International Financial Law Prof Blog

Editor: William Byrnes
Texas A&M University
School of Law

Thursday, August 6, 2015

Swiss Banks Folding Like a House of Cards - Four More Go Down But One Receives Get Out Of Jail for Free Card

A couple days ago Bank EKI Genossenschaft (Bank EKI) entered into a non prosecution agreement Justice logo with the US Department of Justice, admitting it assisted US taxpayer with tax evasion.  Privatbank Reichmuth & Co., Banque Cantonale du Jura SA and Banca Intermobiliare di Investimenti e Gestioni (Suisse) SA then today announced their non-prosecution agreements. One bank will pay no penalty, while the other three will pay penalties $400,000, $2.6 million, and $970,000 respectively, and turn over client records.  

The banks started with 201 clients among them in 2008, but one bank closed its non-compliant accounts and thus has been received a "get out of jail" free.

Since Aug. 1, 2008, Bank EKI held a total of 64 U.S.-related accounts with just over $21 million in aggregate assets.  Bank EKI will pay a penalty of $400,000.  Reichmuth maintained and serviced 103 U.S.-related accounts with an aggregate value of approximately $281 million, including both declared and undeclared accounts.  Reichmuth will pay a penalty of $2.592 million.  BCJ had 18 U.S. clients with a total of 118 U.S.-related accounts.  The aggregate amount of assets under management of all accounts associated with U.S. taxpayers at BCJ was approximately $10 million.  BCJ will pay a penalty of $970,000.   

BUT between Aug. 1, 2008, and May 2015, BIM Suisse closed 13 of its 16 U.S.-related accounts.  As of July 2015, BIM Suisse maintains only three U.S.-related accounts, and none of those accounts remain undisclosed to the U.S. tax authorities.  Under the terms of the agreement signed today, BIM Suisse will not pay a penalty.

Bank EKI was founded in 1852 and has its headquarters in the tourist resort town of Interlaken, Switzerland.  It also operates small branch offices in Bönigen, Wilderswil, Grindelwald and Lauterbrunnen, Switzerland.

Bank EKI opened, serviced and profited from accounts for U.S. clients with the knowledge that many were likely not complying with their tax obligations.  Many of the U.S.-related accounts were transferred from other Swiss financial institutions that were closing such accounts, and Bank EKI knew or had reason to know that a portion of these accounts were likely undeclared.

Bank EKI provided traditional Swiss banking services that it knew could assist, and that did in fact assist, certain U.S. taxpayers in concealing their Bank EKI accounts from the Internal Revenue Service (IRS).  One such service was hold mail: for a fee, Bank EKI would hold all mail correspondence for a particular client at the bank.  By accepting and maintaining such accounts, Bank EKI thus ensured that documents reflecting the existence of the accounts remained outside the United States, beyond the reach of U.S. tax authorities and protected by Swiss banking secrecy laws.

Due in part to the means provided by Bank EKI and its personnel, and with the knowledge that Swiss banking secrecy laws would prevent Bank EKI from disclosing their identities to the IRS, many of the U.S. clients of Bank EKI filed false and fraudulent U.S. Individual Income Tax Returns, or IRS Forms 1040, that failed to report their respective interests in their undeclared accounts and the related income.  Moreover, many of the U.S. clients of Bank EKI also failed to file and otherwise report their undeclared accounts on Reports of Foreign Bank and Financial Accounts (FBARs).

Bank EKI did not sufficiently implement an effective system of supervisory policies, procedures or controls over its relationship managers to increase its U.S.-related clients’ tax compliance.  Moreover, Bank EKI’s relationship managers too readily accepted representations and directions from the accountholders without adequately investigating questionable information.

Since Aug. 1, 2008, Bank EKI held a total of 64 U.S.-related accounts with just over $21 million in aggregate assets.  Bank EKI will pay a penalty of $400,000.

