What is Offshore Banking?

Are you considering placing an investment in an offshore tax haven? While you can protect your wealth, there is a lot of bad press around the practice—so what do you need to know?

An offshore account is a financial product offered in regions around the world. Banks and investment institutions offer accounts in their countries of origin and also in jurisdictions around the globe that are known for their low tax rate and regulatory ease. It is a legal and respectable practice if set up appropriately.

The term “offshore tax haven” refers to a location, jurisdiction, territory, or country where minimal taxes are charged on the investment. In the past, tax havens usually did not share a lot of information with governmental agencies with the aim of reducing tax liabilities in the home country of the investor.

As offshore banking has matured, some tax jurisdictions dropped their tax rates even lower, kept few records, and did no reporting. These secrecy jurisdictions have been outed as prime locations for tax evasion. As more wealth flows around the globe and drains into secrecy jurisdictions, tax fraud has become rampant, leaving countries with minimal tax coffers struggling to stabilize and serve their populations.

Another method used by Big Business has been relocating headquarters and opening foreign bank accounts in offshore tax havens to reduce or eliminate their tax burden. Good examples include Amazon’s European headquarters in Luxembourg and Apple’s headquarters in Ireland. Amazon did huge business in the EU in 2020 and paid zero corporate taxes.

Interest in offshore tax havens remains high for good reasons. Tax shelters work well in strategic plans aiming to place wealth in a protective entity in a location with a low tax rate. You may be able to avoid capital gains tax by placing wealth in a tax haven.

Your offshore options depend upon your investment aims. Offshore tax havens are not a one-size-fits-all solution—but require consideration attuned to your financial profile and current tax laws.

Reasons to Consider Offshore Banking Opportunities

Secret offshore tax havens get a lot of bad press. The Panama Papers and the Paradise Papers are investigative journalism projects based on high-level leaks of sensitive information about where the world’s elite stash their cash when they want to avoid taxes and unwanted publicity. Negative publicity about wealth held in secrecy jurisdictions to avoid taxes has ruined careers, triggered criminal tax charges, and generally exposed high-wealth individuals and companies who skirt regulations to earn or hide unreported income.

Despite the unfavorable media attention, it is important to know there are some very good reasons to place your wealth in legitimate offshore tax jurisdictions and foreign bank accounts. A destabilized economy in any country is a good reason to diversify your wealth in one or several safe harbors. Here are some reasons to consider an offshore account:

1. Asset protection: An offshore company or trust may be structured to legitimately protect the wealth of an owner from exposure to legal or tax actions.
2. Growth of wealth: Placing value in accounts that earn substantial interest is a good way to profit from your existing wealth.
3. Protection from instability: Fluctuating currencies, governmental action, and civil volatility are rife in the world today. An offshore account, depending on its location, can offer the stability that is not easily found in a home country.
4. Diversity: Wealth in various places, tools, and properties can improve tax opportunities and hedge against volatility in any one investment sphere.
5. Privacy: Structured trusts and companies offer privacy to well-known individuals who would prefer their financial dealings to remain private.

A foreign bank account or offshore company could be a smart addition to your wealth management portfolio, as long as you maintain compliance with U.S. tax regulations such as FBAR, FATCA, and other tax reports.

The Pros and Cons of Offshore Tax Havens

Offshore financial centers offer options to people and governments interested in protecting and growing their wealth. Some promote tax fraud, while others do not.

Tax havens can be found all over the world. Some are offshore, like the Cayman Islands, the British Virgin Islands, or Hong Kong. Countries like Switzerland, the Netherlands, and Luxembourg are also tax havens. A couple of very popular tax havens are stateside—in Delaware and Wyoming.

A tax haven, whether island, country, or state, can be developed in order to promote domestic and foreign investment and nurture long-term commercial growth. These tax havens may offer a lower tax rate to local and multinational corporations in order to attract their business. The tax rate offered may be regionally lower—but still competitive. The aim is to boost financial stability and improve economic security in the long term. This type of tax haven attracts and then generates economic activity.

Other tax havens, or secrecy jurisdictions, offer a very low tax rate or dispense with tax altogether. This type of non-competitive tax haven pulls clients and businesses from surrounding countries that have higher tax rates and greater compliance requirements.

Celebrities, large companies, and the wealthy are attracted to secrecy jurisdictions. In these settings, financiers set up shell companies that do no business other than to quietly and anonymously hold the assets and wealth of those wishing to hide their wealth. Investors pay little to no tax. Money moved between shell companies washes around the globe to lose association with its original source—which could be drug trafficking, criminal enterprise, or money stolen from governmental coffers.

Having a shell company is not illegal—unless the assets that it holds are. Shell companies are frequently named owners of expensive real estate, homes, yachts, or airplanes.

Problems arise when companies, countries, or individuals use shell companies to launder money or avoid taxes otherwise due in surrounding or distant countries. American big business is notorious for incorporating into low-cost European tax havens like Ireland and Luxembourg. While companies can claim they pay taxes, they are not paying taxes where they are legitimately owed.

Switzerland is well-known for its “secret” foreign bank accounts. For years, wealthy Americans avoided paying taxes on their wealth through numbered Swiss accounts. A strong push by the U.S. Treasury partly changed this longtime practice by requiring foreign banking institutions to annually file a Foreign Account Tax Compliance Act (FATCA) report on all accounts owned or held by American taxpayers. Similarly, American taxpayers with qualifying holdings in foreign banks must file a report of a Foreign Bank and Financial Account (FBAR).

The IRS compares these reports and levies significant fines and penalties on foreign institutions and U.S. taxpayers that fail to report their assets accordingly.

With greater compliance efforts, investigative journalism, and more buy-in from global tax agencies, the scope of illegal tax havens and their practices is becoming better known. Depending on your goals, there is a tax haven out there for you—be sure to speak with an experienced tax attorney to make sure you understand the big picture. 

