Comment »

Treasury & IRS Issue Final FATCA Regulations

Posted by William Byrnes on January 21, 2013


Treasury Advances Efforts to Secure International Participation, Streamline Compliance, and Prepare for Implementation of the Foreign Account Tax Compliance Act (January 17, 2013 U.S. Treasury Department of Public Affairs)

The U.S. Department of the Treasury and the Internal Revenue Service (IRS) on January 17, 2013 issued comprehensive final regulations implementing the information reporting and withholding tax provisions commonly known as the Foreign Account Tax Compliance Act (FATCA). Enacted by Congress in 2010, these provisions target non-compliance by U.S. taxpayers using foreign accounts. The issuance of the final regulations marks a key step in establishing a common intergovernmental approach to combating tax evasion.

These regulations provide additional certainty for financial institutions and government counterparts by finalizing the step-by-step process for U.S. account identification, information reporting, and withholding requirements for foreign financial institutions (FFIs), other foreign entities, and U.S. withholding agents.

The final regulations issued today:
 Build on intergovernmental agreements that foster international cooperation. The Treasury Department has collaborated with foreign governments to develop and sign intergovernmental agreements that facilitate the effective and efficient implementation of FATCA by eliminating legal barriers to participation, reducing administrative burdens, and ensuring the participation of all nonexempt financial institutions in a partner jurisdiction. In order to reduce administrative burdens for financial institutions with operations in multiple jurisdictions, the final regulations coordinate the obligations for financial institutions under the regulations and the intergovernmental agreements.

 Phase in the timelines for due diligence, reporting and withholding and align them with the intergovernmental agreements. The final regulations phase in over an extended transition period to provide sufficient time for financial institutions to develop necessary systems. In addition, to avoid confusion and unnecessary duplicative procedures, the final regulations align the regulatory timelines with the timelines prescribed in the intergovernmental agreements.

 Expand and clarify the scope of payments not subject to withholding. To limit market disruption, reduce administrative burdens, and establish certainty, the final regulations provide relief from withholding with respect to certain grandfathered obligations and certain payments made by nonfinancial entities.

 Refine and clarify the treatment of investment entities. To better align the obligations under FATCA with the risks posed by certain entities, the final regulations:

(1) expand and clarify the treatment of certain categories of low-risk institutions, such as governmental entities and retirement funds;

(2) provide that certain investment entities may be subject to being reported on by the FFIs with which they hold accounts rather than being required to register as FFIs and report to the IRS; and

(3) clarify the types of passive investment entities that must be identified and reported by financial institutions.

 Clarify the compliance and verification obligations of FFIs. The final regulations provide more streamlined registration and compliance procedures for groups of financial institutions, including commonly managed investment funds, and provide additional detail regarding FFIs’ obligations to verify their compliance under FATCA.

Progress on International Coordination, Including Model Intergovernmental Agreements

Since the proposed regulations were published on February 15, 2012, Treasury has collaborated with foreign governments to develop two alternative model intergovernmental agreements that facilitate the effective and efficient implementation of FATCA. These models serve as the basis for concluding bilateral agreements with interested jurisdictions and help implement the law in a manner that removes domestic legal impediments to compliance, secures wide-spread participation by every non-exempt financial institution in the partner jurisdiction, fulfills FATCA’s policy objectives, and further reduces burdens on FFIs located in partner jurisdictions. Seven countries have already signed or initialed these agreements.

Today, Treasury announced for the first time that Norway has joined the United Kingdom, Mexico, Denmark, Ireland, Switzerland, and Spain as countries that have signed or initialed model agreements. Treasury is engaged with more than 50 countries and jurisdictions to curtail offshore tax evasion, and more signed agreements are expected to follow in the near future.

Additional Background on the Model Agreements
On July 26, 2012, Treasury published its first model intergovernmental agreement (Model 1 IGA). Instead of reporting to the IRS directly, FFIs in jurisdictions that have signed Model 1 IGAs report the information about U.S. accounts required by FACTA to their respective governments who then exchange this information with the IRS.  Treasury also developed a second model intergovernmental agreement (Model 2 IGA) published on November 14, 2012. A partner jurisdiction signing an agreement based on the Model 2 IGA agrees to direct its FFIs to register with the IRS and report the information about U.S. accounts required by FATCA directly to the IRS.

These agreements do not offer an exemption from FATCA for any jurisdiction but instead offer a framework for information sharing pursuant to existing bilateral income tax treaties. Under both models, all financial institutions in a partner jurisdiction that are not otherwise excepted or exempt must report the information about U.S. accounts required by FATCA. Therefore, the IRS receives the same quality and quantity of
information about U.S. accounts from FFIs in jurisdictions with IGAs as it receives from FFIs applying the final regulations elsewhere, but these agreements help streamline reporting and remove legal impediments to
compliance.

