Whistleblower Rewards for Information about Banks Peddling Phony Tax Shelters
[Post updated and rewritten January 2021] Back in 2014 we announced that the IRS and Justice Department had filed a civil suit against Deutsche Bank seeking to collect $190 million in taxes. The government accused the German bank of using shell companies in a complex abusive tax shelter scheme. The lawsuit comes on the heels of $554 million criminal penalty paid by the bank in 2010. That case accused the bank of helping individual customers commit evade taxes through the use of abusive tax shelters.
According to the complaint, Deutsche Bank “acquired a corporation in the fall of 1999 that held stock with a very low cost-basis, such that the sale of this stock would trigger more than $100 million in taxable gain as a result of the appreciation in value of the stock.” To avoid paying tax on the stock’s built in gain, the bank made arrangements with a firm that created three shell companies that served no purpose other than to be stuck with a huge IRS bill it had no ability to pay.
The complaint said that the bank and the 3 shell companies executed a complex series of pre-planned transactions. First, the bank sold the corporation holding the appreciated stock to a shell company for a price that did not represent fair market value. The shell company then “paid” for the stock using a short-term loan conditioned on the completion of the pre-planned transaction. Immediately after purchasing the stock, the shell company then sold the stock back to the bank. The sale triggered the tax liability on the gains in the stock value. The shell company would pay off the loan but have no cash to pay the taxes. The bank was able to profit by selling the stock with the stepped up basis without having to pay taxes.
The IRS has been very aggressive in pursuing transactions that have no economic substance and are only designed to avoid taxes. The use of nominee or shell companies in transactions that are not arms length also attracts increased scrutiny. If the allegations of the complaint are accurate, the bank has a tough road ahead.
The government claims that the scheme helped the bank evade $190 million in taxes, interest and penalties.
In announcing the lawsuit, U.S. Attorney Preet Bharara said: “Through fraudulent conveyances involving shell companies, Deutsche Bank tried to make its potential tax liabilities disappear. This was nothing more than a shell game.”
The bank claimed that the IRS abandoned these claims in 2009 and announced they were “vigorously defending” against the charges. Fast forward to 2017 when the bank agreed to pay an additional $95 million to settle the claims. The settlement required Deutsche Bank to admit and accept responsibility for its actions.
A former Deutsche Bank broker was also sentenced to 42 months in prison for his role in the scheme.
Abusive tax shelters and tax evasion often go hand in hand. Unfortunately, schemes like this are often marketed by promoters who sell these schemes to unsuspecting taxpayers. Even if there is no criminal prosecution, the IRS civil penalties for having an abusive tax shelter are huge.
Whistleblower Rewards for Banking Misconduct
The traditional whistleblower reward program for banking misconduct is FIRREA (Financial Institutions Reform Recovery and Enforcement Act). Passed after the savings and loan crisis left several banks without enough assets to pay depositors, Congress and the FDIC passed a comprehensive reform package to reform banking practices. Several years later Congress passed a second law that allows whistleblowers to receive up to $1.6 million for reporting bank fraud.
Rewards can be based on wrongdoing of the bank itself, bank officers or third parties whose actions jeopardize the financial health of the bank. Until the Trump administration, the law became the favored method of prosecuting bank misconduct. We like FIRREA because it pays rewards to whistleblowers willing to stick their necks out in an effort to fight fraud and corruption.
Early reports are that the new Attorney General is a proponent of FIRREA.
FIRREA isn’t the only reward program available to whistleblowers. The Deutsche Bank case involved phony tax shelters, something within the domain of the IRS. For over 100 years the IRS has been paying out rewards and continues to do so now and at a record pace.
The IRS whistleblower program pays rewards of up to 30% of whatever monies are collected from the wrongdoer. And unlike FIRREA, there is no cap. UBS whistleblower Bradley Birkenfeld received a record breaking $104 million reward from the IRS.
In 2021 Congress overrode a presidential veto and passed a brand new Anti Money Laundering AML whistleblower rewards program. (The president’s veto was not related to the whistleblower reward provisions of the law.)
Deutsche Bank Continues to Break the Law
Often a big bank pays a multi-million or billion fine we hear from other whistleblowers within the organization. Simply because a bank gets caught and prosecuted doesn’t mean the feds know everything that is going on. The prime examples are Bank of America and Wells Fargo. Don’t think that Deutsche Bank has become an angel, however.
In 2019, Deutsche Bank paid a $16 million fine for violating the Foreign Corrupt Practices Act (FCPA) by hiring relatives of foreign government officials in order to improperly influence them in connection with investment banking business. Under the SEC whistleblower program, the government can also pay 30% whistleblower rewards.
The SEC doesn’t name whistleblowers so we don’t know if the case was initiated by a whistleblower but most foreign bribery cases are. Once again, if you have information about misconduct by a bank, you may be eligible for a large cash reward.
Did Deutsche Bank learn its lesson? Apparently not. Last week the bank agreed to pay $120 million to settle claims brought by both the Department of Justice and the SEC. $43 million of the settlement was allocated to the SEC meaning someone may be receiving a $12,900,000 reward. The SEC claimed that the bank paid $7 million in bribes and then classified the bribes as legitimate business expenses on their books and records.
Still not enough? The CFTC fined the German banking giant $30 million for allegedly manipulating the precious metals market. We say allegedly because the bank settled without admitting liability. And yes, the CFTC also has a whistleblower reward program.
The bottom line? When banks break the law, whistleblowers are the eyes and ears of regulators. Especially when the misconduct occurs overseas, it is often insiders who first spot the misconduct. Unlike most every other nation, the United States offers cash whistleblower rewards as an incentive to get whistleblowers to step forward.
When a bank is involved in the misconduct, whistleblower rewards may be available under a wide variety of programs including FIRREA, IRS Whistleblower Program, the CFTC Whistleblower Program, the SEC Whistleblower Program and the new AML whistleblower law.
Are You a Banker or Third Party with Information about Bank Fraud?
The whistleblower lawyers at Mahany Law help whistleblowers fight fraud and corruption and obtain the maximum rewards allowed by law. We can also help protect you against illegal retaliation. To learn more, visit our IRS, FIRREA FCPA and SEC whistleblower reward information pages.
Ready to see if you are entitled to a reward? Contact us online, by email or by phone 202.800.9791. Whistleblower cases accepted worldwide. All inquiries are protected by the attorney – client privilege and kept strictly confidential.
Mahany Law – America’s Bank Fraud and AML Whistleblower Lawyers