26 March 2002
See related US DoJ press release: http://cryptome.org/doj-doe-cards.htm
Contents
MEMORANDUM IN SUPPORT OF EX PARTE PETITION FOR LEAVE TO SERVE JOHN DOE SUMMONS
EX PARTE PETITION FOR LEAVE TO SERVE JOHN DOE SUMMONS
DECLARATION OF JOSEPH C. WEST
Source: http://www.usdoj.gov/usao/can/press/assets/applets/2002_03_25_Memorandum.pdf (450KB)
[12 pages.]
ORIGINAL
FILED
02 MAR 25 AM 9:17
RICHARD W. WIEKING
CLERK OF THE DISTRICT COURT
NORTHERN DISTRICT OF CALIFORNIA
DAVID W. SHAPIRO (New York State Bar No. 2054054)
United States Attorney
JAY R. WEILL (California State Bar No. 75434)
Assistant United States Attorney
Chief, Tax Division
10 Floor, Federal Building
450 Golden Gate Avenue
San Francisco, California 94102
Telephone: (415) 436-7017
Fax: (415) 436-6748
JOSÉ FRANCISCO DE LEÓN (Florida State Bar No. 510180)
Trial Attorney, Tax Division
U.S. Departruent of Justice
P.O. Box 14198
Ben Franklin Station
Washington, D.C. 20044
Telephone: (202) 514-5040
Fax: (202) 514-9868
Attorneys for United States of America
UNITED STATES DISTRICT COURT |
||
| IN THE MATTER OF THE TAX LIABILITIES OF:
JOHN DOES, United States taxpayers |
) |
|
The United States of America, by and through its undersigned attorney, David W. Shapiro, United States Attorney for the Northern District of California, respectfully submits the following Memorandum in support of its EX PARTE PETITION FOR LEAVE TO SERVE JOHN DOE SUMMONS:
INTRODUCTION
This is an ex parte proceeding brought by the United States of America, pursuant to Sections 7609(f) and (h) of the Internal Revenue Code (26 U.S.C.), for leave to serve an Internal Revenue Service "John Doe" summons upon VISA International. Section 7609(f) provides that summons which does not identify the person with respect to whose liability it is issued may be served only after a court proceeding. These types of summonses are known as "John Doe" summonses. Section 7609(h)(1) provides that a, district court in which the person to be summoned resides or is found shall have jurisdiction to hear and deter-mine any proceeding brought under Section 7609(b)1. Section 7609(h)(2) provides that any determinations required to be made under Section 7609(b) shall be made ex parte and shall be made solely on the petition and supporting affidavits.
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1 VISA International has its principal place of business at 900 Metro Center Boulevard, Foster City, in the County of San Mateo, California, within the jurisdiction of this Court.
QUESTIONS PRESENTED
Whether, as required by Section 7609(f), the United States of America has demonstrated (1) that the "John Doe" summons which the Internal Revenue Service desires to serve upon VISA International relates to the investigation of an ascertainable group or class of persons; that there is a reasonable basis for believing that such group or class of persons may fail or may have failed to comply with any provision of any internal revenue law; and (3) that the information sought to be obtained from the examination of the records or testimony (and the identities of the persons with respect to whose liability the summonses are issued) are not readily available from other sources.
DISCUSSION
The Internal Revenue Service is conducting an investigation to determine the correct federal income tax liabilities, for the years ended December 31, 1999 through 2001, of United States taxpayers who have signature authority over VISA cards issued by, through, or for banks or other financial institutions in Anguilla, Antigua and Barbuda, Aruba, Bahamas, Belize, Bermuda, British Virgin Islands, Cayman Islands, Cook Islands, Cyprus, Dominica, Gibraltar, Guernsey/Sark/Aldeney, Hong Kong, Isle of Man, Jersey, Liechtenstein, Luxembourg, Malta, Nauru, Netherlands Antilles, Panama, Samoa, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Singapore, Switzerland, Turks and Caicos, and Vanuatu. In furtherance of this investigation, the Internal Revenue Service has issued a "John Doe" summons to VISA International, its affiliates and subsidiaries. As more fully explained below, the "John Doe" summons relates to the investigation of an ascertainable group or class of persons, that is, United States taxpayers who, during the years ended December 31, 1999 through 2001, had signature authority over VISA cards issued by, through, or for banks or other financial institutions in the jurisdictions listed above; there is a reasonable basis for believing that such group or class of persons may fail, or may have failed, to comply with one or more provisions of the internal revenue laws; and the information sought to be obtained from the examination of the records or testimony (and the identity of the persons with respect to whose tax liabilities the summonses have been issued) is not readily available from other sources.
Section 7601 of the Intertial Revenue Code requires the Secretary of the Treasury to "cause officers or employees of the Treasury Department to proceed, from time to time, through each internal revenue district and inquire after and concerning all ersons therein who may be liable to pay any internal revenue tax." Section 7602 authorizes the Secretary to summon record and testimony for that purpose. Specifically, Section 7602 authorizes the Secretary or his delegate "[f]or the purpose of ascertaining the correctness of any return, making a return where none has been made, (or) determining the liability of any person for aniterrial revenue tax ... [t]o summon . . . any person having possession, custody, or care of books of account containing entries relating to the business of the person liable for tax . . ., or any other person the Secretary or his delegate may deem proper, to appear . . . and to produce such books, papers, records, or other data, and to give such testimony, under oath, as may be relevant or material to such inquiry."
Section 7602 is the Internal Revenue Service's principal information-gathering authority, and, accordingly, the courts have broadly construed it in light of its intended purpose of furthering the effective conduct of tax investigations. Thus, the courts have repeatedly rejected attempts to circumscribe or thwart the effective exercise of the Internal Revenue Service's summons power. See, for example, United States v. Euge, 444 U.S. 707, 715-716, 100 S.Ct. 874, 63 L.Ed.2d 141, (1980); United States v. Bisceglia, 420 U.S. 141, 95 S.Ct. 915, 43 L.Ed.2d 88 (1976); Couch v. United States, 409 U.S. 322, 338, 93 S.Ct, 611, 34 L.Ed.2d 548 (1973).
In Bisceglia, the Supreme Court held that Sections 7601 and 7602 empowered the Internal Revenue Service to issue a "John Doe" summons to a bank to discover the identity of a person who had engaged in certain bank transactions. This authority was subsequently explicitly codified in Section 7609(f) of the Internal Revenue Code, as added by the Tax Reform Act of 1976. Section 7609(f) provides as follows:
Any summons . . . which does not identify the person with respect to whose liability the summons is issued may be served only after a court proceeding in which the Secretary establishes that -(1) the summons relates to the investigation of a particular person or ascertainable group or class of persons,(2) there is a reasonable basis for believing that such person or group or class of persons may fail or may have failed to comply with any provision of any internal revenue law, and
(3) the information sought to be obtained from the examination of the records (and the identity of the person or persons with respect to whose liability is issued) is not readily available from other sources.
It is clear that, as required by Section 7609(f)(1), the group or class of persons to be invesfigated here is ascertainable, that is, United States taxpayers who have signature authority over VISA cards issued by, through, or for banks or other financial institutions in Anguilla, Antigua and Barbuda, Aruba, Bahamas, Belize, Bermuda, British Virgin Islands, Cayman Islands, Cook Islands, Cyprus, Dominica, Gibraltar, Guernsey/Sark/Aldeney, Hong Kong, Isle of Man, Jersey, Latvia, Liechtenstein, Luxembourg, Malta, Nauru, Netherlands Antilles, Panama, Samoa, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Singapore, Switzerland, Turks and Caicos, and Vanuatu. Where the identities of the taxpayers are yet not known, no greater specificity can be expected in defining the group or class of persons.
With respect to the second requirement, set forth in Section 7609(f)(2), the Declarations of Revenue Agent Joseph C. West and Jack A. Blum clearly reflect a reasonable basis for believing that the unknown persons whose identities are sought by the summonses may fail, or may have failed, to comply with one or more provisions of the internal revenue laws.
In the first instance, money transfers between the United States and offshore tax haven and financial privacy jurisdictions are inherently reasonably suggestive of tax avoidance, given that tax avoidance is frequently the purpose for the use of banks in offshore tax haven jurisdictions and financial privacy jurisdictions and that the secrecy and confidentiality purportedly accorded banking transactions by such jurisdictions facilitate tax evasion. In United States v. Pittsburgh Trade Exchange, Inc., 644 F.2d 302, 306 (3rd Cir. 1981), the court held that the "reasonable basis" test had been met based upon a revenue agent's testimony that barter transactions of the type arranged by the Pittsburgh Trade Exchange were "inherently susceptible to tax error." In United States v. Richie, 15 F.3d 592, 602 (6th Cir. 1994), the court held that the mere payment for legal services with large amounts of cash is a reasonable basis for the issuance of a "John Doe" summons. Likewise, the use of credit or debit cards2 to access funds transferred by United States taxpayers to banks in the subject offshore tax haven and financial privacy jurisdictions provides a reasonable basis for the issuance of the summonses at issue. As stated in the Declaration of Jack A. Blum, at pg. 6: "because the summonses are limited to account information related to countries whose banks are known to market their secrecy as protection from tax authorities, there will be a high likelihood that the summonses will generate the names of individuals who failed to report their foreign bank accounts and the related income."
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2 Offshore cards do not seem to offer any advantages to United States taxpayers other than the promoted secrecy and tax considerations. Indeed, as recognized by William P, Binzel, vice-president of government relations for MasterCard International, as reported in Don Bauder, A credit card offer and your credit's lousy? Don't bite, San Diego Union-Tribune, September 14, 1997, at 12: "people should be wary of a credit card issued offshore, he says. That's because credit cards issued in the United States have strong legal protections that are not available offshore."
In this regard, a recent law review article published in the Journal of Taxation is instructive. In Advising a Client with Secret Qffshore Accounts - Current Filing and Reporting Problems, 91 J. Tax'n 158 (1999), Scott D. Michel, a past chair of the Committee on Civil and Criminal Tax Penalties of the ABA Tax Section, describes the following "not atypical hypothetical":
In the spring of 1996, Richard Smith had a marvelous vacation on the tropical island of Azure. While he was there, he attended a free seminar on offshore banking and investing, where he heard about the many benefits of having an Azure bank account, including the island's strict bank secrecy laws. Smith opened an account at an Azure bank and deposited funds over the next three years. The bank invested the money and provided him with a "debit" card to use for "untraceable" cash advances and purchases, While Smith was careful to report all of his domestic income on his tax returns for 1996 and 1997, he did not disclose the existence of the Azure account or report the income earned in the account.
