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The US Department of Justice and the US Internal Revenue Service are continuing their campaign of targeting foreign banks, bankers and advisors suspected of assisting US citizens and residents in evading US tax through the use of offshore accounts and entities. 

Not satisfied with their successful prosecution of a prominent Swiss bank in 2009, DOJ, now armed with a treasure trove of information obtained from disclosures made by US taxpayers who came forward pursuant to the IRS Voluntary Disclosure programs, has continued to investigate financial institutions across the globe.

In addition, DOJ has just announced the filing of two new indictments charging an overseas banker and advisor with conspiring with US taxpayers to evade US taxes. These prosecutions are an ominous development for non-US banks, bankers and advisors that may have, in any fashion, assisted US taxpayers in evading their obligation to pay US taxes.

DOJ is asserting jurisdiction

In what might come as a most unpleasant surprise to foreign banks, DOJ will attempt to assert jurisdiction even where there has been no physical contact with the US by any bank employee.  For those who have any doubts about how aggressive DOJ can be in asserting jurisdiction, they need only look at recent prosecutions under the US Foreign Corrupt Practices Act (FCPA).  DOJ has successfully prosecuted foreign nationals for bribing government officials outside the US simply because the bribe money passed through a New York bank.  By contrast, gaining jurisdiction over a foreign bank or foreign bankers or advisors in the context of an alleged conspiracy to commit tax fraud is a far simpler matter. 

Using a theory of aiding and abetting, DOJ can argue that anyone who “aids” or “abets” a US taxpayer in committing a crime against the US., i.e., tax evasion, is also guilty of the same crime.  For example, if  an overseas bank employee aids, abets or counsels a US taxpayer on how to secure his assets so that the US government will not find them, DOJ will contend that the bank employee, or his employer, could be prosecuted as a coconspirator or aider and abettor. The fact that neither the banker nor the bank has had any direct, physical contact with the US is simply not a viable defense.

The consequences of such a prosecution can hardly be overstated.  The prominent Swiss bank mentioned above entered into a deferred prosecution agreement with the government and agreed to pay US$780 million in order to dispose of the case against it.  Individual bankers at that institution were placed under arrest upon their arrival in the US.  Indeed, that bank reportedly counseled its executives against travel to the US lest there be sealed indictments waiting for them when they arrive.

The new reality cannot be ignored

Offshore banks simply cannot afford to ignore this new reality.  DOJ will continue to pursue foreign banks and bankers.  Foreign financial institutions must take the steps necessary to determine whether their employees’ past dealings with US taxpayers were handled appropriately or may have exposed the bank to criminal liability in the US.  It is simply not sufficient to assume that bank procedures were complied with; due diligence must be performed to assure that this is the case.  Institutions under the mistaken impression that if they have no branches or employees in the US then they cannot be subject US criminal jurisdiction need to think again.  DOJ will attempt to assert jurisdiction if it believes a foreign individual or institution conspired with a US taxpayer to evade the payment of US taxes – whether or not there was any physical contact with US soil.

Foreign financial institutions must, with the assistance of experienced outside counsel, investigate to determine whether their employees’ past dealings with US taxpayers were handled appropriately or may have exposed the bank to criminal liability in the US.  If irregularities are discovered, a determination must be made as to how to address these items in a manner to minimize risk. 

In some circumstances, disciplining the bad actors and the implementation of a robust internal compliance program may suffice.  In other cases, a voluntary disclosure to DOJ may be advisable.  Banks will have to consider whether it is advisable to proactively contact their clients and seek to correct possibly false, incomplete or misleading information.  Termination of some bank clients may be necessary.  How to do this without exacerbating the danger to the bank and its clients must be considered carefully.  These critically important decisions can only be made when there is a full understanding of all relevant facts – the good, the bad and the ugly. 

The new reality is that the era of bank secrecy is over.  DOJ and the IRS are setting their sights overseas.  A “do-nothing-and-hope-for-the-best” approach is not a viable strategy for foreign financial institutions. 

You may also be interested in our other writings about international tax compliance, which may be found here.