Another Crack in Foreign Account Secrecy - UBS Delivers Singapore Affiliate Records Pursuant to IRS Summons (6/22/16; 6/23/16)

Correction:  The blog has been corrected as a result of new information:  UBS has indicated that the client consented to the disclosure of Singapore account information, thus mooting the summons enforcement issue.  Corrections are made in this blog entry where appropriate, and are specifically noted.

I previously reported that the IRS has summonsed UBS for records from a Singapore affiliate and had sought judicial enforcement of the summons. U.S. Summonses Singapore Bank Records from UBS (3/4/16 & 3/5/16), here.  DOJ Tax has announced in a press release, here, that UBS "has now produced all Singapore-based records responsive to the request and the IRS determined that UBS complied with the summons, the Justice Department has voluntarily dismissed its summons enforcement action against the bank." The press release explained, somewhat cryptically:

The IRS served an administrative summons on UBS for records pertaining to accounts held by Ching-Ye “Henry” Hsiaw.  According to the petition, the IRS needed the records in order to determine Hsiaw’s federal income tax liabilities for the years 2006 through 2011.  Hsiaw transferred funds from a Switzerland-based account with UBS to the UBS Singapore branch in 2002, according to the declaration of a revenue agent filed at the same time as the petition.  UBS refused to produce the records, and the United States filed its petition to enforce the summons.

JAT Comments: 

1.  According to the U.S.'s Motion for Voluntary Dismissal,(Dkit. 16), there was no formal show cause hearing or order to enforce.  Rather,

Shortly after the petition was filed, the parties engaged in discussions to determine if they could resolve the matter amicably and without the necessity of any further court involvement. Upon completion of those discussions, UBS AG advised the United States that it would comply with the IRS summons and produce all Singapore-based bank records responsive to the IRS  summons. On May 31, 2016, UBS AG served its initial document production and, thereafter, supplemented its production on June 10, 2016. On June 17, 2016, after reviewing the bank’s document production, the IRS determined that UBS AG has complied with the IRS summons. In view of the above, the United States voluntarily dismisses its petition with prejudice. 

2. [Corrected 6/23/16] UBS has indicated that "complied with the summons based on client consent in accordance with Singapore law."  David Voreacos, UBS Gives IRS Records on U.S. Citizen’s Account in Singapore (Bloomberg 6/22/16), here..  In an earlier posting of this blog I stated that it was not clear on the documents I reviewed why UBS provided the documents required by the summons.  [End of Correction]  Readers will likely recall the earlier UBS proceeding involving a John Doe Summons to UBS that was the starting point for the IRS and DOJ's offshore account initiative starting around 2008.  The summons in this case was a regular summons, although since it was for financial account records, it might have been a third party recordkeeper summons.  The summons is here.  The key difference would be that, in a criminal investigation,  regular summonses require no notice to the taxpayer but third party recordkeeper summonses do. § 7609(c)(2)(E). [Addition 6/24/16]  Asher Rubinstein noted in the comment below that the summons was a Bank of Nova Scotia Summons, which, I understand is just a regular summons to an affiliated entity of a foreign bank for records of the affiliated foreign bank.  I discussed this issue when originally reporting on the case.  U.S. Summonses Singapore Bank Records from UBS (Federal Tax Crimes Blog 3/4/16 & 3/5/16), here, see particularly paragraph 1 under JAT Comments.  [End of Addition]

3.  Normally, in high stakes summonses, if the summonsed third party has an interest in not producing the documents (and certainly, given UBS's role as a player in the offshore account market, it has that interest), it might await a formal order from the Court.  This would then give the summonsed party some cover with the client and perhaps, in this case, with the regulatory authorities in the foreign jurisdiction whose bank secrecy laws may be implicated. [Clarification 6/23/16]  In this case, however, since the client apparently consented to the disclosure, UBS did not need such cover. [End of Clarification]

4.  [Correction 6/212/16] As note noted in the corrections above, UBS did not cave and therefore this brouhaha is mooted in terms of its future effects, but I have to think that, if the IRS did it once, it will do it again in either a regular summons (perhaps of the thirdparty recordkeeper genre) or a John Doe Summons. [End of Correction]

5.  Singapore does not have a tax treaty or mutual legal assistance with the U.S., for exchange of such tax information, so there is no formal mechanism for exchange of information that might permit a specific request to a named taxpayer or what has become known as a group request for unidentified U.S. taxpayers meeting certain characteristics.  (I call such group requests under a treaty request a John Doe Treaty Request.)

