“Dual citizenship affords unique opportunities for cross-border tax evasion” claims report issued by @SenateFinance

As described by AARO (“Association of American Residents Overseas”) in an April 7, 2023 blog post:

On March 29 the Senate Finance Committee Democratic staff issued a report titled “Credit Suisse’s Role in U.S. Tax Evasion Schemes of its investigation of Credit Suisse’s compliance with a 2014 plea agreement with the Department of Justice involving the bank’s participation in a conspiracy to hide offshore accounts from the IRS.

Per Committee chair Senator Ron Wyden’s (D-OR) press release, the report details Credit Suisse’s role in a “potentially criminal tax conspiracy” involving accounts of a U.S. based family that were closed 10 years ago, recycles the Clinton/Bush era tax evasion case by U.S. businessman Dan Horsky, and discusses large undeclared accounts belonging to 23 ultra-high net worth U.S. citizens.

We are surprised that such a large and well-resourced committee working for two years was unable to unearth so little misconduct at a mega-bank that has now collapsed due to mis-management. Most outrageously, the report states that “Dual citizenship affords unique opportunities for cross-border tax evasion,” which gives the impression that ordinary Americans living abroad are prone to criminal tax evasion.

AARO has a meeting scheduled with Senator Wyden’s office in May during our annual Overseas Americans Week, during which we will express our extreme dissatisfaction with this characterization. We will let you know if there are any developments.

AARO deserves thanks and credit from all Americans overseas for publicly pushing back on the report created and published by the Democrat led Senate Finance Committee. The report is outrageous, a waste of public money and appears to be a “back handed attempt” to justify the hiring of more IRS agents and increasing/justifying the imposition of FBAR penalties. The report is NOT (contrary to media reports) really about Credit Suisse. The report uses Credit Suisse as a “prop” to remind the people of America, that there are some people in America (it all took place ten years ago), who deliberately attempt to evade the payment of U.S. tax. The modus operandi includes moving their money to financial institutions and entities outside the United States. Yes, it’s true. Of course, as an added benefit the Senate Finance Committee gets to demonize Swiss banks (in general) and Credit Suisse (in particular). But make no mistake. The Senate Finance report is NOT about Swiss banks. It’s an advertisement to justify the hiring of more IRS agents funded by the Inflation Reduction Act, to legitimize the imposition of more FBAR penalties and to suggest that Republicans are (somehow) soft on tax evasion.

Why this report is dangerous for U.S. citizens generally and for Americans abroad specifically

As AARO makes clear, the report is a clear attempt to add “dual citizenship” to the collection of pejorative terms (and circumstances) that are used as indicators of wrong doing and nefarious behaviour. It’s worth noting that dual citizenship is often a circumstance of the modern world. It’s also often a “circumstance of birth”. Apparently the Senate Finance Committee is unaware that the U.S. Supreme Court in the cases of Afroyim and Vance v. Terrazas has ruled that individuals who became U.S. citizens because they were born in the United States have a constitutional right to dual citizenship. But, why let the law and the U.S. constitution interfere with the presumption of criminal behaviour imagined by the Senate Finance Committee Report and urged on the American people?

The actual report is 78 pages. A copy of the full report is here …

SFC CREDIT SUISSE REPORT FINAL Mar 28

The report is very dangerous for U.S. citizens living outside the United States for at least the following reasons:

1. The report wrongly introduces “dual citizenship” as a circumstance as an indicator of tax evasion

To quote from the press release:

Dual citizenship affords unique opportunities for cross-border tax evasion. A trend in the concealment of offshore bank accounts involves bankers hiding accounts for ultra-high net worth U.S. citizens who have dual citizenship by coding bank accounts using only their non-U.S. passport and foreign residences. A complicit banker is able to code accounts in a manner that would evade any internal systems designed to identify Americans and comply with U.S. law. This behavior was observed in Credit Suisse’s handling of large undeclared accounts held by Horsky and the U.S.-Latin American family.

This paragraph is ridiculous. Everybody knows that dual citizenship exists in the modern world. The United States is the only developed country in the world that ties “tax residency” to citizenship or immigration status. For the rest of the world there is little or no presumptive connection between citizenship and tax residency. Citizenship is relevant ONLY in the case of U.S. citizens. The obligation imposed under the FATCA rules is to enquire about “U.S. citizenship” which is completely irrelevant to “dual citizenship”.

