AML and Tax Evasion Initiatives: Your Institution’s Obligation …files.acams.org/webcasts/20110622/AML TAX EVASION Webinar... · 2011-06-20 · 13 AML and Tax Evasion Initiatives:

AML and Tax Evasion Initiatives: Your Institution’s Obligation under the New Legislation1

AML and Tax Evasion Initiatives: Your Institution’s Obligation under the New Legislation

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AML and Tax Evasion Initiatives: Your Institution’s Obligation under the New Legislation



Speakers:

Scott D. MichelPresidentCaplin & DrysdaleWashington, DC

Heather A. LoweLegal Counsel & Director of Government AffairsGlobal Financial IntegrityWashington, DC


Context for US Tax Compliance Issues re Financial Institutions

• US citizens and residents – must report and pay tax on worldwide income.

• Tax Returns – Form 1040• “Check the box,” list the countries• Report all investment income – interest, dividends,

capital gains/losses

• “FBAR” – TDF 90-22.1 -- all “financial accounts” –broadly defined; due June 30


Context for US Tax Compliance Issues re Financial Institutions

• Additional reporting obligations:• Transfers to Foreign Corporations• Reporting of interests in Controlled Foreign Corporations• Recognition of gain on certain foreign assets• Foreign Partnerships• Foreign Trusts• PFICs


Sanctions

• Criminal – Willful and intentional • Tax evasion

• Filing false returns

• Conspiracy

• Failure to file FBAR

• Felonies, often leading to incarceration


Sanctions

• Civil

• FBAR -- penalties up to 50% of account balances per year for willful failure to file

• Tax penalties – accuracy, fraud – % of the tax

• Substantial penalties for non-compliance re unfiled forms re trusts, corporations, foreign gifts


Historical Perspective

Tax Evasion -- low priority historically:

• Not a Specified Unlawful Activity (“SUA”), but…. • Not a “box” on the Suspicious Activity Report• Difficult to detect and distinguish from other money

laundering SUAs/illegal activities• Unavailability of tax returns

• Timing – time between transaction and filing of returns – the returns could be accurate when filed

• Complexity/expense of evaluation


Tax Evasion: A Predicate Offense?


- United States v. Yusuf(3rd Cir. July 21, 2008- Used U.S. mail service to file a false Virgin Islands tax return, therefore committing mail fraud (a predicate offense for money laundering).- Proceeds of the crime = the money he retained by evading those taxes.- Supreme Court has refused to hear appeal, so only precedent in the 3rd Circuit.

Tax Evasion: Predicate Offense?



Tax Evasion:Not a “specified unlawful activity”.

(18 USC § 1956)

However…


Tax Evasion: Predicate Offense?“Whoever… conducts or attempts to conduct… a

financial transaction which in fact involves the proceeds of a specified unlawful activity…with intent to engage in conduct constituting a violation of section 7201 or 7206 of the Internal Revenue Code of 1986…shall be sentenced…”

18 USC § 1956(a)(1)(A)(2)



IRC Section 7201 is tax evasion.

IRC Section 7206 is tax fraud.

Both tax evasion and tax fraud are felonies.


The Financial Action Task Force (FATF) The international AML standard setting body.

• FATF has a list of predicate offenses to be included in all national laws.

• Tax evasion is not on that list, but…


FATF Proposal

• FATF has proposed adding it as part of its revisions of the 40+9 Recommendations.

• The U.S. Government supports the addition.

• The revision process should be final in 02/2012.


Reasons for Rapid Change

• Governments (U.S. and other) need tax revenues• Longstanding war on money laundering• Future tax compliance threat -- global economy; ease of

establishing offshore accounts via internet• US – IRS claims $100 billion lost tax revenues/year• US reaction -- DOJ, IRS, Congress

• Political dynamics in US• Changing attitudes re tax evasion…lessons of Greece.


The War on Undeclared Foreign Accounts

• Criminal Investigations and Litigation• Banks, bankers, account holders, advisors

• Civil matters• Summonses, subpoenas

• IRS Voluntary Disclosure Programs• Follow up re financial institutions

• Greater push for global transparency – Treaties etc.• Administrative and legislative action


Criminal Investigations of Banks and Bankers

• US Govt. loves corporate criminal liability cases –provides enormous leverage over a company.