Mr. Michel then analyzes how the taxpayer in this hypothetical violated provisions of the Internal Revenue Code, such as failing to comply with the disclosure requirements for foreign financial accounts and willfully failing to report earnings on such accounts, Of course, implicit in the hypothetical set forth by the writer of the article, is the use of the debit card as an integral component of the tax evasion scheme.
In Our Client has "What?"A-Discussion of Undisclosed Cash Hoards, Foreign Bank Accounts. etc., American Law Institute - American Bar Association Continuing Legal Education, Estate Planning Techniques, SF68 ALI-ABA 491 (Feb. 22, 200 1), Sherwin P. Simmons presents the following "'fairly typical" problem:
Tom and Mabel have been marrie[d] 36 years, have raised their children and had a thriving construction business in Ohio. However, about six years ago, Tom had a heart attack and was unable to maintain his construction business. As a result, he sold it and came to Florida, got a general contractor's license, and has been doing small construction projects in the bedroom communities around Miami. They advised that four years ago some of their friends told them about a moneymaking/tax-saving opportunity in which they were engaged, They attended a few seminars and learned that they could obtain a Visa Card from a Cayman bank, deposit their funds with the bank and then in effect live on their Visa card charges (payment of the card charges being made through the funds deposited). This was all done through an off-shore corporation established by an affiliate of the Cayman bank which had as its officers and directors representatives of the Cayman bank. The stock of the corporation were issued in bearer form and Tom and Mabel's names were neither associated nor reflected in the corporate records. As the years passed, most all of the income from the construction business was transferred to their offshore account and neither this income nor any income earned by the offshore account was reported.About three years ago, Tom had an unusually successful year earning $500,000 which he transferred immediately to the offshore account without reporting. He then caused the offshore corporation (or as he would put it, the offshore corporation's directors caused) the $500,000 to be transferred to a brokerage account in Miami to be invested for the benefit of the Cayman corporation. Unfortunately, recent developments in the stock market have reduced the $500,000 [stake] to about $180,000 currently. No investments have been sold, but the investment manager is giving thought to making some sales and reinvesting.
Early on, Tom's friends and neighbors started asking him what he was doing for his income inasmuch as they noticed his construction business was taking on fewer and fewer projects. He advised them what he was doing and they inunediately became enthusiastic about participating. Tom agreed to assist them in making the necessary arrangements and was soon sending their checks and occasionally cash to the Cayman bank for their benefit,
As the assistance to friends and neighbors increased, Tom took note that the Cayman bank affiliate which set up the Cayman corporations for the bank's clients produced a tidy profit of $1000 per corporation. Tom learned that the establishment of a Cayman corporation was no big deal and he concluded that he could set up his own Cayman services organization and to effect the formation of the Cayman corporations for these friends and neighbors as well as other investors. As a result, Tom set up his own Cayman corporation known as Pie In The Sky Opportunities and started forming the Cayman corporations necessary to the arrangement. Tom made a fair amount of money each year in this enterprise, clearing about $1700 per corporation inasmuch as his expenses were lower than the Cayman bank's corporate affiliate's expenses.
Tom and Mabel were very happy with this relationship and were so comfortable in their enterprise that Tom gave up his construction business completely. Fortunately too, his health has improved and he and Mabel have been enjoying the good life in South Florida. Admittedly, the income reported on their tax returns which was modest would not support their lifestyle. To their good fortune, no one has raised any questions about it and their accountant simply prepares their returns with the information given to him. None of the information discloses any of the Cayman arrangements,
Recently, a discordant note has crept into their lives. Tom and Mabel have read in the press about the IRS' successful request of a local federal court for the issuance of John Doe summonses to American Express Credit Card Company and MasterCard seeking the names of taxpayers who have arrangements through Cayman and other island banks similar to those of Tom and Mabel. Tom is not overly concerned since the IRS did not ask for Joe Doe summonses with respect to Visa cardholders, but, their general attorney thought that he should have some advice from you regarding his situation.
Mr. Simmons then discusses the filing and reporting requirements of the internal revenue laws, including the requirement that a taxpayer answer "yes" or "no" to the question: "[a]t any time during [the calendar year], did you have an interest in or a signature or other authority over a financial account in a foreign country, such as a bank account, securities account or other financial account?" Failure to truthfully respond to this question can subject the taxpayer to prosecution under 26 U.&C. § 7206(1). Mr. Simmons notes that "[t]he failure to respond truthfully to the foreign account question is an offense separate from the omission of income from that account which itself can be punished under §7201 as tax evasion and §7206(1) as the filing of a false return.
The Declaration of Revenue Agent West sets forth specific examples of court cases and pending investigations reflecting that other known taxpayers have used or promoted the use of cards to access funds held in banks in offshore tax haven and financial privacy jurisdictions as part of schemes to evade the payment of taxes or otherwise fail to comply with the internal revenue laws. The schemes involve the transfers of funds, not reported as taxable income in federal tax returns, to these banks, and their eventual repatriation for tax-free use in the United States through the use of cards for purchases or direct access to cash withdrawals. See United States v. Brigham Young Univenity, 679 F.2d 13,45, 1349-50 (10th Cir. 1982), vacated for consideration of mootness, 459 U.S. 1095, 103 S.Ct. 713, 74 L.Ed.2d 944 (1983) (prior audit experience with other contributors that had overvalued "in kind" contributions was a reasonable basis for issuing a "John Doe" summons for the identity of all "in kind" contributors to Brigham Young University); United States v. Kersting, 89 1. F.2d 1407 (9th Cir. 1989) ("John Doe" summons enforced after district court found "the existence of at least one case in which a Tax Court found some of Kersting's programs to be abusive of the tax code." At pg. 1409. The Ninth Circuit affirmed: 'There was ample basis for believing that the persons about whom records were sought had not complied with the tax law." At pg. 1412).
With respect to the third and final requirement, set forth in Section 7609(f)(3) -- that the information sought (and the identity of the persons with respect to whose tax liabilities the summonses have been issued) is not readily available to the Internal Revenue Service from other sources -- it is clear that as a practical matter VISA International is the only source from which the requested information can be obtained. Even if the taxpayers at issue have filed tax returns with the Internal Revenue Service, their names are unknown, and, in fact, actual inspection of a particular taxpayer's return is not likely to reveal understatements or misstatements of income resulting from transactions concealed through the offshore transfers of funds or the failure to report foreign accounts. Moreover, the information sought cannot be obtained from the offshore banks as the subject offshore tax haven and financial privacy jurisdictions do not currently have information-exchange treaties with the United States that would allow the Internal Revenue Service to seek the requested information in connection with the pending tax investigation.
Accordingly, the requirements for service of the "John Doe" summons have been satisfied in this proceeding. Indeed, in a similar proceeding commenced in the United States District Court for the Southern District of Florida on October 18, 2000, In re John Does, No. 00-3919 CIV-JORDAN (S.D. Fla.), in which the United States sought authorization to serve "John Doe" summonses upon American Express Travel Related Services Co. and MasterCard International seeking information regarding credit, charge and debit cards issued in Antigua and Barbuda, Bahamas and Cayman Island, United States District Judge Adalbello Jordan issued on October 30, 2000, an order granting the petition filed by the United States. A copy of this order is attached to the Exhibits Appendix to the Declaration of Revenue Agent West at Tab **. Judge Jordan found that the United States had established the requirements of Section 7609(f) and authorized the service of the "John Doe" summonses to American Express and MasterCard.
CONCLUSION
For the foregoing reasons, the Court should enter an order granting the Internal Revenue Service leave to serve a "John Doe" summons upon VISA International in substantially the form as attached to the Exhibits Appendix to the Declaration of Revenue Agent West at Tab 1.
DAVID W. SHAPIRO
United States Attorney[Signature]
JAY R. WEILL
Assistant United States Attorney
Chief, Tax Division
10th Floor, Federal Building
450 Golden Gate Avenue
San Francisco, California 94102
Telephone: (415) 436-7017
Fax: (415) 436-6748By: [Signature]
JOSÉ FRANCISCO DE LEÓN
Trial Attorney, Tax Division
U.S. Department of Justice
P.O. Box 14198
Ben Franklin Station
Washington, D.C. 20044
Telephone: (202) 514-5040
Fax: (202) 514-9868
E-mail: jose.f.de.leon@us.doj.gov
Source: http://www.usdoj.gov/usao/can/press/assets/applets/2002_03_25__Petition.pdf (1.9MB)
[62 pages.]
ORIGINAL
FILED
02 MAR 25 AM 9:17
RICHARD W. WIEKING
CLERK OF THE DISTRICT COURT
NORTHERN DISTRICT OF CALIFORNIA
DAVID W. SHAPIRO (New York State Bar No. 2054054)
United States Attorney
JAY R. WEILL (California State Bar No. 75434)
Assistant United States Attorney
Chief, Tax Division
10 Floor, Federal Building
450 Golden Gate Avenue
San Francisco, California 94102
Telephone: (415) 436-7017
Fax: (415) 436-6748
JOSÉ FRANCISCO DE LEÓN (Florida State Bar No. 510180)
Trial Attorney, Tax Division
U.S. Departruent of Justice
P.O. Box 14198
Ben Franklin Station
Washington, D.C. 20044
Telephone: (202) 514-5040
Fax: (202) 514-9868
Attorneys for United States of America
UNITED STATES DISTRICT COURT |
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| IN THE MATTER OF THE TAX LIABILITIES OF:
JOHN DOES, United States taxpayers |
) |
|
The United States of America, by and through its undeisigned attorney, David W. Shapiro, United States Attorney for the Northern District of California, avers as follows:
JURISDICTION
1. This ex parte proceeding is conunenced pursuant to Sections 7402(a), 7609(f), and 7609(h) of the Internal Revenue Code (26 U.S.C.), for leave to serve an Internal Revenue Service "John Doe" summons upon VISA International.