August 6, 2015 in Tax Compliance | Permalink | Comments (0)

Wednesday, August 5, 2015

Congress Matches FBAR Filing to Tax Return Dates, Allows Extension, Penalty Abatement

BNA Reports - Practitioners are praising the new deadline for reporting foreign bank accounts tucked into newly signed legislation (Pub. L. No. 114-041) to extend the Highway Trust Fund.

The measure ensures that the due date for the Report of Foreign Bank and Financial Accounts Irs_logo(FBAR), formerly June 30, is now the same as the U.S. tax filing deadline of April 15—a change that practitioners said would help taxpayers who frequently didn't know the deadlines were different.

Taxpayers can also now ask for the same six-month extension for FBARs that they can get for their tax returns—permitting them to file by Oct. 15. That option didn't exist before.

August 5, 2015 in FinCEN | Permalink | Comments (0)

UAE Published Detailed FATCA Guidance

The UAE published 173 pages of detailed FATCA guidance and implementation of the IGA with the
USA for its financial services industry.  Download FATCA UAE Guidance Notes

The FATCA Guidance initially provides a general introduction to the Foreign Account Tax Compliance UAE MOF Act and its application to entities regulated by the Central Bank, the Insurance Authority, the Securities and Commodities Authority, the Dubai International Financial Centre and Unregulated Entities.

 What is FATCA and how will it be applied in the United Arab Emirates?

 How will FATCA affect banking entities, insurance companies, financial services companies and asset managers?

 How will FATCA affect Unregulated Entities?

 What if an entity or account holder does not comply with the UAE IGA?

 Purpose and outline of these Guidance Notes. 

CH 1 – General Introduction

CH 2 – Guidance Notes for Banking Sector 

CH 3 – Guidance Notes for Insurance Sector 

CH 4 – Guidance Notes for Financial Services Sector 

 

August 5, 2015 | Permalink | Comments (0)

Treasury Acknowledges More Favorable FATCA IGA Terms for BVI

Comment in response to Dr. Jack Manhire's question: What's going on with the IGAs is that Treasury has a model that, while comprehensive in scope, does not fit each countries financial system. Thus, Treasury has had to negotiate nuances with many countries' Ministry of Finance so that the IGA could be complied with locally. From that perspective, it's the same process as the Model US Tax Treaty.

Where it differs is that, the IGA has been, for the most part, a one-sided discussion of "take it or leave it - you have one week to decide" (not too much an exaggeration). Well, if it was just about the Caribbean IFCs, they would have folded. British Territory or independent, they are all substantially dependent on the US for tourism, travel, trans-shipment, medical, etc.

But our EU friends, like France and Germany, their feathers became ruffled by the urgency and complexity of what the US was proposing with FATCA, such as financial institution mass data dumps, and the possibility of billions of compliance costs without any local benefits.

Not to say, they were against FATCA. The EU already had implemented a intra-FATCA for interest payments a decade earlier, known as the EU Savings Tax Directive. The EU, back then, asked the US to sign on board, and the US rejected doing so.

Given the speed of negotiation among countries, and lack of coordination, the EU countries included the MFN condition in the IGAs. Once the cat was out of the bag, it became part of the Model.

Based on the BVI IGA for FATCA, the United States considers the language in italics to be “more favorable Treasury-Dept.-Seal-of-the-IRSterms” in Annex I, except in those cases where the Agreement already includes such language: (excerpted below in relevant part) -

Annex I: G. Alternative Procedures for New Accounts Opened Prior to Entry Into Force of this Agreement. ...