• Companies face:• Loss of licenses, government contracts• Damage to brand• Significant financial exposure

• So rather than fight, they settle…usually in a Deferred Prosecution Agreement


Civil Summons Process

• The IRS Summons -- information about bank conduct and account holders• Regular summons -- bank’s own tax compliance; • John Doe summons -- info about account holders

• Any bank with a US presence• The UBS case is a lesson in how this works:

• Summons served on US office of foreign bank• Bank claims compliance would violate foreign law• US always wins the balancing test in court


John Doe Summons -- HSBCEveryone knows about UBS, now HSBC

• U.S. Justice Department requested John Doe Summons from a San Francisco court in April to ferret out U.S. citizens hiding money in accounts in HSBC India.

• Two U.S. citizens have already pleaded guilty and are thought to be cooperating.


Voluntary Disclosure Program

• Per longstanding IRS policy: • Legal source income• Timely – disclosure before IRS has info re taxpayer.• Truthful and complete

• Taxpayer must:• Fully cooperate with IRS• Make good faith arrangements to pay any tax, interest,

and penalties.• Disclose every aspect of noncompliance

• Second special IRS program through Aug 31, 2011


Voluntary Disclosure Program

• All 15,000+ taxpayers in old program; all in new program MUST:•Prepare and sign an “Optional Intake Letter” answering a series of questions.

•Answer questionnaire for all accounts over 1MM• Questions aimed at identifying banks, bankers and

others who facilitated the secret accounts-- IRS CID Follow up Interviews – lots of activity


Treaties

• Double Taxation avoidance treaties are common…• Tax certainty for businesses with global footprints.

• Provisions on the mutual exchange of information.• Traditionally – infrequent use• Prohibition against “fishing expeditions”• Cumbersome procedures• Due process rules in “requested party” jurisdiction.

• Switzerland (UBS case) – appeal rights, courts


Treaties

• More activity -- inevitable.• Switzerland abandoned “fraud/evasion” distinction and

recently eased administrative requirements for disclosure

• Other countries pushing• Liechtenstein -- agreement w/US in late 2008• Singapore -- sent delegation to US in 2010• Hong Kong -- considering a treaty w/US, others• New multinational protocol for tax info exchange.

• Pressure -- avoid OECD blacklisting or graylisting


Administrative Actions -- FBAR Revisions

• Feb 2011 –New regs on foreign account reporting, new instructions• U.S. Resident = Definition for Tax Purposes -- Includes companies,

pass throughs, trusts, etc.• Signature Authority Filers

• Moratorium lifted• Applies to corporate employees. No exemption for:

• Custodians of employee benefit plans• Employees of U.S. subsidiaries of foreign parents• Employees of foreign subs of U.S. parents• Employees of U.S. parents who sign on foreign sub accounts

• Some abbreviated filing procedures• Extension for certain employees of financial services companies• Other rules regarding trusts, cash value annuities and insurance

(reportable)


Administrative Action – NRA Accounts

The U.S. Government has very limited information about non-U.S. citizens and residents with U.S. bank accounts.

Treasury has proposed new regulations to require banks to provide 1099-type information for all non-resident alien (NRA) accounts.

Intended to make it easier to comply with TIEA requests, but information could be used to trace proceeds of any number of illegal activities.


Congressional Action-Predicate Offense

Expecting to see a few bills that: • Make all felonies predicate offenses for money

laundering (which picks up tax evasion).• Link certain legal presumptions to banks that

have not signed an agreement with the U.S. Government under FATCA.

• Require states to collect beneficial owner information upon incorporation.


Congressional Action: FATCA

• Foreign Account Tax Compliance Act, passed as part of the “HIRE Act” and signed into law in March 2009.

• General Purpose: to prevent U.S.-resident taxpayers from concealing assets and income in non-U.S. accounts

• FATCA supplements, but does not replace, the QI regime - unclear whether existing QI agreements will satisfy FATCA requirements.


FATCA

• FATCA -- applies to all FFIs, broadly defined - -US presence is irrelevant. FFI must agree with the IRS to:

• Find out when US person is affiliated w/account• Send the IRS every year identifying information, account numbers, account balances, and total receipts or withdrawals;

• Comply with IRS information requests; and• Obtain waivers from account holders of all rights under domestic secrecy laws.


FATCA: What is a “substantial United States owner”?