Background on FATCA

FATCA was enacted in 2010 by Congress as part of the Hiring Incentives to Restore Employment (HIRE) Act. FATCA requires FFIs to report to the IRS information about financial accounts held by U.S. taxpayers,
or by foreign entities in which U.S. taxpayers hold a substantial ownership interest. In order to avoid withholding under FATCA, a participating FFI will have to enter into an agreement with the IRS to:

 Identify U.S. accounts,
 Report certain information to the IRS regarding U.S. accounts, and
 Withhold a 30 percent tax on certain U.S.-connected payments to non-participating FFIs and account holders who are unwilling to provide the required information.

Registration will take place through an online system. FFIs that do not register and enter into an agreement with the IRS will be subject to withholding on certain types of payments relating to U.S. investments.

Posted in Compliance, Financial Crimes, Money Laundering, Reporting, Tax Policy | Tagged: , , , , , , , | Leave a Comment »

Money Laundering, Asset Forfeiture and Recovery, and Compliance: A Global Guide

Posted by William Byrnes on December 2, 2011


Register now to access Money Laundering, Asset Forfeiture and Recovery, and Compliance: A Global Guide, and receive a complimentary chapter in PDF! Order before December 15, 2011 and save 20%!*

View more information here

Written by Professors William Byrnes & Robert Munro of Thomas Jefferson School of Law, the new publication contains in-depth coverage of the laws and government actions in 47 nations to combat money laundering, terrorist funding and similar practices. Each nation has its own chapter with sections covering:

  • Anti-money laundering and counter-terrorist financing;
  • Criminal and civil forfeiture;
  • Compliance & risk; and
  • International cooperation.

The remaining nations of the world will be covered in quarterly updates scheduled to go live in 2012 and 2013.

Because the new product spans so many practice areas, it appears on seven area-of-law pages (Accounting, Banking, Criminal, Foreign Law, International Law, International Trade, and Taxation), plus Lexis Tax Center.  Just look under “Search Analysis, Law Reviews & Journals”.

This title is also available as an ebook and mobile-book.

Posted in Financial Crimes, Money Laundering | Tagged: , , , | Leave a Comment »

FINRA Puts Disciplinary Histories on Web

Posted by William Byrnes on September 29, 2011


Disciplinary histories are becoming easier to access. Brokers’ disciplinary histories are now prominently displayed for the web savvy public; they’re no longer filed away at the Financial Industry Regulatory Authority (FINRA), where only the most diligent investors will find them. FINRA has made your disciplinary history freely and easily available to the public by launching a web-accessible discipline database.

Whether the easy accessibility of the information is a  beneficial will depend on a broker’s history. Those with a clean record will undoubtedly benefit from the easy accessibility of the information and the ease with which clients and prospects can search their record and compare it to others. Those with a negative history, whether deserved or not, may now find themselves on the defensive with prospects more often.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of FINRA complaint and disciplinary procedure in Advisor’s Journal, see FINRA Rule 45-30: Expansive New Complaint Report Requirements (CC 11-96) & Broker Bonus Arbitration Bottleneck Forces FINRA to Reconsider Arbitrator Qualification Standards (CC 11-08).

Posted in Financial Crimes, Wealth Management | Tagged: , , , , , , , | Leave a Comment »

Carriers Targeted by Suit Over Losses on Madoff Investments

Posted by William Byrnes on February 3, 2011


New York Life Insurance Co. and Massachusetts Mutual Life Insurance Co. are caught in the Madoff crossfire. The carriers are being sued by Cummins Inc., which alleges that premiums paid by Cummins to the two carriers were partially invested with Bernard Madoff Investment Securities, LLC (BMIS). Cummins lost roughly $27 million as a result of the investments.

How exposed are MassMutual and New York Life variable products to Madoff investments?

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of advisor scams in Advisor’ Journal, see Three Advisors Sentenced to Prison for Faith-Based Scam (CC 10-126) and Advisor Fakes Death to Avoid Fraud Charges (CC 10-83).

 

Posted in Financial Crimes | Tagged: , , , | Leave a Comment »

Mutual Assistance in the Recovery of Tax Claims

Posted by William Byrnes on October 26, 2009


Historical anecdotes relating to tax information exchange and cross-border assistance with tax collection (continued)

This week I continue in my historical anecdotes leading back up to the subject of cross-border tax (financial) information exchange and cross-border tax collection.  In this blogticle I turn to the OECD Model Convention for Mutual Administrative Assistance in the Recovery of Tax Claims and the EU Directive on the Mutual Assistance for the Recovery of Claims  In our live webinars in the tax treaty course, Marshall Langer will continue to address these issues indepthly.

