Lee Sheppard on UBS, Swiss Evasion and Money Laundering

Lee Sheppard has an article in Tax Notes Today titled Dear Former Tax Evasion Services Customer, 125 Tax Notes 174 (Oct. 12, 2009) and 2009 TNT 195-3 (10/13/09). After she gets off on Roman Polanski, some of her key and pungent comments are:

1. Swiss bankers are feeling a bit like Polanski these days, afraid to travel anywhere U.S. prosecutors might get them. Like Polanski, Swiss bankers just want to be left alone.

2. Among the names that the Swiss have already turned over and are in the IRS line of fire

appears to contain at least one household name. Speculation about the criteria for selection, which are still secret, ran to factors like account size and attempts to conceal ownership through phony entities. Fame, apparently, is also a selection factor.

3. "Swiss banks' customers were wined and dined, literally, and doted on by bankers, but are now being tossed aside." (JAT Note: Sound reminiscent of the KPMG fiasco?)

4. In addressing whether Swiss banks other than UBS are in the line of fire, she comments: "Weren't all the Swiss banks basically selling tax evasion services?"

5. Ms. Sheppared then turns to money laundering. Of course, the Government has not charged money laundering in the offshore bank cases (yet), but Ms. Sheppard notes that they might. She cites the Yusuf case (United States v. Yusuf, 536 F.3d 178 (3d Cir. 2008), cert denied 129 S. Ct. 2764 (2009)) I previously discussed here which uses mail fraud in a state tax setting as the predicate act for money laundering. As practitioners and students know, almost every instance of tax evasion involves some potential act of mail or wire fraud, both predicate crimes for money laundering. Her discussion of this issue follows:

The argument that prevailed in Yusuf is a stretch. It is not clear that this money laundering argument had been cleared with the Tax Division of the Justice Department. Justice is generally reluctant to stretch the money laundering rules to cover tax evasion, given the long-standing reluctance of Congress to make tax evasion a predicate offense to money laundering. So it is not as though Justice would bootstrap tax charges into money laundering using the Yusuf argument.

That long-standing congressional reluctance will change if Senate Finance Committee ranking minority member Chuck Grassley, R-Iowa, has anything to say about it. Grassley has told MoneyLaundering.com that he and Sen. Patrick J. Leahy, D-Vt., plan to reintroduce the rejected provision of S. 386, the Fraud Enforcement and Recovery Act of 2009, that would make tax evasion a predicate act to money laundering (MoneyLaundering.com, Sept. 29, 2009). (For the bill, see Doc 2009-3092 [PDF] or 2009 TNT 28-25 .)

Transferring funds with the intent to engage in conduct constituting a violation of the criminal tax fraud statutes (section 7201 or section 7206) would become a crime. Hence a taxpayer would be guilty of money laundering if a bank helped him make a transfer of funds to assist tax evasion.

If a prosecutor had evidence of intent to evade tax, then that transfer would suffice to charge the taxpayer with money laundering. There would be no need to wait for a customer to file a tax return. There would be no arguments about what constituted the proceeds of the crime. Moreover, the bank that made the transfer could potentially be charged with aiding and abetting money laundering.

Get in Line Brother #26 - Another Plea to Encourage the Reticent and Risky

The Government posted another notch in its publicity belt yesterday which it went public with the squeeze it put on another hapless UBS depositor and thereby, it hopes, to squeeze the masses to come forward. The DOJ Tax announcement of the plea is here. I have received a copy of the plea agreement but have not yet posted it on the web. I may do that later or, hopefully, when someone else does, I will link to it. I offer here just a few brief comments on the plea agreement in the Cittadini plea. I will probably add to this and refine or revise it (particularly if errors are called to my attention).

1. The Plea Count. Cittadani pled to violation of 26 U.S.C. § 7206(1), often referred to as tax perjury. This means, in effect, that Cittadani admitted that he will told a material lie on the tax return with respect to his reporting and nonreporting regarding the UBS account.

2. Origin of the Account. The seed monies for the accounts was originally received from his family in Argentina and deposited in the UBS account in 1991.

3. Use of Entities to Disguise. In 2001, he created a Hong Kong Corporation to avoid QI requirements, with advice and assistance of Hansruedi Schumaker. The HK corp named Swiss lawyers A.M.R. and Matthias Walter Rickenbach as First Directors.