2. The report fails to distinguish between citizenship and residence

A reading of the press release (Appendix A below) and the full report (conclusion in Appendix B below) reveals that the report does NOT describe the alleged tax evaders as “U.S. tax residents” or “U.S. residents”. Rather the report (in a manner similar to the Barrett dissent in the recent Bittner FBAR case) describes them as “U.S. citizens”. (See the BOLDED parts of the appendices.) This is troubling because (like the Barrett dissent in Bittner) it fails to distinguish the bank accounts of Americans abroad from the bank accounts of U.S. residents. The report is one more example of how Americans abroad are victimized and demonized by rules that are (1) sufficiently broad to include all citizens but (2) are unlikely to have been intended to apply to U.S. citizens with foreign bank accounts that are local to them. (This is an ongoing problem as noted by Treasury’s unwillingness to relax the FBAR requirements for Americans abroad.)

3. The report uses language that suggests that the U.S. Government has a “property interest” in U.S. citizens

The language of “U.S. Persons” (presumably following the definition in IRC 7701(a)(30)) suggests that U.S. citizens are the property of the United States of America. Therefore any non-U.S. bank that does business with a “U.S. Person” is messing with “U.S. Property”. If my cow escapes from my farm, it is still my cow, even if it ventures onto your land!

4. The report clearly assumes the reasonableness and propriety of the U.S. citizenship taxation AKA “extraterritorial tax regime”

The language of the report coupled with the lack of differentiation between U.S. residents and Americans abroad is troubling. The report clearly assumes that residence outside the United States is and should be irrelevant for the purposes of U.S. tax residency. The report is an affirmation of the U.S. defining tax residency in a manner that makes the “circumstances of birth” more important that the “circumstances of life”. Seen in this light, the report clearly reninforces the U.S. “citizenship tax” based extra-territorial tax regime.

5. Prospects for change? The Senate Finance Committee has repeatedly refused to respond to submissions from Americans abroad!

Starting in March of 2021, the Senate Finance Committee under the leadership of Senator Wyden began a series of hearings about various aspects of U.S. tax policy. In almost all cases, these hearings had significant implications for Americans abroad. SEAT (along with many individual Americans abroad) filed a number of submissions with the Senate Finance Committee. These submissions included a request that representatives from Americans abroad be given the opportunity to discuss their concerns. Senate Finance has never responded to these requests. It is very clear that:

Not only does the Senate Finance Committee NOT care about the interests of Americans abroad, but they don’t care that they don’t care!

This is a dangerous message to Americans abroad in a FATCA, FBAR, citizenship taxation and “treaty saving clause” world! It’s very difficult for a U.S. citizen to live outside the United States in a FATCA and FBAR world.

The sobering conclusion …

It’s NOT the “dual citizenship” of Americans that’s the problem. It’s the “citizenship taxation” policy of America that’s the problem!

The Senate Finance Press Release and Report does NOT (and rarely references the) focus on the “residence” of the wrong doers. Rather it focuses on the “citizenship”, “nationality” and in many cases refers to them as “U.S. Persons” (presumably reflecting an assumption that the individuals are the property of the U.S. government). By (almost) ignoring “residence” and focussing on “citizenship”, the report reinforces the assumption of “citizenship taxation” which is a sufficient condition for U.S. “tax residency”. Interestingly the criticism of Credit Suisse focuses on its either ignoring the U.S. citizenship of Mr. Horsky and “The Family” or allowing the fact of “dual citizenship” to somehow mask the circumstance of U.S. citizenship.

To put it simply:

The Wyden report assumes and reinforces the reasonableness of “citizenship taxation” in a world where “residence taxation” is the international standard. This should be extremely troubling for ALL Americans abroad!

AARO has expressed its dissatisfaction with the repot.

SEAT expresses its dissatisfaction with the report.

It’s time for others (especially the Democrats Abroad Tax Committee) to express its dissatisfaction with the report.

