Tax Evasion and Tax Fraud
Presenter:
Maleka Ali, CAMs
Director of Customer Relations
Banker’s Toolbox, Inc
UBS Wins Lawsuit over
Tax Evasion- Feb, 07, 2013
Customers sought to blame their bank for tax evasion
- Appeals court threw out an effort by U.S. customers of UBS to recover
damages from the bank because of bank services they used that
helped them evade U.S. taxes.
- Lawsuit by 3 customers with Swiss bank accounts at UBS, who joined
an IRS amnesty program that required them to pay back taxes on
balances plus 20 % penalties.
• Argued that bank failed to tell them to disclose the accounts, which
ranged from $500,000 to $2 million and demanded that bank cover
settlement costs, and pay hundreds of millions of dollars of alleged
profit tied to the fraud.
• Court said Bank had no duty to prevent them from breaking the law.
• Judge likened plaintiffs’ to:
– “Children who sue their parents to recover tax penalties because
parents failed to raise them to be honest people. --Plaintiffs are tax
cheats, and it is very odd for tax cheats to seek to recover their
penalties ... of the income concealed from the IRS….Lawsuit,
including appeal, is a travesty."
TAX EVASION – TAX FRAUD
• What’s the difference
• And Why Do I care?
• Specialty Trade Contractor
• Wealthy client transfers overseas
• Waitress depositing tip money
Does the IRS Go After
Waitresses for Their Cash Tips?
YES
• According to IRS, wait staff under report their tips
by 84 percent
• High prevalence of tax fraud in the service industry
makes waitresses a big target for IRS auditing
• Because the lack of tracking of tips in many
businesses leads many workers in the industry to
omit tips on their taxes
• Just working as a waitress can increase a person's
chance of audit
Paying Under the Table!
Wealthy Clients- Privacy?
• None of our business!
• Hide behind Bank Secrecy /Privacy- Legal principle in some
countries or jurisdictions stating that banks are not allowed to
provide anyone personal or account information about their
customers unless certain conditions apply, (for example, proof of a
crime).
• Gramm-Leach-Bliley Act -November 12, 1999 -Signed “Pre 9/11”
• In some cases and in other countries, even more privacy is
provided to beneficial owners through the use of numbered bank
accounts or other legal vehicles.
• Bank secrecy has historically been prevalent in certain countries,
such as Switzerland, Singapore and Luxembourg, as well as
offshore banks and other tax havens, such as the Cayman Islands
and Panama, under voluntary or even statutory privacy laws and
provisions.
Our Obligations
• Bank Secrecy Act requires financial institutions to
assist government agencies to detect and prevent
money laundering.
• The act requires financial institutions to
– keep records of cash purchases of negotiable instruments,
– file reports of cash transactions exceeding $10,000 (daily
aggregate amount),
– and to report suspicious activity that might signify money
laundering, tax evasion, or other criminal activities.
They specifically mention Tax Evasion!
Tax Crimes- May Hide Serious Crimes
• Al Capone, the famous mobster from the
1930’s, accused of murder, extortion and
criminal racketeering
• Swore he would never would get caught…
only reason he ever was put away was
because of tax evasion crimes
• Tax crimes have often been associated with
many more serious crimes, including
terrorism
• In 2001, the United States learned that the
Swiss had protected the bank that handled
finances for Osama Bin Laden
DEFINITION OF TAX EVASION
• Illegally avoiding paying taxes, failing to report, or
reporting inaccurately
• Government imposes strict and serious penalties for tax
evasion
• Different from tax avoidance, which is making use of
legal methods to minimize a tax burden
Fines & Jail Time
• Fines up to one hundred thousand dollars or
five hundred thousand dollars for a corporation
• Imprisonment up to five years
Criminal Charges
• Charges for not filing or not paying on time are steep, however,
generally you won’t need to worry about major federal charges
of tax evasion unless you’re intentionally avoiding them.