6.  It is interesting that the press release specifically mentions that Hsiaw apparently moved his account from UBS Switzerland to the UBS affiliate in Singapore in 2002.  The IRS has been obtaining so-called leaver lists from Swiss Banks, but I was not aware that they would go all the way back to 2002.  Of course, UBS is a special situation so that the IRS may have obtained such a leaver list or even the UBS bank records on U.S. clients from 2002.

Interview of Acting Assistant Attorney General Ciraolo on Tax Enforcement (3/23/16)

The New York Law Journal has published this article of an interview of Acting AAG Caroline Ciraolo.  Jeremy H. Temkin, DOJ Tax Division Today: Interview With Acting Assistant Attorney General, 255 NYLJ No. 55 (3/23/16), here.  The interview is a general overview of the Tax Division's work, with particular focus on offshore accounts that have been perhaps its most visible effort over the past few years.  Of course, there is the expected claims of great success on the offshore efforts starting in 2009, with many prosecutions of individuals and financial institutions and much revenue gathered.

I focus in the balance of this blog only on matters that I found particularly interesting.

1.  Regarding follow-through, Ciarolo says that DOJ  and the IRS are following leads they have obtained in the various efforts and are continuing to obtain from various sources "to identify and investigate U.S. accountholders who willfully concealed their foreign accounts and evaded U.S. tax, as well as those entities and individuals, foreign and domestic, that facilitated this criminal conduct."

2.  Category 3 and 4 information:

Finally, Tax Division attorneys and IRS personnel are reviewing the information received from Swiss banks that fall under Category 3 and Category 4 of the program. Category 3 and 4 banks maintain that they did not commit any violations of U.S. law, and seek a non-target letter after providing information required by the program.

I have written before that I am baffled that any Swiss Financial Institution would have proceeded under Category 3 or 4.  See US DOJ Swiss Bank Program Categories 3 and 4 Comments (Federal Tax Crimes Blog 2/4/16; 2/7/16), here.  Certainly, though, the Financial Institutions that did join under Categories 3 or 4 would have expected to have been closely scrutinized.

3.  Countries Other than Switzerland:

We are looking well beyond Switzerland, into jurisdictions around the world, including those referenced in the statements of facts admitted to by the Category 2 banks in connection with the tax evasion efforts of U.S. taxpayers. These jurisdictions include, but are not limited to, the British Virgin Islands, the Cayman Islands, the Channel Islands, Guernsey, Hong Kong, Israel, Liechtenstein, Luxembourg, Panama and Singapore. 

4.  She did not indicate that a program similar to the Swiss Bank Program would be adopted for these countries, but did state:

Individuals or entities that assisted U.S. accountholders to conceal foreign accounts and evade U.S. tax will not improve their situation by sitting back and delaying disclosure in the hope of an announcement of another program, particularly while we are actively reviewing information received and opening up additional investigations. Timeliness in coming forward and cooperating remains a critical factor in any criminal resolution. 

JAT Speculation:  I wonder whether DOJ is now trying to identify the worst offenders in the countries listed above so that it will have a representative number of Category 1-type financial institutions that it can prosecute and will then announce some type of program for other financial institutions (perhaps patterned on the Swiss Bank Program).  If that were the case, those financial institutions that can self-identify as being at high risk of being Category 1-like would be well-advised to move fast to open the kimono with DOJ Tax and strike a deal quickly that might be better than if they waited.