1981 OECD Model Convention for Mutual Administrative Assistance in the Recovery of Tax Claims

This 1981 OECD Model provides for both the exchange of information (article 5) and the assistance in recovery (article 6), which state respectively:

EXCHANGE OF INFORMATION

At the request of the applicant State the requested State shall provide any information useful to the applicant State in the recovery of its tax claim and which the requested State has power to obtain for the purpose of recovering its own tax claims.

ASSISTANCE IN RECOVERY

1. At the request of the applicant State the requested State shall recover tax claims of the first-mentioned State in accordance with the laws and administrative practice applying to the recovery of its own tax claims, unless otherwise provided by this Convention.

Procedurally, the documentation must state (1) the authority requesting, (2) name, address and other particulars for identification of the taxpayer, (3) nature and components of the tax claim, and (4) assets of which the Requesting State is aware of from which the claim may be recovered.  The nature of the tax claim must include documentary evidence in the form of the instrumentality establishing that the tax is determined, that it is due, and that it is without further recourse to contest under the Requesting State’s laws.  The applicable Statute of Limitation is of the Requesting State.

The Requested State’s obligation is limited, as under the OECD DTA Model Article 26 and 27, if the request requires the Requested State to go beyond its own or the Requesting State’s capacity to either provide information or take administrative actions pursuant to their respective internal laws.  The Requesting State has a duty to exhaust its own reasonable collection remedies before making the request which procedural requirement may be relied upon by the Requested State.  All requests are also limited by ordre public.

1988 Convention On Mutual Administrative Assistance In Tax Matters

Coming into force April 1, 1995 amongst the signatories Belgium, Denmark, Finland, Iceland, Netherlands, Norway, Poland, Sweden, and the US, this multilateral convention was originally agreed in 1988.  The Convention provides for exchange of information, foreign examination, simultaneous examination, service of documents and assistance in recovery of tax claims.

Tax covered includes income, capital gains, wealth, social security, VAT and sales tax, excise tax, immovable property tax, movable property tax such as automobiles, and any other tax save customs duties.  The tax also includes any penalties and recovery costs.  The tax may have been levied by the State and any of its subdivisions. 

The convention allows the request of information regarding the assessment, collection, recovery and enforcement of tax.  The information may be used for criminal proceedings on a case-by-case basis pursuant to the Requested State agreeing, unless the States have waived the requirement of agreement.

Spontaneous provision of information shall be provided without request when a State with information:

(1) has “grounds for supposing” a loss of tax to another State,

(2) knows that a taxpayer receives a tax reduction in its State that would increase the tax in the other State,

(3) is aware of business dealings between parties located in both States that saves tax,

(4) has grounds for supposing an artificial intro-group transfer of profits, and

(5) that was obtained from the other State has led to further information about taxes in the other State.  

Similar to the OECD Model Conventions above, procedurally the requesting documentation must state (1) the authority requesting and (2) name, address and other particulars for identification of the taxpayer.  For an information request, the document should include in what form the information should be delivered.  For a tax collection assistance request, (1) the tax must be evidenced by documentation in the form of the instrumentality establishing that the tax is determined, that it is due and that it is without further recourse to contest, (2) the nature and components of the tax claim, and (3) assets of which the Requesting State is aware of from which the claim may be recovered. 

This Multilateral Convention’s limitations follow the 1981 and 2003 OECD Model, but further provide for a non-discrimination clause.  The non-discrimination clause limits providing assistance if such assistance would lead to discrimination between a requested State’s national and requesting State’s nationals in the same circumstances.

2001 EU Directive on the Mutual Assistance for the Recovery of Claims relating to Certain Levies, Duties, Taxes and Other Measures

The OECD is not alone in its quest to improve tax information exchanges.  On June 15, 2001 the EU Commission issued a Directive that amended a previous 1976 Directive which substantially changed the impact of that 1976 Directive (on mutual assistance for the recovery of claims resulting from operations forming part of the system of financing the European Agricultural Guidance and Guarantee Fund, and of agricultural levies and customs duties and in respect of value added tax and certain excise duties).