• Corporations: any specified United States person (USP) which owns, directly or indirectly, more than 10% of the stock of such corporation (by vote or value);

• Partnerships: any specified USP which owns, directly or indirectly, more than 10% of the profits interests or capital interests in such partnership;

• Trusts: any specified USP treated as an owner of any portion of such trust under subpart E of part I of subchapter J of chapter 1 [of the Internal Revenue Code of 1986].


Current BSA Definition of Beneficial Owner

One who has a level of control over, or entitlement to, the funds or assets in the account that, as a practical matter, enables the individual, directly or indirectly, to control, manage or direct the account.

(31 CFR 103.175(b))


FATCA

Enforcement?

• IRS will withhold 30% from payments to any “recalcitrant account holder” – someone who doesn’t provide documentation

•IRS will also withhold 30% on ALL U.S. investments maintained by the non-compliant FFI.

• For all practical purposes, FATCA will end bank secrecy for Americans around the world.


FATCA

• Some guidance, but still lots of open questions:

• How much due diligence is required of FFIs? • What’s a “recalcitrant account holder?”• Will “secrecy waivers” be required in all countries or only a

few?

• Lots of rules to be written….lots of lobbying going on.


Other Aspects of HIRE ACT

• US tax returns -- will now have info similar to FBAR• $50,000 asset threshold

• Info for all accounts at FFIs• Instruments issued by foreign person• Instrument w/foreign counterparty• Includes private equity, hedge funds

• In addition to TDF 90-22.1 (FBAR)

• Effective with 2011 tax year.


Other Aspects of HIRE ACT

• Raises tax penalty for undisclosed foreign financial assets.

• Raises limitations period re omitted income from foreign assets

• Changes re foreign trusts -- major source of non-compliance:• Disregards “contingencies” -- deems beneficiaries as

holding current interest• Presumption that a foreign trust has a U.S. beneficiary• New reporting requirement of U.S. owners of foreign trusts• Increases penalties for failure to report certain foreign

trusts.


U.S. has FATCA, QI and John Doe, What are Other Countries Doing?

United Kingdom Liechtenstein

GermanyIndia

Switzerland


Ramifications for Financial Institutions

• Need to enhance focus on potential tax evasion• Include in risk assessment• Review monitoring systems• Increase potential tax evasion profile in training

programs• Attend to QI program audit if applicable• Monitor FATCA rulemaking


Monitoring Activities

• Focus on Tax Neutrals• Charities/trusts/foundations• Circular transactions• Offshore/international transactions

• E.g.,“Spinka” cases• Especially watch for efforts to repatriate offshore accounts

(from trusts, foundations, etc.)

• Charities – Enhanced due diligence• Customers and accounts that blur lines between

personal/business/charitable activities


SARs

Does it Even Matter Whether Tax Evasion

is a Predicate Offense?

When Should You Submit a SAR?


SARs

When you know, suspect or have reason to suspect that the funds are obtained from illegal activity, intended or conducted to hide or disguise funds or assets derived from illegal activity, or designed to evade any reporting requirements of the Bank Secrecy Act.

(31 CFR §103.18)


SARs

You have an obligation to file a SAR with respect to ANY suspected illegal activity, not just “specified unlawful

activities”/predicate offenses.


SARs

“A bank may also file … a report of any suspicious transaction that

it believes is relevant to the possible violation of any law or regulation but

whose reporting is not required by this section.”(31 CFR § 103.18)


Other Steps

• Enlist Tax Department• W-8BENs/W-9s• Focus/train on customer hesitation• Spotting American connections…

• Increased due diligence on offshore tax neutrals

• Focus on money laundering/tax evasion convergence --most financial crimes include tax evasion component


Thank You

Scott D. Michel Heather LoweCaplin & Drysdale Global Financial IntegrityOne Thomas Circle NW 1319 18th Street, NWSuite 1100 Suite 200Washington, DC 20005 Washington, DC 20036(202) 862-5030 (202) [email protected] [email protected]

If you have additional questions for today’s experts, please send them to:

[email protected]

Thank you for joining us today!


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AML and Tax Evasion Initiatives: Your Institution’s Obligation …files.acams.org/webcasts/20110622/AML TAX EVASION Webinar... · 2011-06-20 · 13 AML and Tax Evasion Initiatives: