Secrecy Associated with Offshore Banking is Evaporating
April 2002
By Barbara T. Kaplan and
Patrick T. O’Brien, Greenberg
Traurig
View or download the PDF version of this Alert
here.
The convergence of recent events involving offshore banks, tax haven
jurisdictions, terrorism and concerns over financial transparency, has now
made it extremely perilous to rely on bank secrecy to avoid disclosure of
offshore financial information to U.S. government agencies, particularly
the Internal Revenue Service (IRS). As IRS Commissioner Charles O. Rossotti
stated on March 26, 2002: "the guarantee of secrecy associated with offshore
banking is evaporating." The IRS is aggressively and successfully pursuing
foreign bank account information involving offshore credit card accounts
and abusive foreign trusts. The U.S. government has issued Financial Advisories
curtailing banking relationships with uncooperative jurisdictions. The Financial
Task Force (FATF), an international organization of 31 nations, has blacklisted
19 countries with bank secrecy laws. The Organization for Economic Cooperation
(OECD) threatened economic sanctions against 41 tax haven jurisdictions
and has successfully reduced the number of uncooperative tax havens to a
mere 7 countries. The Treasury Department has entered into agreements with
Caribbean countries to share financial information to curtail criminal tax
evasion. This Alert describes some of these recent developments and suggests
that well-counseled but immediate efforts should be made to evaluate the
continued risks associated with maintaining undisclosed accounts in these
jurisdictions and how to minimize such risks.
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| "concerns over financial transparency,
has now made it extremely perilous to rely on bank secrecy to avoid
disclosure of offshore financial information to U.S. government
agencies, particularly the Internal Revenue Service (IRS)." |
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Offshore Credit and Debit Cards
In March, 2000, the IRS issued John Doe summonses to American Express
and MasterCard to obtain the identities of U.S. cardholders with accounts
at foreign banks. When American Express and MasterCard resisted, the IRS
moved in federal district court in Miami, Florida to compel them to turn
over their records related to cards issued by offshore banks or paid from
funds drawn on offshore banks located in Antigua and Barbuda, the Bahamas
and the Cayman Islands. IRS argued that U.S citizens and residents with
such accounts were diverting income and evading U.S. taxes. The judge agreed,
and in October, 2000, ordered American Express and MasterCard to surrender
the records. After lengthy negotiations, American Express agreed to provide
the identities and information concerning their offshore cardholders, as
well as driver’s license and passport numbers. MasterCard is reported to
have provided records of more than 230,000 accounts and 1.7 million transactions.
As a result, the IRS has said it is moving forward on "hundreds" of credit
card cases for civil audits or potential criminal investigation. The information
obtained will be compared with the taxpayers’ returns and Treasury Department
filings to see if the offshore bank accounts were disclosed.
On March 25, 2002, the IRS petitioned the federal district court in San
Francisco, California to require VISA International to produce foreign bank
account records in more than 30 countries, including Switzerland, Hong Kong,
Singapore, Cyprus, Panama, Latvia and numerous Caribbean countries. In its
court filing, the IRS estimated that one to two million taxpayers have credit
or debit cards issued by offshore banks which are used to pay the individual’s
everyday expenses. Therefore, it can be expected that the IRS will continue
to pursue credit card companies and financial institutions in other offshore
jurisdictions to obtain similar information about U.S. taxpayers.
Financial Advisories
One of the government’s first actions in its attack on the offshore financial
industry was the issuance of Financial Advisories. In late 1998, the Caribbean
island nation of Antigua and Barbuda significantly revised its money laundering
and offshore banking laws, creating what was arguably the strictest anti-money
laundering regime in the world. However, while it drastically diminished
the scope of bank secrecy within its offshore financial sector, it simultaneously
enacted very stringent laws prohibiting the dissemination of account information
beyond the local regulatory bodies. Most importantly, it made it a crime
to disseminate such information to foreign governments without a specific
court order. Although such orders were readily obtainable relative to the
investigation of money laundering offenses, tax evasion was specifically
designated NOT to be a money laundering offense. The reaction of the United
States was swift. In early 1999, it issued a Financial Advisory against
Antigua and Barbuda, advising U.S. financial institutions that Antigua and
Barbuda’s financial sector now constituted a significant money laundering
threat, and all transactions were to be subjected to enhanced scrutiny.
As a result of the Advisory, some of the country’s offshore banks lost U.S.
correspondent relationships and others were prevented from entering into
new relationships. Similar action was taken by the United Kingdom. The Advisories
remained in place until Antigua and Barbuda succumbed, amended its laws,
and began providing account information.
The FATF
This was quickly followed by multi-lateral action against many offshore
jurisdictions under the auspices of the Financial Action Task Force (FATF).