• Criminal tax evasion involves not only not paying your taxes,
but also demonstrating a willful attempt to avoid paying and
taking specific actions to avoid generating financial paperwork.
• Like putting your assets in another person’s name or getting
paid under the table to avoid getting a W-2.
• That definition is NOT permission to skip filing every now and
then.
• You can still get hit with other charges, like willful failure to pay
tax or file a return which carries a prison sentence of up to a
year, and stiff fines.
IRS Definition of Tax Fraud
25.1.1.2 (07-18-2008)
• deception by misrepresentation of
material facts, or silence when good
faith requires expression, resulting in
material damage to one who relies on
it and has the right to rely on it.
Layman’s Definition
of Tax Fraud
Willful and intentional act of lying on a tax return for the
purpose of lowering one's tax liability.
Example: John owns a painting business. As an employer, he
dutifully withholds payroll taxes from his employees' paychecks.
However, John fails to remit those funds to the IRS and instead
uses the money for a vacation and a new car. One of his
employees finds out and reports him. IRS investigates and
determines that John has committed tax fraud. .
Other examples of tax fraud might include deliberately
underreporting or omitting income, making false accounting
entries or keeping two sets of books, taking deductions that the
taxpayer is not entitled to, claiming personal expenses as
business expenses or hiding assets.
Why it matters
• Tax evasion/fraud cheats the government out
of millions of dollars a year.
• It is illegal and punishable by fines, penalties,
interest, and/or prison time.
• Important to note, however, that tax /evasion
fraud generally requires willful and
intentional activity for the purpose of lowering
a tax liability, not mistakes or accidental
misreporting.
HISTORY LESSON
• Why have tax crimes become such a hot topic lately?
• In Wikipedia, they say that the concept of bank secrecy
began with the Swiss Banking Act of 1934, which led to the
infamous Swiss Bank.
• Principle of bank secrecy is sometimes considered one of
the main aspects of private banking and has been accused
by NGOs and governments as being one of the main
instruments of underground economy and organized crime.
• Former bank employees from banks in
Switzerland and Liechtenstein have
testified that their former institutions
helped clients evade billions of dollars in
taxes by routing money through offshore
havens in the Caribbean and
Switzerland.
• One employee, Rudolf M. Elmer, stated,
"It is a global problem...Offshore tax
evasion is the biggest theft among
societies …in this world."
GLOBAL TAX EVASION
THE SWISS CONNECTION
• Swiss principle of bank secrecy, strictly limited any information shared with 3rd
parties, including tax authorities, foreign governments or even Swiss
authorities, except when requested by a Swiss judge's subpoena.
• Only permitted bank to share information with others in cases of severe
criminal acts, such as identifying a terrorist's bank account or tax fraud, but did
not include tax evasion.
• Under worldwide pressure, Swiss government announced March 2009 that it
would abolish distinction between tax fraud & tax evasion in dealings with
foreign clients to make it easier for other governments to obtain information on
individuals attempting to evade taxes.
• You probably heard in news how UBS was caught red-handed by the US
government for offering tax evasion strategies to its clients.
• After they were caught, they paid a $780 million penalty & handed over
hundreds of client files to American authorities.
• 2010, Swiss & U.S. governments negotiated an agreement allowing Swiss
bank UBS to transmit to the US authorities information concerning 4,450
American clients of UBS suspected of tax evasion.
How Does That
Affect Financial
Institutions?
• IRS has a voluntary disclosure program where taxpayers can self-
disclose to prevent more serious penalties and persecution
• As part of the disclosure, taxpayers are willing to give up the
names of the financial institutions and personal private bankers
who helped them evade taxes and move the money.
• IRS is collecting and aggregating all this information.
• Many AML crimes can be linked with tax evasion and Suspicious
Activity Report narratives are an essential tool for these
investigations.
• Put as much detail as possible into the narrative, include common
themes and keywords such as W-8 BEN and tax haven.
