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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Maleka Ali

Maleka@bankerstoolbox.com

Blog: http://www.bsagenie.com/