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French Court Issues Largest Fine Ever against UBS for Tax and Money Laundering Crimes

February 22, 2019 by Bruce Zagaris Leave a Comment

On February 20, 2019, a French trial court issued the largest judgment against a bank for tax-related and money laundering crimes. The court found UBS AG and UBS (France) SA guilty of illicit solicitation and laundering of the proceeds of tax fraud. It imposed a penalty of € 3.7 billion and € 15 million respectively and civil damages of € 800 million.

UBS issued a press release that it “strongly disagrees with the verdict. “ It argues that the conviction is not supported by any concrete evidence. Instead, UBS says it is based on “the unfounded allegations of former employees who were not even heard at the trial.” UBS says the decision is devoid of evidence that any French client was solicited on French territory by a UBS AG client advisor to open an account in Switzerland. UBS criticized the decision as effectively applying French law in Switzerland, thereby undermining the sovereignty of Swiss law and posing significant questions of territoriality.

During the trial Hervé d’Halluin testified about a practice of poaching of clients and pressure by UBS Swiss bankers to provide tips about potential clients.

It appeared that the court relied significantly on the creation by UBS of a parallel accounting system known as milk books. Milk books are the small notebooks Swiss cow farmers use as ledgers. They were used to account for and simultaneously disguise transfers of illicit money between France and Switzerland. UBS has said the milk books were to determine whether a French or a Swiss bank should receive the credit for landing a French client. UBS’s French bankers obtained annual bonuses linked to new business from abroad.

French judges ruled the milk books were evidence UBS was attempting to hide financial transfers from its official books and to assist French clients avoid paying taxes.[1]

UBS in its press release states the verdict is devoid of evidence and a credible methodology for the calculation of the fine and damages. UBS states the charges of laundering the proceeds of tax fraud do not stand up, since the predicate the decision lacked proof of an original tax fraud offense of French taxpayers. UBS says it respected and met its obligations under Swiss and French law as well as the European Tax Savings directive, which became effective in 2004.

UBS will appear the verdict and evaluate whether the written decision requires any further steps. French law provides that an appeal suspends the judgment of the trial court and results in a transfer of the case to the Court of Appeals, which then retries the case in its entirety.

Initially French financial prosecutors and UBS representatives discussed a plea bargain, but UBS rejected the out-of-court settlement, reportedly € 1.1 billion.

The case illustrates the growing criminal prosecutions of so-called enablers, including banks, lawyers, asset managers, and fiduciaries, for tax and money laundering crimes. Already 5 UBS employees received suspended prison sentences and fines from €50,000 to €300,000 in 2018 in the case.[2] The verdict occurs as France is competing with other countries, especially Ireland and Germany, to attract banks leaving London as a result of Brexit. Other tax authorities and prosecutors have targeted so-called enablers of tax crimes. In the context of the implementation and enforcement of the Common Reporting Standard, the OECD and EU have taken initiatives targeting enablers.

The March issue of the IELR will have a more comprehensive article on this story and its implications.

[1] Liz Alderman, French Court Fines UBS $4.2 Billion for Helping Clients to Evade Taxes, N.Y. Times, Feb. 21, 2019, at B4, col. 1.

[2] Id.

Danske Bank Closes Operations in Russia and Baltics After Estonia Orders Its Closure

February 20, 2019 by Bruce Zagaris Leave a Comment

On February 19, 2019, Estonian Financial Supervision Authority (the Estonian FSA) gave Danske Bank 20 days to submit an action plan to close its local branch within eight months. In December, Estonian authorities detained 10 former Danske Bank employees on suspicion they had facilitated money laundering through non-resident clients, including many Russians.

This week the European Banking Authority announced it was opening a formal investigation into a possible violation of EU laws by the FSA and its Danish counterpart Finanstilsynet over the case.

On February 19, 2019, Danske Bank announced that, following the investigation of suspicious transactions in Estonia during the period of 2007 to 2015, the Estonian FSA has ordered Danske Bank to cease banking operations in Estonia, which Danske Bank has agreed to do.

Danske Bank also announced it is closing operations in Latvia, Lithuania, and Russia.

Danske Bank’s press release announced that, independently of the Estonian FSA’s notification, Danske Bank has decided to close all its activities in the Baltics and Russia.

In the future Danske Bank will serve only subsidiaries of Danske Bank’s Nordic customers and global companies with a significant Nordic footprint. It has transferred all other banking activities to its non-core unit to be wound up or divested.