Vast Webs – Billions of Dollars International network of journalists: 2.5MM records from tax havens
detailing shell companies, offshore accounts & dubious financial deals.
Data exposed 120,000 entities, offshore accounts and suspicious deals in
more than 170 countries, in addition to the names of 140,000 individuals
alleged to have placed their money in known tax havens.
Diverse cast of characters included politicians, celebrities, weapons
dealers, and financiers.
To cheat on taxes, bogus firms created with names like Moon Crystal or
Sequoia.
What is a Tax Haven?
• Place where taxes are levied at low rate or not at all
• Individuals and/or corporate entities find it attractive to establish
shell subsidiaries or move to areas with reduced or nil taxation
levels
• Tax competition among governments. Different jurisdictions tend
to be havens for different types of taxes, and for different
categories of people and/or companies
• According to other definitions, the central feature of a haven is
that its laws and other measures can be used to evade or avoid
the tax laws or regulations of other jurisdictions
FIRST TAX HAVEN
• Swiss banks had long been a capital haven for people
fleeing social upheaval in Russia, Germany, South
America and elsewhere
• Early 20th century, (immediately following WWI), many
European governments raised taxes to pay for
reconstruction following the devastation of the war
• Switzerland, having remained neutral during the Great
War, avoided these additional infrastructure costs and
was consequently able to maintain a low level of taxes
• Considerable influx of capital for tax related reasons
• Most suggest Switzerland,
followed closely by
Liechtenstein
Modern Problem
• Wall Street Journal study of 60 large US
companies found that they deposited $166
billion in offshore accounts in 2012, sheltering
over 40% of profits from U.S. taxes
• 2012 report from the Tax Justice Network
estimated that between USD $21 trillion and
$32 trillion is sheltered from taxes in
unreported tax havens worldwide
No two commentators agrees on a "list of tax havens",
but the following countries are commonly cited as
falling within the "classic" perception of a sovereign
tax haven.
• Bahamas
• Cyprus
• Liechtenstein
• Luxembourg
• Monaco
• Panama
• San Marino
• Seychelles
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Other jurisdictions also labeled as tax
havens include: • Italy
– Campione d'Italia
• United Arab Emirates
– Jebel Ali Free Zone
• Malaysia
– Labuan
• Netherlands
– Curaco
• United Kingdom
– Bermuda
– British Virgin Islands
– Cayman Islands
– Jersey
– Guernsey
– Isle of Man
– Turks and Caicos Islands
• United States
– Alaska,
– Delaware
– Florida
– Nevada
– Texas
– South Dakota
– United States Virgin Islands
– Wyoming
– Washington
United States...
a Tax Haven?
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• The Tax Justice Network in November 2009 ranked the United States as the top financial secrecy jurisdiction in the world, and ranked Delaware the most financially secretive state.
• A September 2006 report from Financial Action Task Force ranked Delaware as the second most secretive jurisdiction, behind Singapore.
• Delaware LLC/Corporation: – Cheap, Secret and Disclosure of all LLC Members
or beneficial owners not required
G20 Tax Havens
April 2009- London G20 summit, G20 countries agreed to define a
blacklist for tax havens, according to a four-tier system, based on
compliance with an "internationally agreed tax standard.”
• Tier 1: Those that have substantially implemented their standards
– includes most countries except Hong Kong and Macau
• Tier 2: Tax havens that have committed to – but not yet fully
implemented their standards
– includes Montserrat, Nauru, Niue, Panama, and Vanuatu
• Tier 3: Financial centers that have committed to – but not yet fully
implemented their standards
– includes Guatemala, Costa Rica and Uruguay
• Tier 4: Those that have not committed to their standard
– No one? Countries in the bottom tier were initially classified as
being 'non-cooperative tax havens‘ –BLACK LIST
G20 Tax Havens Blacklist
Uruguay initially classified as being uncooperative, however, they
appealed this decision
Philippines also took steps to remove itself from the blacklist
Malaysian Prime Minister suggested they should not be on list
o After appeals-OECD, removed Costa Rica, Malaysia, Philippines
and Uruguay from the blacklist after they had made a full
commitment to exchange information to the standards
Recommendations for Hong Kong and Macau to be included separately
from China on list, expected that they will be added at later date
Luxembourg has criticized the list, stating that it has "no
credibility", for failing to include various states of the U.S.A.