The 2001 Directive provided that Member States enact regulations that provide for the implementation of a number of EU Directives on mutual assistance between Member States of the Community on the provision of information in respect of, and the recovery in the State of, claims made by Other Member States in respect of debts due to the Member State in question from:

  • Import & Export Duties
  • Value Added Tax
  • Excise duties on manufactured tobacco, alcohol and alcoholic beverages and mineral oils
  • Taxes on income and capital
  • Taxes on insurance premiums
  • Interest, administrative penalties and fines, and costs incidental to these claims (with the exclusion of any sanction in respect of which the act or commission giving rise to the sanction if committed in the State would be criminal in nature)
  • Refunds, interventions and other measures forming part of the system of financing the European Agricultural Guidance and Guarantee Fund
  • Levies and other duties provided for under the common organization of the market of the market for the sugar section

In summary, the Directive provides for one Member State’s competent authority at the request of another Member State’s competent authority to disclose to the requester’s competent authority any information in relation to a claim which is required to be disclosed by virtue of the Directive.
On receipt of a request, the Revenue Commissioners can decline a request to provide information in the following circumstances:

– if the information would, in the opinion of the Competent Authority, be liable to prejudice the security of the State or be contrary to public policy;

– if the Competent Authority would not be able to obtain the information requested for the purpose of recovering a similar claim, or

– if the information, in the opinion of the Competent Authority, would be materially detrimental to any commercial, industrial or professional secrets.

Any information provided to a competent authority under the enacting regulations pursuant to the Directive can only be used for the purposes of the recovery of a claim or to facilitate legal proceedings to the recovery of such a claim.

Under the Directive, the collecting Member State is obliged to collect the amount of a claim specified in any request received from a competent authority in another Member State and remit the amount collected to that competent authority.

In the Tax Treaties course, Prof. Marshall Langer will be undertaking an in-depth analysis of these instruments and issues raised above regarding the IRS efforts to collect tax via assistance from foreign states.  For further tax treaty course information, please contact me at William Byrnes (wbyrnes@tjsl.edu).

Posted in Compliance, Financial Crimes, information exchange, Legal History, OECD, Taxation | Tagged: , , , , , , | 1 Comment »

Tax Information Exchange (TIEA): an Opportunity for Latin America and Switzerland to Clawback the Capital Flight to America?

Posted by William Byrnes on September 3, 2009


Tax Information Exchange (TIEA): an Opportunity for Latin American to Clawback Its Capital Flight Back from America?  Perhaps even Switzerland?

This blogticle is a short note regarding the potential risk management exposure of US financial institutions’ exposure to a UBS style strategy being employed by foreign revenue departments, such as that of Brazil, and Switzerland.  Of course, such foreign government strategies can only be productive if US financial institutions are the recipient of substantial funds that are unreported by foreign nationals to their respective national revenue departments and national reserve banks, constituting tax and currency/exchange control violations in many foreign countries. 

The important issue of Cross Border Assistance with Tax Collection takes on more relevance when foreign governments begin seeking such assistance from the USA Treasury in collecting and levying against the hundred thousand plus properties purchased with unreported funds, and whose asset value may not have been declared to foreign tax authorities where such reporting is required in either the past, or the current, tax years.  

In the 15 week online International Tax courses starting September 14, we will be undertaking an in-depth analysis of the topics covered in this blog during the 10 online interactive webinars each week.

Tax Elasticity Of Deposits

In the 2002 article International Tax Co-operation and Capital Mobility, prepared for an ECLAC report, from analysing data from the Bank for International Settlements (“BIS”) on international bank deposits, Valpy Fitzgerald found “that non-bank depositors are very sensitive to domestic wealth taxes and interest reporting, as well as to interest rates, which implies that tax evasion is a determinant of such deposits….”[1]  Non-bank depositors are persons that instead invest in alternative international portfolios and financial instruments. 

Estimating How Much Latin American Tax Evasion are US Banks Involved With?

Within two weeks I will post a short blogticle that I am preparing regarding an estimated low figure of $300B capital outflow that has begun / will occur from the USA pursuant to its signing of a TIEA with Brazil.  Some South Florida real estate moguls have speculated that this TIEA has played a substantial role in the withdrawal of Brazilian interest in its real estate market, which has partly led to the sudden crash in purchases of newly contrasted condominium projects.  

Three historical benchmarks regarding the imposition of withholding tax on interest illustrate the immediate and substantial correlation that an increase in tax on interest has on capital flight.  The benchmarks are (1) the 1964 US imposition of withholding tax on interest that immediately led to the creation of the London Euro-dollar market;[2] (2) the 1984 US exemption of withholding tax on portfolio interest that immediately led to the capital flight from Latin America of US$300 billion to US banks;[3] and (3) the 1989 German imposition of withholding tax that led to immediate capital flight to Luxembourg and other jurisdictions with banking secrecy[4].  The effect was so substantial that the tax was repealed only four months after imposition.