John Richardson – Follow me on Twitter @Expatriationlaw

Appendix A – The full press release of March 29, 2023

https://www.finance.senate.gov/chairmans-news/wyden-investigation-finds-credit-suisse-complicit-in-ongoing-tax-evasion-by-ultra-wealthy-americans

MARCH 29,2023
Press Contact:
Ryan Carey

Wyden Investigation Finds Credit Suisse Complicit in Ongoing Tax Evasion by Ultra-Wealthy Americans
Senate Finance Committee Details Credit Suisse’s Role in an Ongoing, Potentially Criminal Tax Conspiracy Involving $100 Million in Undeclared Offshore Accounts

In Response to Pressure from Committee Investigators, Credit Suisse Identifies 23 Additional Large, Undeclared Accounts Belonging to Ultra-Wealthy Americans each with Assets over $20 Million

Washington, D.C. – Senate Finance Committee Chairman Ron Wyden (D-Ore.) today released the findings of a two-year investigation into Swiss bank Credit Suisse’s compliance with its 2014 plea agreement with the U.S. Department of Justice (DOJ) for enabling tax evasion by thousands of wealthy U.S. individuals. The committee’s investigation uncovered major violations of that plea agreement, including a previously unknown, ongoing and potentially criminal conspiracy involving the failure to disclose nearly $100 million in secret offshore accounts belonging to a single family of American taxpayers. The investigation also shed new light on the extent to which Credit Suisse bankers aided and abetted offshore tax evasion by U.S. businessman Dan Horsky, who pleaded guilty in 2016 to one of the largest criminal tax evasion cases in American history.

The committee also requested information from Credit Suisse on any other large, undeclared accounts belonging to ultra-wealthy U.S. citizens with more than $20 million held at the bank. By the time of the investigation’s conclusion, Credit Suisse disclosed to the committee that it had identified 23 such accounts, with more reviews underway. Based on the committee’s findings, the total amount concealed in violation of Credit Suisse’s 2014 plea agreement is more than $700 million.

“At the center of this investigation are greedy Swiss bankers and catnapping government regulators, and the result appears to be a massive, ongoing conspiracy to help ultra-wealthy U.S. citizens to evade taxes and rip off their fellow Americans,” Senator Wyden said. “Credit Suisse got a discount on the penalty it faced in 2014 for enabling tax evasion because bank executives swore up and down they’d get out of the business of defrauding the United States. This investigation shows Credit Suisse did not make good on that promise, and the bank’s pending acquisition does not wipe the slate clean. Officials at the Department of Justice have said they intend to crack down on corporate offenders, particularly repeat offenders like Credit Suisse, and I expect them to follow through on that commitment. In addition to a significant penalty for the bank, the individual bankers involved in these schemes must also face criminal investigation. It simply makes no sense to allow the bankers who have their hands on these hidden accounts and enable tax evasion to get away scot free. Finally, the cases detailed in this investigation are textbook examples of why Democrats gave the IRS new funding for enforcement. Republican budget cuts have decimated the IRS’s ability to root out this kind of offshore tax evasion scheme, but Democrats are committed to stepping up enforcement against wealthy tax cheats.”

More detailed findings from the committee’s investigation include:

The committee found that Credit Suisse violated key terms of its plea agreement with the Department of Justice. In particular, the committee believes Credit Suisse violated the “leaver list” provisions of its plea agreement when it closed large undeclared accounts belonging to a family of dual U.S.-Latin American nationals while some members resided in the United States, and transferred nearly $100 million in funds to other banks in Switzerland and elsewhere without notifying DOJ. By wiring these assets to other banks without notifying DOJ, Credit Suisse enabled what appears to be potentially criminal tax evasion to go undetected for almost a decade.

The committee uncovered what may be one of the largest Foreign Bank Account Report (FBAR) violations in U.S. history. The scheme involving nearly $100 million in undeclared accounts held by the U.S.-Latin American family may lead to one of the largest FBAR penalties in history. FBAR penalties can be up to $100,000 or half the value of the undeclared accounts, whichever is greater. The largest penalties paid to date by individuals are believed to be the $100 million FBAR penalty paid by Dan Horsky and the $83 million paid by private equity executive Robert Smith.

Former senior bankers at Credit Suisse were involved in the management of large, undeclared offshore accounts. The committee’s investigation revealed that the former head of private banking for Latin America, Alexander Siegenthaler, played a significant role in the management of the U.S.-Latin American family’s accounts. Siegenthaler supervised several Credit Suisse bankers who faced criminal charges in the United States. Siegenthaler reported directly to the head of private banking for all of the Americas, who in turn reported directly to the global head of private banking.

Credit Suisse employees knowingly and willfully helped Dan Horsky conceal $220 million from U.S. authorities. Credit Suisse provided information to the committee that Horsky carried out his scheme “with the knowledge and participation of multiple Credit Suisse employees.” The committee obtained records showing that Credit Suisse bankers were aware of Horsky’s citizenship and worked to help him conceal his beneficial ownership of the accounts. Senior regional executives failed to comply with the Foreign Account Tax Compliance Act (FATCA) and the bank’s obligations under the plea agreement with DOJ.