The Global Economic Problem with Offshore Tax Havens

Generally, offshore tax havens project the allure of anonymity, exotic locales, and money—lots and lots of money. The real-time picture is different and draws its lines between those seeking a solid investment process and economy-trashing tax evasion.

As we said earlier, the purest view of offshore investment is one that provides legal tax advantages that legitimately cannot be obtained on home soil. Companies that locate headquarters in the region of a tax haven can oftentimes dramatically reduce their tax liability. Wealthy individuals, families, and foundations with a desire for privacy, wealth protection, and asset growth are great candidates for a tax haven strategy. The same goes for any company, startup, or individual looking to expand their interests and do so in a fairly anonymous way.

Overall, a solid tax haven provides security for funds (that may otherwise be unstable in a home jurisdiction), ownership privacy, and little to no taxation.

The opaque nature of tax havens and the use of foreign bank accounts is a draw for those seeking a discreet place to park funds for the short or long term. Yet, that opacity leads to disturbing practices by which the offshore world is more predominantly known today.

The most popular tax havens got that way through the competition with other jurisdictions to provide the best service and lowest taxes to multinational companies and basically any entity with wealth. As a tax haven, countries without a more remarkable means of support can become a magnet for international investment and financial and business exchange. Tax havens are often a win for investors and the community that grows up around servicing those investments.

But the opacity of those regional jurisdictions also muddies the view, giving a darker and well-earned reputation that tax havens carry today. 

Tax havens are an important playing piece in the global game of tax evasion. According to a 2019 report from the International Monetary Fund (IMF), tax havens defer between $500 and $600 billion from legitimate governmental coffers. The loss of tax revenue starves economies of money needed to serve citizens and grow and maintain stable infrastructure. Taxpayers, legitimate tax-paying businesses, and economies around the world are suffering increased damage from this long-term practice. As well, tax havens, shell companies, and tax evasion are commonly used by terror organizations to fund operations around the world.

For existing tax havens, like Ireland and some states in the U.S., reducing tax rates attracts business—but at a cost to neighboring regions and other countries. According to the Tax Justice Network, the top ten secrecy jurisdictions involved in tax evasion in the world include the British Virgin Islands, the Cayman Islands, Bermuda, the Netherlands, Switzerland, Hong Kong, Jersey, Singapore, and the United Arab Emirates.

In 2021, 131 countries signed on to an initiative that disrupts the way large multinational companies are taxed. Multinationals typically take advantage of countries with ultra-low tax rates to minimize or eliminate taxes owed in countries where they do business. The new initiative included a measure to impose a global minimum tax on untaxed foreign income. 

Tax havens have quickly risen as a global economic problem. Interested investors are wise to speak with an experienced tax attorney to understand compliance and other issues around offshore banking.

The Potential Pitfalls of a Foreign Bank Account

Whether you live abroad or stateside, there are advantages and disadvantages to using foreign bank accounts. Offshore accounts have advantages, including privacy, stability if your home economy is prone to destabilization, and access to funds while living abroad. While it sounds good, it is important to consider some of the complicating factors of foreign accounts.

Let’s walk through a few:

• Compliance: The IRS is interested in your money, wherever it is. You are responsible for taxes on income earned anywhere in the world. In order to track your assets and income, the U.S. enforces stringent compliance requirements on foreign bank accounts and the institutions that hold them. Enhanced compliance can make both you and your foreign bank nervous. In recent years, the long arm of the IRS has frequently reached abroad to levy penalties against institutions that do not comply with its reporting requirements.
• Reporting: Offshore financial compliance takes the form of detailed reports. Some of the reports you may need to file include the Report of Foreign Bank and Financial Accounts (FBAR) (Form FinCen 114), the Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gift (Form 3520), and the Annual Information Return of Foreign Trust with a U.S. Owner (Form 3520-A).
• Penalties for non-compliance: The compliance requirements around foreign accounts are intended to defer tax fraud and tax evasion. Given the length of time reporting requirements have been in place, the IRS is not likely to consider lack of knowledge as a reason for failure to file annually the due reports. The distinction between a willful and non-willful mistake is critical. Penalties for non-willful errors are less severe and less likely to proceed toward an IRS criminal tax investigation.

For non-willful penalties involving missing FBAR reports, the maximum penalty is $12,921 per violation. For willful violation of compliance rules around FBAR reporting, the penalty is 50 percent of the amount in the delinquent account or $129,210—whichever is greater. Despite the compliance hoops, a foreign bank account could help you with the service and wealth protection you are looking for.

Opening a Foreign Bank Account—How Does That Happen?

For a number of reasons, you may be interested in opening a foreign financial account. Stateside, it is pretty easy to open a bank account but offshore, it pays to know a little bit about the system.

We talked earlier about some of the potential issues involved with opening a foreign account. Overall, much of the difficulty around offshore accounts has to do with compliance—reports that must be filed with the IRS and fines that will be paid if they are not.

As you think about opening an account, remember those same issues pop up on the service side. Many foreign financial institutions no longer spend big marketing dollars trying to attract U.S. business because of the compliance system needed to service the account. With that in mind, consider these points about opening a foreign financial account:

• You do not have to have high wealth to open an offshore account. If you travel frequently, spend part of the year in another country, or find it worthwhile to protect and grow your assets in an offshore tax jurisdiction, it is perfectly legal to open an account abroad. When planning to open an offshore account, take the time to understand how you will open the account. You may need to visit or contact a special bank branch or unit for U.S. persons. You may need to make an appointment with a particular representative who is familiar with the process.
• As with any bank account, you will need to have your personal documents available. These include your passport, driver's license, and documents that prove your residency. While you may be able to use notarized copies of your documents, certification with an apostille stamp may be required as well. To discourage tax fraud, other papers may be needed.