The Establishment of London as an International Financial Center

The 1999 IMF Report on Offshore Banking concluded that the US experienced immediate and significant capital outflows in 1964 and 1965 resulting from the imposition of a withholding tax on interest.  Literature identifies the establishment of London as a global financial centre as a result of the capital flight from the US because of its imposition of Interest Equalisation Tax (IET) of 1964.[5]  The take off of the embryonic London eurodollar market resulted from the imposition of the IET.[6]  IET made it unattractive for foreign firms to issue bonds in the US.  Syndicated bonds issued outside the US rose from US$135 million in 1963 to US$696 million in 1964.[7]    In 1964-65, the imposition of withholding tax in Germany, France, and The Netherlands, created the euromark, eurofranc and euroguilder markets respectively.[8]  

The Establishment of Miami as an International Financial Center

Conversely, when in 1984 the US enacted an exemption for portfolio interest from withholding tax, Latin America experienced a capital flight of $300 billion to the US.[9]  A substantial portion of these funds were derived from Brazil.  In fact, some pundits have suggested that Miami as a financial center resulted not from the billions generated from the laundering of drug proceeds which had a tendency to flow outward, but from the hundreds of billions generated from Latin inward capital, nearly all unreported to the governments of origination.

The Establishment of Luxembourg as an International Financial Center

In January of 1989, West Germany imposed a 10% withholding tax on savings and investments.  In April it was repealed, effective July 1st, because the immediate cost to German Banks had already reached DM1.1 billion.[10]  The capital flight was so substantial that it caused a decrease in the value of the Deutsche mark, thereby increasing inflation and forcing up interest rates.  According to the Financial Times, uncertainty about application of the tax, coupled with the stock crash in 1987, had caused a number of foreign investment houses to slow down or postpone their investment plans in Germany.  A substantial amount of capital went to Luxembourg, as well as Switzerland and Lichtenstein.

Switzerland’s Fisc May Come Out Ahead

Perhaps ironically given the nature of the UBS situation currently unfolding, a Trade Based Money Laundering study by three prominent economists and AML experts focused also on measuring tax evasion uncovered that overvalued Swiss imports and undervalued Swiss exports resulted in capital outflows from Switzerland to the United States in the amount of $31 billion within a five year time span of 1995-2000.[11]  That is, pursuant to this transfer pricing study, the Swiss federal and cantonal revenue authorities are a substantial loser to capital flight to the USA.  The comparable impact of the lost tax revenue to the much smaller nation of Switzerland upon this transfer pricing tax avoidance (and perhaps trade-based money laundering) may be significantly greater than that of the USA from its lost revenue on UBS account holders.  Certainly, both competent authorities will have plenty of work on their hands addressing the vast amount of information that needs to be exchanged to stop the bleeding from both countries’ fiscs.

Let me know if you are interested in further developments or analysis in this area.  Prof. William Byrnes (www.llmprogram.org)


[1] International Tax Cooperation and Capital Mobility, Valpy Fitzgerald, 77 CEPAL Review 67 (August 2002) p.72.

[2] See Charles Batchelor, European Issues Go from Strength to Strength: It began with Autostrade’s International Bond in 1963, The Financial Times (September 25, 2003) p.33; An E.U. Withholding Tax?

[3] Globalisation, Tax Competition, and the Fiscal Crisis of the Welfare State, Reuven Avi-Yonah, 113 HVLR 1573, 1631 (May 2000).

[4] Abolition of Withholding Tax Agreed in Bonn Five-Month-Old Interest Withholding To Be Repealed, 89 TNI 19-17.

[5] See Charles Batchelor, European Issues Go from Strength to Strength: It began with Autostrade’s International Bond in 1963, The Financial Times (September 25, 2003) p.33; An E.U. Withholding Tax?

[6] 1999 IMF Offshore Banking Report  p.16.

[7] 1999 IMF Offshore Banking Report  p.16-17.

[8] 1999 IMF Offshore Banking Report  p.17.

[9] Globalisation, Tax Competition, and the Fiscal Crisis of the Welfare State, Reuven Avi-Yonah, 113 HVLR 1573, 1631 (May 2000).

[10] Abolition of Withholding Tax Agreed in Bonn Five-Month-Old Interest Withholding To Be Repealed, 89 TNI 19-17.

[11] Maria E. de Boyrie, Simon J. Pak and John S. Zdanowicz The Impact Of Switzerland’s Money Laundering Law On Capital Flows Through Abnormal Pricing In International Trade Applied 15 Financial Economics 217–230 (Rutledge 2005).