which provide incorporation infrastructure which are
indistinguishable from the aspects of pure tax havens to which
the G20 object
According to “Transparency International” half of the least
corrupted countries are tax havens, and criticizes this list
U.S. National Bureau of
Economic Research
Suggested that roughly 15% of countries in the world are tax
havens. Possible Tax Havens May Include:
Andorra , Anguilla, Antigua and Barbuda, Aruba, Bahamas,
Barbados, Belize, Bermuda, Bosnia and Herzegovina, British
Virgin Islands, Bulgaria, Campione d'Italia (an Italian enclave
within Switzerland), Cayman Islands (including in the Channel
Islands of Jersey, Guernsey, & Alderney), Cook Islands,
Cyprus, State of Delaware (yes…here in the USA), Gibraltar,
Hong Kong, The Isle of Man, Labuan (a Malaysian island off
Borneo), Kuwait, Macau, Mauritius, Macedonia, Monaco,
Nauru, Netherlands Antilles, Nevis, New Zealand, Norfolk
Island, Panama , Russia, Samoa, San Marino, Sark,
Seychelles, St Kitts and Nevis, St Vincent and the Grenadines,
Switzerland (if you become a resident), Turks and Caicos
Islands, Ukraine, United Arab Emirates, United States Virgin
Islands, and Vanuatu.
What is a Tax Haven?
• In its December 2008 report on the use of tax havens
by American corporations, the U.S. Government
Accountability Office was unable to find a satisfactory
definition of a tax haven but regarded the following
characteristics as indications:
– nil or nominal taxes;
– lack of effective exchange of tax information with foreign
tax authorities;
– lack of transparency in the operation of legislative, legal or
administrative provisions;
– no requirement for a substantive local presence; and
– self-promotion as an offshore financial center
These Islands Aren’t Just a Shelter From Taxes By ROBERT M. MORGENTHAU
“Apple funnels more than a billion dollars worth of iTunes sales
through Luxembourg to avoid paying higher taxes. Tax
strategies are nothing new — and, no doubt, Apple has taken
advantage of tax rules that allow them.
Senate’s Permanent Subcommittee on Investigations in 2008
estimated that at least $5 trillion to $7 trillion was sheltered in
offshore jurisdictions like the British Virgin Islands, the Cayman
Islands, Gibraltar, Bermuda and the Bahamas
Jurisdictions with little or no income tax”
Published: May 5, 2012
Hiding Fraudsters Money • Not just low tax rates that makes jurisdictions attractive
• The secrecy of offshore jurisdictions allows some individuals and
corporations to engage in outright tax fraud, costing America at
least $40 billion each year
• Secrecy makes offshore tax fraud almost impossible for law
enforcement to detect. Most are only discovered through whistle-
blowers or cooperators
• The secrecy laws in these tax havens are at the root of serious
crimes: fraud, money laundering and international terrorism
• Follow the trail of nearly any major financial scandal and you will
enter one or more of these notorious jurisdictions
Hiding Money
• “Bernard L. Madoff favored exotic offshore locales
for the funds that secretly fed his Ponzi scheme.
These funds looked like independent hedge funds,
but were in fact merely conduits that funneled
investor money to Mr. Madoff and furnished no
information to the United States Treasury or
regulatory authorities.”
• “Because the ownership of these funds was such a
tightly guarded secret, now not even the Madoff
trustee can figure out who should be sued to recover
illegal profits — and who are victims entitled to
restitution.”