The FATF is an international organization of 31 member nations, created
in 1989 for the explicit purpose of coordinating international anti-money
laundering efforts. The FATF’s most significant accomplishment has been
the establishment of Financial Intelligence Units (FIU’s) in 58 countries
to share financial information without resort to the courts. Recognizing
that bank secrecy laws were a significant impediment to its efforts, in
June, 2000, it issued a report designating 15 countries as uncooperative,
and threatening unspecified action if the countries did not change their
laws and begin sharing financial information. Some countries have complied
with the FATF mandate and have been removed from the list, others remain,
and still others have been added. The list now stands at 19 countries whose
bank secrecy laws are under attack. These are: Cook Islands, Dominica, Egypt,
Grenada, Guatemala, Hungry, Israel, Lebanon, Marshall Islands, Myanmar,
Nauru, Nigeria, Niue, Philippines, Russia, St. Kitts and Nevis, St. Vincent
and the Grenadines and the Ukraine.
The OECD
The most recent, and perhaps the most successful multi-national attack
on bank secrecy, came from the FATF’s parent organization, the Organization
for Economic Cooperation and Development (OECD). In 1998, the OECD published
a report on Harmful Tax Competition, which largely criticized no-tax and
low-tax undeveloped countries for engaging in tax practices which attracted
capital from higher-tax more developed countries. It called on the countries
of the world to tax foreign investment and to eliminate bank secrecy.
In 2000, the OECD refocused its attack on the issue of bank secrecy and
the exchange of information in tax investigations. It targeted 41 jurisdictions
as tax havens, and threatened economic sanctions unless the countries pledged
to cooperate on tax matters, including the elimination of tax secrecy. The
deadline for committing to cooperation was July 2001, but was later extended
to February 28, 2002. Although most nations initially stood firm, one by
one they began to yield. At present, only 7 nations have failed to make
the pledge to principles of transparency and effective exchange of information.
These 7 nations have been deemed to be tax havens. They are: The Republic
of the Marshall Islands, The Principality of Liechtenstein, The Republic
of Nauru, Liberia, The Republic of Vanuatu and The Principality of Monaco.
Information Exchange Agreements
The Treasury Department recently has entered into a number of tax information
exchange agreements: one with Antigua and Barbuda on December 6, 2001, a
second with the Cayman Islands on November 27, 2001, a third with the Bahamas
on January 25, 2002, and a fourth with the United Kingdom, including the
British Virgin Islands, on April 3, 2002. These agreements, when they take
effect, will require these countries to provide information relevant to
civil and criminal tax matters upon the request of the United States. Each
of the countries must ensure that it has the right to obtain and provide
information held by financial institutions, nominees and fiduciaries. Each
is required to: (1) provide information from its tax files, (2) take all
relevant measures to supply the requested information if the tax files are
inadequate and (3) provide the information covered by the agreement irrespective
of whether the information relates to its residents or nationals. The four
information exchange pacts are not identical. They also are not yet effective.
For example, the Bahamas agreement takes effect on January 1, 2004 for information
relating to criminal matters and on January 1, 2006 for civil matters.
Recommendation and Conclusion
In the months and years ahead, the IRS will take additional steps to
combat offshore accounts used for tax avoidance or evasion. As Commissioner
Rossotti said:
"These actions should send a clear message to tax evaders. If people
use these illegal offshore methods to hide their income, we will find
out who they are.
If taxpayers are involved in these schemes, it is time to make things
right. We urge these taxpayers to consult with a reputable, trusted tax
professional for advice."
Other IRS officials have reiterated these thoughts.
Anyone with access to or control over an undisclosed foreign account
should heed the Commissioner’s warning and take immediate action to evaluate
his or her exposure. Under voluntary disclosure protections offered by the
IRS and Department of Justice, qualifying taxpayers can avoid criminal prosecution
by correcting prior filed returns or filing previously unfiled returns and
paying the taxes due. However, this process and its application require
specialized expertise to avoid disqualification from voluntary disclosure
treatment that a "triggering event" can produce. Given the almost daily
changes in IRS and other government agency activity and enforcement, the
risk of facing a triggering event is high. At present, there exists a window
of opportunity for many taxpayers to cure their prior misdeeds, but that
window is slowly closing. How and when to do so should be approached with
caution under the direction of experienced counsel.
Taxpayers would be well-served by heeding the Commissioner’s advice to
consult with knowledgeable professionals. We at Greenberg Traurig, LLP have
extensive experience in addressing these issues for clients.
© 2002 Greenberg Traurig
Additional Information:
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This GT ALERT is issued for general purposes only and is not intended
to be construed or used as legal advice. Greenberg Traurig attorneys provide
practical, result-oriented strategies and solutions tailored to meet our
clients’ individual legal needs. The Firm’s responsive approach to client
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