Analysis

The decision by the Estonian FSA to order the Danske Bank branch to close and the decision of Danske Bank to also close its operations in Latvia, Lithuania and Russia, along with the pending criminal investigations of Danske Bank in France, the United Kingdom and the United States, the investigation of the European Banking Authority, and the detention of 10 former Danske Bank employees in Estonia, illustrate the financial and reputational loss that accompanies inadequate attention to financial regulatory matters, especially relating to transnational corruption and money laundering. In the onslaught of investigations Danske Bank is struggling to survive. In this context its trimming of its operations is essential to its survival.

Oregon Senators introduce Bills to Counter Foreign Embassies and Consulates Helping Nationals Flee U.S. Justice

January 28, 2019 by Bruce Zagaris Leave a Comment

On January 25, 2019, Oregon’s Senators Jeff Merkley and Ron Wyden introduced two bills that would impose significant consequences on foreign consulates that help their citizens escape legal accountability within the U.S.

Merkley and Wyden’s legislation follows investigative reporting by the Oregonian that found Saudi consular officials within the U.S. helped Abdulrahmeen Sameer Noorah, a Saudi national, escape the U.S. soon before his trial. Noorah was charged with manslaughter, felony hit-and-run, and reckless driving after fatally striking an Oregon teen with his car. A Saudi consulate posted $100,000 bail for Noorah before he escaped, and the U.S. Marshalls Service suspects Saudi officials helped Noorah escape the country on a private flight.

In addition to the Noorah case, the Saudi government is alleged to have helped at least four other Saudi nationals charged with serious crimes evade accountability in Oregon. Reportedly, the Saudi government bailed out Ali Hussain Alhamoud, a Saudi national, from Lincoln County Jail in 2012 after he was indicted on multiple sex crime charges. Alhamoud subsequently fled successfully to Saudi Arabia, and his case remains open in the United States. The Saudi consulate in Los Angeles posted bond for Saudi nationals in two of the three other known cases where Saudi nationals fled prosecution.

The first bill being introduced today, the ESCAPE (Examining Saudi Consular Activities Promoting Extraction) of Saudi Nationals Act, would:

“Urge the President to declare any Saudi diplomat involved in the extraction of Noorah or Alhamoud as a persona non-grata, which would trigger their expulsion from the United States.

Urge the State Department not to accredit any Saudi diplomat at the Los Angeles Consulate until those two fugitives are returned to the United States.

Require the State Department, in coordination with the U.S. Attorney General, to deliver a report within 90 days investigating any involvement of the Saudi Consulate in Los Angeles in aiding the disappearance of Noorah and Alhamoud.

Amend the State Department Basic Authorities Act of 1956 to require the State Department to shut down any consulate or embassy in the United States that is found to have aided in the removal of one of its citizens in order to evade criminal accountability, provided Saudi diplomats found to have aided such a removal are not expelled from the United States.”

The second bill, the Preserving American Justice Act, would:

“Charge the Department of Justice with maintaining an annual report about foreign nationals who flee before facing justice in the United States. Currently, no agency formally tracks this information.

Require the Director of National Intelligence to maintain a list of countries that facilitate the escape of foreign nationals.

If Department of Justice determines that the Saudi government assisted any alleged criminal in escaping justice in the United States, the bill would prohibit the issuance of all visas and travel to the United States to the following groups of Saudi nationals: the Council of Ministers, their respective families, King Salman, all of his direct descendants and full-relatives.

Create a tax penalty for any countries that land on such a list, removing a tax exemption that foreign governments and sovereign wealth funds are able to access on certain types of investment income. This penalty could significantly impact the Saudi sovereign wealth fund, which is estimated at near $400 billion.”

The press release also refers to the need for accountability on the murder of former Washington Post journalist Jamal Khashoggi,

U.S. Indictment Charges Professionals and U.S. Taxpayer for Tax and Related Offenses Arising From Panama Papers

December 5, 2018 by Bruce Zagaris Leave a Comment

On December 4, 2018, U.S. law enforcement announced the unsealing an indictment in the U.S. District Court for the Southern District of New York, charging four individuals with wire fraud, tax fraud, money laundering, and other crimes for their alleged roles in a decades-long criminal scheme perpetrated by Mossack Fonseca & Co. (“Mossack Fonseca”), a Panamanian-based international law firm, and related entities.