Posted in Compliance, Financial Crimes, information exchange, Legal History, OECD, Taxation, Uncategorized | Tagged: , , , , , , | 1 Comment »

Tax Information Exchange and Collection Assistance

Posted by William Byrnes on August 22, 2009


Over the past weeks, we have opened the exploration of issues addressing business and legal service outsourcing, new trends in wealth management, the history and taxation of charities, anti money laundering regulations, compliance training, and even The Obama administrations’ proposed international tax rule changes.  Many topics have been left hanging for which further researched exploration is warranted.

However this week, because of the continuing interest in Cross-Border Information Exchange, primarily due to the press about the UBS settlement and the soon turning over of approximately 5,000 tax-evading US account holders, over the coming weeks we will explore Information Exchange and Cross Border Assistance with Tax Collection.

Keep your emails coming about suggestion for this blog, and your comments.  I have been keeping up with answering each of you within a day or two.  Prof. William Byrnes (wbyrnes@tjsl.edu)

Cross-Border Information Exchange and Mutual Assistance (with regard to Tax) 

To uncover and analyze the issues of cross-border tax information exchange and also the mutual assistance with regard to tax collection by one jurisdiction on behalf of another one, we must at a minimum over the next few weeks examine the following:

(1) the behaviour of the OECD and its members toward the micro economy jurisdictions versus the OECD’s treatment amongst it own members and other economically significantly trade partners;

(2) the EU Savings Directive and other related EU Directives;

(3) the US proposal to automatically report to EU State’s bank interest of their residents;

(4) the tax application of the mutual assistance and extradition treaty between the US and EU;

(5) the geo-politics of tax information exchange agreements (TIEAs) such as positive inducements made and broken by the US to the Caribbean, and the inverse being recent threats made by the OECD to the international financial centers;

(6) other international initiatives for the provision of tax information, such as the FATF and Offshore Group of Banking Supervisors (OGBS) partnership and finally,

(7) the procedural process and practicalities of seeking tax information pursuant to an international agreement, be it a full tax treaty, a limited agreement only applying to exchange of information, another type of bi-lateral or multi-lateral instrument, or just simply domestic legislation. 

Tax Information Exchange Background

We will need to consult the following exemplary documents (amongst many others) over my coming blogticles, being: 

  • OECD Model DTA – Tax Information Exchange (Art. 26 & 27)
  • OECD Model Convention for Mutual Administrative Assistance in the Recovery of Tax Claims
  • Convention on Mutual Administrative Assistance in Tax Matters (OECD & Council of Europe)
  • UN Model DTA – Tax Information Exchange (Art. 26)
  • OECD Model Tax Information Exchange Agreement (TIEA)
  • EU Directive on Exchange of Information
  • EU Directive on Mutual Assistance for the Recovery of Claims
  • EU Savings Directive
  • Mutual Legal Assistance Treaties (MLATs) and US-EU MLATs
  • Improving Access to Bank Information for Tax Purposes
  • Financial action task force (FATF)
  • Offshore Group of Banking Supervisors Best Practices (OGBS)

Exchange Pursuant to the OECD Conventions

OECD MODEL DTA – Tax Information Exchange (Art. 26 & 27)

Article 26, Exchange of Information, of the 2003 OECD Model Convention reads: 

The competent authorities of the Contracting States shall exchange such information as is necessary for carrying out the provisions of this Convention or of the domestic laws concerning taxes of every kind and description imposed on behalf of the Contracting States, or of their political subdivisions or local authorities, insofar as the taxation thereunder is not contrary to the Convention. …  Any information received by a Contracting State shall be treated as secret in the same manner as information obtained under the domestic laws of that State and shall be disclosed only to persons or authorities (including courts and administrative bodies) concerned with the assessment or collection of, the enforcement or prosecution in respect of, or the determination of appeals in relation to the taxes referred to in the first sentence. Such persons or authorities shall use the information only for such purposes. They may disclose the information in public court proceedings or in judicial decisions.

 The 2003 OECD Model, pursuant to its Commentary to the article, allows the following methods of information disclosure[1]

  • By request
  • Automatically
  • Spontaneously
  • Simultaneous examination of same taxpayer between the two States
  • Allowing requesting foreign Revenue examination of taxpayer in requested State
  • Industry-wide exchange of tax information without identifying specific taxpayers
  • Other methods to be developed between the States

The 2003 Model established limitations on the request of information:[2]

  • Requested State is not obliged to go beyond its own or the Requesting State’s capacity pursuant to its internal laws in providing information or taking administrative actions.
  • Requested State should not invoke tax secrecy as a shield.
  • Requested State is not obliged to supply information which would disclose any trade, business, industrial, commercial or professional secret or trade process.
  • Requested State is not obliged to supply information regarding its own vital interests or contrary to public policy (Ordre Public).

