Due Diligence

by Brian Mahany

We have all heard this story line before but it bears repeating. The Department of Justice is more than willing to cut deals with Swiss bankers in return for information about Americans with unreported foreign accounts. This week Christos Bagios, a former banker with UBS and Credit Suisse, was sentenced on a felony charge to just 37 days in jail.  Coincidentally, he had served 37 days prior to his plea – in other words, he received a “time served” sentence.

Why such a short sentence? That’s the story behind the story.

Bagios is a Greek citizen and resident of Switzerland. While working for UBS, IRS investigators believe he helped over a 100 Americans hide almost $500 million dollars in offshore accounts. Bagios was ultimately arrested while in New York and charged with conspiracy to defraud the United States, a felony.

The New York Times reports that the judge gave him a time served sentence and acknowledged his “substantial assistance” to the government. We obtained the plea agreement from the federal court in Florida. Prosecutors recommended a low sentence because “The defendant has provided substantial assistance regarding his former colleagues and customers at UBS.” It doesn’t take a genius to figure out what that means.

The Department of Justice has been extremely effective in ferreting out unreported offshore accounts. By targeting bankers for criminal prosecution, the government is almost always able to coax a plea from the guilty bankers in return for information about their clients and colleagues.

Why their colleagues? Because they become the next round of arrests. The tactic has been so effective that some lawyers are telling their bankers not to travel outside Switzerland. Although the Swiss are still trying to cling to some semblance of their once legendary bank secrecy laws, other countries will honor arrest warrants from the United States and arrest the bankers.

If faced with a potentially lengthy prison sentence, most bankers will quickly roll on their customers. With a relatively long statute of limitations, the government can pursue taxpayers even if they quickly moved their money at the first sign of trouble.

People with unreported accounts fall into two broad categories. There are many folks that still haven’t learned that offshore accounts must be reported annually on a Report of Foreign Bank and Financial Accounts or FBAR form. Failure to file an FBAR can be a felony in certain circumstances and almost always subjects the account holder to harsh penalties. If the government believes the failure to report was willful, the penalties are the greater of $100,000 per year or 50% of the high account balance per account and per each year the account was unreported.

Those who don’t know about the foreign reporting requirements are often Americans who retired overseas, dual nationals and those born outside the United States. We have represented many physicians, engineers and other professionals who work here but send money home to India, Lebanon, China and other countries.

The smaller group of non filers represent those who are truly trying to evade taxes. Unfortunately, the government’s drag net often does not differentiate between the two.

There is presently several programs available for those with unreported accounts. The primary program is the IRS’ Offshore Voluntary Disclosure Program or “OVDI.” The advantage of OVDI is the ability to avoid an audit and criminal prosecution. Penalties are greatly reduced as well. For those living overseas or with smaller accounts, other IRS amnesty programs may offer a better deal. And for some, a traditional voluntary disclosure may help you avoid all penalties.

The rules are quite complex. If you have an unreported account including offshore bank, brokerage, hedge fund or even some insurance products with an investment component, seek competent legal counsel. Make sure you do so quickly because amnesty is not an option if the IRS finds you first or if your name is disclosed through a cooperating bank or banker.

The tax lawyers at Mahany & Ertl have helped many taxpayers with a wide variety of offshore reporting requirements. We also represent offshore hedge funds, banks and those under criminal investigation. The earlier you speak to us, the more help we can provide. All inquiries are protected by the attorney – client privilege and kept in strict confidence. There is never a charge for the initial consultation.

For more information, contact attorney Bethany Kroes at bckroes@mahanyertl.com or by telephone at (414) 223-0464.

Mahany & Ertl – America’s Tax Lawyers. Offices in Milwaukee, Wisconsin; Detroit, Michigan; Portland, Maine; Minneapolis, Minnesota and coming soon, San Francisco, California. Services available worldwide.