"John Doe" Summonses Issued to World's Largest Swiss Bank
By: Bill E. Branscum
Copyright 2009

The IRS is engaged in an unprecedented assault on tax cheats who are involved in abusive offshore transactions and financial arrangements for tax avoidance purposes. Considering that they have set their sights on UBS AG, one of the world's largest banks, with offices in more than fifty countries, including the United States, and they have served "John Doe Summonses" upon UBS demanding information regarding some 52,000 accounts, I would expect that many of you who are engaged in financial investigations to be fielding inquiries about this. There are a lot of people out their wringing their hands, desperately trying to figure out what to do, much like we saw in 2003 when the IRS announced their Offshore Voluntary Compliance Initiative encouraging U.S. taxpayers with offshore credit cards to avoid penalties through voluntary disclosure of their offshore accounts.

Although the IRS has been using John Doe Summonses very effectively for many years, they have been plowing up a lot of new ground lately. The recent prosecution of UBS Personal Banker Bradley Birkenfeld (SD FL Case: 0:08-cr-60099-WJZ-1) was the first time the Office of the United States Attorney has prosecuted a Swiss banker for helping U.S. citizens in tax evasion, and the successful criminal prosecution of the world's largest Swiss bank (SD FL Case: 0:09-cr-60033-JIC-1) shook the world of offshore finance. This is an interesting story, but that's not the place to start.

In February 2008, the world learned how a forty-two year old fugitive fraudster became a millionaire overnight. That story lays the foundation for this one.

LGT Bank in Liechtenstein decided to go "hi tech" so, in April 2001, they hired a charming young computer technician named Heinrich Kieber to digitize their hard copy records. Unfortunately for LGT, and all the clever tax cheats doing business with LGT, it turns out that Kieber was an international fugitive wanted by Spanish investigators regarding a real estate scam that he perpetrated in Barcelona in 1996. Kieber is reported to have defrauded people of approximately $553,000 before he fled Spain en route to Argentina, and moved on to Liechtenstein. Apparently, someone at LGT failed to do a background check. That was their first mistake.

Heinrich Kieber, used his position at LGT Bank, and his unfettered access to their financial records, to steal several DVD's worth of client files in 2002. Then, this enterprising extortionist attempted to use the fact that he had this data to blackmail his way out of trouble. Liechtenstein state prosecutor Robert Wallner has been quoted as reporting that Kieber contacted Liechtenstein authorities and demanded free passage and forged passports, and in exchange for which, Kieber promised that he would not turn over the stolen client data to "foreign media and authorities." They turned him down.

Kieber was subsequently prosecuted, convicted and sentenced to probation for three years, but nobody recovered the stolen data. It has been suggested that the bank, and the judge were convinced that Kieber was truly remorseful and would return the DVD's. That was their second mistake.

Heinrich Kieber contacted U.S. authorities as well as the authorities in Britain and Germany. It has been widely reported, and seems very clear, that the United States made some sort of deal with Kieber, and German authorities have publicly acknowledged.that Kieber contacted them via e-mail on January 24, 2006, and after much negotiation, the Bundesnachrichtendienst (BND), Germany's foreign intelligence agency, gave Kieber $7.4 million USD, and a new identity for the data he had stolen from LGT. Evidently, German law regarding this sort of thing mirrors our own - there is no "fruit of the poisonous tree" issue as it is undeniable that Kieber acted on his own initiative, without the assistance or encouragement of any law enforcement organization.

These DVD's implicated thousands of people from all over the world in tax evasion, but they also implicated LGT Bank, as they contained LGT training materials complete with explicit instructions related to tax evasion strategies. Moreover, they revealed that Liechtenstein, obscure and tiny principality though it may be, serves as hub for international finance - both legitimate, and the illegitimate proceeds of organized crime. One of their primary claims to fame is the Liechtenstein Trust - an anonymously held entity that serves to build a "Chinese Wall" between assets and their owners, but can be dissolved at any time, reuniting Trustors with their beloved wealth.

Tax evasion investigations were initiated in the United States, Britain, Germany, and elsewhere.

On June 19, 2008, UBS AG Banker Bradley Birkenfeld pleaded guilty to conspiring with American billionaire real estate developer Igor Olenicoff, Swiss bankers and Birkenfeld's co-defendant, Mario Staggl, to help the developer evade paying $7.2 million in taxes by assisting in concealing $200 million of assets in Switzerland and Liechtenstein. A copy of his Indictment is appended below.