 Article 27 of the 2003 Model addresses assistance in the collection of taxes, stating:

     1. The Contracting States shall lend assistance to each other in the collection of revenue claims. …

     2. The term “revenue claim” as used in this Article means an amount owed in respect of taxes of every kind and description imposed on behalf of the Contracting States, or of their political subdivisions or local authorities, insofar as the taxation thereunder is not contrary to this Convention or any other instrument to which the Contracting States are parties, as well as interest, administrative penalties and costs of collection or conservancy related to such amount.

     3. … That revenue claim shall be collected by that other State in accordance with the provisions of its laws applicable to the enforcement and collection of its own taxes as if the revenue claim were a revenue claim of that other State.

The limitations remain the same as under Article 26 but also include that the Requesting State must have exhausted reasonable efforts of collection and conservancy pursuant to its domestic law.  Also, the Requested State’s obligation is limited if its administrative burden would exceed the tax collected for the Requesting State.

2003 OECD Model Agreement for Tax Information Exchange (TIEA)

The OECD Model TIEA was developed by an OECD Working Group consisting of the OECD Members and delegates from Aruba, Bermuda, Bahrain, Cayman Islands, Cyprus, Isle of Man, Malta, Mauritius, the Netherlands Antilles, the Seychelles and San Marino.  The OECD Model TIEA obviates from several principles established in the 2003 OECD Model DTA, 2001 UN Model, 1981 OECD Convention on Tax Claims and 1988 OECD Convention on Administrative Assistance.

The Model TIEA provides that the Parties shall give “information that is foreseeably relevant to the determination, assessment and collection of such taxes, the recovery and enforcement of tax claims, or the investigation or prosecution of tax matters.”  The Model TIEA allows for a two year phase between information sought in criminal tax matters, i.e. criminal tax evasion, versus the later extension to information sought in civil tax matters i.e. civil tax evasion but importantly also tax avoidance.   

The TIEA obviates from the traditional requirement of dual criminality, that is the underlying crime for which information is sought should be a crime in both Parties’ domestic laws: “Such information shall be exchanged without regard to whether the conduct being investigated would constitute a crime under the laws of the requested Party if such conduct occurred in the requested Party.”

Because the OECD Model TIEA is meant to be applied to negotiations with jurisdictions that do not have a direct tax system, the TIEA provides that the Requested Party must seek requested information even when it does not need the information for its own tax purposes.  But a Requested State is not obliged to exceed the power to gather information that is allowable under its laws.  However, the TIEA is specific that each Party is obliged to provide:

“a) information held by banks, other financial institutions, and any person acting in an agency or fiduciary capacity including nominees and trustees;

b) information regarding the ownership of companies, partnerships, trusts, foundations, “Anstalten” and other persons,…ownership information on all such persons in an ownership chain; in the case of trusts, information on settlors, trustees and beneficiaries; and in the case of foundations, information on founders, members of the foundation council and beneficiaries….”

Procedurally, the Requesting State’s competent authority must provide, in order to “demonstrate the foreseeable relevance of the information to the request” the following information:

“(a) the identity of the person under examination or investigation;

(b) a statement of the information sought including its nature and the form in which the applicant Party wishes to receive the information from the requested Party;

(c) the tax purpose for which the information is sought;

(d) grounds for believing that the information requested is held in the requested Party or is in the possession or control of a person within the jurisdiction of the requested Party;

(e) to the extent known, the name and address of any person believed to be in possession of the requested information;

(f) a statement that the request is in conformity with the law and administrative practices of the applicant Party, that if the requested information was within the jurisdiction of the applicant Party then the competent authority of the applicant Party would be able to obtain the information under the laws of the applicant Party or in the normal course of administrative practice and that it is in conformity with this Agreement;

(g) a statement that the applicant Party has pursued all means available in its own territory to obtain the information, except those that would give rise to disproportionate difficulties.”

Next Blogticle

In our next blogticle we will next turn to the 1988 Convention On Mutual Administrative Assistance In Tax Matters and continue form there.  In case you are wondering what this Convention is and why it is relevant, it came into force April 1, 1995 amongst the signatories Belgium, Denmark, Finland, Iceland, Netherlands, Norway, Poland, Sweden, and the US,  providing for exchange of information, foreign examination, simultaneous examination, service of documents and assistance in recovery of tax claims.

In the Tax Treaties course starting September 14, Prof. Marshall Langer will be undertaking an in-depth analysis f these instruments and issues raised above. 


[1] Commentary to Article 26, paragraph 1 sections 9. and 9.1, OECD Model Tax Convention, 2003.