Dual citizenship affords unique opportunities for cross-border tax evasion. A trend in the concealment of offshore bank accounts involves bankers hiding accounts for ultra-high net worth U.S. citizens who have dual citizenship by coding bank accounts using only their non-U.S. passport and foreign residences. A complicit banker is able to code accounts in a manner that would evade any internal systems designed to identify Americans and comply with U.S. law. This behavior was observed in Credit Suisse’s handling of large undeclared accounts held by Horsky and the U.S.-Latin American family.

DOJ must conduct rigorous scrutiny into why Credit Suisse continues to discover large, secret accounts held by U.S. persons. The committee is concerned that nine years after signing its plea agreement with DOJ, Credit Suisse is still disclosing information about large potentially undeclared accounts that may have been held at the bank. Despite internal reviews, a court appointed monitor, several whistleblower disclosures to DOJ, a modernization of systems and significant sums spent on outside attorneys, Credit Suisse is still reviewing dozens of additional accounts potentially held by ultra-high net worth U.S. persons. DOJ must correct its lax oversight of Credit Suisse, rigorously scrutinize the bank’s compliance with its 2014 plea, and hold Credit Suisse accountable for any violations of its plea agreement.

Several additional Swiss banks may be currently holding large secret offshore accounts for U.S. persons. Credit Suisse indicated to the committee that from November 2012 to February 2013, a U.S.-Latin American family transferred tens of millions of dollars out of Credit Suisse to a group of unidentified banks in Switzerland. Confidential sources informed the committee these funds were sent to Union Bancaire Privée, UBP SA (UBP) and PKB Privatbank AG (PKB) in Switzerland. Both have existing non-prosecution agreements with DOJ resulting from previous investigations of their involvement in tax evasion cases. The failure to identify and report any accounts held by the family may constitute a violation of those non-prosecution agreements. In the case of UBP, this would represent the third violation of its non-prosecution agreement.

Bank Leumi may have violated its own deferred prosecution agreement with DOJ. Credit Suisse indicated to the committee that a U.S.-Latin American family transferred tens of millions of dollars out of Credit Suisse to Bank Leumi in Israel. It is unclear whether Bank Leumi, which also entered into a deferred prosecution agreement with DOJ, ever disclosed the existence of the accounts to DOJ.

The full report on the committee’s investigation is available here.

___________________________________________________________________

Appendix B – The Report’s “Conclusions and Recommendations For Action” – starting at page 37

Conclusion and Committee recommendations for action

The Committee’s report makes clear that certain wealthy Americans continue to use secret bank accounts in Switzerland and elsewhere to hide massive amounts of income from the U.S. government. These tax evaders frequently do so with the willing assistance of foreign financial institutions whose employees help them execute tax evasion schemes to conceal the existence of these accounts from the IRS.

The Committee believes the conduct of ultra-high net worth tax evaders at Credit Suisse and other banks in Switzerland just scratches the surface, and that properly funding the IRS is the single most important factor in stemming offshore tax evasion by wealthy tax cheats. The recently passed Inflation Reduction Act provides a historic increase in funding for the IRS to hire revenue agents and other professionals capable of conducting sophisticated audits of millionaires and billionaires and detecting tax evasion through the use of undeclared foreign bank accounts.

Many of the largest individual tax evasion schemes in U.S. history involve Swiss banks. DOJ and the IRS must step up investigations into the role of these banks and their employees in carrying out these schemes. Enforcement agencies should actively review whether banks like Credit Suisse that cut deals to avoid criminal prosecution are honoring the terms of their
agreements. Sending the message that enabling of tax evasion by foreign financial institutions will result in real criminal prosecution will serve as a strong deterrent, result in more accountability, and encourage further voluntary disclosure of undeclared offshore accounts. ions involving repeat offenders. The conduct identified in the Committee’s report exemplifies such repeat offenses and raises serious questions as to whether several foreign financial institutions have violated the terms of their deferred or non-prosecution agreements.

Foreign banks and their employees are sophisticated actors that are well aware of their obligations to the U.S. government, as well as the tax reporting obligations of their clients. There is no excuse for the willful facilitation of tax evasion by trained professionals or turning a blind eye to large, undisclosed accounts held by American taxpayers. U.S. law explicitly requires foreign financial institutions to identify and report accounts belonging to U.S. persons, and imposes heightened due diligence standards for accounts valued at over $1 million.