Birkenfeld, an American citizen employed by UBS AG, pleaded guilty before U.S. District Court Judge William J. Zloch in Fort Lauderdale, FL. Birkenfeld admitted that between 2001 and 2006, while he was employed as the Director of the UBS AG Private Banking Division, he routinely traveled to, and had contacts within, the United States to help wealthy Americans conceal their ownership in assets held offshore, and evade the payment of taxes on the income generated from those assets.

According to statements and documents filed with the court, Birkenfeld's services to American clients violated a 2001 Qualified Intermediary Agreement that UBS entered into with the United States. Under the terms of the QI Agreement, UBS was supposed identify and document any customers who who held U.S. investments, which were generally marketable securities and bonds, received reportable U.S. source income or would withhold and anonymously pay a 28 percent withholding tax. This agreement, if they had honored it, would have been a significant departure from historical Swiss bank secrecy laws under which Swiss banks concealed bank information for U.S. clients from the IRS.

As part of his Plea Agreement, Bradley Birkenfeld, the Director of UBS AG's Private Banking Division, agreed to cooperate with United States authorities. The Statement of Facts filed in this case is appended below.

On July 1, 2008, the US District Court, Southern District of Florida, granted a petition filed by the United States for leave to serve a "John Doe" summons on UBS, under the authority of Title 26 U.S.C. §7609(f). This "John Doe Summons" identified the John Doe Class as:

"United States taxpayers, who at any time during the years ended December 31, 2002 through December 31,2007, had signature or other authority (including authority to withdraw funds; to make investment decisions; to receive account statements, trade confirmations, or other account information; or to receive advice or solicitations) with respect to any financial accounts maintained at, monitored by, or managed through any office in Switzerland of UBS AG or its subsidiaries or affiliates in Switzerland and for whom UBS AG or its subsidiaries or affiliates (1) did not have in its possession Forms W-9 executed by such United States taxpayers, and (2) had not filed timely and accurate Forms 1099 naming such United States taxpayers and reporting to United States taxing authorities all payments made to such United States taxpayers."

On July 21,2008, the IRS served that summons on UBS by handing a copy to James Dow, Director and Head of Compliance for UBS in Miami, Florida.

Meanwhile, on July 17, 2008, the Senate Permanent Subcommittee on Investigations held a hearing regarding tax haven banks and the ways in which these financial institutions use bank secrecy laws to facilitate tax evasion by U.S. clients, thereby defrauding the United States of an estimated $100 billion dollars a year. Following a six month investigation of UBS AG, and LGT Bank in Liechtenstein, they released a one hundred fifteen page report entitled, Tax Haven Banks and U.S. Tax Compliance, alleging that these banks offer tax evasion services to U.S. clients, and structure their clients' accounts such that they can avoid disclosure. A copy of this report is appended below.

The report alleges that, between 2000 and 2007, UBS opened "tens of thousands of accounts in Switzerland that are beneficially owned by U.S. clients, hold billions of dollars in assets, and have not been reported to U.S. tax authorities." The report notes that although these accounts were owned by US taxpayers, the account owners did not file Forms W-9 identifying themselves as the owners, and the bank did not file Forms 1099 reporting the earnings on those accounts to the IRS. The bank refers to these accounts as "undeclared accounts."

Specifically, the report alleges that UBS maintains approximately 52,000 undeclared "account relationships" with US taxpayers, containing assets valued at 17 billion CHF (Swiss
Francs), the equivalent of about $14.8 billion at the time. About 32,940 of those undeclared accounts contain only cash, while the remaining 20,877 accounts contain at least some securities. Although there are more cash accounts than securities accounts, the securities accounts held approximately 39 times the amount of assets in the cash accounts.

That's a lot of U.S. citizens who need to be making some good decisions, especially in light of the following.

In 2009, the United States of America successfully prosecuted UBS AG (SD FL Case 0:09-cr-60033-JIC-1). On February 13, 2009, the US Attorney's Office filed an Information alleging a Klein Conspiracy, in that "UBS AG, together with its co-conspirators, did unlawfully, willfully and knowingly, combine, conspire, confederate and agree to defraud the United States and an agency thereof, to wit, the Internal Revenue Service of the United States Department of Treasury in the ascertainment, computation, assessment and collection of federal income taxes." A copy of this Information is appended below. On February 18, 2009, this Court approved a deferred prosecution agreement between UBS and the U.S. Department of Justice.

Part II
So, "What does all this actually mean?"