[2] Commentary to Article 26, paragraph 2 sections 14, 15 and 16, OECD Model Tax Convention, 2003.

Posted in Compliance, Financial Crimes, Taxation | Tagged: , , | 3 Comments »

Is AML Training Effective or Whitewashing? Part II

Posted by William Byrnes on August 15, 2009


In my previous blogticle I presented a few of the very many examples of regulatory fines for financial institutions failing to meet minimum money laundering training for staff, in many cases leading to failures of their money laundering risk management system.  Hereunder I turn to expenditures on money laundering training.

Consider that the above regulatory enforcement actions, and those referred to by the GAO report, were issued at least three years after the US financial institutions were put on initial notice of the hawkish nature of enforcement of AML programs.  Certainly, neither management nor staff wanted to, by example, be responsible for over 2,000 filing errors for only 1,639 SARs.  Riggs divestiture of its international banking operations certainly provided a resounding warning for boards to take their AML compliance responsibilities seriously.  Enforcement actions generally lead to management and staff level firing holding persons accountable for their errors.

In a global review of money laundering legislation throughout financial centers, none of the legislation provides specific benchmarks or at least an assessable minimum standard for a level of training of the staff or the MLRO.  Further, the regulator guidance, where available, is scant to the issue of quality assurance of training.  The US Federal Financial Institutions Examination Council’s (“FFIEC”) Bank Secrecy Act/Anti Money Laundering Manual (“Manual”) states that a bank must –

        “[T]rain employees to be aware of their responsibilities under the BSA regulations and internal policy guidelines”

 whereas the UK FSA Handbook states that a firm’s should ensure that its –

         “systems and controls include (1) appropriate training for its employees in relation to money laundering …”.[1] 

The FFIEC Manual’s most specific example of what should be contained within a training program is “…training for tellers should focus on examples involving large currency transactions or other suspicious activities; training for the loan department should provide examples involving money laundering through lending arrangements.”

Aren’t Expenditures on Training Going up, uP, UP?

Thus, to avoid enforcement actions and thus being fired, in some markets the training budgets and the compliance cost per-dollar-of-deposit have more than doubled.  By example, from 2002 – 2005, banks offering international financial services in Miami reported a 160% increase both in the total costs of staff resources devoted to AML compliance and in the compliance costs of staff resources per dollar of deposit.[2] 

Senior banking management perceives rising and unpredictable compliance costs that undermine global competitiveness as the most significant threats to the future growth of banking.[3]  The cost of AML compliance increased around 58% globally and 71% in North America between 2004 and 2007.[4]

A 2005 survey of Florida banks engaged in international banking estimated the staffing cost of AML compliance at nearly $25 million. The study concluded that compliance costs are not uniform across institutions, even after making adjustment for size.[5] Banks estimate that training costs and transaction monitoring will require the largest investment of all AML activities. All North American banks provide AML training for nearly all of their employees. See KPMG’s Figure in its AML Survey.

Larger institutions (measured in terms of deposits) typically devote more resources and spend more on compliance than smaller ones, of course, but the compliance burden does not rise proportionately with size.  That is, survey data indicates that economies of scale in compliance are present, and that compliance costs per dollar of deposits is greater for smaller institutions than for larger ones.[6] Even after the dramatic increases in compliance costs and regulatory complexity since 2001, the regulatory environment is likely to become increasingly challenging in coming years.

In a 2006 Economist Intelligence Unit survey, international senior bank executives were asked about the costs of compliance with government regulation. When asked what changes they expected in the regulatory environment over the coming three to five year, over 91% stated that they expected regulations affecting their institution to grow in complexity and breadth, 88% stated that compliance with industry regulations will become more onerous, and 81% reported that they expect penalties for non-compliance to increase in severity.[7]


[1] http://www.ffiec.gov/pdf/bsa_aml_examination_manual2007.pdf and http://fsahandbook.info/FSA/html/handbook/SYSC/6/3#D78.

[2] The Washington Economics Group, The Economic Impacts of International Banking in Florida and Industry Survey: 2005.

[3] The Washington Economics Group, The Economic Impacts of International Banking in Florida and Industry Survey: 2005.

[4] KPMG’s Global Anti-Money Laundering Survey 2007.

[5] The Washington Economics Group, The Economic Impacts of International Banking in Florida and Industry Survey: 2005.

[6] The Washington Economics Group, The Economic Impacts of International Banking in Florida and Industry Survey: 2005.

[7] Economist Intelligence Unit, Bank Compliance: Controlling Risk and Improving Effectiveness (2006).

Posted in Compliance, Financial Crimes, Money Laundering | Tagged: , , | 2 Comments »

 
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