2. VISA International is a nonstock membership corporation under the laws of Delaware having its principal place of business at 900 Metro Center Boulevard, Foster City, California. The Court has jurisdiction to hear and determine this proceeding pursuant to 26 U.S.C. § 7609(h) because VISA International resides and is found in this district.
INTRADISTRICT ASSIGNMENT
3. This proceeding relates to a "John Doe" summons to be served in the County of San Mateo.
ALLEGATIONS
4. As explained in the Declaration of Revenue Agent Joseph C. West attached hereto as Exhibit A and incorporated herein by reference, the Internal Revenue Service is conducting an investigation to determine the correct federal income tax liabilities, for the years ended December 31, 1999 through 2001, of United States taxpayers who have signature authority over VISA cards issued by, through, or for banks or other financial institutions in Anguilla, Antigua and Barbuda, Aruba, Bahamas, Belize, Bermuda, British Virgin Islands, Cayman Islands, Cook Islands, Cyprus, Dominica, Gibraltar, Guernsey/Sark/Aldency, Hong Kong, Isle of Man, Jersey, Liechtenstein, Luxembourg, Malta, Nauru, Netherlands Antilles, Panama, Samoa, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Singapore, Switzerland, Turks and Caicos, and Vanuatu.
5. In furtherance of this investigation, the Internal Revenue Service has issued, under the authority of Section 7602 of the Internal Revenue Code, an Internal Revenue Service "John Doe" summons to VISA International. A copy of the summons is attached to the Exhibits Appendix to Declaration of Revenue Agent West at Tab 1.
6. The "John Doe" summons relates to the investigation of an ascertainable group or class of persons, that is, United States taxpayers who, during the years ended Dccember 31, 1999 through 2001, had signature authority over VISA cards issued by, through, or for banks or other financial institutions in the jurisdictions listed above; there is a reasonable basis for believing that such group or class of persons may fail, or may have failed, to comply with one or more provisions of the Internal Revenue laws; and the information sought to be obtained from the examination of the records or testimony (and the identity of the persons with respect to whose liabilities the summonses have been issued) is not readily available from other sources.
7. Ln further support of this Petition and incorporated herein by reference, the Petitioner submits the declarations of Revenue Agent West and of Jack A. Blum, attached hereto as Exhibits A and B, respectively, and the Exhibits Appendix to the declaration of Revenue Agent West,
WHEREFORE, the petitioner respectfully prays:
A. That this Court enter an order permitting service of the Internal Revenue Service "John Doe" summons issued to VISA International in substantially the form as attached to the Exhibits Appendix to Declaration of Revenue Agent West at Tab 1; and
B. That this Court grant such other and further relief as the Court deems proper or justice may require.
DAVID W. SHAPIRO
United States Attorney[Signature]
JAY R. WEILL
Assistant United States Attorney
Chief, Tax Division
10th Floor, Federal Building
450 Golden Gate Avenue
San Francisco, California 94102
Telephone: (415) 436-7017
Fax: (415) 436-6748By: [Signature]
JOSÉ FRANCISCO DE LEÓN
Trial Attorney, Tax Division
U.S. Department of Justice
P.O. Box 14198
Ben Franklin Station
Washington, D.C. 20044
Telephone: (202) 514-5040
Fax: (202) 514-9868
E-mail: jose.f.de.leon@us.doj.gov
UNITED STATES DISTRICT COURT |
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| IN THE MATTER OF THE TAX LIABILITIES OF:
JOHN DOES, United States taxpayers |
) |
|
I, Joseph C. West, pursuant to 28 U.S.C. Section 1746, declare and state:
I am a Revenue Agent/Analyst with the Large and Mid-Size Business Division of the Internal Revenue Service. I have been a Revenue Agent for 22 years. As a Revenue Agent, I have received training in tax law and audit techniques. In addition, I am a Certified Public Accountant and I have received a Masters of Science Degree in Taxation.
I have extensive experience with respect to the use of financial accounts in offshore tax haven and financial privacy jurisdictions developed in the course of the following representative activities: (1) attending a United Nations session on financial havens, bank secrecy and money laundering; attending, organizing and making presentations at four Pacific Association of Tax Administrators (PATA)/Group of 4 meetings on offshore transactions and electronic commerce concerns; participating in a Rand Corporation exercise on electronic commerce and offshore jurisdictions; attending and having conversations with participants at an offshore seminar, (2) conducting interviews of a former Cayman islands banker, a U.S. private banking employee, an employee of an offshore promoter, an individual who utilized a credit/debit card to access funds illegally diverted to an account in the Cayman Islands, and the publisher of an offshore news periodical; (3) having conversations and consultations with a leading offshore expert and with knowledgeable employees of various governmental and regulatory agencies, including Office of Comptroller of the Currency, Federal Reserve and the State Department; (4) conducting interviews with credit card companies, including American Express, MasterCard International and VISA International, and third party card processors; (5) having discussions with IRS employees throughout the United States concerning their experiences with examinations involving offshore transactions; (6) conducting examinations involving offshore transactions and providing assistance to examiners engaged in the examination of offshore transactions; (7) attending multiagency meetings on the impact of offshore jurisdictions; (8) assisting in the national foreign trust project and participating in the creation of the national foreign trust training; (9) Providing assistance to the IRS National Office in an Organization for Economic Cooperation and Development (OECD) initiative on tax haven countries; (10) participated in the ongoing creation of an Offshore Audit Techniques Guide; (11) providing assistance since 1997 to other revenue agents, around the country, who have been auditing tax haven and offshore issues.
The Internal Revenue Service is conducting an investigation to determine the correct federal tax liabilities, for the years ended December 31, 1999, 2000 and 2001, of United States taxpayers who have signature authority over VISA cards issued by, through, or for banks or other financial institutions in Anguilla, Antigua and Barbuda, Aruba, Bahamas, Belize, Bermuda, British Virgin Islands, Cayman Islands, Cook Islands, Cyprus, Dominica, Gibraltar, Guernsey/Sark/Aldency, Hong Kong, Isle of Man, Jersey Latvia, Liechtenstein, Luxembourg, Malta, Nauru, Netherlands Antilles, Panama, Samoa, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Singapore, Switzerland, Turks and Caicos, and Vanuatu.
To facilitate this investigation, the Internal Revenue Service has issued, under the authority of Section 7602 of the Internal Revenue Code (26 U.S.C.), a "John Doe" summons to VISA International, its affiliates and subsidiaries. A copy of this summons isi attached to the Exhibits Appendix, submitted contemporaneously with this Declaration, at Tab 1. The records sought by the summons will reveal the identities of and/or disclose transactions by persons who may be liable for federal taxes and will enable the Internal Revenue Service to investigate whether those persons have complied with the internal revenue laws.
Based upon my experience and information received from other investigations, it is likely that a number of the persons who have signature authority over VISA cards issued by, through, or for banks or other financial institutions in the jurisdictions identified in the "John Doe" summons may have been under-reporting income, evading income taxes, or otherwise violating the internal revenue laws of the United States.
The "John Doe" summons to VISA International relates to the investigation of an ascertainalbe group or class of persons. There is a reasonable basis for believing that this group or class of persons has failed or may have failed to comply with provisions of the internal revenue laws. The information and documents sought to be obtained by these summonses are not already in the possession of the Internal Revenue Service and are not readily available from sources other than VISA International.
I INTRODUCTION
The Internal Revenue Service has been concerned with the growing problem of United States taxpayers, involved in both lawful and unlawful activities, evading the payment of United States taxes by concealing unreported taxable income or claiming improper deductions as a result of maintaining diverted funds in accounts in offshore tax haven and financial privacy jurisdictions and accessing those funds through the use of payment cards (including credit, charge or debit cards) issued to the taxpayer. The United States Congress, the United States Treasury Department, a Presidential Commission, the Internal Revenue Service and numerous journalists have examined and reported on this problem.
II OVERVIEW ON THE USE OF OFFSHORE TAX HAVEN AND FINANCIAL PRIVACY JURISDICTIONS
A. The Gordon Report
On January 12, 1981, the Internal Revenue Service issued a report entitled "Tax Havens and Their Use by United States Taxpayers - An Overview," commonly known as the "Gordon Report" for its author, Richard A. Gordon, Special Counsel for International Taxation. The Gordon Report was based on a review of judicial decisions and published literature in the field of international tax planning, research into internal IRS documents concerning taxpayer activities, interviews with IRS personnel, personnel who dealt with tax haven issues for other federal government agencies, and lawyers and certified public accountants who specialized in international taxation. Additionally, the findings in the Gordon report were based on a statistical analysis of available data concerning international banking, United States direct investment abroad and foreign investment in the United States.
The Gordon Report states that the available data and interviews with practitioners, IRS personnel, personnel from other agencies and representatives of foreign government, support the view that taxpayers ranging from large multi-national companies to individuals and criminals are making extensive use of tax havens. It describes tax haven countries as having at least some of the following characteristics: (1) low rates of tax when compared with the United States; (2) a high level of bank or commercial secrecy that the country refuses to breach even under an international agreement; (3) relative importance of banking and similar financial activities to its economy; (4) the availability of modern communication facilities; (5) lack of currency controls on foreign deposits of foreign currency; and (6) self-promotion as an offshore financial center. The Gordon report concluded that there are:
enormous and growing levels of financial activity and accumulation of funds in tax havens [as well as a] large number of transactions involving illegally earned income and legally earned income which is diverted to or passed through havens for purposes of tax evasion.
The Gordon Report also found that the "term 'tax haven' may also be defined by a 'smell' or reputation test: a country is a tax haven if it looks like one and if it is considered one by those who care. Many publications identify jurisdictions as tax havens, and the same jurisdictions generally appear on all of the lists." The tax havens studied in the Gordon Report include the Bahamas, Bermuda, Cayman Islands, the Channel Islands, Hong Kong, Isle of Man, Luxembourg, Netherlands Antilles, Panama, Singapore, and Switzerland.
