If you blinked, you probably missed the news. On January 29, 2013, a federal judge sitting
in New York City authorized the IRS to issue a John Doe summons to UBS AG in
Stamford, Connecticut for the correspondent bank records of Wegelin Bank of
Switzerland and at least two other Swiss banks that nested their correspondent
accounts with Wegelin. Only a few media outlets thought
it newsworthy enough to report the event, apparently seeing it as merely the
next step in the Wegelin case … just another bump in the road. Those that did report the story covered it primarily
as further evidence of the U.S. governments continuing pursuit of offshore tax
evaders.
Certainly
the news was not as dramatic as Wegelin’s earlier indictment on tax evasion
conspiracy charges, its subsequent guilty plea to those charges, the
announcement that it was closing its doors after 272 years of continuous
operations or its later sentencing to pay $58 million in penalties on top of
the millions it had already forfeited for helping wealthy Americans evade their
taxes. Those events represented obvious
watershed moments in the U.S. government’s continuing pursuit of offshore tax
evaders and the banks and professionals that facilitate and enable them. But sometimes, it’s the less dramatic and
subtler events that have the greatest impact on future events. What all
the news organizations and others failed to recognize in the filing was the
opening of a dramatic new approach by IRS that could ultimately be a game
changer in combatting offshore tax evasion.
Some technical review is necessary.
Correspondent
accounts are bank accounts maintained by foreign banks at financial institutions
in another country. Correspondent
accounts allow foreign banks to conduct business and provide services for their
clients in jurisdictions where they have no physical presence. For example, through correspondent bank
relationships in the United States, banks in offshore financial centers can
wire funds from their own jurisdiction into the account in the U.S. for the
benefit of a U.S. client and funds can be wired from the account in the U.S. to
the bank in the offshore financial center on behalf of the U.S. client. Correspondent accounts also provide foreign
banks with the ability to issue checks drawn on the U.S. correspondent account
that can then be deposited in or cashed at other financial institutions. Some offshore banks maintain separate
correspondent accounts for their day-to-day banking operations and their
high-wealth private banking divisions.
As
clearly stated by IRS Agent Cheryl Kiger in her declaration filed with the
court:
"The
correspondent account records requested in the John Doe summons will contain information needed to identify
U.S. taxpayers with undisclosed accounts [emphasis added] at Wegelin and at
the other Swiss banks Wegelin permitted to use its U.S. correspondent account."
In other words, those domestic U.S. correspondent records; which
are prepared, maintained and available within the United States; will identify U.S. taxpayers who engage in funds transfers
between the United States and their secret offshore accounts in Switzerland. Furthermore, since the correspondent bank records
being prepared and maintained are mandated by federal law, that means by extension
that any offshore bank that maintains a correspondent account in the United
States (and virtually all of them do), has vulnerability within the United
States regardless of physical presence or how strong their home country secrecy
laws may be. More importantly, any U.S.
taxpayers who transmit funds to or from their secret offshore accounts through
the use of an offshore bank’s correspondent account are likewise vulnerable to
discovery. One can only imagine the
impact that would result on compliance and voluntary disclosures if IRS were to start serving John Doe
summonses on offshore private banks operating out of the Cayman Islands or
the Isle of Man or Singapore or any other offshore financial center all at the same
time.
I suppose banks and
tax evaders could always find other ways to secretly move funds across
international borders, but those would all seem to lend themselves to criminal
money laundering charges … sort of like jumping from the frying pan directly
into the fire.
In Greek mythology,
it was an arrow fired at the heel of Achilles that brought him to his knees and
ultimately to an end … in modern times, it may be a John Doe summons fired at
the Achilles heel of offshore banking and those who use it for tax evasion that
will ultimately prove their undoing … only time will tell.