• Because of stringent compliance issues, you may be asked about the nature of the business you intend to transact with your account and the source of the monies you intend to deposit. Before you protest, remember those compliance measures are directly aimed at deterring money laundering. Investigate exactly what is needed by the banking entity with which you would like to do business.
• When researching a bank to hold your funds, learn about fees and requirements for U.S. citizens. American citizens may have to pay a fee to open the account, higher service fees, and higher deposit requirements. With a larger institution, you may qualify to open the account stateside while having access to your account with an online app. If you are already residing abroad, you may be able to open an account using your current residence and foreign identity card. You may also be able to open an Expat account online, which gives you flexibility and access to your money while living abroad.

Banking abroad is a great option for some people. If you are living abroad or planning on it, remember that you will need to report all of your income earned—regardless of your location—to the IRS each year.

Be Aware of the IRS International Tax and Financial Crimes Group

IRS: CI has a unit that responds to specialized areas of tax crime. The International Tax and Financial Crime (ITFC) group focuses on fraudulent activity involving offshore tax holdings, financial institutions, and foreign bank accounts.

The IRS formed the ITFC in 2017. As part of the field office in Washington, DC, the unit is composed of special agents from across the country with expertise in international tax intrigue and tax evasion. Among others, the types of projects in which these agents engage include:

• Reducing tax evasion through the pursuit of foreign financial institutions (FFIs): In 2010, Congress enacted the Foreign Account Tax Compliance Act (FATCA), a measure that requires foreign financial institutions to report holdings of U.S. taxpayers to the IRS. The Swiss Bank Program was initiated in 2013 through the work of the IRS and the Department of Justice (DOJ). At the time, and still today, Swiss banking interests sometimes offer services to U.S. taxpayers that help them to avoid their tax liability. Typically, the IRS enters into non-prosecution agreements in exchange for compliance with U.S. regulations. The agreement requires each institution to completely disclose cross-border transactions and provide detailed information on accounts owned by or associated with, U.S. taxpayers. The strident efforts of the IRS in this regard have tightened services provided abroad to U.S. taxpayers, due to the heightened requirements on banks to ensure all information is disclosed to the U.S. Treasury.
• Offshore tax investigations: According to the IRS, the ITFC also “works to identify and investigate enablers, financial institutions, third-party asset managers, promotors, referral agents, and expatriated U.S. citizens, who utilized international jurisdictions to effect tax fraud.” The ITFC engages in partnerships with the Department of Justice and the United States Attorney’s offices to investigate offshore tax fraud, tax evasion, and money laundering.

The ITFC also works with the Joint Chiefs of Global Tax Enforcement (G5), a joint effort between the U.S., Australia, the U.K., and the Netherlands. The group was formed to create a larger information and enforcement network to battle money laundering. Following a series of document leaks several years ago that revealed the real scope of illicit money being funneled around the world, the G5, along with the ITFC and other partnering agencies, agreed to collaborate to battle global tax crime.

Staying Compliant With Offshore Tax Investments

It begins with compliance. Compliance is important for realizing the full benefits of offshore investments. Let’s take a look at some relatively easy ways to stay on the right side of the law when considering or maintaining foreign bank accounts or holdings.

Cross-border and international investment strategies can help you save and grow your wealth. There are a number of reasons to consider offshore accounts, including preferential tax rates, privacy concerns, the desire to shelter assets in a relatively stable environment, or interest in international investments operating with a different form of currency.

It is not difficult to go astray when holding assets in a foreign country. The potential for a tax crime, evasion, and tax fraud that occurs in many offshore secrecy jurisdictions is well known. New investors may not take a hard look at compliance before setting up accounts—or—seasoned investors may just wish to look the other way.

Either way, the regulatory net around foreign investing is tighter than it used to be and it is a good idea to keep compliance in mind. Here are some quick tips:

• Report of Foreign Bank and Financial Accounts (FBAR): Annual FBAR reporting is critical to maintaining compliance with the IRS. Filing FinCen Form 114 is required for U.S. persons with a financial or signatory interest in foreign funds that exceed (in the aggregate) $10,000 at any time during the reporting year. An FBAR report is due annually on April 15, Tax Day. That said, an automatic extension is applied to allow submission of the report by October 15 without application or penalty.
• The Foreign Account Tax Compliance Act (FATCA): It is important for offshore investors to understand that their FBAR report is not the singular reporting tool reviewed by the IRS. FATCA requires foreign financial institutions to report holdings of U.S. taxpayers annually. In order to avoid a civil audit or other criminal tax investigation, U.S. taxpayers with a higher aggregate investment sum must report assets on Form 8938, for “Specified Foreign Financial Assets.”
• Additional reporting requirements: Depending upon your investment portfolio, the IRS may require the submission of additional forms. Ownership in a foreign interest (Form 5471) and receipt of a gift from a foreign trust (Form 3520) are just two special instances for further scrutiny when setting up your compliance protocol. 

Your Annual FBAR Report

Filing your Report of Foreign Bank and Financial Accounts (FBAR) is an annual requirement. Since 1970, the Bank Secrecy Act decrees that certain U.S. persons must file an FBAR report. Your FBAR report is due in April but is not bundled with your federal income tax return. While your tax return will report income earned from your foreign bank accounts, the FBAR provides identifying information on assets in which you have an interest that resides outside of the country.

