Fifty shades of deterrence: Gray area of dissuasion for assisting tax evaders

For individual taxpayers engaged in offshore tax evasion, the U.S. government has issued a clarion call of deterrence best summarized in the song made famous by the 1960s R&B group Martha and the Vandellas:  

“Nowhere to run to; nowhere to hide.”   

For example, last year investment adviser Eric St-Cyr and attorney Patrick Poulin, both Caribbean-based professionals, were sentenced for using offshore accounts and entities for purposes of money laundering and tax evasion. In response to the 14-month prison sentence, IRS Criminal Investigation Chief Richard Weber cautioned those who seek to use offshore entities to evade tax: “We will find you.”  

So far, the results of the U.S. Department of Justice Tax Division’s (DOJ Tax) Offshore Compliance Initiative seem to support Chief Weber’s warning as it applies to individual tax evaders and account holders.    

Jury still out for bankers, advisers  

Yet, the jury is still out – literally – for most bankers, attorneys, and advisers charged with assisting U.S. offshore tax evaders. It appears too early to tell if the same warning is as applicable to the bankers, attorneys, and financial/tax advisers charged with facilitating offshore tax evasion.  

The DOJ Tax statistics show that of the 60 individual account holders charged with offshore tax evasion between 2008 and 2013, 51 taxpayers were convicted or pleaded guilty. That’s an admittedly impressive 85 percent success rate for DOJ Tax, especially since some cases are still pending.  

On the other hand, of the 38 professionals charged with some form of illegally assisting with individual offshore tax evasion, DOJ Tax secured only two convictions and seven guilty pleas by the end of 2014.  

That’s a slightly less impressive success rate of just over 23 percent. For the remaining almost 77 percent of the cases against bankers, attorneys, and advisers, two were acquitted, another two pleaded not guilty and are awaiting trial, and three are on the lam as fugitives.  

What’s most interesting is that in 22 of the 38 cases (almost 58 percent), the accused have not yet responded in court. This makes the success of DOJ Tax’s Offshore Compliance Initiative “too soon to call” when it comes to cases against those who allegedly make it possible for taxpayers to evade at least $100 billion annually in U.S. taxes, according to a 2008 Senate report.    

Top litigation priority  

The initiative to combat the quite serious problem of noncompliance with U.S. tax laws by using secret offshore accounts has been one of the top litigation priorities for DOJ Tax. DOJ Tax has worked closely with the IRS and U.S. Attorneys’ offices since the 2008 investigation of Switzerland’s largest bank, UBS AG, for conspiring to defraud the United States by impeding the IRS’s investigations, audits and collection attempts by providing banking services to clients with undeclared accounts.  

The UBS deferred prosecution agreement included the bank agreeing to turn over information for thousands of U.S. taxpayers maintaining secret Swiss bank accounts. This became the catalyst for the IRS’s Offshore Voluntary Disclosure Initiative, which succeeded in encouraging more than 38,000 taxpayers to voluntarily come forward and disclose their foreign bank account information without solid assurances of immunity from criminal prosecution or civil penalties.  

These events were also the impetus for U.S. congressional action that led to passing the Foreign Account Tax Compliance Act (FATCA), a federal law that requires all U.S. persons, including those who live outside the United States, to report their financial accounts held outside of the United States to the IRS. Additionally, FATCA requires foreign financial institutions to report information on their U.S. clients to the IRS. 

DOJ Tax has pressed hard to expand its investigations into offshore banks in other countries besides Switzerland, including India, Israel and the Caribbean region. In 2013, a U.S. court allowed the IRS to issue a “John Doe” summons to Wells Fargo bank seeking any information about any U.S. taxpayers holding undeclared accounts with the Barbados-based CIBC FirstCaribbean International Bank. Since FCIB has branches throughout the Caribbean, this might be an indication of DOJ Tax’s strategy to infiltrate countries by issuing summonses related to banks with a hefty presence in a particular region.  

DOJ Tax readily admits that the division is committed to using every tool at its disposal to identify, investigate, and prosecute tax evaders and those who assist them. One example is the use of subpoenas for foreign financial records, which courts have upheld even over Fifth Amendment Constitutional objections since Title 31 of the United States Code requires that such financial records be maintained.   

