Cayman National Corp.’s affiliated trust and securities management businesses conspired with American taxpayers to hide US$137 million in assets managed by those companies from the U.S. Internal Revenue Service, according to a guilty plea to tax evasion conspiracy allegations recorded Wednesday in Manhattan.
Cayman National Trust Co. Ltd. and Cayman National Securities Ltd. have agreed to forfeit US$6 million as part of the deal. In addition, the companies agreed to turn over account information on the alleged tax evaders whose accounts they managed.
The pleas made Wednesday represented the U.S. Department of Justice’s first criminal conviction of non-Swiss financial entities for tax evasion conspiracy.
“The veil of secrecy has been lifted from what was once a common place for criminals to hide their money offshore,” said IRS criminal investigations chief Richard Weber.
U.S. Attorney for the Southern District of New York Preet Bharara said the plea agreement showed the government’s commitment to pursue not only financial institutions that assist with tax evasion, but also the individuals who use them. “We will follow them, no matter how far they go to hide their accounts,” Mr. Bharara said.
No individual criminal convictions were recorded as part of Wednesday’s plea announcement.
However, prosecutors warned that an agreement not to prosecute Cayman National’s securities and trust businesses further in this case did not preclude the U.S. Attorney’s Office from charging individuals who had potentially committed a criminal offense.
Cayman National Corp.’s shareholders were informed of the pending court action last year in the company’s 2014/2015 fourth quarter financial statements ending Sept. 30, which identified the US$6 million settlement. Those statements were released in December 2015.
Cayman National Corp. is the parent company of Cayman National Bank, as well as the trust and securities businesses.
A statement released Thursday by the Cayman Islands Monetary Authority indicated the authority has been “assured” that the guilty pleas by Cayman National Trust Co. Ltd. and Cayman National Securities Ltd. should have “no adverse impact on the solvency of Cayman National Bank.”
Stuart Dack, chief executive officer of Cayman National Corp., said in a press statement, “We are pleased finally to reach a conclusion to this matter. Many financial institutions around the world, including others in the Caribbean, have been under investigation for their roles in U.S. tax compliance matters.”
He added, “Upon learning of the investigation relating to [Cayman National Securities] and [Cayman National Trust], we fully cooperated with the U.S. authorities to the extent possible, including approaching the authorities before they approached us.”
The admitted conduct of Cayman National Securities and Cayman National Trust “is generally a historic issue,” Mr. Dack said.
“We deeply regret that the conduct occurred, and the conduct does not continue today. We have policies, procedures, and staff now to ensure that this conduct, which assisted U.S. taxpayers in evading their own tax obligations, does not occur again.”
Sham trusts and companies
Federal prosecutors said Cayman National Trust and Cayman National Securities helped U.S. taxpayers evade income tax bills during a period of “at least” 10 years between 2001 and 2011.
The companies continued to do so, prosecutors alleged, even though they learned in 2008 that Switzerland-based bank UBS AG was being investigated for the same course of conduct.
The scheme essentially consisted of Cayman National’s companies opening undeclared accounts in the name of sham Cayman Islands businesses and trusts which were created to hide the identities of the accounts’ true beneficial owners, prosecutors said. The bogus companies were treated as the account-holders by the companies, allowing the real beneficial owners to trade in U.S. securities without paying taxes on any profits they might make.
Cayman National Securities admitted to doing this while failing to disclose the identities of the beneficial owners of those accounts, which it was required to do under formal legal agreements with the U.S. Internal Revenue Service.
“[Cayman National Securities and Cayman National Trust Co.] agreed to maintain these structures for U.S. taxpayer-clients after many of them expressed concern that their accounts would be detected by the IRS,” information from the U.S. federal charges reveals.
The plea agreement suggests that the Cayman National Securities board of directors was informed in March 2001 about IRS reporting requirements, but that the company’s president told the board “most U.S. persons were unwilling to complete the [tax reporting form, known as a W-9].”
By mid-2011, new management had been appointed at Cayman National Trust Co. and a full review of the trust company’s files was completed.
“Not a single file was found to be complete and without tax or other issues,” prosecutors reported. “[Cayman National Trust’s] files contained little, if any, evidence of tax compliance.”
At its peak in 2009, Cayman National Securities and Cayman National Trust had approximately $137 million in assets under management relating to undeclared accounts held by U.S. clients.
“At least half of those assets … were undeclared,” according to the plea agreement.
The total amount of assets held by Cayman National Corp. companies during the period totaled between US$700 million and US$900 million, according to the U.S. plea agreement.
Between 2001 and 2011, prosecutors said, the two Cayman companies earned US$3.4 million in “gross revenues” from the undeclared U.S. accounts they managed.
Files turned over
The two Cayman companies have already made substantial efforts to cooperate with the U.S. federal investigation, prosecutors acknowledged.
The companies have facilitated interviews of company employees regarding the U.S. taxpayer accounts and voluntarily produced financial records prior to Wednesday’s plea agreement. Unredacted client files were provided for about 20 percent of the U.S. account holders by the companies, as is required by the IRS treaty.
Up to 95 percent of the unredacted client files are expected to be provided to the IRS by the end of the Cayman investigation, prosecutors said. Approximately 20 percent of clients’ files have already been made available under treaty requests, according to the plea agreements.
Cayman’s political leadership acknowledged Thursday that it had been aware of the Cayman National issues for some time. Premier Alden McLaughlin stressed that the current position of the Progressives-led administration is one of “zero tolerance” for tax evasion and tax fraud.
“Government is very concerned about the reputational issue this has created … despite our best efforts,” Mr. McLaughlin said. “It’s most unfortunate.”
Former Cayman Islands Monetary Authority Chairman Tim Ridley called the situation a “most unfortunate turn of events.”
“It is some small comfort to learn that the issues have been settled with the U.S. authorities, but the shareholders and board of Cayman National Corporation should ask themselves how and why senior management allowed these clearly unacceptable businesses practices to go on for so long,” Mr. Ridley said.
Compass reporter Michael Klein contributed reporting.