If you are new to foreign holdings, you may not have filed an FBAR in the past. An FBAR is required in the following circumstances:

• A U.S. person who has signature authority, financial interest, or ownership over one or more foreign accounts may need to file an FBAR.
• An FBAR is required if the value of any one or all of your offshore tax or other accounts exceeds $10,000 at any time of the year. It is a common mistake to assume the value threshold is only considered at the conclusion of the calendar year. As well, this means if the aggregate value of three smaller accounts exceeds $10,000, an FBAR is required.
• Jointly owned foreign assets that meet the threshold requirement must be reported by each party with signature authority or ownership of financial interest.  
• In most cases, spouses are not required to file a separate FBAR.

On your FBAR, you will need to calculate and report the greatest value of monies or other assets held by foreign entities during the year in U.S. dollars. 

Filing an FBAR is an easy way to stay in compliance and help yourself steer clear of an IRS civil tax audit. Although filed at approximately the same time as an annual tax return, the FBAR is filed through the Financial Crimes Enforcement Network’s (FinCen) website.

Plus, it is a good idea to maintain compliance with FBAR reporting. Forgiveness programs once offered by the Internal Revenue Service (IRS) have lapsed. Penalties for non-filing can be wicked and break the difference between willful and non-willful filing. The current maximum penalty for non-willful (accidental) non-filing of an FBAR is $12,291 per event. For a purposeful avoidance of filing or willful non-filing, that penalty jumps to $129,210 or 50 percent of the account value, whichever is greater. Given that the requirement for FBAR reporting is well-established, proving a non-willful filing can be a difficult feat to accomplish.

What is the FATCA Report?

While both FATCA and FBAR arise due to the transfer or holding of assets abroad by U.S. taxpayers, the similarity ends there.

The Foreign Account Tax Compliance Act (FATCA): report is not the responsibility of the U.S. taxpayer, but of the foreign institution that holds the financial account. The IRS program requires financial entities in foreign countries to provide information to the IRS on accounts owned by persons with ties to the U.S. Among other factors, an association with the U.S. is triggered when funds are transferred to an American account, a U.S. resident owns, has signature authority, or power of attorney on a foreign account, or if the owner has U.S. contact information or was born in the U.S.

Both FATCA and the FBAR try to plug the leaks when money from the U.S. flows to foreign financial institutions and back without taxation. By comparing reports, the IRS can identify when there is a failure to file on either the part of the taxpayer or the foreign financial institution—potentially triggering an IRS audit, and if warranted, money penalties.

In recent years, the IRS has maintained robust enforcement against U.S. persons who do not file FBARs and institutions that fail to file FATCA reports. In either case, the penalties and settlements are high.

Not Offshore Tax Compliant? Consider IRS Streamlined Procedures

Non-compliance happens. Whether as an accidental American or a U.S. taxpayer with surprise foreign holdings, the Internal Revenue Service offers streamlined procedures to allow taxpayers to become current on filings involving foreign bank accounts—and take advantage of terms for resolving penalties and taxes owed as a result of non-compliance. Essentially, the procedures are a channel toward compliance that can avoid help avoid IRS prosecution for failure to file your FBAR.

While streamlined compliance procedures can move a taxpayer toward compliance, eligibility for the program is limited. Here are some of the main criteria:

1. Attest to non-willful tax avoidance: The IRS streamlined process applies to non-U.S. residents (accidental Americans) and U.S. residents. A prime eligibility requirement is that the applicant certifies the behavior that allowed the lapse in compliance was not willful. Before you pass that one off, carefully consider the factors that led to your failure to file your FBAR.

Perhaps you live abroad and only became aware of the requirements for U.S. tax reports on foreign holdings. It makes sense you would look for a channel to become compliant. If, however, you certify that your delinquency was non-willful, and the IRS takes a closer look into your accounts that say otherwise, you could be prosecuted by the IRS. Think about the question before you attest to your answer.

The IRS considers non-willful conduct to include “negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.”

The IRS also offers a Criminal Investigation Voluntary Disclosure Practice for taxpayers who are concerned, or already know, that their non-compliance in filing an FBAR was due to willful conduct. If considering this option, speak with an experienced criminal tax defense attorney about your situation before moving forward.

2. Under investigation? If you are already the subject of an IRS criminal tax investigation or a civil tax audit for failure to disclose foreign assets, you are not eligible to use the streamlined reporting procedures.

3. Taxpayer ID needed: To use the streamlined procedures, a taxpayer identification number is needed. For most individuals, this would take the form of a social security number. The streamlined process is not available to those without a social security number or individual taxpayer identification number (ITIN). That said, a taxpayer may be eligible for the streamlined processes if their submission is accompanied by a completed application for an ITIN.

The penalties for failure to file an FBAR are serious. If you know you are non-compliant, talk to your tax lawyer about whether one of the IRS streamlined compliance processes would be helpful in your situation.

Is a Global Asset Registry In Your Future?

In March 2019, the Independent Commission for the Reform of International Corporate Taxation (ICRICT) published a study to discuss a Global Asset Registry (GAR), a tool to battle wealth inequality around the world. ICRICT is a consortium of labor and civil organizations aimed at providing and discussing perspectives on global tax reform.

The more secretive the flow of money into offshore tax havens, the higher the likelihood of financial crime, money laundering, and loss of revenue to legitimate tax bases. Don’t get us wrong, our work as tax attorneys aims to reduce the tax burden of high-asset individuals and corporations. As we have said before, there is an enormous difference between tax avoidance and tax evasion. Avoiding tax is typically a good idea, but tax evasion is not.

At present, money laundering avenues circle the globe, running through secrecy jurisdictions, shedding tax liability, and moving wealth to the next tax haven before dropping it permanently under the radar. The resulting economic gaps threaten geo-political stability. There is a good reason to address global tax crime in a meaningful way.

