Butterfield Bank agreed to forfeit almost US$4.9 million in a non-prosecution agreement with the United States Department of Justice, after admitting it helped US taxpayers evade paying taxes via its Cayman Islands and Bermuda banks.

According to the agreed summary of facts in the case, published today by Offshore Alert, between at least 1 Jan. 2001 and 31 Dec. 2013, the Bermuda-headquartered Bank of N.T. Butterfield & Son Limited committed “criminal conduct” by assisting a number of American taxpayer-clients to evade paying US taxes. During that period, the bank’s Bermuda and Cayman operations had approximately 300 non-compliant US-related accounts at any one time, the summary of facts stated.

Butterfield received about US$4,896,000 in gross fees from US taxpayers with undeclared accounts, the Department of Justice noted. As well as forfeiting that amount, Butterfield has also agreed to make a restitution payment of US$704,000, which represents the approximate unpaid pecuniary loss to the US as a result of the bank’s conduct.

No criminal prosecution

Under this agreement, which has a three-year term, the Office of the United States Attorney for the Southern District of New York and the Department of Justice Tax Division will not criminally prosecute Butterfield for its participation in a conspiracy to defraud the Internal Revenue Service, to file false federal income tax returns, and to evade federal income taxes in connection with services that it provided to US taxpayers during the relevant period.

In a statement issued today, Butterfield’s chairman and CEO Michael Collins, said, “We are pleased to resolve this matter which dates back to late 2013. Since that time, we have enhanced our compliance controls for business with US clients and the total payment has been provisioned. Moving forward, we remain focused on delivering for our clients and our stakeholders.”

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Butterfield said the financial payments, which total US$5.6 million in forfeiture and tax restitution, were in line with the existing provision included in Butterfield’s financial statements in 2015 and 2016.

In the non-prosecution agreement signed by Butterfield, the US Department of Justice stated that it had entered into the agreement because of the bank’s “extraordinary cooperation with this Office and the Tax Division”, which had led to the production of 386 unredacted account files relating to the US taxpayer-clients, who held undeclared accounts overseas with the assistance of Butterfield.

The summary of facts note that the clients, including one or more from the Southern District of New York, used US mail, private or commercial interstate carriers, or interstate wire communications to submit federal income tax returns to the IRS “that were materially false and fraudulent, in that these returns failed to disclose the existence of such taxpayers’ undeclared accounts at the Bank or the income earned in such accounts”.

The document noted that Butterfield maintained undeclared accounts for certain US taxpayer-clients that were held by sham entities, or “structures”. It stated, “These structures, which had no legitimate business purpose, served as the nominal account holders of accounts that, in reality, belonged to the U.S. taxpayer-clients. Butterfield maintained such U.S. taxpayer-clients’ accounts in this fashion even when Bank personnel knew, or should have known, that the structures were being used by U.S. taxpayers to conceal the identities of the true beneficial owners of the accounts held by these entities.” The Department of Justice stated that bank personnel had ignored “obvious red flags” relating to the accounts in questions.

Employee failures

It pointed out that, despite a long-standing practice of requiring clients setting up or holding a local bank account to prove a local connection to Cayman or Bermuda, bank employees failed to strictly enforce that practice.

Some of those instances were outlined in the summary of facts.

One included a US customer of Butterfield in Cayman who had engineered a series of sham contracts in order to funnel money between that client’s US and Cayman bank accounts. The summary of facts noted that the client’s relationship manager at the bank “knew or should have known that these transactions were illegitimate but nonetheless assisted [the client] in carrying out these transactions”. In April 2016, that client pleaded guilty to tax-related offences in connection with the accounts held at the Cayman bank.

In another instance, in 2002, two US business partners set up an account at Butterfield in Cayman, stating they wanted to have funds available when visiting the islands on holiday. Subsequent transfers from those clients were flagged by the bank, because they were much higher than needed for vacation-spending money. But, rather than investigate or close the accounts, bank employees accepted “false and inconsistent explanations” from the clients, including that the funds were intended for a real estate purchase.

In another case in 2002, a physician, who had a relationship with the bank dating back to the 1990s, was allowed to open a new account in the Cayman Islands to hold his savings from his salary, despite having no connection with Cayman and no particular reason for banking in the jurisdiction.

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