DOJ Offshore Bank Resolution Offers Cooperation Road Map

August 29, 2017Articles Law360

The U.S. Department of Justice revealed its latest offshore bank resolution by announcing that it had entered into a nonprosecution agreement with a Swiss asset management firm called Prime Partners SA. This means that Prime Partners will not be criminally prosecuted for participating in what prosecutors characterized as a conspiracy to defraud the Internal Revenue Service and evade federal income taxes in connection with services that it provided to U.S. account holders between 2001 and 2010.

According to a press release announcing the resolution, the nonprosecution agreement was based upon Prime Partners’ “extraordinary cooperation,” including its voluntary production of approximately 175 client files for noncompliant U.S. taxpayer-clients. The nonprosecution agreement further requires Prime Partners to forfeit $4.32 million to the United States, representing certain fees that it earned by assisting its U.S. taxpayer-clients in opening and maintaining these undeclared accounts, and to pay $680,000 in restitution to the IRS, representing the approximate unpaid taxes arising from the tax evasion by Prime Partners’ U.S. taxpayer-clients.

As part of the nonprosecution agreement, Prime Partners admitted that it knew certain U.S. taxpayers were maintaining undeclared foreign bank accounts with the assistance of Prime Partners in order to evade their U.S. tax obligations, in violation of U.S. law. Prime Partners acknowledged that it helped certain U.S. taxpayer-clients conceal from the IRS their beneficial ownership of undeclared assets maintained in foreign bank accounts by using well-known mechanisms employed by offshore banks to hide funds and obscure ownership, such as:
 

  • creating sham entities, which had no business purpose, that served as the nominal account holders for the accounts;
  • advising U.S. taxpayer-clients not to retain their account statements, to call Prime Partners collect from pay phones, and to destroy any faxes they received from Prime Partners;
  • providing U.S. taxpayer-clients with prepaid debit cards, which were funded with money from the clients’ undeclared accounts; and
  • facilitating cash transfers in the United States between U.S. taxpayer-clients with undeclared accounts.


An unusual feature of this latest bank resolution is what the Justice Department characterizes as Prime Partners’ “voluntary and extraordinary cooperation” with the U.S. government. In early 2009, Prime Partners voluntarily implemented a series of remedial measures to stop assisting U.S. taxpayers in evading federal income taxes, before the initiation of any investigation by the U.S. government. The timing of these corrective actions is particularly notable, as the Justice Department announced its landmark deferred prosecution agreement with UBS AG, the largest bank in Switzerland, in February 2009, and the Internal Revenue Service unveiled its Offshore Voluntary Disclosure Program approximately 30 days later. In the midst of the announcement of the UBS resolution, many other Swiss banks were advising their U.S. clients to transfer their account holdings to other, smaller Swiss banks in order to avoid detection by U.S. authorities, thereby creating a class of U.S. taxpayers now labeled by authorities as “leavers.” In stark contrast, it appears that Prime Partners embarked on a different course of conduct, implementing corrective action to avoid further violations of U.S. law.

The Justice Department appears to have taken great care to describe publicly the extent of Prime Partners’ extensive cooperation, which included the following:
 

  • Prime Partners’ voluntary production of approximately 175 client files for noncompliant U.S. taxpayers, which included the identities of those U.S. taxpayers;
  • Prime Partners’ willingness to continue to cooperate to the extent permitted by applicable law; and
  • Prime Partners’ representation — based on an investigation by outside counsel, the results of which have been reviewed by the Justice Department — that the misconduct under investigation did not, and does not, extend beyond that described in a statement of facts accompanying the non-prosecution agreement.


Another notable aspect of this case is that while Prime Partners is a Swiss institution, it did not take advantage of the popular yet now-closed “Swiss Bank Program,” which essentially offered amnesty to any Swiss financial institution willing to come forward and make full disclosure of its cross-border activities involving U.S. citizens. Nearly 80 Swiss institutions enrolled in the Swiss Bank Program and successfully resolved their potential exposure under U.S. tax laws by paying steep financial penalties and agreeing to fully cooperate with the U.S. government’s ongoing investigations of offshore tax evasion. Instead of enrolling in the Swiss Bank Program, Prime Partners appears to have conducted an internal investigation, voluntarily disclosed its misconduct to the Justice Department, cooperated with the subsequent government investigation, and attempted to negotiate the best possible deal it could. Prime Partners may have been prompted to undertake such action based upon what the Justice Department has publicly stated is its “willingness to reach fair and appropriate resolutions with entities that come forward in a timely manner, disclose all relevant information regarding their illegal activities and cooperate fully and completely, including naming the individuals engaged in criminal conduct.”

The Justice Department’s announcement that it agreed to a nonprosecution agreement with Prime Partners is no doubt a signal to other financial institutions (both Swiss and non-Swiss) that the voluntary disclosure “window” remains open (notwithstanding the termination of the Swiss Bank Program), and that institutions voluntarily disclosing their wrongdoing and demonstrating substantial cooperation — like that of Prime Partners — will be treated leniently.

Indeed, in a press release announcing the resolution Acting Manhattan U.S. Attorney Joon H. Kim stated that “[t]he resolution of this matter through a non-prosecution agreement, along with forfeiture and restitution, reflects the extraordinary cooperation provided by Prime Partners to our investigation. It should serve as proof that cooperation has tangible benefits.” In the same vein, Acting Deputy Assistant Attorney General Stuart M. Goldberg said that “[i]n our ongoing investigations, we will continue to draw on information from a variety of sources and to provide substantial credit to those around the globe who provide full and timely cooperation regarding the identity of U.S. tax cheats and the phony trusts and shell companies they seek to hide behind.” At the same time, the Justice Department will undoubtedly seek to punish — to the fullest extent possible under U.S. laws — financial institutions that have aided and abetted tax evasion by their U.S. customers and that fail to come forward voluntarily and cooperatively.

Finally, the Justice Department’s resolution with Prime Partners stands as yet another stern warning to taxpayers with undisclosed foreign accounts that they must take corrective action immediately or face harsh consequences. In the press release, Acting Deputy Assistant Attorney General Stuart M. Goldberg said “[t]he message is clear to those using foreign bank accounts to engage in schemes to evade U.S. taxes – you can no longer assume your ‘secret’ accounts will remain concealed, no matter where they are located. In our ongoing investigations, we will continue to draw on information from a variety of sources and to provide substantial credit to those around the globe who provide full and timely cooperation regarding the identity of U.S. tax cheats and the phony trusts and shell companies they seek to hide behind.” The Internal Revenue Service’s Offshore Voluntary Disclosure Program remains available to taxpayers with undisclosed foreign assets, although the penalty for account holders at Prime Partners will now increase from 27.5 percent to 50 percent.

Reprinted with permission from Law360. (c) 2017 Portfolio Media. Further duplication without permission is prohibited. All rights reserved.