• “Robert Allen Stanford, another Ponzi schemer,
inherited a legitimate insurance company in Houston
— but when he branched out into banking fraud, he
moved to Antigua. Taking advantage of secrecy
laws and outright bribery, he cheated investors out
of $7 billion by selling phony certificates of deposit.”
The Havoc an Offshore Scheme Can Wreak?
• Bankruptcies like Enron have resulted when corporations faked their balance
sheets using offshore secrecy jurisdictions.
• Offshore secrecy jurisdictions provide the perfect cover to funnel money and
arms. Arms dealer Viktor Bout, (Merchant of Death), was sentenced to 25
years by a federal judge for conspiring to sell antiaircraft missiles to agents
posing as foreign revolutionaries. Published reports have linked him to arms
sales to Al Qaeda and the Taliban. He found a Bulgarian weapons supplier
based on the offshore haven of Gibraltar.
• Many corporations do business with Iran through offshore tax haven
subsidiaries
FATCA--What?
Foreign Account Tax Compliance Act (FATCA)
• Designed primarily to combat offshore tax evasion and recoup
federal tax revenues.
• An important development to improve tax compliance involving
foreign financial assets and offshore accounts.
• Under FATCA, U.S. taxpayers with specified foreign financial
assets that exceed $50k must report those assets to the IRS.
This reporting will be made on Form 8938, which taxpayers
attach to their federal income tax return, starting this tax filing
season.
• In addition, FATCA will require foreign financial institutions to
report directly to the IRS information about financial accounts
held by U.S. taxpayers, or held by foreign entities in which U.S.
taxpayers hold a substantial ownership interest.
Cooperating Countries
• France, Germany, Italy, Spain, the
United Kingdom, Switzerland,
South Africa and Japan have
already consented to cooperate
with the U.S. on FATCA
implementation
• As of June 2013 the following have
concluded intergovernmental
agreements with U.S.: UK,
Denmark, Mexico, Ireland,
Switzerland, Norway, Spain,
Germany, France and Italy
What does FATCA mean for us?
• Other countries avoiding U.S. Citizens
• Giving up U.S. citizenship?
• Hold outs until the U.S. reciprocates
• U.S. Institutions need to collect
additional information on foreign
accounts
– Identify electronically all foreign citizens
– Identify electronically country of
citizenship 38
New Concerns:
Digital currency scrutinized by IRS
• Concerned digital currencies could be used to evade taxes
• Liberty Reserve, (currency exchange shut down for
allegedly providing secret financial
services to criminals), could have
been (and probably was) used for
tax fraud
• Two tools Liberty Reserve used to evade
financial scrutiny
– Anonymity and
– Layering through multiple companies
• Internet provides more streamlined
methodology, greater access, and allows the money to get
up into billions of dollars
IRS considering new disclosure rules for
businesses that use digital currency
Digital Route to
the Tax Havens • Before the Internet and Digital Currencies
– Difficulties in getting money to Offshore
financial centers
– Internet shrunk the world- These Tools
bring offshore banking to the masses.
• US typically combats tax evasion
through disclosure, as with FATCA.
– Requirement that non-US banks
share the details of their US
customers' accounts
• Similarly, US businesses that
transmit money are required to
adopt know-your-customer policies
and monitor large transactions
How to look for Tax Evasion
What can you do to show
you are being proactive?
• Review cash for consumers or businesses
that just doesn’t make sense
• Review accounts with wires to Tax Havens
• Review accounts with excessive digital
currency/exchange activity
• Does activity make sense for customer?
• Do dollar amounts make sense?
Identity Theft and Tax Fraud
• Identity theft and tax fraud is not a new topic.
• This is subject matter that we have all heard about however,
• Our government relies on intelligence information from various sources.
FinCEN Director
Remarks of Jennifer Shasky-Calvery Director of FinCEN
March 19, 2013 at the 18th Annual international AML and
Financial Crime Conference:
“I cannot emphasize this fact enough. Our nation’s financial institutions play a vital role in our efforts to safeguard the financial system from illicit use, combat money laundering, and promote national security.