2. Alternative Procedures. 

a) Within one year after the date of entry into force of this Agreement, Reporting British Virgin Islands Financial Institutions must:

(i) with respect to a New Individual Account described in subparagraph G(1) of this section, request the self-certification specified in section III of this Annex I and confirm the reasonableness of such self-certification consistent with the procedures described in section III of this Annex I, and

(ii) with respect to a New Entity Account described in subparagraph G(1) of this section, perform the due diligence procedures specified in section V of this Annex I and request information as necessary to document the account, including any self-certification, required by section V of this Annex I. 

c) By the date that is one year after the date of entry into force of this Agreement, Reporting British Virgin Islands Financial Institutions must close any New Account described in subparagraph G(1) of this section for which it was unable to collect the required self-certification or other documentation pursuant to the procedures described in subparagraph G(2)(a) of this section.

In addition, by the date that is one year after the date of entry into force of this Agreement, Reporting British Virgin Islands Financial Institutions must: (i) with respect to such closed accounts that prior to such closure were New Individual Accounts (without regard to whether such accounts were High Value Accounts), perform the due diligence procedures specified in paragraph D of section II of this Annex I, or (ii) with respect to such closed accounts that prior to such closure were New Entity Accounts, perform the due diligence procedures specified in section IV of this Annex I. 

 Treasury's Notices of More Favorable Terms:

August 5, 2015 | Permalink | Comments (0)

Tuesday, August 4, 2015

Expanding the Profit Split Method to Combat BEPS

Prof. Jeffery Kadet's explains - Why Expansion of the Profit Split Method is Required to Combat BEPS...

Recognizing the reality that multinational corporations are centrally managed and not groups of Jeffrey-M-Kadet-244x300entities that operate independently of one another, the OECD base erosion and profit-shifting project is considering expanded use of the profit-split method.

This article provides background on why expanded use of the profit-split method is sorely needed. In particular, resource-constrained tax authorities in many countries are unable to administer or intelligently analyze and contest transfer pricing results presented by multinational groups. Most importantly, this article suggests a simplified profit-split approach using set concrete and objective allocation keys for commonly used business models that should be welcomed by multinational groups and tax authorities alike.

Read Prof Jeffery Kadet's full analysis on SSRN http://ssrn.com/abstract=2593548

August 4, 2015 in BEPS | Permalink | Comments (0)

New FATCA FAQs for OFAC SDN Listed Entities

IRS FATCA Registration Update

Q6. The entity I represent is on the Office of Foreign Asset Control's Specially Designated Nationals list.  Is the entity eligible to register and receive a GIIN?


No.  For more information, please contact the Office of Foreign Asset Control at 1-800-540-6322, or refer to the OFAC website.

Q7.  What is the Office of Foreign Asset Control's Specially Designated Nationals (SDN) list?
As part of its enforcement efforts, OFAC publishes a list of individuals and companies owned or OFACcontrolled by, or acting for or on behalf of, targeted countries. It also lists individuals, groups, and entities, such as terrorists and narcotics traffickers designated under programs that are not country-specific. Collectively, such individuals and companies are called "Specially Designated Nationals" or "SDNs." Their assets are blocked and U.S. persons are  prohibited from dealing with them.

August 4, 2015 | Permalink | Comments (0)

Monday, August 3, 2015

Three Additional Swiss Banks Enter Non-Prosecution Program, Turn Over Tax Evading Clients

Banks Will Collectively Pay Penalties of More than $8.4 Million and Continue to Cooperate with Department

The Department of Justice announced that PKB Privatbank AG, Falcon Private Bank AG and Credito Privato Commerciale in liquidazione SA (CPC) have reached resolutions under the department’s Swiss Bank Program.

PKB Privatbank AG was founded in 1958 and has its head office in Lugano, Switzerland.  It Justice logoalso maintained offices in Bellinzona, Zurich, Geneva and Lausanne, Switzerland.  PKB was aware that some U.S. taxpayers who had opened and maintained accounts at PKB were not complying with their U.S. income tax and reporting obligations.  PKB offered a variety of traditional Swiss banking services that it knew would, and in certain instances did, assist U.S. clients in concealing assets and income from the Internal Revenue Service (IRS).  These services included code name or numbered accounts and hold mail services, pursuant to which PKB would hold all mail correspondence for a particular client.  These services allowed U.S. clients to conceal their identities and minimize the paper trail associated with the undeclared assets and income they held at PKB in Switzerland.

