A U.S. District Court has authorized the Internal Revenue Service to issue summonses requiring five U.S. correspondent banks of The Bank of N.T. Butterfield & Son Ltd. in Bermuda and its affiliates in eight jurisdictions, including the Cayman Islands, to produce the records of account holders that are suspected of tax evasion.
U.S. District Judge Richard M. Berman of the Southern District of New York entered an order allowing the IRS to issue so-called “John Doe” summonses to obtain information about possible tax fraud by individuals whose identities are unknown.
The summonses direct Bank of New York Mellon, Citibank, JPMorgan, HSBC and Bank of America to produce records identifying U.S. taxpayers with accounts at Butterfield and its affiliates, including other foreign banks that may have used Butterfield’s U.S. correspondent accounts.
Butterfield has affiliates in the Bahamas, Barbados, the Cayman Islands, Guernsey, Hong Kong, Malta, Switzerland and the United Kingdom.
The order follows a similar permission granted by the same court regarding U.S. correspondent banks of Swiss bank Zurcher Kantonalbank last week.
Banks often employ the services of correspondent banks in countries where they have no branches but want to conduct banking transactions on behalf of their customers. Rather than compelling the non-U.S. bank to produce customer records, for example through a tax information exchange agreement, the John Doe summonses direct the U.S.-based correspondent bank to divulge the information.
“These cases once again demonstrate the department’s resolve to uncover and identify taxpayers who tried to hide money overseas as a way to avoid federal taxes,” said Assistant U.S. Attorney General Kathryn Keneally.
“These John Doe summonses will provide information about individuals using financial institutions from Switzerland to the Cayman Islands to Hong Kong to avoid their U.S. tax obligations.
U.S. taxpayers still holding accounts who have not come clean should come forward and do the right thing before it’s too late.” The action comes in response to 81 Butterfield and 371 ZKB account holders admitting, as part of various IRS Offshore Voluntary Disclosure programs, that they had not disclosed these accounts in the past. In addition, a number of U.S. taxpayers with beneficial ownership and control over funds held in accounts at Butterfield and ZKB have admitted failing to report income earned from their offshore accounts on their federal tax returns.
The U.S. Department of Justice said the IRS has reason to believe that other U.S. taxpayers who held or presently hold similar accounts at ZKB, Butterfield and their affiliates have done the same in violation of federal tax law.
The IRS introduced a number of Offshore Voluntary Disclosure programs and initiatives since 2009 to enable U.S. taxpayers to come forward, resolve their tax liabilities and minimize their chances of criminal prosecution by voluntarily disclosing previously undisclosed foreign accounts and income.
Federal tax law requires U.S. taxpayers to pay taxes on all income earned worldwide. U.S. taxpayers must also report foreign financial accounts if the total value of the accounts exceeds $10,000 at any time during the calendar year. Willful failure to report a foreign account can result in a fine of up to 50 percent of the amount in the account at the time of the violation.
“Today’s action shows that the use of foreign banks for tax evasion remains a high investigative priority of this office and U.S. citizens should understand that loud and clear,” said U.S. Attorney Preet Bharara. “By issuing these John Doe summonses, we continue our joint efforts with the IRS to identify and hold accountable those who try to evade their legal responsibility to pay taxes.”
In December 2012, three employees of Zurcher Kantonalbank were indicted for conspiring with U.S. taxpayers and others to hide at least $423 million from the IRS in secret Swiss bank accounts.
John Doe summonses, which require the approval by a U.S. Federal Court, were first used by the IRS in 2008 to circumvent Swiss bank secrecy laws and obtain information about U.S. taxpayers who maintained undisclosed bank accounts with Swiss bank UBS.
Although a John Doe summons can apply to a group of unknown taxpayers, it cannot be used to conduct a “fishing expedition.” This means the IRS has to offer sufficient evidence to suspect tax fraud.
In the order, Judge Berman noted the summonses relate to an investigation of an ascertainable group of people and there is a reasonable basis to believe that this group of account holders had failed to comply with the internal revenue law. At the same time the information sought is not readily available from other sources.
In April a federal court in San Francisco permitted the IRS to serve a John Doe summons seeking information about U.S. taxpayers who may hold offshore accounts at CIBC FirstCaribbean International Bank from the bank’s U.S. correspondent bank Wells Fargo. Similar to the Butterfield correspondent banks’ summonses, the court heard of the voluntary disclosure by 129 U.S. taxpayers, who had maintained previously undeclared FirstCaribbean accounts.
“International issues remain a major focus for the IRS, and we are continuing our efforts to fight tax evaders who use offshore accounts to skirt the law,” said IRS Acting Commissioner Danny Werfel. “These John Doe summonses for correspondent account records show our determination to pursue evaders using offshore accounts, even if the person hiding money overseas chooses a bank that has no offices on U.S. soil.”