B. The Caribbean Basin Report
On January 6, 1984, the United States Department of the Treasury published an update of the Gordon Report entitled "Tax Havens in the Caribbean Basin." The Caribbean Basin Report includes Bahamas, Bermuda, Cayman Islands, Netherlands Antilles, and Panama among the Caribbean Basin tax haven jurisdictions that are the focus of the report. The Report includes a discussion of tax haven transactions designed to escape taxation through fraudulent means including so-called "double-trust" schemes and the use of tax haven corporations to hide beneficial ownership. The Caribbean Basin Report concludes with the following language:
It is difficult to measure the illegal use of tax havens because of the nature of the transactions and because of the difficulty of obtaining information from most tax havens. Nevertheless, it seems reasonable to assume that a great deal of activities designed to violate the tax and other laws of the United States takes place in the Caribbean Basin tax havens.
C. The Crime and Secrecy Report
On August 28, 1985, the Permanent Subcommittee on Investigations of the United States Governmental Affairs Committee issued a report entitled "Crime and Secrecy: The Use of Offshore Banks and Companies." The Crime and Secrecy Report summarized the offshore problem as follows:
The subcommittm found that the criminal exploitation of offshore havens is flourishing because of haven secrecy and foreign government intransigence in the face of overwhelming evidence of dirty money in their banking systems. The effect has been to systematically obstruct U.S. law enforcement investigations, erode the public's confidence in our criminal justice system, and thwart the collection of massive amounts of tax revenues.
The report includes a quote from Senator William V. Roth, Chairman of the subcommittee regarding the committee's findings on the use of tax havens by American citizens:
But equally shocking is the fact that we have also found that offshore havens are no longer used exclusively by criminals. Instead, they are increasingly being used by otherwise law abiding Americans to avoid paying taxes and to shield assets from creditors.
The Crime and Secrecy Report estimated that the "underground economy" at that time was hiding between $150 billion and $600 billion apparently unreported income from both legal and illegal business from the Internal Revenue Service. Furthermore, it stated that the underground economy was unquestionably linked to the use of offshore facilities. The Crime and Secrecy Report includes an extensive discussion of "principal havens," including Anguilla, Antigua, Bahamas, Bermuda, Cayman Islands, Hong Kong, Liechtenstein, Luxembourg, Nauru, Netherlands Antilles, Panama, St. Vincent and the Grenadines, Singapore, Switzerland, Turks and Caicos Islands, and Vanuatu.
D. The United Nations Report
On May 29, 1998, the United Nations' Office for Drug Control and Crime Prevention, Global Programme Against Money Laundering, released a report entitled "Financial Havens, Banking Secrecy and Money Laundering." The United Nations Report states that offshore financial centers, tax havens and bank secrecy jurisdictions --
attract funds partly because they promise both anonymity and the possibility of tax avoidance or evasion. A high level of bank secrecy is almost invariably used as a selling point by offshore financial centers. Many Internet advertisements for banks emphasize the strictness of the jurisdiction's secrecy and assure the prospective customers that neither the bank nor the government will ever give bank data to another government. When the advertising is for private banks, it also stresses the protection from tax collectors.
United Nations Report, pg. 37.
Among the "major financial havens" described in this report are the following jurisdictions: Anguilla, Antigua, Aruba, Bahamas, Belize, Bermuda, British Virgin Islands, Cayman Islands, Cook Islands, Cyprus, Gibraltar, Guernsey, Hong Kong, Isle of Man, Jersey, Liechtenstein, Luxembourg, Malta, Nauru, Netherlands Antilles, Panama, Samoa, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Singapore, Switzerland, Turks and Caicos Islands, and Vanuatu. United Nations Report, pg. 51.
E. The OECD Report on Harmful Tax Practices
In June 2000, the Organisation for Economic Co-Operation and Development (OECD) issues its Report on Progress in Identifying and Eliminating Harmful Tax Practices (at http://www.oecd.org/pdf/M000014000/M00014130.pdf) in furtherance of its efforts to establish an "international framework to counter the spread of harmful tax competition." The OECD has described its "starting point for identifying a tax haven as whether the jurisdiction has no or nominal taxation on financial or other service income and offers or is perceived to offer itself as a place where non-residnets can escape tax in their country of residence. Other key factors are used to confirm the existence of a tax haven (hereinafter referred to as the 'tax haven criteria') that focus on transparency, exchange of information, and local business activities of foreign enterprises." From an initial identification of forty-seven such jurisdictions, the OECD identified in this Report thirty-five uncooperative jurisdictions meeting its definition of tax haven. Several jurisdictions were not included on the list because they had made public political commitments prior to June 2000 to eliminate their harmful tax practices. Prior to a deadline of February 28, 2002, sixteen other jurisdictions have also announced commitments to the OECD. As set forth in the OECD's 2001 Progress Report (at http://www.oecd.org/pdf/M00021000/M00021182.pdf), a jurisdiction will not be considered uncooperative if "it commits to transparency and effective exchange of information." The commitments made by these jurisdictions would not allow the Internal Revenue Service to request the exchange of information with respect to the investigation of U.S. taxpayers for the years ended December 31, 1999 through 2001.
III. THE USE OF CARDS IN OFFSHORE SCHEMES
A. Overview
Based upon my involvement with a compliance initiative gathering project on offshore transactions, I have found the use of payment cards (including credit, charge and debit cards), as a means of obtaining access to offshore funds, to be a common practice promoted by offshore professionals and used by persons with offshore accounts. My investigation and research reveals that the following generally occurs. To engage in an offshore scheme, the individual in the United States (hereinafter "'U.S. person" or "U.S. taxpayer") will find an offshore professional to assist in the development of an overall offshore plan. The plan will often include the creation of an entity or entities in a financial secrecy jurisdiction. For example, the offshore professional will facilitate the creation of an International Business Corporation ("IBC") in the Bahamas. The IBC will have nominee owners, usually employees of a Bahamian law firm. The nominee owners will execute some type of agreement or declaration stating that they hold the shares of the IBC for the U.S. person, who then is referred to as the beneficial owner of the IBC. Under Bahamian secrecy laws, there can be no disclosure of the U.S. person's beneficial ownership of the IBC. There will be no mention of the U.S. person's ownership interest inany of the corporate documents or corporate filings. Once the offshore structure is created, the next step is devising methods to transfer funds or assets to the IBC. These funds or assets may represent profits the U.S. person seeks to hide from U.S. tax authorities. The last step in the process is using techniques to access funds when desired, either by repatriation or by use abroad. Payment cards are a common and purportedly a non-traceable method of accessing offshore funds in any location where the card is honored. The card account may be in the name of the U.S. person or in the name of the beneficially owned foreign entity. Offshore cards are typically secured by funds equaling anywhere from 100% to 200% of the credit extended. The funds are locked into an account at the bank offering the card. Arrangements can be made for discreet billing and discreet card payments such that all such transactions occur away from the scrutiny of U.S. investigators.
The United Nations Report, discussing the use of cards as a repatriation device, states that:
Funds can be repatriated through a debit or credit card issued by an offshore bank. Withdrawals from ATM machines or expenditures using the card can be settled either by automatic deduction from a foreign bank account or by the card-holder periodically transferring the required funds from one foreign bank account to another. Debit cards are superior from the point of view of automaticity and confidentiality. However, even an ordinary credit card can be turned into a debit card by being secured through the deposit of collateral with the issuing bank. Although secured credit cards were initially intended to give persons who were deemed a bad credit risk the advantages of use of a credit card, something that is increasingly essential for many purposes such as reserving hotel rooms or renting cars, it can be very useful to anyone seeking to lower their financial profile.
United Nations Report, pg. 18. The Report also states:
Credit and debit cards are the way people who have laundered money draw ready cash without leaving a financial trail. As one advertisement for a bank put it, it is the best way to stay in touch with "your offshore account."
United Nations Report, pg. 102.
B. Interviews and Conversations
Interview with a Cayman Island Banker -- I interviewed John Mathewson, the former president and majority owner of Guardian Bank, located in the Cayman Islands. Since his arrest in 1996 and subsequent guilty plea to bank fraud, tax evasion and money laundering charges, Mr. Mathewson has cooperated with the United States in the investigation of individuals who had used Guardian Bank to evade U.S. taxes. Mr. Mathewson indicated to me that 95 percent of the over 1000 depositors at the bank were U.S. citizens. He indicated that he promoted the creation of an offshore entity to "own" the U.S. person's assets. Mr. Mathewson stated that he recommended numerous techniques to covertly move money from the U.S. to the Cayman Islands. These methods included wire transfer, money orders, check payments to correspondent accounts or dummy corporate accounts, diverting taxable receipts and false invoicing. Mr. Mathewson advised that be promoted the use of credit/debit cards so that his clients could covertly access funds stored in the Cayman Islands. He stated that these techniques were promoted and used to evade U.S. taxation. Mr. Mathewson showed me a credit card with the name of Guardian Bank embossed on the front, which he used for his personal purposes.
Interview with Employee of an Offshore Promoter -- This person is a confidential informant. The person indicated that the promoter for whom he worked targeted U.S. persons to engage in offshore transactions. He further stated that the clients were advised to access their offshore funds via debit/credit cards.
C. Brochures
I attended an offshore conference and exposition held in London, England,
on December 2-4, 1997. The conference, called Shorex 97, was marketed as
"the Premier Offshore Conference." Exhibitors and presenters of information
included numerous banks, offshore promoters, accountants, trustees, lawyers,
software companies, tax haven government officials, and other well known
businesses interested in profiting from the offshore market. During our
attendance at Shorex 97, I had the opportunity to obtain literature and
promotional materials regarding offshore products. These are excerpts from
a variety of brochures and advertisements:
D. Internet Sites
I have reviewed various offshore/tax haven related Web sites on the Internet. A search of the Internet with any search engine using the key words "offshore" or "tax haven" will produce a very large number of hits. The Internet is becoming an increasingly popular method of obtaining information about any subject matter. As an information and marketing tool, the Internet is being used to market a wide variety of offshore related services. An individual can form an offshore corporation, create an offshore bank account, request offshore credit and/or debit cards, receive advice regarding offshore schemes, attend offshore presentations and do a variety of other offshore related tasks all via the Internet. Offshore services are being offered by a wide variety of individuals and entities. The marketers range from scam artists pushing offshore techniques as means to steal money from the public to major financial institutions. All are promoting the use of some offshore vehicle, either offshore trusts, foreign bank accounts or offshore corporations that are touted as being completely legal and are effective in reducing tax.
