Global tax enforcement puts Cayman in the crosshairs

The investigation and prosecution of tax evasion has, in the last decade, grown from a specialised subcategory of law enforcement into a first-tier policy concern for the global community.Starting with the US government’s crackdown on Swiss bank UBS in 2008, there has been a steady drumbeat of news about prosecutions of financial institutions, bankers and taxpayers.

The Cayman Islands have proven no exception to this rule, particularly within the last 12-18 months.

The US government’s pursuit of financial institutions continues, with no signs of abating; Cayman National, Caledonian and Butterfield are only the most recent examples.

The current era of tax enforcement against banks began when the US government’s investigation of UBS became public in 2008. In February 2009, UBS entered into a deferred prosecution agreement with the US Department of Justice and agreed to cease its US cross-border business and pay a fine of $780 million.

While this ended UBS’s troubles with the US authorities over assisting US taxpayers in evading taxes (leaving aside the widely reported 2015 tax evasion investigation of UBS over bearer securities), it signaled the beginning of the US government’s attack on financial institutions that may have assisted their clients in violating US tax laws.

After UBS, the US government turned its attention to Wegelin & Co., Pictet & Cie, Neue Zuercher Bank, Credit Suisse Group AG, Basler Kantonalbank, Bank Julius Baer, Bank Frey, Bank Hapoalim, Bank Leumi, Bank Mizrahi-Tefahot, Liechtensteinische Landesbank AG, Swisspartners, CIBC FirstCaribbean, Cayman National Securities & Cayman National Trust Co., HSBC India and Bank of Butterfield.

Of these entities, local companies Cayman National Securities and Cayman National Trust Co have been prosecuted for allegedly assisting some US customers in tax evasion.

As reported locally, the Bank of N.T. Butterfield & Son Ltd. has made provision for the payment of US$4.8 million, recorded during its financial year which ended Dec. 31, 2015, against the possibility that it could be required to make a settlement payment as the result of an ongoing US federal investigation into tax evasion.

In November 2013, the US Attorney’s Office for the Southern District of New York announced the issuing of what were called the “John Doe summonses” to US financial institutions with which Butterfield Bank had correspondent bank relationships.

The John Doe summonses sought “to obtain information about possible tax fraud by individuals whose identities are unknown,” according to a US Department of Justice press release from Nov. 12, 2013.

The summonses required five banks operating in the US to produce that information in connection with undisclosed accounts at Butterfield Bank and its affiliates in the Bahamas, Barbados, the Cayman Islands, Guernsey, Hong Kong, Malta, Switzerland and the UK.

These “John Doe summonses” are similar to ordinary subpoenas that most people recognise, and can be served when the IRS does not know the identities or names of those persons that are potential violators of federal law, like individuals that may be moving money around to avoid taxes or to launder cash. Traditional summonses or subpoenas are of limited use in identifying unknown taxpayers with offshore bank accounts. This is because a traditional subpoena must identify the taxpayer whose conduct is at issue.

The John Doe summons is perfectly tailored to the IRS’s effort to identify account holders. They force the banks to produce bank records to the IRS that reveal the identities of owners of bank accounts held at their financial institutions. The John Doe summons makes the bank turn over the contact information in its files that corresponds to the bank accounts that the IRS is investigating. If the IRS finds bad things in that account, the result can be federal charges being brought not only against the account holder but also against the banker.

The court action marks federal investigators’ latest use of the special summonses to compel account disclosures by offshore banks suspected of helping wealthy American clients evade US taxes. In the last decade, the IRS has greatly increased its use of the so-called John Doe summons.

These special summonses have also proven successful at yielding fruit for prosecution. Since 2008, the US Department of Justice (DOJ) has publicly charged a few dozen bankers, lawyers and financial advisers. As of the end of 2015, more than half of them remain fugitives. Being a fugitive means being unable to travel to or through any countries that extradite to the US for tax crimes. For the majority of the fugitives, this means essentially being confined to Switzerland indefinitely. The banks, lawyers and financial advisers that have answered their charges in the US have either pleaded guilty and cooperated with the US authorities or been convicted at trial.

Recognising the public’s growing discomfort with corporate prosecutions resulting in no one spending time in prison, Deputy Attorney General Sally Yates issued a memorandum to DOJ prosecutors on Sept. 9, 2015. In the so-called Yates memo, she emphasised the DOJ’s strong interest in holding individuals accountable for corporate crime, calling on the DOJ to “fully leverage its resources to identify culpable individuals at all levels in corporate cases.”

“International issues remain a major focus for the IRS, and we are continuing our efforts to fight tax evaders who use offshore accounts to skirt the law,” IRS Acting Commissioner Danny Werfel said in a statement. “These John Doe summonses for correspondent account records show our determination to pursue evaders using offshore accounts even if the person hiding money overseas chooses a bank that has no offices on US soil.”

US citizens are required to report all of their foreign financial accounts if the total value of the accounts exceeds $10,000 at any time during year. If someone withholds information on their foreign accounts, he can be fined up to 50 per cent of the amount in the account at the time of the violation, according to the IRS.

We have seen the effects of the US DOJ’s persistence locally in the collapse Caledonian Bank and in the recent guilty pleas recorded in US Federal Courts against Cayman National Securities & Cayman National Trust Co.