21 July, 2016
There are increasing signs that the US authorities are stepping up their pursuit of US tax evaders and those who they perceive as having assisted them.
On 21 June 2016 the US Department of Justice (DOJ) confirmed that it succeeded in obtaining bank records relating to a bank account held with the Singapore branch of UBS (the Bank). The records were obtained after the DOJ filed a petition against the Bank in US federal court in Florida earlier this year to enforce an Internal Revenue Service (IRS) summons served on the Bank in July 2013.
The timing and the background to this summons send a clear message to US tax payers and to Foreign Financial Institutions (FFIs) that the DOJ will aggressively pursue off-shore tax evasion. As expressed by the DOJ Acting Assistant Attorney General in an interview in March this year, the DOJ is wrapping up the “Swiss Bank Program” and is now “looking well beyond Switzerland, into jurisdictions around the world […], [including] but not limited to Hong Kong and Singapore.”
Background
In June 2008 the DOJ served a summons on the Bank seeking information about bank accounts held by US tax payers in Switzerland. In February 2009 the Bank entered into a Deferred Prosecution Agreement (DPA) and, under an order issued by the Swiss Financial Market Supervisory Authority (FINMA), provided the required identities and account information. This was followed by the provision of further information, including information about the closing of accounts and the flow of funds into other jurisdictions. In August 2013 the DOJ announced the “Swiss Bank Program” and obtained similar information from other banks in exchange for Non-Prosecution Agreements (NPAs).
Further, the DOJ has obtained information regarding practices within FFIs and about the FFI’s customers from cooperating bank employees and from US tax payers who have disclosed their previously undeclared accounts under various Offshore Voluntary Disclosure Programs.
As a result, the DOJ has obtained a significant amount of information about the identity of US tax payers who have been holding funds off-shore, and the FFIs and jurisdictions into and through which these funds have flown.
The summons targeting Singapore
The summons targeting the Singapore account with the Bank relates to a US tax payer (the Client) who had initially opened an account with the Bank in Switzerland in 1994. The Client was living and working in the US at the time. When the Client was informed in 2000 that the Bank would need to identify US account holders under new “Qualified Intermediary” rules, he closed the Swiss account, opened the account in Singapore and transferred his funds to Singapore. Details of the account holder’s identity, his accounts in Switzerland and Singapore, the circumstances under which the Singapore account was opened and fund transfers into Singapore, were all obtained by the DOJ as a result of the original summons in 2008. Information was also obtained from the relationship manager who was arrested in the US and entered into a plea agreement in November 2012.
In 2012, the IRS located the Client in China and tried to obtain information from him, or alternatively a waiver allowing the Bank to provide the IRS with further information regarding the Singapore account. The IRS also sent an exchange of information request to China in March 2013. Thereafter, the IRS served the Bank with a summons in July 2013, which was followed by the DOJ petition in February 2016.
Singapore bank secrecy
According to the petition the Bank had informed IRS in August 2013 that it could not comply with the summons “because, in the absence of a waiver from [the Client], [the Bank] is prohibited by Singapore’s bank secrecy laws from disclosing the summoned bank records.” It is noteworthy that the scope of the summons was very broad and included a variety of documents relating to the Client’s savings, checking and securities accounts, all correspondence with the Client, and all internal memos and file notes relating to the account.
DOJ argued in the petition that “even if Singapore’s bank secrecy laws, as [the Bank] contends, preclude disclosure of the summoned bank records […], international comity requires that the records be disclosed. The interest of the United States in combating tax evasion by U.S. taxpayers through the use of secret foreign bank accounts substantially outweighs the interest of Singapore in preserving the privacy of its bank customers.”
Singapore bank secrecy is strict and prohibits the disclosure of customer information in any way and to any person except as expressly provided by the Banking Act (Chapter 19). A breach of Singapore bank secrecy is a criminal offence.
It appears from a statement of the Bank’s spokesperson that the Bank was eventually able to provide the requested documents “based on client consent in accordance with Singapore law.”
Prosecution of offshore tax evasion going forward
The DOJ has been providing clear indications that it is wrapping up the Swiss Program, that it has collected considerable amounts of information and that it is ready to follow suspected tax evaders into off-shore jurisdictions beyond Switzerland.
The DOJ will be looking out for evidence that FFIs knowingly assisted in the evasion of US tax laws. Such “badges of fraud” are likely to exist where funds were accepted from Switzerland after 2008/2009 or where bankers assisted in setting up structures aimed at concealing the true beneficial ownership of an account (e.g. “hold mail” arrangements, numbered accounts or accounts held by non-US intermediaries). DOJ may also look at conduct related to clients whose accounts were closed as part of an FFI’s FATCA due diligence in 2014.
However, FFIs in Singapore must also be conscious of Singapore bank secrecy when thinking of providing information to foreign enforcement agencies. According to an article in the Singapore Straits Times of 24 June 2016, the Monetary Association of Singapore (MAS) indicated after the disclosure of Singapore bank records by the Bank that “Singapore’s laws and regulations do not prohibit sharing of information for investigations into possible tax offences” and that “banking information could be disclosed through client’s consent or via Singapore mutual legal assistance.”
However the client’s consent may not always be forthcoming if not obtained at the outset of the banking relationship, and the ability to share information via mutual legal assistance is hampered by the fact that there is no income tax treaty or tax information exchange agreement between Singapore and the United States. Although information sharing is possible under the Mutual Assistance in Criminal Matters Act (MACMA), this is limited to cases where criminal proceedings are already pending in a foreign court and is unlikely to allow for the broad scope of information commonly sought under US summonses.
For further information, please contact:
Kyle Wombolt, Partner, Herbert Smith Freehills
kyle.wombolt@hsf.com