The following is a sampling of Web sites representative of the financial
services being marketed.
This "internationally diversified group" based in Panama provides "like-minded individuals and companies the best in offshore advice, products, and useful privacy related services for highly confidential business." The tax considerations behind these services are clearly expressed:
At this time, both direct and indirect taxes are accounted of, the Governments of most industrialized nations collect well in excess of 50% of all we earn, yet persistently say that taxes are lower than ever: believe that and you'll believe anything!That's why we have a situation where virtually everyone who is either self employed, owns and runs a business or has family money, needs to move offshore to protect both assets and income. In one way our philosophy is very simple -- to pay the least tax ourselves and to help others do the same! It's not that we're against all taxes per se, but there are limits to what we'll take!
This website offers offshore banking with "NO Reporting Requirements, NO Taxation, International ATM Debit/Secured Credit Card Availability." Among the cards offered is a VISA debit card. Bank accounts with credit/debit cards are offered in the following jurisdictions (among others):
Anguilla
Antigua
Bahamas
Belize
British Virgin Islands
Cayman Islands
Cyprus
Dominica
Gibraltar
Guernsey
Hong Kong
Jersey
Latvia
Luxembourg
Malta
Panama
Singapore
Switzerland
Turks & Caicos
(Copies of these Web pages are attached to Exhibits Appendix at Tab 2).
This is the homepage for a large international bank offering offshore
"international banking services from 5 centres in the Caribbean." The homepage
displays a map that highlights the proximity of these Caribbean offshore
banking centres to Miami, Florida, and thus their easy access by U.S. persons.
From the hornepage there is a link to a page setting forth the "Key Benefits
of Banking with Barclays in the Turks & Caicos Islands." The benefits
described include: "Thejurisdiction is responsive to the needs of international
investors, with a tax-free status and no double tax nor exchange of fiscal
treaties with other countries." The links to the benefits of banking in the
Bahamas and the British Virgin Islands also highlight their "tax-free status"
and the "lack of exchange controls for non-residents." Available ftom Barclays
is the Gold VISA Barclaycard with availability of cash advances of up to
US$5,000 through a worldwide ATM network, These cards, if lost or stolen,
"can be replaced within one working day (in the U.S.)" (Copies of these Web
pages are attached to Exhibits Appendix at Tab 3).
This is the homepage for "one of the world's leading offshore banks" offering
"high-net worth individuals and their families a high level of personal service
along with a full range of offshore banking services. From offshore bank
accounts to Internet banking, from international trust and tax planning to
investing money offshore." The homepage includes a pull-down menu directing
visitors to "Find out how you can: Get a VISA Gold Card." This takes the
visitor to a page for the "Executive Plus" account, "for people who . . .
need a safehold for their money that's easy to access . . . want the
confidentiality and financial advantage of an offshore account." The Executive
Plus account "includes the convenience of -- A Royal Bank of Canada
VisaTM Gold Debit Card." A person can gain "entry
into the exclusive world of private banking" with a surprisingly low minimum
deposit of only US$20,000." (Copies of these Web pages are attached to Exhibits
Appendix at Tab 4).
This bank, "ideally situated in Bermuda, Cayman, Guernsey and Hong Kong,
some of the world's premier offshore international business centres" offers
private bank services if "You seek to preserve your wealth and accumulate
assets while reducing legal and tax restrictions" and "You require the premium,
efficient, confidential service offered by a private bank." The bank offers
MasterCard and VISA cards for "easy access to cash and credit." (Copies of
these Web pages are attached to Exhibits Appendix at Tab 5).
This bank offers services in the Isle of Man to clients "that require gross
income.The website notes the Isle of Man has no capital gains, inheritance
or death duty taxes and that nonresidents are exempt from the Isle of Man
Income Tax. It suggests that investors "ensure that their affairs are structured
in a correct manner in order to avoid potentially adverse taxation or other
consequences in their country of domicile or residence." It recommends that
"As part of their tax planning, or to provide additional security for their
financial affairs, many clients choose to make use of company or trust
structures." Prominently displayed on Singer & Friedlander's homepage
is a link to a VISA International Debit Card. This VISA card is available
to customers with a balance on deposit of at least $10,000 and "can be used
to access your offshore funds for direct payments of goods and services or
to withdraw cash from machines bearing the VISA symbol." (Copies of these
Web pages are allached to Exhibits Appendix at Tab 6).
Argon Limited
http://www.argonlimited.com/index.htm
This website offers offshore bank accounts in St. Vincent and the Grenadines; also offered is a VISA card "tied to a bank account." The credit card requires a total deposit of $2,000 and can be "drawn down at the rate of $2,000 maximum per day." The website answers the question "Why St. Vincent?" by noting that it does not have a tax treaty with the United States and is the "first country in the world to enact a General Confidentiality Law applicable to all offshore transactions and businesses." To open an investment account, a person must set up an International Business Corporation or trust "to protect what you are about to earn." (Copies of these Web pages are attached to Exhibits Appendix at Tab 7).
The website offers suggestions on how to avoid the reporting requirements of the Internal Revenue Code by setting up an Intemational Business Corporation and a trust:
One consequence of having an IBC and an account in the name of the IBC, is that Schedule B of the IRS form for US citizens, requires that one answer two pertinent questions. Do you own a bank account offshore? Do you have signature power over an offshore bank account? In general, anyone who has an IBC with one or more bank accounts should answer "Yes! " to both questions.The only exception is when the bank account is in the name of an IBC that is owned by a trust.
(http://www.argonlimited.com/ibcs.htm)Please note that since the bank account(s) in the name of the Trust is/are owned by the trust, a Grantor or Manager of the bank account can answer on Schedule B that s/he does not own an offshore bank account. If the trustee is the only one who is a signatory, then the Grantor may truthfully answer that s/he does not have signature power over an offshore bank account. However, if s/he is made a Manager over such an account, s/he should answer that s/he has signature power over an offshore bank account.
(http://www.argonlimited.com/trusts.htm)
This is the website for a "leading global financial service provider' offering
offshore banking services in the Channel Islands (Guernsey and Jersey). The
"banking solutions" offered by HSBC include "convenience, flexibility and
attractive interest rates,"' "24 hour global access," "and of course . .
. confidentiality," and, as the first consideration, "tax savings": "We are
based offshore so we can provide a tax-efficient home for your finances.
This is but one of the many reasons customers bank with us. All interest
our account is paid without the deduction of tax." A bank account can be
opened with a minimum opening deposit of $2,000. HSBC also offers VISA cards
"to obtain cash from a global cash machine network." (Copies of these Web
pages are attached to Exhibits Appendix at Tab 8).
This website offers professional financial, management and corporate services
including the formation of International Business Corporations and offshore
trusts in St. Kitts and Nevis for "asset protection and offshore privacy."
The "practical uses" of a St. Kitts and Nevis International Business Corporation
allow someone to "own property for tax efficiency and preserve anonymity."
AFM Services also provides services for obtaining secured VISA cards and
bank accounts. (Copies of these Web pages attached to Exhibits Appendix at
Tab 9).
KPMG Corporate Services (an affiliate of the global KPMG network of "6,561
partners and more than 85,291 total staff across 155 countries") is the "only
guide you will need to Belize's offshore industry." KPMG Corporate Services
"will make setting up offshore an easy decision." Its staff can assist in
offshore company formation and administration, facilitating the opening of
"US $ accounts"' and "access to globaly accepted credit cards." This website
promotes a Belize International Business Corporation as the "ideal financial
tool for a growing number of international investors because Belize's "offshore
legislation provides for maximum flexibility in global asset protection and
tax and investment planning." (Copies of these Web pages are attached to
ExIfibits; Appendix at Tab 10).
HSBC provides private banking services in Malta where interest (at a premium
rate) for international clients is paid gross and is free of Maltese taxes.
According to the brochure available on this website (a copy of which is attached
to the Exhibits Appendix at Tab 11) promoting the benefits of banking in
Malta, "the essence of private banking is confidentiality, a pre-requisite
for all private investors. This concept is also enshrined in Maltese legislation
on professional secrecy, precluding us from divulging any details of our
clients' financial affairs." The brochure notes that HSBC Bank Malta offers
a choice of credit cards for use "throughout the world" and prominently displays
a VISA card.
"If you sincerely want to legally obtain personal and financial freedom from
Big Brother -- Point and Click below for our 451 asset protection and privacy
products and services. . ." These include Swiss bank accounts with available
VISA cards. (Copies of these Web pages are attached to Exhibits Appendix
at Tab 12).
This website from Latvia offers an anonymous offshore debit card with internet
banking system. Among the cards offered is an Offshore VISA Electron debit
card with an "US DOLLAR card account (for replenishing card)." The address
given on the application for the bank "may be coded -- 'not real'." (Copies
of these Web pages are attached to Exhibits Appendix at Tab 13).
Maritime International offers "tax free companies, LLCs and offshore asset protection trusts" in a number of jurisdictions including Antigua, Bahamas, Belize, Dominica, Panama, St. Vincent, St. Kitts, and Samoa. It also arranges for the "opening of tax free offshore personal or corporate bank and brokerage accounts" in the Caribbean, South Pacific and Switzerland. This website explains the distinction between onshore and offshore banking: Onshore banking "is subject to the tax rules, foreign exchange and charges of whatever country the account is in. . . . Offshore banking on the other hand is tax free, there are no foreign exchange regulations attached to the account and all account information is confidential."' Offshore VISA credit cards with debit facilities are also made available. Maritime International extensively promotes several jurisdictions as having the "best offshore legislation, asset protection and privacy available." All recommendations emphasize the tax and secrecy considerations of forming offshore entities. For example:
PANAMA:Although Panama has fairly high rates of tax internally, its status as a tax haven depends upon the principle that income received by a Panamanian corporation from sources outside Panama is exempt from tax.
Panama has full confidentiality and privacy embedded in the law, with civil and criminal penalties for disclosure. There is no requirement for the disclosure of beneficial ownership to the Panama authorities and no requirement for audited reports or financial statements. There are no double taxation agreements and no tax exchange agreements with other countries.