The 11-count indictment charges Ramses Owens, 50, a Panamanian citizen; Dirk Brauer, 54, a German citizen; Richard Gaffey, a U.S. citizen, of Medfield, Massachusetts; and Harald Joachim Von Der Goltz, 81, a German citizen. Owens, Gaffey and Von Der Goltz are charged with one count of conspiracy to commit tax evasion, one count of wire fraud, and one count of money laundering conspiracy. Owens and Brauer are charged with one count of conspiracy to defraud the U.S. and one count of conspiracy to commit wire fraud. Gaffey and Von Der Goltz are also charged with four counts of willful failure to file an FBAR. In addition, Von Der Goltz is charged with two counts of making false statements.

On November 15, 2018, French authorities arrested Brauer, who worked as an investment manager for Mossfon Asset Management, S.A., an asset management company closely affiliated with Mossack Fonseca, in Paris, France. On December 3, 2018, British authorities arrested Von Der Goltz, a former U.S. resident and taxpayer in London, England. On December 4, U.S. authorities arrested Gaffey, a U.S.-based accountant in Boston, Massachusetts. Owens, a Panamanian attorney who worked for Mossack Fonseca, remains at large.

The indictment alleges that, from at least in or about 2000 through in or about 2017, Owens and Brauer conspired with others to help U.S. taxpayer clients of Mossack Fonseca hide assets and investments, and the income generated by those assets and investments, from the IRS through fraudulent, deceitful and dishonest means. Owens and Brauer allegedly worked to establish and manage opaque offshore trusts and undeclared bank accounts on behalf of U.S. taxpayers who were clients of Mossack Fonseca. Owens and Brauer allegedly marketed, created, and serviced sham foundations and shell companies formed under the laws of countries, such as Panama, Hong Kong, and the British Virgin Islands, to conceal from the IRS and others the ownership by U.S. taxpayers of accounts established at overseas banks, as well as the income generated in those accounts. Typically the sham foundations “owned” the shell companies that nominally held the undeclared assets on behalf of the U.S. taxpayer clients of Mossack Fonseca.

In exchange for additional fees, Owens and Brauer allegedly helped clients who had bought the sham foundations and related shell companies by preparing corporate meeting minutes, resolutions, mail forwarding, and signature services. Owens and Brauder are also alleged to have intentionally established the bank accounts in jurisdictions with strict bank secrecy laws, thereby impeding the ability of the U.S. to obtain bank records for the accounts. Additionally, Owens and Brauer allegedly instructed U.S. taxpayer clients of Mossack Fonseca about how to repatriate funds to the U.S. from their offshore bank accounts in a manner designed to keep the undeclared bank accounts concealed. Among other things, Owens and Brauer instructed clients to use debit cards and fictitious sales to repatriate their funds covertly.

Von Der Goltz was allegedly one of Mossack Fonseca’s U.S. taxpayer clients. Von Der Goltz was a U.S. resident and was subject to U.S. tax laws, requiring him to report and pay income tax on worldwide income, including income and capital gains generated in domestic and foreign bank accounts. As a U.S. taxpayer, Von Der Goltz was required to file a Report of Foreign Bank and Financial Accounts (FBAR). Von Der Goltz allegedly evaded his tax reporting obligations by establishing a series of shell companies and bank accounts, and hiding his beneficial ownership of the shell companies and bank accounts from the IRS. These shell companies and bank accounts allegedly made investments worth tens of millions of dollars. Owens and Gaffey, a partner at a U.S.-based accounting firm, helped Van Der Goltz in this scheme. Van Der Goltz, Gaffey, and Owens allegedly falsely claimed that Von Der Goltz’s elderly mother was the sole beneficial owner of the shell companies and bank accounts at issue because, at all relevant times, she was a Guatemalan citizen and resident, and, unlike Von Der Goltz, was not a U.S. taxpayer.

The indictment alleges Gaffey, besides helping Von Der Goltz evade U.S. income taxes and reporting requirements, also worked closely with Owens to help another U.S. taxpayer client (Client-1) of Mossack Fonseca defraud the IRS. Client-1 allegedly maintained a series of offshore bank accounts, which Mossack Fonseca helped Client-1 conceal from the IRS for years. The indictment also alleges that, on the advice of Owens and Gaffey, Client-1 covertly repatriated approximately $3 million of Client-1’s offshore money to the U.S. by falsely stating on Client-1’s federal tax return that the money represented proceeds from the sale of a company. After Client-1 repatriated approximately $3 million in this way, approximately $1 million still remained in Client-1’s offshore account, the existence of which remained hidden from the IRS.

