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Dan ReevesRetired Senior Advisor, IRS Offshore Compliance Initiatives
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On Correspondent Bank Accounts ... the Achilles Heel of Offshore Banking

March 11, 2013 by Dan Reeves 1 Comment

 

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.

 

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1 COMMENTS

  • Mel Content
    By Mel Contenton Friday, March 15, 2013 5:34:22 PM

    Excellent description of how the dots are all connected. Thanks. It won't stop money laundering, but it will make it harder since the Swiss and Bahamian banks don't have a drive thru lane for gulfstream jets.