SAMOA:
Total exemption from taxes is granted to "International Companies" incorporated under the 1987 Act as well as to "International Trusts" registered under the International Trusts Act, 1987. . .
In our opinion, Western Samoa has the best legislation regarding offshore companies, tax liabilities and asset protection that is currently available. Western Samoa is not party to any mutual assistance, gateway, or information agreements unlike some of the British Dependent Territories...
The International Companies Act expressly denies any right to disclose information that "will, or is likely to, result in the payment of any tax, other penalty or any fine by the company" (section 227(4)(c) of the Act)... (Copies of these Web pages are attached to Exhibits Appendix at Tab 14).
This website offers offshore financial services in Antigua, Nevis and Dominica. It highlights the "benefits of going offshore" as including:
Tax avoidance -- considerable tax savings in onshore territory. Although there is in the United States the legal requirement to report holdings in offshore companies to the local tax authorities, no matter how restrictive these rules may be a greater tax savings may be achieved by the use of an offshore company rather than a company incorporated in one's country of residence (Emphasis in original).
This website promotes the benefits of Dominica as an "offshore haven" that offers a twenty year tax exempt, confidential, treaty-free jurisdiction." Additionally, it answers the questions "Why go offshore?" and "Why use Nevis?' by emphasizing financial privacy and tax considerations including that Nevis has "No tax information treaty with the United States." (Copies of these Web pages are attached to Exhibits Appendix at Tab 15.)
This company offers banking services including call accounts, current accounts, savings accounts, certificates of deposits, and money market accounts "provided with respect to intemationally accepted credit card applications. Note that credit cards must be secured by up to one and a half times the spending limit."
Offered is a "VISA© Gold SwissAmericard© Corporate Card." The application for this VISA card, available online, notes that it "enables you to get instant cash at over 100,000 institutions worldwide and at Plus© System ATMs." [Plus is VISA's global ATM mark. http://corporate.visa.com/mc/facts/visaplus.shtml]. The application also touts the "Confidentiality and Flexibility" of this VISA card: "With SwissAmericard you enjoy unparalleled confidentiality. Transactions and record of cards issued by Swiss American Bank Ltd. are protected by Antigua's Offshore Banking Secrecy Act."
IV. COURT CASES AND INVESTIGATIONS INVOLVING OFFSHORE CARDS
Several recent court cases and pending Internal Revenue Service investigations reflect that offshore cards have been used by U.S. taxpayers as part of their failure to comply with provisions of the internal revenue laws:
A. Court Cases
Michael J. Hogan was indicted by a grand jury in the United States District
Court for the Southern District of Ohio on April 15, 1998, on various tax
charges. He was arrested in Florida where his pre-trial detention hearing
took place. The evidence presented at the pre-trial hearing reflects that
at the time of his arrest Mr. Hogan had in his possession a VISA card (with
his name: and the name of a corporation on it) issued by Swiss American Bank
in Antigua. After finding that Mr. Hogan had at least $1,000,000 offshore,
United States Magistrate Judge Karla R. Spaulding ordered Mr. Hogan to post
a bond in the amount of $1,000,000. Mr. Hogan was sentenced on November 21,
2000, to serve thirty-six months imprisonment, to be served concurrently,
on one count pursuant to 18 U.S.C. § 371 (conspiracy to defraud the
United States) and one count pursuant to 26 U.S.C. § 7201 (attempt to
evade or defeat tax).
David L. Bamford pled guilty to a one count Information charging him with
attempting to evade or defeat taxes in violation of 26 U.S.C. § 7201.
In a personal interview, Mr. Bamford told me that he had funds which he had
illegally diverted to Guardian Bank in the Cayman Islands. Mr. Bamford stated
that he obtained a credit/debit card to access the funds and used that
credit/debit card to purchase personal items. Mr. Bamford stated that he
did not receive bills from the credit card company. Rather, upon issuance
of the credit/debit card, funds were removed from his account and placed
in a reserve account and the reserve account was tapped by Guardian to pay
the credit card bills. According to the face of the statements, the bills
were addressed to Mr. Bamford at Guardian Bank's post office box. Mr. Bramford
stated that the credit/debit card was suggested to him by John Mathewson
as a covert means of accessing Mr. Bamford's offshore funds and that Mr.
Bamford used the credit/debit card to make purchases in and out of the United
States.
The defendant is a medical doctor in Idaho who pled guilty to a charge of subscribing to a false tax return for the 1995 year in violation of 26 U.S.C. § 7206(1). In the Plea Agreement signed by Dr. Barton on April 21, 1999, a copy of which is attached to the Exhibits Appendix at Tab 16, he agreed that in 1994 he began diverting partnership profits to a series of trusts as part of tax evasion scheme. The Plea Agreement (at pg. 5) states:
These sums would be paid as "management fees" rather than taken by Dr. Barton as income. Income in 1995 was deposited in local bank accounts opened in order to transfer said income to bank accounts in the Turk and Caicos Islands which were controlled by Paul Harris. Mr. Harris would then disburse sums to Dr. Barton by transfers or deposits to bank accounts Dr. Carroll maintained in the Turks and Caicos Islands and/or in the Channel Islands. Dr. Carroll would then disburse sums to Dr. Barton by transfer or deposits to a bank account Dr. Barton controlled in the Channel Islands. Dr. Barton would then access these funds with debit cards, which funds were used for ordinary fiving or "personal inurement." (Emphasis added).
The three defendants pled guilty to charges under 26 U.S.C. § 7206(1). The charges included references to the use of credit cards issued by a bank in the Cayman Islands. In his Plea Agreement he signed on May 26, 2000, a copy of which is attached to the Exhibits Appendix at Tab 17, Robert Mark Kirk admitted (at pg. 4) the following:
I, ROBERT MARK KIRK, admit that I, on or about April 15, 1994, in theNorthern District of Oklahoma, did knowingly and willfully make and subscribe, under penalties of perjury, and did file with the Internal Revenue Servicel a false U.S. Individual Incorne Tax Return (Form 1040) for the year 1993 that materially under reported my total income, my taxable income, and the total tax due and owing to the Internal Revenue Service, in that I signed in, and presented to the Internal Revenue Service from, Owasso and Tulsa, Oklahoma, a false 1993 income tax return containing a written declaration that the return was made under penalties of pejury, in which I falsely omitted a substantial portion of the income I received from Datalink Electronics Corporation (Datalink) during 1993. The omitted income was deposited by Datalink to a bank account in my name in Grand Cayman Island, British West Indies, and repatriated to the United States through cash withdrawals/advances and personal expenses charged on a credit card issued in my name. (Emphasis added).
The defendants were convicted of criminal charges involving conspiracy to commit mail fraud, mail fraud, conspiracy to commit money laundering and domestic and international money laundering. While this was not a case under the tax laws, the Press Notice issued by the United States Attorney on August 9, 2000, upon the sentencing of the defendants, a copy of which is attached to the Exhibits Appendix at Tab 18, discloses the offering of offshore cards to help people evade taxes. The Press Notice states, in relevant part:
Testimony was presented at the trial establishing that from April of 1996 to May of 1999, Roper and Davis and others promoted Offshore Financial Services (OFS) and other entities in Jamaica and Phoenix, Arizona. They promoted programs of OFS by claiming that persons joining and selling OFS programs would receive commissions for their sales and commissions for individuals brought into OFS with a double your money back guarantee. The programs were supposed to help people evade taxes, and included offshore bank accounts, credit cards, mailing services, telephone answering services. (Emphasis added).
On September 25, 2001, the defendant entered into a plea agreement in which
he agreed to enter a plea of guilty to two counts of filing a false income
tax return in violation of 26 U.S.C. § 7206(l). He also agreed that
the amount of the tax loss is not less than $325,000 and not more than $500,000.
A report filed in the public record in this criminal case pursuant to the
plea agreement reflects that during a three year period charges totaling
$112,296 (including $16,890 for a diamond) were made on a VISA card issued
by an offshore bank in the Cayman Islands. On March 7, 2002, Mr. McCoy was
sentenced to a term of imprisonment of twenty-one months for each count to
be served concurrently.
On December 7, 2000, a superseding indictment was filed charging Neil R. Brown and Paul R. Brown with twenty-one tax counts alleging a massive tax loss to the United States due to a scheme using foreign corporations and trusts to move millions of dollars through the international banking system. The defendants marketed these tax evasion schemes to dentists, chiropractors and other self-employed professionals. A newspaper article described the steps through which the defendants led their clients:
A taxpayer formed a trust with himself as the beneficiary and a Brown associate as trustee, then formed a corporation wholly owned by the trust, both in the Bahamas. The client retained control over the trustee's activities.Next, the corporation opened a bank account in St. Helier, on the Channel Island of Jersey off Great Britain. The client was the only signatory on the account, but there was no paperwork available to U.S. authorities linking the taxpayer to the corporation and its account.
***
The orthodontist would go to a"'consulting seminar" in the Bahamas, where he would attend a half-dozen 45-minute classes devoted to such subjects as "internal cost controls," "accounts receivable factoring," and "estate and inheritance management."
The Bahamian corporation would bill the professional corporation $300,000 in consulting fees and the money would be deposited in the Jersey bank account. The fees would be deducted as a business expense at a rate of 34 percent, and the orthodontist's professional corporation would realize a reduction in taxes of $100,000.
The $300,000 would then come back to the orthodontist either through a credit card issued on a foreign bank or as a bogus loan.
The credit card bills would be paid by a Brown-controlled entity in Dublin, Ireland, which would be reimbursed with funds transferred from the Jersey bank account. There would be no paper trail to the orthodontist, who would be the actual user of the card.
See Denny Walsh, New tax scam makes use of trust, Sacramento Bee, January 8, 2001. Acopy of this article is attached Exhibits Appepdix at Tab 19.
