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GT Alert

Secrecy Associated with Offshore Banking is Evaporating

April 2002
By Barbara T. Kaplan and Patrick T. O’Brien, Greenberg Traurig

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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.

Barbara T. Kaplan
"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)."

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


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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 service often cuts across legal subject matter, applying the right experience and resources to provide cost-effective solutions.