PKB also employed a variety of other means or conduct that it knew or should have known would assist U.S. taxpayers in concealing their PKB accounts, including:

  • referring U.S. taxpayers to an outside service provider to establish an offshore structure for purposes of holding an undeclared account at PKB;

  • assisting U.S. taxpayers in transferring assets from accounts being closed at PKB to other PKB accounts held by a non-U.S. relative or other non-U.S. parties;

  • assisting U.S. beneficial owners in transferring assets from accounts being closed at PKB to accounts at other banks in Switzerland;

  • opening accounts for U.S. taxpayers who had left other banks being investigated by the department, including UBS; and

  • providing credit cards or debit cards linked to undeclared accounts held in the name of an offshore trust, foundation or company that was beneficially owned by one or more U.S. taxpayers.

In certain cases, U.S. clients of PKB, with the assistance of their advisors, would create an entity, such as a Liechtenstein foundation, a Panamanian corporation or a British Virgin Islands corporation, and pay a fee to third parties to act as corporate directors.  Those third parties, at the direction of the U.S. client, would then open a bank account at PKB in the name of the entity or transfer assets from an account at another Swiss or other foreign bank.  

In such cases involving a non-U.S. entity, PKB was aware that a U.S. client was the true beneficial owner of the account.  Despite this, PKB would obtain from the entity’s directors an IRS Form W-8BEN or equivalent bank document that falsely declared that the beneficial owner of the PKB account was not a U.S. taxpayer.  In some cases, the U.S. client or a related party also held a power of attorney or other signature authority with respect to the PKB account, thereby permitting the U.S. client to act directly with respect to the account and assets held therein, notwithstanding the corporate form of the accountholder.  Ultimately, the use of such offshore structures by U.S. taxpayer clients provided an additional layer of confidentiality and further assisted them in concealing their beneficial ownership of their PKB accounts and evading their U.S. tax and information reporting obligations.

Since Aug. 1, 2008, PKB had 244 U.S.-related accounts, both declared and undeclared, with an aggregate maximum balance of approximately $328.8 million.  PKB will pay a penalty of $6.328 million.

Falcon Private Bank AG was founded in 1965 by American International Group Inc. (AIG), and is headquartered in Zurich.  Falcon has branches in Geneva, Hong Kong and Singapore, and representative offices in Abu Dhabi, Dubai and London.  Since April 2009, Falcon has been owned by aabar Investments.  The majority shareholder of aabar is the International Petroleum Investment Company, a sovereign wealth fund owned by the government of Abu Dhabi.

Through its managers, employees and others, Falcon knew that some U.S. taxpayers who had opened and maintained accounts at Falcon were not complying with their U.S. income tax and reporting obligations.  Falcon offered a variety of standard Swiss banking services, including hold mail and code name or numbered account services, which it knew could assist, and did assist, its U.S. clients in the concealment of assets and income from the IRS.

The majority of Falcon’s U.S.-related accounts held since Aug. 1, 2008, were held in the names of entities or structures.  Those accounts were almost entirely held by non-U.S. structures, such as offshore corporations or trusts.  Typically, the beneficial owners of these structures created a legal entity, such as a Panamanian corporation, and paid third parties to act as the corporate “directors.”  Those third parties would then open a bank account at Falcon in the name of the entity, allowing clients the ability to conceal their undeclared accounts from the IRS.

Falcon also: 

  • accepted instructions in connection with one U.S.-related account not to invest in U.S. securities and not to disclose the names of U.S. taxpayer-clients to U.S. tax authorities, including the IRS;

  • issued checks, including series of checks, in amounts of less than $10,000, in seven cases, that were drawn on accounts of U.S. taxpayers or structures even though Falcon knew or had reason to know that the withdrawals were made to avoid triggering scrutiny; and

  • provided cash (310,000 Swiss francs and $250,000) at account closure in July 2011 to a U.S. citizen with signatory authority over an account held in the name of a British Virgin Island nominee company. 

