Learn the risks and pitfalls associated with trying to hide income and assets from the Internal Revenue Service (“IRS”).
Principals at an ordinary accounting firm in the Isle of Jersey, a Crown Dependent of the United Kingdom, discovered an opportunity existed for advising clients about offshore banking and tax avoidance. While illegal at the time, many wealthy individuals and family regularly employed such tactics, with few cases pursued because of the complicated nature of the transactions and strict bank secrecy laws within countries. Changes in technology eventually made pursuing the prosecution of such illegal tax strategies feasible. As a result, impacted countries placed considerable pressure on the countries serving as tax havens to change their bank secrecy laws, exposing both the tax haven providers and individuals with foreign accounts to legal jeopardy.
Upon completion of this case study, readers will be able to:
- Understand that the US government patiently pursues complicated international cases.
- Describe how changes in enforcement policies can lead to consequences from events that occurred prior to such changes.
- Explain the importance cooperation may have in mitigating consequences.
- Identify how the government pursues enforcement actions.
Internal Revenue Service, Foreign Bank Accounts, Accounting, Taxes, Deferred Prosecution Agreement (DPA)
Industry Current State
Many wealthy individuals seek ways to shelter assets and income in order to minimize the amount of taxes they pay each year. They may establish family trusts and other complicated structures in order to legally do so. Others are more willing to take chances in pushing the envelope of tax avoidance, parking money in foreign accounts with the hopes of avoiding discovery.
Strachans SA, began operations as an accounting and financial services company in 1987 under the stewardship of Philip Egglishaw and Philip de Figueiredo. They provided ordinary services at the outset but quickly discovered a niche in advising clients from the United States, Australia, and other high tax jurisdictions on how to avoid paying taxes using complicated legal structures and offshore bank accounts. This practice was going on for decades, if not longer, rarely pursued by such governments taxing authorities because of the complexity of the transactions.
Strachans moved its offices to Geneva, Switzerland in 1999. From that time on, its principal form of business consisted of providing administration to offshore structures. This included the formation of trusts and offshore companies, administration, bookkeeping, and accounting.
Strachans managed accounts for at least 60 US citizens, but the exact number is difficult to truly determine because (due to the illegal nature). They purposely kept few records and recommended clients do likewise. To affect the subterfuge of tax avoidance, Strachans devised elaborate schemes using fake structures, which 1) had no business purpose and 2) served as the holders of bank accounts that, in reality, belonged to US-based clients.
As an example, one U.S. citizen client earned over $25 million in an overseas entity involved in the entertainment industry. The client directed the funds from that sale to an offshore structure set up specifically by Strachans for him. This allowed the money earned from the sale of the overseas entity to evade U.S. taxes. Strachans then invested those funds in a range of securities (stocks, bonds, etc.). The client also regularly accessed those funds for everyday personal use. The client acquired real estate, flew on personal jets, and used credit cards that were owned by, in the name of, and paid for by the structure.
Strachans also facilitated frequent one-way cash collections for its clients. Clients would visit Strachans in Geneva and pick up $10,000 in cash for each adult on the visit in order to fall below the declaration amount required on US Department of Immigration entry forms. The principals of Strachans also facilitated the purchase of watches, jewelry, and even cash that they personally would transport to US clients.
Another more sophisticated strategy involved brokering two-way cash swaps within the United States whereby one client who wanted to deposit funds with Strachans would transfer funds to another client of Strachans who wanted a withdrawal, with Strachans recognizing this transaction as a book entry on its records, crediting one client and debiting the other.
Strachans employed the use of fake loans, consultancy agreements, and dummy invoicing as well, allowing clients to borrow or pay themselves from their own money in their offshore account. To make these false transactions look real, they executed loan agreements, created contracts, and created phone service records with an overseas third-party payor.
As part of business development, Strachans’ representatives regularly met with US clients in the United States, Switzerland, the United Kingdom, and elsewhere, to discuss investment strategy and set up future transactions. Much of Strachan’s new business came via recommendations from current clients as a result of Strachan’s impeccable attention to customer service. While it’s tough to tell the exact amount of the funds managed by Strachans, clear evidence exists that it exceeded a few hundred million dollars, with Egglishaw and Figueiredo raking in millions each. Strachans remained in operation until 2014.