5.  On the issue of whether, given the mass publicity about foreign bank accounts and the offshore disclosure programs, it was realistic to think that significant additional voluntary disclosures will be made and the impact on DOJ Tax's work.  She answered (bold-face supplied by JAT):

 After seven years of voluntary disclosure programs, nearly 200 criminal prosecutions, and the increased assessment and suits to collect FBAR penalties, a taxpayer’s claims of ignorance or lack of willfulness in failing to comply with disclosure and reporting obligations are not well-received. Similarly, we are very interested in taxpayers who filed tax returns and FBARs pursuant to the Streamlined filing procedures, or the Delinquent International  Information Return or FBAR submission procedures, who falsely claimed either to have engaged in non-willful conduct or to have acted with reasonable cause.

I have bold-faced this because, I suspect, many have not adequately assessed the risk of improper certifications in the Streamlined Programs.

6.  She also addressed the effect of budget cuts on DOJ Tax's mission, saying DOJ Tax is back to full strength and works with IRS and US Attorneys to better focus its resources for maximum effect.

U.S. Summonses Singapore Bank Records from UBS (3/4/16 & 3/5/16)

David Voreacos, Is Singapore the Next Switzerland for U.S. Tax Crackdown? (BloombergBusiness 3/3/16), here.  Excerpts:

The Internal Revenue Service is seeking to force UBS Group AG to turn over records on an account in Singapore held by a U.S. citizen, potentially opening a new front against offshore tax evasion beyond Switzerland. 

The IRS last month asked a federal judge in Miami to force UBS, the largest Swiss bank, to produce documents on Ching-Ye Hsiaw, who lives in China. The judge on Wednesday told UBS to show up in court on March 31 to explain why it has refused to supply the account records. 

* * * * 

Singapore will lift banking confidentiality when foreign authorities ask it to do so and when the law is used to shield criminal activities, according to a person with direct knowledge of the city-state’s bank-regulation framework who asked not to be named because of an ongoing court case. [JAT NOTE:  See ¶ 7 in my comments below.]

* * * * 

Singapore Secrecy 

The U.S. has focused largely on Switzerland in recent years as it has fought offshore tax evasion. More than 80 Swiss banks, including UBS and Credit Suisse Group AG, have agreed to pay a total of $5 billion or so in penalties and fines. The question is where the IRS and the Justice Department will turn next as they sift through a trove of data gathered from Swiss banks and from more than 50,000 U.S. taxpayers who disclosed their accounts to avoid prosecution. 

The Hsiaw case provides some clues. IRS agents served a summons on UBS in 2013 for records of his account in Singapore from 2001 to 2011. The bank said it couldn’t produce them because Singapore’s bank secrecy laws prevent disclosure without permission from Hsiaw, which he hasn’t provided, according to a court filing. 

“Even if Singapore’s bank secrecy laws, as UBS contends, precludes disclosure of the summoned bank records relating or pertaining to Hsiaw’s Singapore account(s), international comity requires that the records be disclosed,” IRS revenue agent James Oertel said in the filing.

The case is United States v. UBS AG (SD FL. 16-mc-20653)..

Documents and JAT Comments Added 3/6/16 11:15am:

The key documents are:

• IRS Summons, here.
• US Petition to Enforce Summons, here.
• IRS Agent Declaration for Petition to Enforce Summons, here.
• Show Cause Order, here.

JAT Comments:

1.  The summons is a regular IRS third party recordkeeper summons to a bank, requiring notice to the taxpayer which was given by registered mail to Hsiaw's Shenzhen, China address..  Because it is issued to a person (UBS) with sufficient U.S. presence to permit enforcement by contempt sanctions if necessary, even over the defense that foreign law does not permit the summonsee (UBS) to comply, it is of a type called a Bank of Nova Scotia summons.  In re Grand Jury Proceedings (Bank of Nova Scotia), 691 F.2d 1384 (11th Cir. 1982).  I have only seen the BNS summons applied to banks, and it is usually described in relation to banks.  For example in a Tax Notes Today article, the author says "ts used when a branch of a foreign financial institution is located in the United States and the IRS seeks documents located at the bank's foreign location."  Marie Sapirie,  DOJ Eyes UBS Accounts in Singapore in Latest Offshore Effort, 2016 TNT 44-4 (3/7/16) (the article is good on other points, so those with a TNT subscription should read it).  However, I think it can apply to other types of entities and, in my mind, perhaps to individuals as well.  For example, in the DOJ Tax Summons Enforcement Manual, here, the BNS summons is discussed as follows (p. 74):

6. Summonses to entities located in the United States for records located abroad 

A person or entity located in the United States may have control over documents located abroad that the IRS wants to review in connection with an investigation. For example, a foreign bank might have a United States branch and the IRS may seek documents located at the bank’s foreign headquarters. E.g., In re Grand Jury Proceedings (Bank of Nova Scotia), 691 F.2d 1384 (11th Cir. 1982). Similarly, the IRS may want to review documents of a foreign accounting firm that is controlled by an accounting firm located in the United States. Cf. In re Parmalat Sec. Litigation, 594 F. Supp. 2d 444 (S.D.N.Y. 2009) (holding in a tort suit that Deloitte & Touche USA had not established that it was entitled to summary judgment based upon its claim that it did not control an Italian accounting firm which was a member of the same accounting group as Deloitte & Touche USA). See also United States v. Vetco Inc., 691 F.2d 1281 (9th Cir. 1981) (affirming order enforcing summonses issued to U.S. company and to its U.S. auditing firm for records maintained in Switzerland by the company’s Swiss subsidiary and the auditing firm’s Swiss affiliate).

The key is that there be someone with power to actually produce the documents in the U.S. jurisdiction to impose sanctions.  UBS is present in the U.S. and thus is sanctionable.  The issue as in all BNS summons is whether the U.S. court will inflict enough pain or potential pain on UBS that UBS will comply regardless of the pain that Singapore could inflict for violating Singapore law..

2.  The facts alleged in the Agent's declaration seems to make out at least a prima facie criminal case. (I discuss the potential criminal case in more detail below in par. 4.)  Two things flow from that.  First, Hsiaw could assert his Fifth Amendment privilege to refuse to give any testimony that might incriminate him.  He is in China with no apparent plans to return (Agent Decl ¶ 9), so how much practical value his Fifth Amendment has is speculative.  Second, since he is in China with no apparent plans to return, the criminal statute of limitations will be suspended for tax crimes while he is out of the country.  Section 6531, here.  He apparently let the U.S. in January 2008 (Agent Decl ¶ 7), so the six year statute for tax crimes means that his tax years are open for prosecution of tax crimes back to at least 2002.  And, some of the facts alleged in the declaration might suggest that he committed some act in that period that refreshed the statute of limitations for even earlier years..

3.  The IRS learned of Hsiaw's offshore activity as follows:

12. Based on information that Switzerland disclosed to the IRS under the Convention between the United States of America and the Swiss Confederation for the Avoidance of Double Taxation With Respect to Taxes on Income and pursuant to a settlement of the John Doe summons that the IRS served on UBS in 2008, the IRS learned, inter alia, that Hsiaw maintained a bank account at UBS in Switzerland, referred to herein as the Swiss account. See In the Matter of the Tax Liabilities of John Does, Case No. 08-mc-21864 (S.D. Fla.); United States v. UBS AG, Case No. 09-cr-60033 (S.D. Fla.), at Doc. 20, ¶¶ 13-14, and Doc. 32.