There should be 52,000 people out there asking, "Should we voluntarily disclose our interest in offshore accounts, in an effort to avoid criminal prosecution, and get right with Tax Jesus, or stand pat and pray?" As Private Investigators, it is not incumbent upon us to answer that question, but if you are going to be involved in these cases, you need to understand the issues, and know what questions to ask. One thing I can promise you -- if the person responsible for answering that question declares it to be a "no brainer," you are dealing with a person perfectly well qualified to handle any issue requiring a brainless approach.

Don't get me wrong, voluntary disclosure and compliance may very well be the best available option for your Client, and it probably is, depending upon individual facts and circumstances, but it is not a foregone, generally applicable, conclusion. Let's talk a little bit about what is involved here.

It is often erroneously reported that, "Every U.S. taxpayer with a foreign bank account of $10,000 or more has an obligation to file a TD F 90-22.1, Report of Foreign Bank and Financial Accounts," more commonly known as an FBAR." I suppose that someone must have put that in writing once upon a time, and everyone else just copied it. The statement is accurate as far as it goes, but there is a good bit more to it than that, and you are going to need to be able to explain this to Clients.

The responsibility to file the FBAR rests upon:

1) Every "US Person"
2) With a financial interest in, or authority over
3) Financial account(s) in a foreign country
4) With an aggregate value exceeding $10,000 USD at any time during the year.

That begs the question, "Who then is a US Person?" A "US Person" is a:

1) Citizen of the United States; or
2) Resident of the United States; or
3) Anyone in, and doing business in, the United States

Note that this includes all forms of business entities, trusts and estates.

Also note that this FBAR filing requirement is not the same thing as the obligation to disclose interests in foreign bank accounts on the tax return, Form 1040, Schedule B, Part III. It is very important that you understand this, as I have found that many professionals who should know better, do not have a firm grip on the distinction. Your Client, who has an interest in a foreign account must:

1) Disclose their interest in this account on their tax return, Form 1040, Schedule B, Part III; and
2) File a Treasury Department Form 90-22.1, Report of Foreign Bank and Financial Accounts; and
3) Pay taxes upon any income derived from this account

Failure to comply with any of these requirements (more typically all of them) will have both civil, and criminal, implications. Note the use of the word, "and." The 52,000 account holders, that the government is interested in, face potential criminal charges, and civil penalties -- and that is assuming that the assets involved are legitimate, as opposed to the fruits of some criminal enterprise.

So, let's go back to the Client who asks,"Should we voluntarily disclose our interest in offshore accounts, in an effort to avoid criminal prosecution, and get right with Tax Jesus, or stand pat and pray?" While it is not incumbent upon us to answer that question, the answer is simple. "That depends."

First of all, that depends upon the government. Historically, the IRS has encouraged voluntary disclosure and compliance through their Offshore Voluntary Compliance Initiative {OVCI), and the Last Chance Compliance Initiative (LCCI) that followed. As a matter of public policy, the IRS can be expected to be more lenient on those who come forward to disclose and comply, but it is hard to predict whether the government will offer these people any formal, special arrangement.

So, what that means is this:

Behind Door #1, we have criminal prosecution for: Tax Evasion; the Filing of False/Fraudulent Returns; Conspiracy to impede, impair, obstruct, and defeat the lawful governmental
functions of the IRS in the ascertainment, computation, assessment, and collection of revenue (Klein Conspiracy); Willful Failure to File a Report of Foreign Financial Accounts . . . not to mention the upward bump you get in the USSG (Sentencing Guidelines) for "Sophisticated Means."

That's the best case scenario, assuming that the offshore accounts were funded with legitimate, post tax, dollars. Many of these cases will have Money Laundering implications as well.

Behind Door #2, we have voluntary disclosure and compliance. Those who take this route accept the responsibility for taxes owed, fines and penalties, hoping to avoid criminal prosecution - but there is no guarantee, unless the IRS offers an amnesty program. Those considering this option should be aware that the FBAR violation alone is likely to cost them half the value of their account(s). That's a draconian penalty, but I suspect that many people would find it a lot more palatable if they spent a few months in prison prior to contemplation.

I suppose there will be some who will consider a Door #3 -- expatriation to some country that will not extradite those accused of "tax crimes." Even if expatriation was the option it is cracked up to be, one might well ask, "Where would that be in this day and time?" While many countries will not extradite a person guilty of "tax crimes" per se, the person considering this "option" should look very hard at how these haven countries react to MLAT petitions related to "fraud crimes." A Klein Conspiracy is a conspiracy to commit fraud.