B. Articles and Books
On November 14, 1999, the Washington Post published an article by Sharon Walsh titled "A Case Study in the Elusiveness of Offshore Banks" in which the activities of a Melvin J. Ford were highlighted. According to the article, a copy of which is attached to the Exhibits Appendix at Tab 20, Mr. Ford and his associates were being investigated by the Internal Revenue Service, the Securities and Exchange Conunission, the U.S. Attorney's office in Maryland, the U.S. Customs Service and U.S. postal inspectors. The article explains Mr. Ford's activities:
In addition to insulating himself by depositing his investor's money in accounts in offshore jurisdictions that are difficult to trace, Ford also has protected himself by preaching the gospel of fear to his clients, according to invesfigators and former clients.Many of the investors he has lured to offshore seminars affiliated with The Forum have been part of militant anti-government groups and already have a natural distrust of government agencies. Ford has added to that concern by telling them the IRS Would only want to take away their investment returns, so even those who have lost tens of thousands of dollars have not reported those losses to authorities.
Another aspect of Mr. Ford's activities include the use of offshore cards. The Washington Post writes:
U.S. banks must keep records of all inbound and outbound wire transfers, although once the money is deposited in an offshore bank, the account names may be changed, making it impossible to trace it further. In addition, many offshore banks issue credit cards that can be used as debit cards. So if you wanted to buy a $50,000 car in the United States, you could simply use your Antigua bank's Visa card rather than writing a check or wiring the money back to the United States. This is how Melvin Ford paid his living expenses, according to investigators.
There are several books promoting the benefits of offshore banking. One of these books, THE COMPLETE GUIDE TO OFFSHORE MONEY HAVENS -- HOW TO MAKE MILLIONS, PROTECT YOUR PROPERTY, AND LEGALLY AVOID TAXES (Prima Publishing) by Jerome Schneider, has been updated and revised in several editions. Chapter 6 of the 3rd Edition, published in 1999, is titled "Say Goodbye to the IRS" and ends with the following paragraph: "Right now, offshore banks and some foreign companies let you legally move assets outside the United States and beyond the reach of Uncle Sam. While the special tax breaks they provide may not last forever, for the moment there are fortunes to be made abroad." Chapter 6 of the 4th Edition, published in December 2001, is titled "Trying to Say Goodbye to the IRS." The last paragraph of this chapter now reads: "Right now, offshore banks and some foreign companies let you legally move assets outside the United States and benefit from this move. All you have to do is reap your profits and pay your taxes. There are still fortunes to be made abroad," However, this book continues to recommend offshore money havens, especially (at pg. 219): "Overall, I can tell you that my favorite offshore money havens are the British Virgin Islands and my three Ns: Nauru, Nevis, and the Netherlands Antilles. These four locations have ironclad secrecy rules and a reputation for making it difficult for U.S. authorities to access private information."
In United States v. Premises Known as: 712 Harkness Street, Manhattan Beach, California, Docket No. 01-0387M (C.D. Cal.), the court issued a search warrant in connection with the following investigation described in paragraph 5 of the affidavit in support of the search warrant affidavit:
Since January 1997, 1 have been investigating Jerome Schneider, Eric Witmeyer, and others regarding their involvement in the promotion of offshore banks, offshore trusts, and offshore corporations as a way to evade taxes and/or hide one's liability from the Internal Revenue Service. Based on this investigation, there is probable cause to believe that Jerome Schneider, Eric Witineyer, and others have devised and agreed to market an offshore nominee ownenhip, structure involving offshore banks, offshore trusts, and offshore corporations, concealing the customer' s ownership and control of the seemingly offshore banks, trusts and corporations. Although this offshore structure uses such terms as independent foreign owners (IFO's), shareholding purpose trusts (SPT's), trust enforcers, Rabbi Trusts, etc., to appear somewhat complicated, your affiant believes it is no more than a simple scheme designed to conceal income that should properly be reported by U.S. citizens on U.S. tax returns.
A copy of this search warrant affidavit is available at
http://www.offshorebusiness.com/Documents/schneider.PDF)
In his book THE COMPLETE GUIDE TO OFFSHORE MONEY HAVENS (3rd Edition), Jerome Schneider writes (at pg. 85): "A U.S. nest egg is as vulnemble as a real egg, and that's not much use to you if ever you should fall on hard times. Not so for the offshore nest egg. It remains safely and legally hidden from the prying eye of the government, or anyone else that wants to get their hands on your capital." Mr. Schneider then describes (at pg. 86) "two emergency tools in my wallet": one is a plastic key to his car, "The other is a credit card which I've had set up so it's connected to my offshore nest egg. If ever I should find myself in need, I can use this card to quickly tap in to my emergency capital. I think of it as myget out of trouble free card -- just like in the board game Monopoly."
In THE OFFSHORE MONEY BOOK -- HOW TO MOVE ASSETS OFFSHORE FOR PRIVACY, PROTECTION, AND TAX ADVANTAGE (Contemporary Books 2000), Arnold L. Comez, J.D., writess:
If you truly crave privacy, avoid using your onshore credit cards. They provide an ongoing permanent electronic diary of where you go, what you buy, how much you spend, where you shop, whom you telephone, what telephone companies you use, where you entertain and vacation, which travel agents and airlines you use, and on and on. Charge your discreet expenses offshore!
Likewise, in Terry Neal's THE OFFSHORE ADVANTAGE: PRIVACY, ASSET PROTECTION, TAX SHELTERS, OFFSHORE BANKING & INVESTING (MasterMedia Publishing Corp. 1998) (at pg. 156), the author promotes the benefits of offshore credit cards:
You get further protection with an offshore account because you are entitled to a credit card issued on that bank. That means you can charge to your heart's content, anywhere you want, and the information stops at your offshore bank. If you charge on a domestic domiciled bank however, the information could become part of a database that is sold to whoever is willing to pay the price.
C. "John Doe" summons to MasterCard
Based on the petition and supporting materials filed in the United States District Court for the Southern District of Florida in Case No. 00-3919 CIV-JORDAN, the court on October 30, 2000, issued an order approving the service of a "John Doe" summons upon MasterCard International, Inc. ('MasterCard"). Copies of the Court's Order and of the "John Doe" summons are attached to the Exhibits Attachment at Tabs 21 and 22, respectively. Through the "John Doe" summons issued to MasterCard, the Internal Revenue Service sought information regarding holders of MasterCard credit and debit cards issued by or through banks or other financial institutions in Antigua and Barbuda, the Bahamas and the Cayman Islands. MasterCard complied with the "John Doe" summons by producing electronic database records with transactions for cards issued by authorized issuers of MasterCard cards in the three jurisdictions. This file contains over 1.7 million transactional records, involving over 230,000 different accounts.
Since production of the transactional records by MasterCard, I and other
Revenue Agents under my direction have been analyzing the data and comparing
it to Internal Revenue Service records and information available from other
public sources in an effort to identify U.S. persons. Our efforts have resulted
thus far in the identification of certain taxpayers, and additional analysis
and other procedures will lead to the identification of numerous other U.S.
persons. Individuals already identified include executives of publicly held
companies, business owners, doctors, lawyers, investment professionals, promoters
of tax shelters and/or the use of tax haven jurisdictions (including an author
of several books) and wealthy individuals who are using the offshore cards
to pay for living expenses (at such places as grocery stores, restaurants,
gas stations, department stores, online services and merchants, cell-phone
services, satellite TV services and mail order merchants), travel related
transactions (such as airline tickets, resorts, casinos, cruise line expenses,
hotels and car rentals), and to purchase large-dollar items (such as jewelry,
country club expenses, art dealerships, tuition for colleges
and universities and motor vehicles) in the United States. From this data,
we have identified U.S. persons who failed to check on their tax returns,
as required by law, that they had an interest in or signature or other authority
over a financial account in a foreign country. We have also identified U.S.
persons who have not filed federal income tax returns. This information is
being used in civil examinations and crirainal. investigations under the
internal revenue laws.
The Internal Revenue Service's continuing analysis of the MasterCard data supports my belief that the ascertainable class of individuals using credit or debit cards issued by or through banks or other financial institutions in tax haven jurisdictions have failed to comply with the provisions of the internal revenue laws.
V. THE IDENTIFIED COUNTRIES
Based on the results of the continuing analysis of information obtained from MasterCard, the Internal Revenue Service has expanded the scope of the investigation to include the determination of the correct federal tax liabilities, for the years ended December 31, 1999, 2000 and 2001, of United States taxpayers who have signature authority over VISA cards issued by, through, or for banks or other financial institutions in major offshore tax haven and financial privacy jurisdictions throughout the Caribbean, European and Asian/Pacific markets. Like Antigua and Barbuda, the Bahamas and the Cayman Islands, all of the jurisdictions listed on the "John Doe" summons to VISA International are widely known as places where, because of strict bank secrecy laws and devices such as International Business Corporations, trusts and other subterfuges, persons can shield their wealth from taxation in their home countries. The jurisdictions listed on the "John Doe" summons to VISA International are all recognized as principal offshore tax haven and financial privacy jurisdictions by industry analysts and are actively marketed as such by promoters of offshore schemes. The jurisdictions listed on the "John Doe" summons to VISA International were selected on the reasonable belief that U.S. taxpayers have failed or may have failed to comply with provisions of the internal revenue laws through the use of VISA cards issued by, through, or on behalf of banks and other financial institutions in those jurisdictions.
VI. SUMMONED PARTY AND RECORDS
Like MasterCard, VISA International does not issue cards directly; it licenses its members to issue VISA cards. VISA International (including its subsidiaries) is responsible for the processing of transactions ftom its initial authorization when a cardholder tenders the VISA card to a merchant through the final clearing and settlement of the transactions between issuing banks (the VISA International members issuing VISA cards to persons) and acquiring banks (the VISA International members contracting with merchants that accept VISA cards).
The "John Doe" summons issued requires VISA International to provide the names, addresses, social security numbers (or such other identifying information as driver license, passport or employer identification numbers) and telephone numbers of cardholders or card users of VISA cards issued by the banks and financial institutions in the subject jurisdictions where a U.S. citizen or U.S. resident had signature authority over the VISA card or account during the years ended December 31, 1999 through 2001. To the extent VISA International does not have such information, the "John Doe" summons requires VISA International to provide all documents related to card transactions, charge and purchases during the period January 1, 1999, through the date of compliance with the summons, including computer records of transactions processed through VISA's authorizations system and VISA's clearing and settlement system, for all VISA cards issue d by the banks and financial institutions in the subject jurisdictions in which such card or account had at least two (2) transactions, charges or purchases in the United States in each of six (6) different months during any twelve (12) month period between January 1 1999 and December 31, 2001, The "John Doe" summons is narrowly crafted in an attempt to retrieve from VISA International records leading to the identification of U.S. persons.