4. Enablers.

a. Identities. Identifies other Swiss enablers by name where they are already indicted (Shoemaker and Rickenbach) and by initials where not indicted (yet).

b. U.S. Activity. Meetings with one of the enablers were held in the U.S.

5. Relevant Conduct. It is unclear when the UBS account was closed or whether, if closed, the funds went into another offshore account or elsewhere offshore in order to hide from the IRS. The agreement is just silent, perhaps in order to channel the sentencing (i.e., as noted below, the agreement stipulates that the tax loss relevant to sentencing is limited to the years 2001 through 2003). The trend in these cases is certainly to cut off the opening date for relevant conduct consideration, but the truth really is that years prior to that opening cutoff date is relevant conduct. And, of course, a sweeter deal can be achieved if there is an ending date cutoff as there is here. The Government wants pleas and will get its pound of flesh (as well as the perceived needed publicity) by offering goodies to coax out pleas with enough there to permit a significant sentence if that is the sentencing judge's wish. (I should note, however, that he agrees to a single 50% penalty for the FBAR violations for the years 2001 through 2008, certainly suggesting that there was relevant conduct in years after 2003.)

6. Sentencing Factors.

a. Tax Loss (including all relevant conduct): "the tax loss associated with the accounts at UBS that were disclosed to the Government pursuant to the Deferred Prosecution Agreement with UBS, and of which the defendant was the beneficial owner for the tax years 2001 through 2003.” See my comments above.

b. Sophisticated means. A no-brainer.

c. Acceptance of responsibility. A no-brainer.

7. Cooperation.

a. 5K1. Requires cooperation with a possibility of 5K1

b. No Deception. The plea contains this apparently targeted paragraph:

Defendant understands that the United States will tolerate no deception from him. If, in the estimation of the United States Attorney or the United States Department of Justice Tax Division, information or testimony provided from the date of the Plea Agreement proves to be untruthful or incomplete in any way, regardless of whether the untruthfulness helps or hurts the United States' case, the United States may consider that Defendant has breached this Plea Agreement.

c. Use of Information During Cooperation. Not a strange paragraph, but apparently a concern:

d. The parties agree that information provided by Defendant in connection with this Plea Agreement shall not be used to determine Defendant's sentence, except to the extent permitted by USSG § IB1.8.

USSG 1B1.8 provides that information divulged pursuant to plea cooperation agreements contains the usual suspects designed to make the cooperation more effective, but also contains the following exceptions permitting the Government to disclosure: "(5) in determining whether, or to what extent, a downward departure from the guidelines is warranted pursuant to a government motion under §5K1.1 (Substantial Assistance to Authorities)."

d. Cooperation and Rule 6(e). The agreement does not contain an express waiver of Rule 6(e) as seen in other plea agreements but does contain the following:

The defendant further agrees that any evidence, including statements and documents, provided to the United States by the defendant pursuant to a Proffer Agreement, without any limitations, can be utilized by the United States in its civil examination, determination, assessment, and collection of income taxes related to his income tax returns and any related corporate/entity tax returns, or any other civil proceeding.

It is unclear precisely when the proffer(s) occurred, but if they occurrred pre-indictment, I think they have the Rule 6(e) problem that, I am sure, they would prefer to avoid. (I have previously commented on this here.) Certainly, the IRS can get that evidence from him, assuming they formulate the right requests and asks the right questions (based on information independent of the grand jury investigation), but I think it is highly suspect for the "United States" to turn over that information so imbued with the grand jury investigation which was the only investigation DOJ can conduct in a tax case.

Reports of Switzerland Conversion Experience are an Exaggeration

I have previously here invoked the famous quote of Samuel Clements' dba Mark Twain for claims that are more smoke than substance. I invoke it again to address the notion that Switzerland has seen the light and will join the civilized world -- at least that portion of it that the OECD here influences (which in the tax world is substantial) -- to give more transparency with respect to taxes of other countries. Joann M. Wiener has an interesting and excellent article here titled "Switzerland, No Longer a Tax Haven?" She addresses how Switzerland with a stroke of a pen can give the appearance but not the reality of legitimacy to its continuing, profit driven, need to enable tax evaders. Switzerland has demonstrated over and over that it will protect its premium franchise in the tax haven business, so that it can continue -- perhaps not at the same level -- to enable taxpayers in other countries evade taxes for a fee that includes a healthy share of the taxes evaded for its enablement services.