The Committee recommends the following actions in response to the findings of its investigation into Credit Suisse:

 DOJ investigation of Credit Suisse’s compliance with its plea agreement. DOJ should investigate whether Credit Suisse violated its plea agreement and determine whether any violations merit further criminal prosecution or additional financial penalties. In particular, DOJ should examine Credit Suisse’s compliance with the “leaver list” requirements established by Section II.D.2 of the Swiss Bank Program. This investigation should also examine whether senior bankers at Credit Suisse failed to report large undeclared accounts despite knowledge of clear U.S. indicia indicating an account
holder’s status as a U.S. person.

 DOJ and IRS CI investigation of conduct of former senior bankers at Credit Suisse. DOJ and the IRS Criminal Investigation division should conduct an investigation into whether senior bankers at Credit Suisse helped conceal the Family’s accounts and
determine whether they participated in a conspiracy to assist U.S. taxpayers in filing false tax returns. In particular, DOJ should examine the facts laid out in this report, including that the former Head of Private Banking for Latin America, Alexander Siegenthaler, was intimately involved in the Family’s accounts and traveled to the U.S. on several occasions to meet with the account holders. This review should investigate whether senior bankers at Credit Suisse were aware the account holders were U.S. persons.

 DOJ and IRS CI should increase oversight of FBAR violations by taxpayers. DOJ and IRS CI should increase oversight and enforcement of FBAR violations, focusing on violations by high-net worth individuals. The number of criminal FBAR investigations initiated by the IRS dropped from 24 in 2017 to just seven in 2021, and the Committee believes that with focused effort, the IRS could meet or exceed its 2017 FBAR investigations output. This should include hiring of additional revenue agents and criminal investigators capable of unpacking major cases involving large dollar amounts and sophisticated conduct that rise to the level of willful violations.

 DOJ and IRS review of other large undeclared accounts being examined by Credit Suisse. DOJ and the IRS should assess whether FBAR violations are discovered as part of Credit Suisse’s ongoing review of dozens of client relationships possessing large
undeclared accounts with assets exceeding $20 million. Credit Suisse has indicated to the Committee that it has identified 23 client relationships each with undeclared assets exceeding $20 million. These accounts do not include accounts belonging to Horsky or the Family.

 The IRS should send updated guidance to Swiss banks regarding the “reason to know” provisions of the U.S.–Switzerland FATCA agreement. A provision in the U.S.–Switzerland FATCA intergovernmental agreement requires Swiss banks to identify and report U.S. accounts to the IRS when they have “reason to know” that the “self certification or other documentation with an account is incorrect or unreliable.”99 The IRS has previously indicated that these knowledge standards are vague and hard to enforce as currently written. The IRS should act quickly to issue situational guidance to Swiss banks clarifying the instances in which Swiss banks are expected to detect and report accounts held by U.S. persons, particularly situations involving high-net worth clients.

 Use of Inflation Reduction Act funding for expedited processing of whistleblower claims. The IRS should dedicate funding from the Inflation Reduction Act to increase the Whistleblower Office’s ability to quickly analyze and act on the information provided by whistleblowers, especially in major cases involving offshore tax evasion schemes. This may require closer coordination with the functional components at the IRS.

 The IRS should consider relaunching the Offshore Voluntary Disclosure Program (OVDP) in conjunction with other enforcement actions. The most recent OVDP was closed by the IRS on September 28, 2018 due to a decline in participation and the
increased awareness of offshore tax and reporting obligations. As this investigation has demonstrated, the Committee believes there are many hidden offshore accounts belonging to high-net worth individuals that have not been properly reported to the IRS.

The Committee believes that the decline in IRS enforcement personnel and audits in recent years has emboldened wealthy taxpayers to conceal income from the IRS. The IRS can send a clear message to noncompliant taxpayers that they have one final chance to report all of their income before the IRS uses resources from the Inflation Reduction Act to pursue aggressive enforcement actions against large undeclared offshore accounts.

One thought on ““Dual citizenship affords unique opportunities for cross-border tax evasion” claims report issued by @SenateFinance

  1. Easy solution, don’t allow dual citizenship, which for me would mean I could relinquish US passport immediately. Hate being thought of as some rich expat whilst everyone I know back in the US pays much less tax than I currently do in the country I reside. FATCA is grossly unfair and has now locked me out of some of the financial benifits all of my fellow employees receive at my workplace. I should have lied on the form and said I was born in Canada.

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