Strachans’ business practices first came to light as a result of legal action taken by the country of Australia against 46 of the company’s Australian clients. Those clients were indicted and convicted, with many of them (including music promoter Glenn Wheatley) ending up behind bars. Others, such as the actor Paul Hogan (famously known for portraying Crocodile Dundee) and his business partner John Cornell, faced pursuit from tax authorities for years. Hogan further accused Strachans of stealing tens of millions of dollars. The parties subsequently settled that suit for an undisclosed amount. Australia also filed an Interpol Red Notice for the arrest of Strachans’ owners Egglishaw and Figueiredo.
Figuerido was captured and served 2-1/2 year in an Australian prison while Egglishaw remained on the run as one of Interpol’s most wanted. The two also came up on prosecutors’ radars in the United States.
Since 1935, Switzerland has maintained criminal laws to ensure the secrecy of client relationships at Swiss Banks. While Swiss law permits the exchange of information in response to administrative requests made pursuant to a tax treaty with the United States and certain legal requests in cases of tax fraud, Swiss law otherwise prohibits the disclosure of identifying information without client authorization. This secrecy historically enabled U.S. taxpayer-clients to conceal their Swiss bank accounts from U.S. authorities.
That all changed in 2008 when the US Department of Justice (“DOJ”) opened a criminal investigation spearheaded by the IRS against UBS, one of Switzerland’s largest banks. UBS quickly announced it would no longer accepting certain U.S. clients. And many other Swiss banks followed suit. UBS settled that case through a Deferred Prosecution Agreement, agreeing to cooperate and provide information to authorities.
In 2009, a court sentenced Bradley Birkenfeld, a former UBS banker working in the U.S. to 40 months for playing a central role in such illegal tax avoidance schemes. A few years later, US prosecutors charged three UBS Wealth Management bankers with conspiring to hide more than $1.2 billion in assets from tax authorities on behalf of US clients. They pled guilty in October 2020 from their residences in Austria, and potentially face a similar result.
In 2009, the IRS made collecting taxes from overseas accounts directly or indirectly owned by US citizens a top priority. It provided amnesty through an initiative appropriately called the Swiss Banks Program. The initiative was created, in recognition of past lax enforcement, and available to all US citizens who came forth and reported their holdings. While not exempt on the taxes owed for that money, these individuals could avoid fines, penalties and potential prison time for voluntary reporting. This program ended in September of 2019 with more than 56,000 taxpayers have fessed up to owning overseas accounts and have forked over $11.1 billion in back taxes, interest and penalties. Many people, nonetheless, chose not to report, hoping to slip through the cracks.
Egglishaw engaged U.S. counsel and made a voluntary approach to the DOJ in May 2014. He conducted an internal review of the records Strachans retained in order to identify and collect data and information regarding its U.S.-taxpayer accounts. Egglishaw reported his findings to the DOJ, providing documentation supporting those findings. Strachans also assisted the DOJ in preparing treaty requests under the Convention between the United States of America and Switzerland to help identify the U.S.-taxpayer accounts at certain Swiss banks.
Egglishaw nonetheless, remained on the run as one of Interpol’s most wanted. Authorities in Italy picked him up at a hotel, based on a tip. An Italian judge, however, ruled too much time had passed to now honor the Australian request. Egglishaw came to the United States in 2020 to settle his legal issues. He accepted a guilty plea on behalf of Strachans, now no longer operating and in liquidation, in exchange for an extremely lenient $500,000 fine, in recognition of the significant cooperation provided. Egglishaw still remains a wanted man in the country of Australia. Strachan’s former U.S. clients who did not voluntarily come forward under the now expired Swiss Bank Program remain at extreme risk of major fines and significant prison time.
Law enforcement constantly sets a and changes priorities for any number of reasons. Enforcement may change even as the laws remain the same. It could arise from political pressure, a spate of a certain type of fraudulent behavior or, as in this case, a change of technology. Just because law enforcement accepted certain illegal practices in the past with a wink and a nod, does not mean they will always continue to do so. Anyone engaging in illegal business practices not currently enforced bears the risk that enforcement may change at any moment.
The best way to avoid consequences from breaking the law remains simply not breaking the law to begin with. Mindfully consider the risks before pursuing a strategy. Take it from me, 20/20 hindsight is a painful way to learn a lesson.
Industry Future State
The United States and numerous other countries began strongly cracking down on tax avoidance via offshore bank accounts in the mid-2000s. These countries placed tremendous pressure upon formerly popular tax havens such as Switzerland and the Isle of Jersey, threatening removal of banks in those jurisdictions from the international banking system. Those banks slowly complied over the course of a few years, putting their clients at huge risk for large monetary penalties and potential time in prison.