Based on my experience with the MasterCard summons, I know that data from the processing of credit and debit card authorization and clearing transactions is maintained by credit card processors such as VISA International (including its subsidiaries) in standard file layouts searchable by many different fields of information, including fields containing information on the financial institutions who issued the cards. I have learned that it is a simple matter for VISA International to extract ftom its database all information pertaining to cards issued by issuers with particular Bank Identifier Numbers (BINs) and copy that data to a computer tape or tapes. Thus, VISA Internationa has readily accessible data which may be relevant to the determination of the correct federal tax liabilities, for the years ended December 31, 1999, 2000 and 200 1, of United States taxpayers who have signature authority over VISA cards issued by, through, or for banks or other financial insfitutions in the subject offshore tax haven and financial privacy jurisdictions. A VISA International spokeperson, commenting on the "John Doe" summonses issued to American Express and MasterCard has stated: "We urge our cardholders not to use Visa cards for illegal purposes. We are not a law enforcement agency, but we will cooperate to the fullest extent possible with investigators, should the need arise." Crooks launder money via cards, Cards International, September 12, 2001, available at 2001 WL 13276228.
VIII. CONCLUSION
Based upon the foregoing, I have concluded that there is a reasonable basis for believing that the information sought in the "'John Doe" summons issued to VISA International will identify United States taxpayers who may have diverted unreported income offshore or received unreported income from undisclosed offshore sources or have taken improper deductions or credits or have failed to withhold tax on certain payments made offshore and will enable the Internal Revenue Service to locate taxpayers who have failed to pay taxes owing under the Internal Revenue laws during the years ended December 31, 1999 through 2001.
I declare under penalty of pedury, pursuant to 28 U.S.C. Section 1746, that the foregoing is true and correct.
Executed this 14th day of March 2002.
[Signature]JOSEPH W. WEST
Revenue Agent
Internal Revenue Service
[No exhibits provided with the declaration.]
UNITED STATES DISTRICT COURT |
||
| IN THE MATTER OF THE TAX LIABILITIES OF:
JOHN DOES, United States taxpayers |
) |
|
I, Jack A. Blum, Esq., pursuant to 28 U.S.C. Section 1746, declare and state:
I am a member of the District of Columbia Bar and a partner in the law firm of Lobel, Novins & Lamont. I have served as Associate Counsel and Special Counsel to the United States Senate Foreign Relations Committee and in that capacity investigated money laundering issues and the problems created by the existence of "offshore" bank secrecy jurisdictions. I am generally recognized as an expert on offshore bank secrecy, tax haven and money laundering issues. I was retained by the United Nations Drug Control Programme as one of four experts to prepare a report on the problem of money laundering for the General Assembly session in June, 1998. A copy of my curriculum vitae is attached hereto.
The use of offshore bank accounts and offshore entities to facilitate tax evasion is a massive problem for the United States. At a minimum, I estimate the annual losses to the U.S. Treasury through offshore evasion by individual taxpayers at $70 billion dollars a year. According to the best available estimates more than five trillion dollars in assets are held offshore. Three trillion dollars is in the form of deposits in tax haven banks. The Cayman Islands, one of the largest "offshore" centers, claims to have in excess of $600 billion in bank deposits. These deposits are in the more than 580 banks licensed to do business there. The balance is in the form of securities held by International Business Corporations and trusts.
Although much of the money on deposit comes from banks "booking" their transactions to tax haven branches and affiliates to minimize their cost of funds, each of the havens boasts specialty banks which cater to the needs of wealthy individuals who want to escape income, estate and gift tax. These banks offer extensive private banking services which include the management of trusts, the creation and management of international business corporations which are vehicles for holding assets and the structuring of arrangements for hiding funds from tax collectors.
There are more than 360,000 International Business Corporations registered in the British Virgin Islands alone. The numbers grow by the day. Ten thousand new International Business Corporations were formed on the island of Nevis between January 1998 and March 1999. World wide, according to statistics gathered by the Department of State the total number of offshore International Business Corporations is approximately 1.6 million. In my opinion the State Department numbers are conservative. The IBC's are not required to file annual reports and may have nominee officers and directors. Forty one jurisdictions have been identified by the Organisation for Economic Co-operation and Development (OECD) as tax haven jurisdictions. These jurisdictions have corporation laws which allow the owners of the corporation to hide the identity of both the owners and the managers. Although some of these jurisdictions under pressure from the OECD have recently agreed to track beneficial ownership of corporations and to cooperate in certain tax matters, in most cases final tax agreements have not been ratified. Issues of compliance with the new requirements have not been addressed.
The International Business Corporations in tax haven jurisdictions are used to hold bank and securities accounts and to function as the operating arm of grantor trusts. People trying to hide assets use corporations from one jurisdiction to open bank account in another, thus adding additional layers of complexity to the financial trail.
For many years the growth in the use of offshore havens for tax evasion was limited by a single factor -- a person with money hidden offshore faced major problems and major expense in getting access to it. Moreover, the access left a paper trail in the form of checks, telephone and telex communications and other records. Tax evaders were reluctant to pay their bills with checks drawn on foreign banks because of the fees associated with international clearing operations. Many companies refused foreign checks for routine payments because of the fees charged by American banks for processing the checks and the long delays before the depositor had access to the funds.
The widespread use of credit and debit cards has enabled offshore bankers to offer easy and instantaneous access to offshore accounts without an apparent paper trail and without the associated fees. By issuing a bank sponsored credit or debit card and associating it with the offshore account offshore bankers can and do tell their customers that they can make most purchases, pay for travel, and get cash using the money in the offshore account without arousing suspicion and without leaving a paper trail in the form of communications and correspondence.
In 1994, I covertly taped an interview with John Mathewson, the chairman of a Cayman Islands bank, Guardian Bank and Trust. In that interview, he was trying to sell me on the idea of "going offshore." I asked him about getting access to my money. He offered a gold credit/debit card. He told me it could be issued in my name, the name of his bank, the name of an offshore corporation, or no name at all. By using an associated personal identification number the card would be good for up to $1 million a month, provided I had that much on account at his bank. He assured me that his records were protected by Cayman bank secrecy laws and those laws protected against inquiries from the Internal Revenue Service. It was obvious to me then that he was marketing the bank's services in assisting tax evasion to American citizens. Since that time I have been involved in a number of matters that demonstrated to me how common the credit card/access option has become.
In a series of advertisements for bank credit and debit cards that ran in the Financial Times of London in the mid-1990's, the Standard Chartered Bank, a large British bank with offshore operations, used the tag line "keep, in touch with your offshore money." The ad made the same points that Mr. Mathewson made -- instant access to funds in the remote location with complete secrecy.
In my opinion, the John Doe summons request by the Internal Revenue Service is an appropriate way of identifying foreign bank account holders. As a general rule, offshore banks will not issue bank related credit cards unless the recipient of the card has an associated bank account. Thus, the identification of United Sates persons who are card holders and who have cards issued by banks in the offshore tax haven and financial privacy jurisdictions listed in the John Doe summons will identify a group which has offshore bank accounts. The lists provided by the credit card firms will enable the Service to determine whether taxpayers have reported the existence of an offshore bank account they control and whether they have reported the related income.
In my opinion, because the summons is limited to account information related to countries whose banks are known to market their secrecy as protection from tax authorities, there will be a high likelihood that most of the names generated will be those of individuals who failed to report their foreign bank accounts and the related income. All of the jurisdictions for which data is requested have bank secrecy laws. Until now they have refused to cooperate with the United States on tax matters. In each jurisdiction bankers use secrecy and non-cooperation with United States tax authorities as a selling point.
Banks in these jurisidictions regularly market their services in the United States to United States residents, their legal advisers, and accountants. The marketing is done by the Internet, by personal sales calls, by advertising in airline magazines and in magazines aimed at wealthy individuals and their professional advisers. Marketing is done at trade shows and seminars. Marketing is done by having senior officials of the banks travel to the United States to sell their services to lawyers, accountants, and private clients.
I have been involved in cases in which banks and shell companies in Antigua, the Bahamas, Bermuda, the Cayman Islands, the Cook Islands, Gibraltar, Jersey, Liechtenstein, the Isle of Man, Nauru, Panama, Singapore, Switzerland, and Vanuatu, were used by American citizens seeking to avoid the payment of taxes. Although I have not been involved in cases in all of the jurisdictions covered by this summons request, based on information and belief I can say that their financial institutions have all been used by Americans seeking to avoid taxes.
In the course of preparing this Declaration, I reviewed the statistics on the number of foreign bank account reports (FBARs) received by the Treasury Department for the years 1994, 1995, and 1996 for financial accounts in Antigua, the Bahamas and the Cayman Islands. The law requires that a Report of Foreign Bank and Financial Accounts form be filed with the Treasury Departwnt to report each financial account over which the United States person has control. Control is defined as the ability to direct the movement of funds in the account whether or not the person has signature authority or a power of attorney.
In my opinion, the number of accounts reported and the number of persons filing FBARs for all three jurisdictions are far below the numbers that I would expect if there were full compliance with the reporting requirements. I base my opinion on the number of financial institutions in each location, the volume of advertising and promotion they engage in, the number of International Business Corporations in each jurisdiction and the very substantial trust activity in each jurisdiction.
Bankers, lawyers and regulators in the jurisdictions and in the United States have expressed the view that about half of the offshore financial business is done for United States persons. If the filings were in fact complete, the numbers suggest there would not be enough bank business to support a single institution.
Similarly, the number of foreign trust returns made to the Internal Revenue Service based on Cayman trusts is completely inconsistent with the movement of bank officers and lawyers to and from the United States and the number of banks offering trust services to United States persons, from the Cayman Islands.
Further, it is my view that it will not be difficult or costly for the credit card processors to provide the information. It should be readily available in machine readable format.
I declare under penalty of perjury, pursuant to 28 U.S.C. Section 1746, that the foregoing is true and correct.
Executed this 13th day of March 2002
[Signature]JACK A. BLUM, ESQ.
[9-page curriculum vitae for Jack A. Blum omitted here.]
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