ICRICT describes a GAR as a means to record, measure, and understand global wealth in a manner that allows proper taxation, regulatory authority, and offers a firewall against financial crime. ICRICT argues that real estate and land registries have been used to achieve accountability; the same principle could be used with a GAR

ICRICT recommends establishing registries on a pilot basis, with fundamental guidance as follows:

• A registry would include information about the final owner of the asset, not a holding company or anonymous shell company.
• A GAR could include information on wealth, real estate, financial assets, gold, and other types of value.
• GARs could be used in particular financial regions, as a networked resource covering several regions, or a global registry. It follows that areas without registries will attract illicit investment. The EU is suggested as an initial financial center in which to start a GAR.

ICRICT estimates 45 percent of the profit of multinational companies finds its way into offshore tax havens. About 63 percent of the foreign profits of U.S. multinational companies move into the sometimes shadowy safekeeping of foreign bank accounts. By increasing accountability, GARs could provide a bottom line to the problem of global wealth and economic inequity. 

Is a GAR in your future? Not anytime soon. But the uptick in global money scandals and the increasing ability to capture data on missing money may press the issue in the not-so-distant future.

Multi-National Companies: What Do They Face?

Strategies to reduce or eliminate taxes for companies that operate globally have been in play for years. In the past decade, Big Tech, Finance, and Pharma have become stand-out examples for critics of businesses that establish their headquarters and subsidiaries offshore to manipulate their tax rates.

As we have discussed in the past, the use of these strategies by Amazon, Apple, and many other companies effectively reduces corporate tax burden as it starves countries of needed tax income. For several years, discussions around the regulation of multinational companies have advanced and faltered. With 130 countries now backing a draft framework for global regulation of these companies, the possibility of a standard tax rate is looming large in the window.

The framework is sprawling but essentially means that companies will pay taxes to countries where their products or services are sold—regardless of whether the company has a physical presence in the country or region. Previously, a company might locate its headquarters in Ireland, which is known for its friendly corporate tax philosophies. The company would then pay rock-bottom taxes in Ireland, while at the same time earning big money from consumers living in other countries.

A tax rate of at least 15 percent could effectively end the use of foreign jurisdictions like Ireland, Luxembourg, and many others, as a sole strategy for tax avoidance. With a corporate tax rate of 12.5 percent, Ireland is one of the countries that has, so far, refused to sign the agreement. Hungary and Estonia have also remained out of the agreement.

While gaining approval from participating countries will not be easy or fast, gaining a tentative agreement on a tax rate and structure that benefits every country that does business with multinationals is a very big deal.

Flashback: The Panama Papers and the Pursuit of Foreign Bank Accounts

In 2016, an investigative expose into the opaque world of offshore tax deals shook global halls of governance and woke up the world to the concept of dirty money. What has happened since? 

That year, the International Consortium of Investigative Journalists (ICIJ) began publishing articles based after a year of analysis on more than 11.5 million documents leaked from the now-defunct Panamanian law firm Mossack Fonesca. The ongoing articles take a deep dive into the means by which enormous sums of money flow into secrecy jurisdictions to avoid detection and taxation.

Make no mistake—the use of offshore tax havens is a legal business practice that can support wealth growth and protection when set up within regulatory and reporting guidelines. Our firm advises clients on compliance and offshore tax practices that augment other wealth strategies—without incurring the risk of prosecutorial action by the Internal Revenue Service (IRS).

The leaked Panama Papers point to the wrong kind of offshore tax practice—wealth that is quietly moved through shell companies around the world into opaque tax havens for the purpose of evading taxation. The Panama Papers were the first of several other investigations undertaken by the ICIJ to put names, faces, and dollar amounts to the global habit of stashing cash and avoiding taxes. A 2016 estimate puts the amount of money lost to this practice in the trillions of dollars.

Since 2016, the battle against illicit offshore tax havens and associated practices has gone mainstream. When the media reports broke, waves of protest rose against financial entities and individuals named in the reports. Around the world, regional tax enforcement agencies opened investigations, many of which have since concluded in guilty pleas for tax fraud. In the U.S. and elsewhere, legislation is pending to reduce the abuse of tax havens. By 2019, 23 countries had retrieved approximately $1.2 billion in taxes.

The Panama Papers scandal put financial institutions, corporations, and taxpayers who commit tax crimes on notice, and the fallout has shut down some players. But far more work lies ahead to strengthen global regulations to reduce tax evasion. For U.S. taxpayers, that means robust attention to accurate FBAR submissions.

In 2017, the ICIJ won a Pulitzer Prize for “using a collaboration of more than 300 reporters on six continents to expose the hidden infrastructure and global scale of offshore tax havens.” To underscore the importance of this sea change, in February 2021 the ICIJ was nominated for a Nobel Peace Prize. The nomination letter reads:

The outstanding work of the ICIJ to expose illicit flows, and the mammoth achievement of the GATJ to build national and international pressure for accountability and fair taxation — warrants attention, recognition, and support…They are, independently and by different means, trailblazers in creating a world where financial incentives for conflict, wars, human rights abuses, and violence are non-existent. These courageous journalists and civil society organizations play a critical role in documenting corruption and Illicit flows, often while putting their lives in peril in the process.

Enough said.

Use of Shell Companies and Swiss Accounts Sends Professor to Prison

An esteemed university professor—renowned as an expert in organized crime, author, and consultant to the Federal Bureau of Investigation (FBI) and the United Nations—yielded to the siren song of tax fraud and is headed to prison.

We wrote earlier about the interesting case of Dr. Bruce Bagley, a professor at the University of Miami who is a recognized expert in drug trafficking, money laundering, and corruption. Throughout his career, Dr. Bagley worked to identify, discuss, and try to deter the bribery and drug trafficking that impoverishes countries in Latin America, like Venezuela. Yet, when given the opportunity, Dr. Bagley played the shell game and ultimately lost.