“ And we do this through the collection, analysis, and dissemination of financial intelligence and strategic use of our financial authorities.”
Suspicious Activity Reporting
When completing SARs on suspected tax refund fraud, financial institutions should use the term “tax refund fraud” in the narrative section of the SAR and provide a detailed description of the activity.
Due to the time sensitive nature of these transactions, a financial institution may also wish to contact their local IRS Criminal Investigation Field Office to alert them that a SAR has been filed related to tax refund fraud.
Wall Street Journal
• Identity Theft cases rocketed to 1.1 million from 51,700 in 2008.
• IRS - backlog of 650,000 cases.
• Easy for criminals to e-file using a real name and Social Security number combined with phony (wages) or fabricated (business income).
• Refund can be deposited to an anonymous “Green Dot” prepaid or MasterCard, which can be purchased at a drugstore, Wal-Mart etc.
January 13, 2013
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Tax Fraud Identity Theft
– Individual using another’s name
&/or SSN to file a fraudulent tax
return to generate a tax refund
Employment Related Identity Theft
– Individual using another’s
identity (name, SSN or both) to
obtain employment.
11/2011: Congressional Report
Fraudulent Use of TIN’s for IRS Refund and Employment:
• 2 primary types of ID theft relating to tax Fraud:
Red Flags
Multiple direct deposit tax refund payments, directed to different individuals, are made to accounts held in name of a single account holder.
Account opening on behalf of individuals who are not present, with the absent individuals having signing authority on the account.
Red Flags
Individuals processing 3rd party tax refund checks through a personal account with no business or apparent lawful purpose.
Individuals using bank accounts where the majority of the ACH transactions are ACH federal tax refunds or refund anticipation loans.
A large volume of refund checks bearing addresses of customers who reside in another state.
Bank Teller Pleads Guilty- Tax Refund
Fraud- June 5, 2013- Rochester, NY
• Scheme to obtain income tax refunds by filing fraudulent
income tax returns
• Stolen identities utilized to file fraudulent returns, and the
wages and related tax withholdings reported on the returns
were fabricated
• Most were filed in the names and SSNs of individuals residing
in Puerto Rico without their knowledge
• Refund checks were sent to various addresses in Rochester
and other locations in the country
• Used her position at the bank to cash the checks for other
participants in the scheme who brought the checks to her at the
bank.
• Defendant cashed the checks knowing they were in the names
of individuals other than the individuals who brought the checks
to the bank and was paid a fee for cashing the checks 5
Did You Know?
No change in the law that relates to reclamations
• The period that the IRS has to issue reclamation is 18
months. There can be no reclamation with out an
affidavit of forgery from the payees.
Problem for IRS:
• True payees do have not knowledge that a return is filed
in their name until months or years after the fact.
Tax refunds that are received electronically are not subject
to the reclamation process.
For a listing of payments not subject to reclamation:
• Federal Government ACH Payments and Collections,
AKA “THE GREEN BOOK” www.fms.gov/greenbook.
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Did you Know?
What happens when the time for reclamations has passed?
When the time period of 18 months has lapsed, the alternative is to go through the court system with prosecution and seek restitution from the perpetrator.
What can institutions do to help mitigate risk?
• Do as much as we can to know who we are banking.
• Review your CIP policy when it comes to your requirements for account opening.
• Use your AML/Fraud tools to detect suspicious activity.
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Remember to use your resources
for updates and the latest
information and trends.
Websites for recent information are
www. fincen.gov and www.irs.gov
are great resources for information.
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• Whether it’s tax evasion or tax fraud, it is
a crime and if they are using your
financial institution to perpetuate that
crime:
– you must be aware of it, understand
the signs so you can look for it and
report it.
• Hot button: Examiners want to know that
you are looking for the signs and
reporting.
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