OFFSHORE PROBES EXPAND BEYOND SWITZERLAND: NOMINEE ENTITY FAILS TO SHIELD TRUE ACCOUNT OWNER

Two recent guilty pleas in a California District Court, announced in April by the DOJ, should shake what complacency remains for those with unreported offshore accounts outside of Switzerland.  The IRS can find you even if your account is in the name of a nominee entity and other evading tactics are used to hide your identity.

Guity Kashfi, a U.S. citizen is a California business woman who runs a clothing business called Countess of California.   Countess had a$2.5 million line of credit with Mizrahi Bank secured with inventory.  When the bank demanded more collateral she and the bank used back to back loans to hide the fact that offshore funds (certificates of deposit) were being used as the additional collateral.  The accounts at the time were in a nominee name to prevent IRS from discovering the unreported funds.  Following the arrest of a Mizrahi banker, her account was moved to Luxembourg to avoid repatriating the unreported funds. The bankers there assured her of secrecy and gave her a German cell phone to conceal communications with them.  IRS found her anyway.  She pleaded guilty to one count of conspiracy to defraud the U.S. government under 18 U.S.C. 371 (commonly called “Klein Conspiracy”).  The co-conspirator banks not named in the information are said to be Israeli banks: Bank Leumi Le-Israel Ltd (Israel’s largest bank), and Mizrahi Telfahot Bank Ltd., both of which are under investigation.  The conspiracy plea carries criminal sanctions of up to 5 years imprisonment and a fine of up to $250,000.  The plea agreement for Kashfi states a civil tax loss of $70K (rounded) on unreported interest income of approximately  $211K  The FBAR penalties agreed to will be approximately $1,250,000, 50% of the highest balance for only one year (approximately $2.5 million) during the period 2005 through 2011.  This is a large penalty in relation to the tax due but considerably less than the maximum FBAR penalty that could have been assessed, 50% of the highest balance for each year of non-reporting.  Assessment of the maximum FBAR penalty is the equivalent of a seizure of the asset. 

In the other case, Los Angeles businessman, Zvi Sperling (Born in Israel), who also used the back-to-back loan scheme to shield his unreported account activity, plead guilty to the same one-count conspiracy and likewise agreed to pay an FBAR penalty of 50% of the highest balance ($4 million) for only one year.  Sperling’s unreported income on the accounts was approximately $381K

Both Kashfi and Sperling have agreed to cooperate in the DOJ investigation of the Israeli Banks.  The probe is said to involve a Grand Jury. The end-game could be an indictment and guilty plea as in the case of Wegelin & Co (Oldest Swiss private bank) or a deferred prosecution agreement as was worked out with UBS AG (Largest Swiss Bank) which paid a $780 million fine and submitted depositor names.    Whether the Israeli banks will agree to submit depositor names remains to be seen.

Late last year Bank Leumi in a letter to its U.S. depositors suggested that they consult lawyers about participating in the OVDP.  Kashfi and Sperling did not enter one of the Offshore Voluntary Disclosure Programs.  Other former Leumi and Mizrahi clients, however, entered one of the Offshore Disclosure programs and made disclosures that revealed the back-to-back loan arrangements.  In April, attorney’s for some Bank Leumi depositors who had been provisionally accepted into the program received faxes from IRS Criminal Investigation that, “upon further review,” they had been disqualified.  Some had already submitted complete disclosures making later prosecution murky, since tainted evidence would be difficult to separate from properly acquired proof.   

Other banks investigated since UBS and Wegelin include Credit Suisse AG, (Second largest Swiss Bank) and HSBC Plc. (Europe’s largest bank).   The net is yet widening.  On April 30, DOJ announced that a federal court had authorized IRS to serve a “John Doe” summons seeking records of U.S. depositors at Canadian Imperial Bank of Commerce First Caribbean International Bank (FCIB), from its U.S. correspondent bank Wells Fargo.  FCIB is based in Barbados and operates branches in many Caribbean countries. 

The guilty pleas and new investigations are evidence that IRS intends to continue its full-court press on discovering and prosecuting offshore tax scofflaws.  Those still out in the cold, are wise to consult with knowledgeable tax counsel about entering the2012 OVDP which offers amnesty from criminal prosecution and relief from the potentially draconian maximum civil FBAR penalties. 

© 2013 by Robert S. Steinberg, Esquire
All rights reserved

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