The indictment illustrates the trend by U.S. and law enforcement around the world to investigate and prosecute law firms, asset managers, accountants, and other enablers for their key roles in the global financial system. Assistant Attorney General Benczkowski said “the charges…demonstrate our commitment to prosecute professionals who facilitate financial crime across international borders and the tax cheats who utilize their services.” IRS-Criminal Investigations Chief Don Fort said the indictments send a message that “more investigations are on the way.”

With respect to prosecuting tax enablers, on July 2, 2018 the heads of tax crime and senior tax officials of the U.S., U.K., Canada, the Netherlands, and Australia announced an alliance on tax enforcement cooperation. At their first meeting they agreed to develop tactical plans and identify opportunities to pursue enablers of international tax crime. This new indictment shows a tangible result.

The indictment also is the latest of many indictments brought by tax authorities and prosecutors arising out of the publication on April 3, 2016 by the International Consortium of Investigative Journalists (ICIJ) of the Panama Papers investigation. As of December 1, 2016, governments in more than 70 countries have started over 150 investigations, inquiries, audits and probes into the affairs of thousands of people and corporations linked to Panama Papers.

U.S. Treasury Expands GTO to 12 Metropolitan Areas and Lowers Reporting Threshold to $300,000

November 20, 2018 by Bruce Zagaris Leave a Comment

On November 15, 2018, the U.S. Department of Treasury Financial Crimes Enforcement Network (FinCEN) announced the issuance of revised Geographic Targeting Orders (GTOs) that require U.S. title insurance companies to identify the natural persons behind shell companies used in all-cash purchases of residential real estate. The purchase amount threshold, which previously varied by city, is now set at $300,000 for each covered metropolitan area. FinCEN is also requiring that covered purchases using virtual currencies be reported.

Prior GTOs resulted in valuable data on the purchase of residential real estate by persons implicated, or allegedly involved, in various illicit enterprises including foreign corruption, organized crime,fraud, narcotics trafficking, and other violations. Reissuing the GTOs will further assist in tracking illicit funds and other criminal or illicit activity, as well as inform FinCEN’s future regulatory efforts in this sector.

The latest GTOs cover certain counties within the following major U.S. metropolitan areas: Boston; Chicago; Dallas-Fort Worth; Honolulu;Las Vegas; Los Angeles; Miami; New York City; San Antonio; San Diego; San Francisco; and Seattle.

FinCEN also realized Frequently Asked Questions. The FAQs explain that one of the four criteria that triggers a Covered Transaction, is that “(s)uch purchase is made, at least in part,using currency or a cashier’s check, a certified check, a traveler’s check, a personal check, a business check, or a money order in any form, a funds transfer, or virtual currency.” Accordingly, payment of at least part of the purchase price using one of these methods, such as virtual currency, a wire transfer, a cashier’s check (sometimes referred to as a “bank check,” “official check,” or “treasurer’s check”), a personal check, a business check, or a certified check, triggers a Covered Transaction, assuming the other criteria to trigger a GTO are met: “residential real property”; foreign beneficial owner,which means each individual who,directly or indirectly, owns 25% or more of the equity interests of the Purchaser; and a Covered Business’s “agents” refers to people or entities that are authorized by the Covered Business, usually through a contractual relationship, to act on its behalf to provide title insurance underwritten by the Covered Business (or its subsidiaries).

The U.K. already has initiated a New Beneficial Ownership Register for UK Properties owned by Overseas Companies and other Legal Entities that will go live in 2021. The British Columbia government has released regulations to create a new condo and strata assignment register, in part in response to the significant number of foreign purchases of residences, some of which appear to be connected to proceeds of crime. With the international developments and the continuing extension of the GTOs by FinCEN, pressure is building for the GTOs to become permanent.

OECD and Argentina Establish Latin America Academy for Tax and Financial Crime Investigation

August 7, 2018 by Bruce Zagaris Leave a Comment

On July 22, 2018, OECD Secretary-General Angel Gurria and Argentina’s Minister of Treasury Nicolás Dujovne presided over a Memorandum of Understanding (MOU) to establish a center of the OECD Academy for Tax and Financial Crime Investigation in Buenos Aires, Argentina.

The signing occurred in the margins of the meeting of the G20 Finance Ministers and Central Bank Governments. The center will be housed in the facilities of Argentina’s Federal Administration of Public Revenues. Argentina’s Commissioner of Public Revenues Leandro Cuccioli and the OECD’s Director of the Centre for Tax Policy and Administration Pascal Saint-Amans signed the MOU.