Falcon maintained accounts for four British Virgin Islands nominee companies and two Panamanian nominee companies when Falcon knew or should have known that the Forms W-8BEN and Forms A associated with those accounts were contradictory, that the beneficial owners were U.S. citizens or residents, and that the structures were used by the U.S. taxpayer-clients to help conceal their identities from the IRS.

Since Aug. 1, 2008, Falcon also maintained three insurance segregated accounts for which it was aware that the policy holder or premium payer was a U.S. person.  By placing and maintaining their assets in accounts held in the names of insurance companies and not the actual beneficial owner of the funds (a procedure known colloquially as an “insurance wrapper”), Falcon was aware that by operation of Swiss bank secrecy laws, the U.S. client’s ownership would not be disclosed to U.S. authorities, including the IRS.

Since Aug. 1, 2008, Falcon maintained a total of 84 U.S.-related accounts with an aggregate value of approximately $134 million.  Falcon will pay a penalty of $1.806 million.

 CPC is located in Lugano.  It was established in 1973 as a trust company and received its Swiss banking license in 2004.  On June 8, 2012, CPC’s Italian parent decided to exit the banking industry in Switzerland for reasons unrelated to U.S. tax issues and entered CPC into voluntary liquidation.  Ernst & Young AG, Zurich (Ernst & Young) was appointed as liquidator.  As of that date, with the assistance of three administrative personnel, Ernst & Young has engaged solely in carrying out the liquidation of CPC, including closing client accounts and disposing of assets pursuant to client instructions.

CPC offered a variety of traditional Swiss banking services, including numbered accounts and hold mail service.  CPC also employed other means to assist U.S. taxpayers in concealing their undeclared accounts, including: 

  • opening an account for a U.S. taxpayer who had left UBS, which was being investigated by the department;

  • opening an account for two U.S. taxpayers who had left a bank in Luxembourg because, according to their later voluntary disclosures, their external asset manager was concerned about bank secrecy in Luxembourg and indicated it would be safer to maintain an undeclared account in Switzerland; and

  • providing a cash card linked to an undeclared account.

After March 13, 2012, and considering the implementation of the U.S. Foreign Account Tax Compliance Act (FATCA), CPC decided to discontinue all of its relationships with its U.S. customers and closed its last U.S.-related account in April 2013.

In the period between Aug. 1, 2008, and CPC’s liquidation, CPC had 16 U.S.-related accounts with an aggregate maximum balance of approximately $71 million.  CPC will pay a penalty of $348,900.

August 3, 2015 in Tax Compliance | Permalink | Comments (0)

NFL-Related Securities Fraud Scheme Leads to 8 Indictments (and Potential Blindness)

"The defendants also neglected to tell investors the TDI laser technology posed a potential risk of blindness to players on the football field."

According to allegations contained in the indictment, the defendants pressured investors into FBISealpurchasing stock in two companies, Thought Development Inc. (TDI) and Virgin Gaming. 

TDI was a Miami Beach-based company that claimed its signature invention generated a green laser line on the football field visible in the stadium to players, fans as well as on television.  TDI represented that use of its technology would decrease the time used by officials to determine first downs, freeing up broadcast time that could then be sold to television advertisers. 

The defendants raised approximately $2.4 million through the use of call rooms that targeted more than 200 investors throughout the nation, who were told that an initial public offering (IPO) in TDI was imminent and that their money would be safe and used to develop the ground-breaking technology. 

Instead, the indictment alleges that the IPO was not forthcoming as promised and at least 50 percent of the offering proceeds were retained by the defendants or paid to sales agents through undisclosed, exorbitant commissions and fees.  The defendants also lured investors by misrepresenting that TDI’s technology was about to be used by the NFL.  The defendants also neglected to tell investors the TDI laser technology posed a potential risk of blindness to players on the football field.