4.  A brief statement of the prima facie criminal case:  From the UBS disclosures, it was established that Hsiaw established a UBS account in 1994 with "hold mail" instructions.  (Agent Decl ¶¶ 13 & 14.)  On 9/15/00, in response to UBS's warning about new "Qualified Intermediary" rules that would require it to identify account holders having investments with U.S. source income (see e.g., 26 U.S.C. § 1441), Hsiaw signed a UBS form, stating, in pertinent part, that he "would like to avoid disclosure of [his] identity to the US Internal Revenue Service under the new tax regulations."  (Agent Decl ¶ 15.)  One of his account managers in the period was Chris Bagios who met with him in the U.S. and has pled guitly,.  (Agent Decl. ¶¶ 16 and 17.)  It would be expected that, in any criminal case, Bagios would be able to provide damning testimony (if a jury found it credible).  In 2002,Hsiaw closed the UBS account, withdrawing $600,066 by check, the proceeds of which have not been traced, and the balance of $194,356 by transfer to a Singapore account (presumably UBS).  (Agent Decl. ¶¶ 19-21).  Of course, a criminal case would have a lot more facts than these, but these facts certainly raise a real risk of criminal prosecution.  (In this regard, the U.S. could get a sealed indictment and arrest Hsiaw should he attempt to re-enter  the U.S.; alternatively or in addition, the U.S. might get an international warrant for his arrest that, although China would not enforce, another country might if he traveled internationally, but he does not seem to be a prominent enough target that the U.S. would go to that effort.)

5.  The petition does allege that there has been no criminal referral to DOJ as follows:

22. No Justice Department referral, as defined by 26 U.S.C. § 7602(d)(2), is in effect with respect to Hsiaw for the years under examination. See Oertel Decl., at ¶ 39.

Of course, the IRS is prohibited by the cited statute from using the IRS summons if a DOJ referral is in effect.  It seems to me that there might be a potential defense to this particular summons based on this provision.  Certainly, I have reason to believe that the formal referrals mentioned in § 7602(d)(2), here.  But the milieu of the press against UBS for the documents leading to the Hsiaw (and others) might mean that the documents indicating criminal culpability were originally shared with DOJ Tax originally and certainly by the time of the summons enforcement.  If, indeed, the documents were obtained under the double tax treaty exchange of information provision, that means that they shoulkd have gone to the IRS and not to DOJ Tax (although I suspect that they did get to DOJ Tax directly or indirectly).  Given DOJ's claim that it has independent authority to investigate tax crimes, how much use is this statutory prohibition if the IRS can give documents to IRS without a formal referral for criminal investigation or prosecution?  I think there is a lot of nuance there, but can't develop it here and really can't develop it in great detail without a client willing to fund my efforts and a forum to blast out information from the IRS and DOJ (such as a pending case).  Maybe UBS's lawyers, who, I presume, are very smart and well compensated will explore this issue.  (On the other hand, if this type of argument would taint the enforcement of the summons, the Government could simply present the compulsion in the form of a grand jury subpoena rather than a summons.)

6.  Of course, the bigger news is that this summons enforcement proceeding presages an IRS and DOJ move against Singapore whose financial institutions have offered tax haven with bank secrecy to U.S. persons for many years.

7.  The petition contain the allegation that:

Even if Singapore's bank secrecy laws, as UBS contends, preclude disclosure of the summoned bank records relating or pertaining to Hsiaw's Singapore account(s), international comity requires that the records be disclosed. See Oertel Decl., at ¶ 34. The interest of the United States in combating tax evasion by U.S. taxpayers through the use of secret foreign bank accounts substantially outweighs the interest of Singapore in preserving the privacy of its bank customers. See Oertel Decl., at ¶ 34. As a consequence, judicial enforcement of the summons is required. See Oertel Decl., at ¶ 34.

Neither the petition nor the declaration provides any support for that conclusory allegation.  International comity in this case would seem to be a matter between the U.S. and Singapore, not the U.S. and UBS.  I will look forward to the briefing on this issue.

7.  If, as is likely, this works, the U.S. will have a powerful tool to crack Singapore secrecy and, as with the initial UBS summons way back in 2008, this may start a series of events that requires Singapore to open the kimona to the U.S. at least for the more egregious instances of U.S. person use of Singapore banks for U.S. tax evasion.