The Academy will provide intensive capacity-building courses targeting tax crime investigators and other related law enforcement officials, including prosecutors, anti-money laundering and anti-corruption officials, especially from Latin America countries. The courses will aim to support tax crime investigators. It will feature broad-based courses on conducting and managing financial investigations as well as giving courses on specific types of tax and financial crimes, such as those associated with crypto-currencies, money laundering and VAT fraud.

The creation of the OECD Latin America Academy builds on the success of the original centre hosted by the Guardia de Finanza in Ostia, Italy, and a pilot Africa Academy for Tax and Financial Crime Investigation started by the OECD, Kenya, Italy and Germany at the G20 Africa Partnership conference in June 2017. Together, the centers have trained more than 550 financial investigators from over 80 countries.

The first program of the OECD Latin America Academy will occur in late 2018 and will focus on VAT/GST Fraud.

The 2019 Academy schedule for Latin America will include a program, concentrating on Conducting and Managing Financial Investigations. The program will include subject areas such as: bribery and corruption; beneficial ownership and offshore structures; money laundering; investigative techniques; international cooperation; and asset recovery.

With globalization the ways for individuals and entities to evade and avoid tax have expanded significantly. Just as importantly, the international mechanisms to prevent and combat tax evasion and avoidance, such as BEPS and its components, such as Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS, Country-by-Country reporting, the different types of exchange of information, the interplay between anti-money laundering, transnational corruption, and tax issues all require initial and ongoing training. The OECD Academies will help train tax officials at different levels. The nature of the training illustrates the increasing convergence between international tax enforcement and other international white collar enforcement. For more discussion of this development, stay tuned for the August issue of the International Enforcement Law Reporter.

Five Countries Form Joint Chiefs of Global Tax Enforcement (J5) Alliance

July 2, 2018 by Bruce Zagaris 2 Comments

On July 2, 2018, Her Majesty’s Revenue and Customs announced an alliance on tax enforcement between the United Kingdom, Canada, the Netherlands, the United States and Australia to combat international tax crime and money laundering. Members include the heads of tax crime and senior officials from the Australian Criminal Intelligence Commission (ACAC) and the Australian Taxation Office (ATO), the Canada Revenue Agency (CRA), the Dutch Fiscal Information and Investigation Service (FIOD), Her Majesty’s Revenue & Customs (HMRC), and Internal Revenue Service Criminal Investigation (IRS-CI).

The group will build on existing international cooperation by sharing intelligence and expertise, and will cooperate on joint operations to investigate persons who are enablers of tax crime.

At their first meeting, the J5 brought leading experts in tax and other financial crimes from each of the five member countries to develop tactical plans and identify opportunities to pursue cyber criminals and enablers of international tax crime.

According to HMRC, the new alliance will help to build on work that has obtained more than £ 2.8 billion from offshore tax evaders since 2010.

The J5 was formed in response to a call to action from the OECD for countries to do more to tackle the enablers of tax crime. All five countries have similar threats: organized crime groups and wealthy offshore tax evaders who are well resourced and have access to professional enablers to hide income and assets using the global financial system.

According to IRS Criminal Investigation division chief Don Fort, the J5 will have three areas of focus: professional enablers, cybercrimes and cryptocurrencies, and increased use of data analytics and new investigation technology. (Nathan J. Richman, Enforcement Collaboration to Focus on Emerging Tax Issues, 2018 Worldwide Tax Daily 126-1, June 29, 2018).

The J5 has similarities to the Joint International Tax Shelter Information and Collaboration (JITSIC). On October 24, 2014, 38 countries, meeting in Dublin, Ireland for the 9th meeting of the Forum on Tax Administration (FTA), agreed to establish the JITSIC. The JITSIC Network focuses specifically on cross border tax avoidance. JITSIC has the goal to deter the promotion of, and investment in, abusive tax schemes by: increasing the community’s awareness of the potential risks of promoting and investing in tax schemes; sharing ideas on how to identify and address abusive tax schemes; enhancing compliance and enforcement efforts through coordinated ‘real-time’ exchanges of information; developing new internet searches and other techniques for the early identification of promoters and investors involved in abusive tax schemes; and identifying emerging trends and patterns to anticipate new abusive tax schemes, and improving knowledge of techniques used to promote cross-border abusive tax schemes.

The J5, unlike JITSIC, will actually engage in joint tax investigations and use increased data analytics and investigation technology in its work.

There will be a more comprehensive article in the July 2018 issue of the International Enforcement Law Reporter.