Gray area for those who assist tax evaders  

While it is clear that offshore tax evaders are running out of places to hide, it is less clear whether the bankers, attorneys, and advisers who assist in the tax evasion of others have as much to worry about as the tax evaders themselves. As Table 1 shows, bankers seem to be the most targeted group, while financial and tax advisers (including tax preparers) are a solid second, and attorneys a distant third. However, it is difficult to tell exactly what story the data tell. 

For example, bankers lead the pack in guilty pleas with a total of six, compared to only one by lawyers and none by advisers. Yet, the only two trial convictions were of advisers, who many consider “fringe tax preparers” as compared to the more traditional roles of lawyers, bankers and financial advisers.  

In fact, the two acquittals in the DOJ Tax cases were those of bankers. With 24 cases still awaiting either trial or a response to charges, there is scant evidence at this stage in the game as to what will come; certainly not enough to tell if alleged “bagmen” will end up paying the same price as the tax evaders themselves. 

This uncertainty as to whether justice is done to the enablers as well as the offenders leaves a certain “gray area” in the U.S. government’s enforcement efforts, and not merely by way of tallying up the conviction scorecard of DOJ Tax.  

For the Department of Justice and the IRS, tax enforcement is always first and foremost about encouraging voluntary compliance with the tax laws. Certainly wrongs should be righted and taxes properly returned to the fisc, but these are consequences ancillary to the primary objective of promoting voluntary compliance partially through deterrence. Assuming that convictions deter future illegal action, there is a lot at stake for the U.S. government with the yet undetermined results of the 24 financial professionals accused of facilitating tax evasion.  

Additionally, the “gray area” is compounded by what some say is anything but a deterrent to the illegal aiding of offshore tax evasion. Sometimes, the “bad guy” is convicted and still walks away with millions of U.S. taxpayer dollars…legitimately. Case in point: that of Bradley Birkenfeld. He was a UBS banker who helped wealthy Americans evade millions in U.S. taxes.  

Although he entered a guilty plea for his crimes and was sentenced to 40 months in prison, Birkenfeld ultimately walked away with an IRS whistleblower award of $104 million for approaching DOJ Tax about the evasion scheme at UBS. For some, over three years in prison might be worth a hundred million dollars, leaving some to wonder if this award undermines the deterrence effects of convictions.  

Although Birkenfeld’s situation is admittedly unique, it is one more smudge in the “gray area” of deterrence when it comes to tax evasion enablers. 

The government’s message is clear for offshore account holders who evade U.S. taxes, but the message is less clear for those who assist in the creation and planning of offshore accounts for the purposes of tax evasion. In many ways, the approach taken by the IRS and DOJ Tax appears backward. One would imagine that the best way to put an end to an illegal activity is to cut off an offender’s access to that illegal activity.  

The U.S. Drug Enforcement Agency (DEA) seems to understand this clearly by focusing their efforts and resources on suppliers of drugs at the higher levels. While they do not forego arrests of end users, that group is certainly not the DEA’s prime focus. In some cases, the DEA even offers immunity or rewards for “ratting out” the user’s supplier. This is because the DEA recognizes that closing down just one drug pipeline at a higher level stops the supply of drugs to hundreds of end users.  


Reducing ‘supply’  

It is similar with abusive offshore accounts. By putting more resources into stopping the “dealers” of offshore accounts, the government makes it harder for individual taxpayers to get and use offshore accounts for the purpose of tax evasion.  

This result stems from the reduced “supply” of the illegal product, as well as the reduction in bankers, attorneys, and advisers willing to risk entering into the market because of the government’s focus on prosecuting them. While the U.S. government is certainly coming after suppliers of abusive accounts, its focus seems to be more on the account holders themselves (the end users) than those who make having such accounts possible (the dealers). 

This approach of shaking a stick at account holders without promise of immunity or reward, while seemingly taking a less ardent approach with bankers, attorneys and advisers, could send the wrong message.  

Along with policies that actually pay some illegal advisers millions of taxpayer dollars in whistleblower awards, this tactic might create a “gray area” of deterrence where advisers are less deterred from being in the account creation business than the government would hope.  

It will be interesting to see the final dispositions of the remaining cases against bankers, lawyers and advisers. Only time will tell if the desired net deterrence effect emerges as a consequence of DOJ Tax’s prosecution tactic. 


Jack Manhire is a faculty member at the Treasury Executive Institute in Washington, DC, which is part of the U.S. Department of the Treasury. He is a former chief of Legal Analysis at the IRS Office of Professional Responsibility.  


Jack Manhire