According to the Department of Justice (DOJ), in late 2016, Dr. Bagley opened a Florida bank account for a company that he owned and controlled. The account was quiet for about a year when regular deposits from the United Arab Emirates began to arrive on a routine basis. For about a year, Dr. Bagley received about $200,000 per month to the account. Each month, he withdrew about 90 percent of the funds and transmitted that money to another recipient in the form of a cashier’s check. The remaining ten percent each month was shuttled to his personal account. In just less than a year, Dr. Bagley had netted $2.5 million for very minimal effort.

Like many offshore tax dodges and secret foreign bank accounts, the shell company scam of Dr. Bagley is a well-known scheme. Moving money quietly around the world through shell accounts eventually disguises the origin of the money and its potentially criminal origins. In this case, Dr. Bagley was laundering money for a Columbian who had obtained the funds through bribery and embezzlement of monies from Venezuela. 

Although his actions literally flew in the face of his life’s work, Dr. Bagley not only laundered the money but opened a second account to increase the amount of money he was able to wash for his criminal counterparts. Evidence produced by prosecutors detailed Dr. Bagley’s longtime association with Central American political and criminal figures. 

Following his arrest in late 2019, Dr. Bagley said he was not worried, and that he was not guilty. In June 2020, Dr. Bagley pled guilty. At his sentencing in November 2021, he struck a different tone, noting “I am ashamed of my irresponsible behavior.” The turnabout on his plea may have saved him from serving more than the six months in prison to which he was sentenced. 

In poor health at 75, Dr. Bagley will serve his prison time in a federal medical facility. During the ordeal of his arrest, his wife of many years passed away as the life they had built together crumbled. Perhaps in the case of Dr. Bagley, like a moth to a flame, his longtime research led him just a little too close to the individuals and environment that would eventually destroy his well-being. 

Indicted: A Case Study in Hidden Offshore Tax Intrigue and Tax Evasion

A Florida man was arrested in September 2021 on criminal tax charges that stretch around the world.

Born in the states, Mark Gyetvay is a CPA and the longtime CFO of Novatek—the largest, non-state-owned gas producer in Russia. His tenure with Novatek began in 2003, after he had worked as a CPA in the U.S. and Russia for a number of years. To skirt U.S. sanctions imposed on Russia in 2014, Russian President Putin gave Russian citizenship to Mr. Gyetvay.

As part of his compensation package with Novatek, Mr. Gyetvay earned stock-based benefits. According to the Department of Justice (DOJ), Mr. Gyetvay eventually opened two Swiss bank accounts to hold these assets. The DOJ states the value of the offshore tax accounts eventually stood at around $93 million.

Between 2005 and 2016, the DOJ alleges Mr. Gyetvay took several steps to hide and dissuade authorities about his ownership of the foreign bank accounts. At one point, he named his wife at the time, a Russian citizen, as the owner of the accounts. The DOJ notes Mr. Gyetvay is himself a CPA, making it difficult to argue ignorance, rather than indifference, of regulations surrounding the reporting of many millions in assets.

During the same period, Mr. Gyetvay failed to file U.S. income tax returns and when he did file, he filed false tax returns. Although the penalties for failure to file FBAR reports are high, Mr. Gyetvay also neglected to submit those reports while at the same time filing a false compliance report through the Streamlined Filing Compliance process with the IRS. During that process, Mr. Gyetvay attested that his failure to file tax returns and FBAR reports was non-willful. The IRS gets very testy with customers that it knows are willfully engaged in tax fraud and purposefully ignoring FBAR reports—and it imposes draconian penalties to prove it.

The Russian News Agency, TASS, reported Mr. Gyetvay, who holds both U.S. and Russian passports, was released on $80 million bail. Kremlin spokesperson Dmitry Peskov has stated Moscow is not likely to interfere in the U.S. matter as Mr. Gyetvay holds citizenship in both countries.

Said Mr. Gyetvay, “…I was indicted for baseless tax charges that I already settled through a voluntary program, and pleaded not guilty. I will vigorously fight these charges and will continue to discuss gas topics as normal.” Let’s hope the charges are baseless, if unsuccessful in fighting the charges, Mr. Gyetvay could be looking at 20 years in prison.

The Pandora Papers: Offshore Tax Havens in a 2.94 Terabyte Leak

A trove of financial data on the offshore banking habits of the ultra-wealthy from around the world was leaked (again). The intrigue includes trillions of dollars, 330 politicians from approximately 100 countries, 35 current and former state leaders, and much more. The Pandora Papers deliver a broad—if incomplete—view of the hidden world of offshore banking and tax evasion.

In 2016, the so-called Panama Papers made headlines as the first big look at global tax evasion. The leak, from a now-defunct Panamanian law firm brought down political careers, led to criminal investigations and rubbed some of the shine off of celebrities who were revealed to stash their cash in foreign bank accounts to avoid taxes. In 2017, another leak from two offshore tax service companies to a German Newspaper called the Paradise Papers, shone more light on secrecy jurisdictions.

The research and release of the Panama Papers, the Paradise Papers, and the Pandora Papers (clearly someone is enjoying the alliteration) is a collaborative investigative project of the International Consortium of Investigative Journalists (ICIJ). The ICIJ is a network of approximately 280 journalists and investigative reporters partnering in over 100 countries and territories around the world.