The indictment alleges that the second fraudulently sold stock, for Virgin Gaming, a subsidiary of Virgin Media Inc., provided a fee-based service that facilitated online tournaments, fantasy sports leagues and competitive online gaming.  The Virgin Gaming scheme took one of two forms. 

In some instances, sales agents told investors they would be investing in a company that had obtained the right to purchase shares of Virgin Gaming stock.  The defendants told investors those shares would be converted into shares of Virgin Gaming just prior to an IPO.  However, this was not a true representation as no such option to buy Virgin Gaming stock, in fact existed. 

On other occasions, sales agents told investors that they were directly purchasing Virgin Gaming stock when in fact they were not.  The defendants’ sales agents also lied about guaranteed returns on investments and the timing of the purported IPO. 

Over the course of the scheme, the defendants caused approximately 35 individuals to purchase the non-existent Virgin Gaming stock and thereby made approximately $325,000 in fraudulent sales.  Nearly all of the monies were misappropriated as undisclosed commissions and fees.

This indictment relates to a case filed a year ago, United States v. Kirschner.  All four defendants in that matter, the leader/organizers of the TDI fraud scheme discussed above, pleaded guilty and have been sentenced.

Defendants: David Anthony Eratostene, 53, of Miramar, Florida, Christopher J. Borgo, 41, of Boca Raton, Florida, Alan D. Messina, 54, of Sunrise, Florida, Michael T. Angeletti, 33, of Sunrise, Florida, Michael J. Calash 34, of Boca Raton, Florida, Stephen R. Reynolds, 38, of Pompano Beach, Florida, Gary X. Schultz, 55, of Miramar, Florida, Chazon Stein, 36, North Miami Beach, Florida, were charged with conspiracy to commit mail and wire fraud.

August 3, 2015 | Permalink | Comments (0)

Sunday, August 2, 2015

Should Law Students Learn About Art?

Investment News reports that "... wealth managers haven't been so successful at keeping younger clients. On average, firms have seen almost half of the assets leave when a family's wealth is being handed to the next generation, ..."  (See UBS & PwC Billionaires Report)

How are the big wealth managers responding? Educating their clients in week long, networking seminars.

"Held in countries including Singapore and Switzerland, the programs usually span several days to more than a week and participants often fly in from around the world. The seminars — which cover topics such as sustainable investing, philanthropy, entrepreneurship or how to protect your family reputation and brand online — are free to attend while clients generally cover their own travel and accommodation.

Read the Investment News story

August 2, 2015 in Education | Permalink | Comments (0)

Saturday, August 1, 2015

EU Asset Management Careers and Compliance Expenditures Report

The industry lobby group, New City Initiative (not to be confused with the Portland 'help the homeless' initiative of the same name) has released its study, and recommendations, of the EU Asset Management industry - as it pertains to the City of London.  Relevant excerpts follow:

In the City of London alone, over 25,000 people worked in fund management at the end of EU Commission2014 – a 4.7% increase from the previous year.  

An estimated 90,000 people were directly employed by asset management firms in Europe at the end of 2013, while a further 410,000 were employed in functions servicing the asset management industry.

The main EU regulations directly or indirectly impacting the UK asset management industry come with an estimated cost of around £2 billion a year. 

We estimate that a UK-based fund manager marketing and distributing in all the other 27 EU member states plus Switzerland would face total initial costs of over €1.5 million.  Total on-going maintenance costs – allowing for the continuation of cross-border marketing – could be near €1.4 million per year.

Sounds like an expanding market of high paying careers on the asset management side and on the compliance side of asset management, both for which lawyers are well suited (and with compliance, of course, essential).

Read the full report here.

August 1, 2015 | Permalink | Comments (0)