There is a tidal wave of Klein Conspiracy/FBAR cases coming, and the IRS is negotiating with some of the world's largest accounting firms to line up outside assistance. Considering the fact that the government's won/loss percentage in Klein Conspiracy cases runs somewhere around body temperature, and considering the fact that very few law firms can claim to have ever won one, I find myself wishing that I could buy stock in the few that have.

Related Reading:

UPDATE: April 28, 2009

Dan Reeves, the IRS Agent in charge of offshore compliance, addressed a conference in Miami yesterday and revealed that the IRS has identified additional banks involved in assisting US tax payers evade taxes, and the IRS is in the process of issuing John Doe Summonses to those financial institutions as well.

UPDATE: September 21, 2009

The IRS has published some information about their Amnesty Program for those who may be involved in this UBS situation. They have extended the program, and they say there will be no more extensions. An amnesty offer with a "no FBAR penalty" is a "no brainer" for those who can come forward - if you find yourself involved in such a discussion, remember that that if your Client chooses to "stand pat," that is a sure loser of a strategy if a host of others come forward. If others come forward who have some commonality with his situation, it is certain death.

UPDATE: November 19, 2009

The International Herald Tribune reported today that 14,700 Americans have responded to the IRS Amnesty Program that closed on October 23, 2009. Consider the implications of that to those who have not come forward, and the promoters of these programs.

The amnesty deal is an agreement that requires compliance, and full cooperation. That means that the IRS now has almost 15,000 new witnesses to debrief.

These people did not get to UBS bank by strolling around Geneva with a duffel bag full of cash. Most of these people were directed there by some sort of manager/advisor/attorney who advised them, and in many cases, facilitated the transactions. Those advisors are the walking dead and, although I am sure they are anxiously following these developments, very few of them will have the perspicuity to forsee the inevitable.

Every one of the 15,000 new witnesses will be explaining how they wound up offshore and their advisors, once identified, will be the subject of the next wave of IRS/CID investigations - and they will fall like dominos. The IRS very seldom loses cases like these so, in the end, the IRS will have their full cooperation too.

In their cooperation, they will identify everyone else that they "assisted," and they will be witnesses against them. Sadly, in their desperation, many of these cooperating advisors say whatever the government wants to hear about their former Clients, even if it means exaggerating and embellishing an already damning truth.

"Sell 'em down the river, and toss 'em under the bus," is about to be the order of the day.

If you have a Client involved in this mess, don't let them sit back and pray for salvation that isn't coming - they would be better served by telling them what's coming, and how to most effectively survive that game while there are still seats on the bus, as we discussed HERE.

UPDATE: June 19, 2010

The Swiss government has finally approved the UBS deal to turn over the names of US citizens suspected of utilizing offshore accounts to avoid taxes - think about the far reaching implications of that. Perhaps it will be easier if I explain it.

As previously reported in the November 2009 Update, almost 15000 people came forward to voluntarily disclose their offshore accounts.

During that same time period, the US had a deal in place with UBS Bank requiring that UBS identify all their US tax cheats - reported to be about 52,000 accounts. The politics involved made the deal difficult, there was a lot of politicking to do . . . but the grunt work is done and the US now has it worked out with the Swiss law makers to allow for the identification of tax cheats.

OK, so that's UBS - probably the largest wealth manager in the world, but certainly not the only one out there playing the same games. Credit Suisse and HSBC (Hongkong Shanghai Banking Company) immediately come to mind.

While some, and probably many, of the 15,000 new witnesses that the IRS has acquired consequent to their voluntary compliance initiative will have been guided through the tax evasion process by UBS, many will not. Many will be providing testimony and evidence related to the other major players in the field.

US tax enforcement authorities are going to be in a position to offer the other major players the option - "Do we do this the hard way, or the harder way?" The government can debrief all their new witnesses, put together the evidence, and indict offshore bank officials for conspiracy to defraud, work thru the MLAT to obtain Swiss government assistance, settle with banks, force disclosure . . . and, like I pointed out, the grunt work has been done.

Or, since Swiss law makers have agreed that banks can be forced to turn over this information, why go through the unnecessary pain, publicity and expense? Would it not be rational and reasonable for the person calling the shots at Credit Suisse to see the writing on the wall and quietly negotiate cooperation?

If not, look for Indictments.

Oracle International
Bill E. Branscum, Investigator
(239) 304-1639




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