 Let’s dig into some of the details:

• What is in the document leak? The Pandora Papers represent about 11.9 million records received from 14 entities involved in servicing and secreting wealth in shell companies, trusts, and other structures in order to hide money and sometimes avoid taxes. Keep in mind, the use of offshore tax strategies is not illegal, but can easily cross the line when financial institutions or taxpaying citizens forgo regulations designed to prevent money laundering, tax fraud, and tax evasion. The Pandora Papers represent the largest collaboration of investigative reporting to date.
• What kind of data was leaked? The ICIJ is not detailing how the records were leaked to the organization from so many sources. The data was provided in the form of spreadsheets, documents, email, images, slide decks, video, audio, and other document formats. This included more than four million PDFs and approximately 1.79 million Word documents.
• What is the date range of the document sets? The Pandora Papers cover a broad range of transactions, some dating back to the 1970s, but mostly between the years 1996 to 2020.
• What is the basic content? The documents touch on most of the options that a tax attorney might advise for use by a wealthy client interested in protecting—or hiding—their money. This includes estate planning, the use of foundations and trusts, the creation of shell companies to hold and transfer assets, and high-ticket purchases like jets, yachts, or life insurance policies. In some instances, the documents reveal the path taken through banks, shell companies, and tax havens to launder money, commit tax crimes, and do other financial wrongdoing.
• Who is in the Pandora Papers? The Pandora Papers involve data from at least 27,000 companies and approximately 29,000 owners. The Pandora Papers involves about twice as many owners, politicians, and public officials as the Panama Papers. While the document set does include transactional data from Russian oligarchs, it does not include mention of high-profile Americans gazillionaires like Warren Buffett, Jeff Bezos, Elon Musk, or Bill Gates. That likely means wealthier Americans use different avenues to protect their wealth that may (or may not) be less secretive.
• News you can use: Access to competitive secrecy jurisdictions may be closer than you think. The ICIJ notes South Dakota and Nevada “have adopted financial secrecy laws that rival those of offshore jurisdictions.”

Like the Panama Papers in 2016, the release of the Pandora Papers lays out how and where some of the world’s wealthiest people move money away from legitimate tax agencies in their home countries. In some cases, politicians bemoaning the low-income of populations they represent are among those using abusive tax structures to live a life of luxury.

Swiss Life Settles Up with IRS in Offshore Tax Sting

It is an old story with a new name—Swiss Life admits to helping Americans hide offshore assets and will pay a fine as a result.

Swiss Life is one of the largest financial and insurance agencies in Europe as well as the biggest life insurance company in Switzerland. It maintains entities in Liechtenstein, Singapore, and Luxembourg, as well as Zurich.

Criminal tax investigations by the Department of Justice (DOJ) and the Internal Revenue Service (IRS) have been ongoing for years as fallout after allegations aimed at UBS, the Swiss bank, in 2009. At the time, UBS assisted U.S. persons open and maintain foreign bank accounts in Switzerland. Maintaining assets in Switzerland helped American clients avoid reporting and paying taxes to the U.S. Government.

Skirting U.S. regulatory requirements constitutes a tax crime and UBS ultimately paid $780 million for the tax fraud. The bank was allowed to enter into a deferred prosecution agreement, a disciplinary action that has become standard in big banking gone wrong.

As part of the settlement, UBS turned over data on thousands of clients they had been helping to hide their assets. Included in this were companies and agencies, like Swiss Life, that became collateral damage to the UBS deal.

In May 2021, Swiss Life entered into its own deferred prosecution agreement for marketing products and services to Americans interested in escaping the long arm of the IRS. According to the DOJ, Swiss Life worked to hide $1.45 billion in offshore insurance policies for U.S. taxpayers. In addition to promising to play nice in the future and adhere to the deferral agreement, Swiss Life will pay about $77 million to the U.S. Treasury.

U.S. Attorney Audrey Strauss said “As they admit, Swiss Life and its subsidiaries sought out and offered their services to U.S. taxpayers to help them become U.S. tax evaders. The Swiss Life Entities offered private placement life insurance policies and related investment accounts to U.S. customers and provided services that concealed the policies and other assets from the IRS. Indeed, the Swiss Life Entities saw U.S. authorities’ stepped-up offshore tax enforcement as an opportunity to pitch themselves to tax-evading U.S. customers as an alternative to Swiss banks.”

As with other deals of this type—compare $1.45 billion in filthy lucre to a $77 million fine. With so many European financial entities caught up in this type of tax investigation, Swiss Life is not likely to suffer a credibility problem for long. Pretty sweet deal.

Recent Legal Rulings on FBAR Matters

Two 2021 court rulings drive home the need to pay careful attention to FBAR filings—and the penalties that accrue if they are ignored.

Court rules on penalties assessed for failure to file FBAR

In the matter U.S. vs. Frank Giraldi, the court sided with a taxpayer who did not file FBAR reports on foreign bank accounts from 2006 through 2009. At 89 years of age, Mr. Frank Giraldi had four offshore accounts, three of which were tax-deferred annuity accounts for the benefit of the spouse of Mr. Giraldi, who is considerably younger than Mr. Giraldi.

In 2014, Mr. Giraldi took advantage of the IRS voluntary disclosure program for offshore tax accounts. He later withdrew from the program. The penalties applied by the program were significantly higher than the normal fine Mr. Giraldi would pay for failure to file the tax reports. Two years later, the IRS assessed him with a penalty for failing to file on each account for each year he was in arrears.

A District Court judge ruled in favor of Mr. Giraldi, noting the taxpayer should pay only one penalty ($10,000) for each year that he did not file. This reduced the amount owing by Mr. Giraldi from $160,000 to $40,000.

Court affirms lower court ruling assessing significant fines for willful failure to file FBAR

In the matter of the U.S. vs. Peter and Susan Horowitz, the Court of Appeals affirmed a lower court finding that a couple recklessly disregarded the FBAR requirement on their foreign bank accounts.

Mr. and Mrs. Horowitz are successful professionals who moved to Riyadh, Saudi Arabia in 1984 in order for Mr. Horowitz to take a job as an anesthesiologist at King Feisal Hospital. Mrs. Horowitz has a Ph.D. and found work that supported the couple, allowing them to mostly bank the earnings of Mr. Horowitz. In time, the couple opened a Swiss bank account for their savings, while continuing to report and pay U.S. taxes.

When the couple returned to the U.S. in 2001, they maintained their Swiss account which had accrued $1.6 million. Once back in the U.S., the Horowitzes waited until 2010 to apply to the Offshore Voluntary Disclosure Program. Thereafter, they filed their FBARs along with amended tax returns for select years. Given the amended returns, the couple paid an additional $100,000 in back taxes.

The Horowitzes did not report their offshore account to the accountant who prepared and filed their taxes each year. In 2014, the IRS corresponded with the couple about penalties due. When an agreement could not be reached, the IRS filed suit against the couple.

The Appeals court affirmed a lower court finding that Mr. Horowitz owes $654,568 in enhanced penalties and Mrs. Horowitz owes $327,284 for failing to file their FBARs.

The Cowboy Cocktail—How Wyoming Became a World Class Tax Haven

The Cowboy Cocktail is not an interesting after-hours beverage. It is a potent combination of a made-in-Wyoming trust added to often unregulated, infrequently scrutinized private companies. The Cowboy Cocktail put Wyoming on the global leaderboard for opaque not-really-offshore tax havens.

The Cowboy Cocktail was a well-hidden non-secret until early 2022, when an expose’ from the International Consortium of Investigative Journalists (ICCJ) laid out the facts. The ICCJ was drawn to the 44^th state by revelations unearthed in the Pandora Papers, a trove of approximately 11.9 million records that details the lengths to which the world’s wealthy go to hide wealth in shell companies, trusts, and other structures that may, or may not, have a whiff of tax fraud to them. 

While it may seem odd to consider Wyoming a sought-after offshore tax option for dictators, oligarchs, and their closest friends, Wyoming was recently named one of the friendliest tax shelters in the world. Wyoming is not alone in the U.S. for its come-hither financial ways. Nevada, Alaska, South Dakota, and Delaware have all been named by the EU as “hubs of financial and corporate secrecy.” 

Notes Josh Rudolph, formerly with the National Security Counsel in the Trump and Obama administrations, “For some time now, the U.S. has been the weak link in the international anti-money laundering regime. The European Parliament is absolutely right—we are the enablers.”

Here is how the Cowboy Cocktail works:

• Wyoming provides two trust options for those with assets of usually $100 million or more. One option is regulated, according to the ICCJ, which helps investors avoid unexpected tax bills or other inspections. The other trust is unregulated and allows families to place control of the trust in a private, family company. Currently, there are seven regulated private companies using the Cowboy Cocktail in Wyoming and an unknown number of unregulated companies.  One estimate places the creation of private, unregulated companies in Wyoming at 100 per year. 
• Investors have the option to place their assets in a trust—or in a company (regulated or unregulated) that will control the assets in the trust. Together, the trust and the limited liability company offer wealth protection and opacity. 

Over the years, Wyoming legislators have continued to refine state laws to ensure investors could remain anonymous and their assets hidden, although Wyoming reaps little tax profit from the deals. Legislative refinements to the process are referred to as “Wyoming home cooking.” As noted in the ICCJ pieces, the arrangement is a winner. “A Cowboy Cocktail is a double-barreled approach to asset protection that may be the best thing since sliced bread.”

Professor Convicted in Tax Fraud Litigation Over Foreign Bank Account

A professor charged under a sweeping initiative to uncover Chinese espionage in the U.S. was instead convicted of failing to disclose an offshore bank account.

In 2018, the U.S. Department of Justice launched an ambitious program to investigate and prosecute bad actors engaged in Chinese economic espionage in the U.S. The program was apparently aimed at academics and researchers in U.S. labs and facilities as well as defense agencies and contractors. Amid accusations of racial bias toward residents and citizens of Chinese origin, the initiative was halted in February 2022. 

Despite the broad underpinnings of the initiative, the program appeared to narrowly focus on researchers who filled out grant applications with the National Science Foundation (NSF). Dr. Mingqing Xiao, was a mathematics researcher with Southern Illinois University-Carbondale when he was accused of making a false statement to the NSF. Associated with that charge, Dr. Xiao also faced two counts of wire fraud.

As part of his research, Dr. Xiao had a grant with Shenzhenalo University in Shenzhen, China. As well, Dr. Xiao had a Chinese bank account into which his routine payments from the University were deposited. Between 2016 and 2020, he had approximately $100,000 in the account. Along with the charges related to his NSF grant, Dr. Xiao was charged with failure to file a report of a Foreign Bank Account (FBAR) as well as filing false tax returns between 2017 and 2019.

Ultimately, a federal jury cleared Dr. Xiao of the charges accusing him of espionage-related charges of hiding his connection to the Chinese university. Like several other academics pursued by the FBI, this prosecution under the China Initiative failed to bear significant fruit. However, because Dr. Xiao failed to file his FBAR and report the foreign account on his tax returns, he was convicted of those allegations.

Failing to file an FBAR and not registering foreign income on a tax return constitutes tax fraud. We frequently discuss schemes and scams carried out by those trying to make a fast buck by failing to pay taxes or report income. Yet, in this instance, there is a whiff of animus in the news release of the Department of Justice when reporting the case.

The press release weaves together the allegations around the grant application that were dismissed with the allegations on which he was convicted. The FBI Special Agent-in-Charge said, “Failing to disclose a foreign bank account and filing false tax returns demonstrates a lack of truthfulness and an abdication of the duties of citizenship”—an unusually slanted statement calling citizenship into question for a somewhat run-of-the-mill tax crime.  

There is strong evidence that nation-state actors are at work in the U.S., working hard to exploit and capture American research, trade secrets, and technology. But the focused pursuit of Chinese nationals and American citizens of Chinese origin smacks of something else. The suspension of the Chinese Initiative came none too soon.