United States: Foreign Bank Account Reporting And Enforcement Update: U.S. Files Suit Against HSBC Seeking Account Records

The United States government has opened another front in its campaign against U.S. taxpayers using secret offshore bank accounts to evade their tax responsibilities, with the Justice Department filing a lawsuit seeking the names of Americans believed to be hiding funds in bank accounts at HSBC in India. The lawsuit, filed yesterday in federal court in San Francisco, seeks court authorization for the Internal Revenue Service to serve what is known as a "John Doe" summons on HSBC's main U.S. affiliate, HSBC Bank USA, seeking details of accounts held by Americans of Indian descent at HSBC India, the bank's affiliate in India. If approved by the court, the "John Doe" summons would require HBSC to produce records identifying U.S. taxpayers holding accounts at HSBC in India, many of whom are believed to be using secret accounts in that country in order to hide assets from the IRS.

In its suit, the government alleges that HSBC operated offices in New York and California between 2002 and 2010 in order to provide banking services to "non-resident Indians" living in the U.S. It is further alleged that HSBC representatives assured their customers that they could invest in accounts at HSBC India without paying U.S. income tax on interest earned on the accounts and that HSBC would not report income earned on those accounts to the IRS. The Justice Department believes that approximately 9,000 individuals residing in the United States maintained accounts at HSBC in India, with deposits totaling nearly $400 million.

The Justice Department's focus on HSBC and accounts in India was previewed in January, when a federal grand jury in New Jersey charged an individual named Vaibhav Dahake with conspiracy to defraud the IRS through the use of undeclared bank accounts in the British Virgin Islands and India. That indictment charged that a large "International Bank" assisted Mr. Dahake in opening a bank account in India and transferring funds into that account from accounts in the United States and the British Virgin Islands. The indictment identified five bankers as unindicted conspirators, and alleged that they convinced Mr. Dahake to transfer his funds from the British Virgin Islands to India and advised him how to maintain his funds in Indian accounts so as to avoid detection by U.S. authorities. The indictment further alleged that after it was announced that Swiss bank UBS AG had entered into a Deferred Prosecution Agreement with the United States in February 2009, the bankers advised their customer that they could arrange for transfer of his funds from India to banks in either Singapore or Hong Kong. The government's suit filed yesterday against HSBC confirms that that the "International Bank" referenced in the Dahake indictment is HSBC.

In 2008, a federal judge in Miami approved a similar request to serve a "John Doe" summons on Switzerland's largest bank, UBS AG. That summons eventually led to the landmark Deferred Prosecution Agreement between UBS and the U.S. which was announced on February 18, 2009. Under the terms of that agreement, in return for avoiding criminal prosecution, UBS agreed to pay $780 million in penalties, admitted it helped taxpayers hide money in Swiss accounts, and provided the IRS with the names of more than 250 of its U.S. account holders who were suspected of committing tax fraud. UBS eventually turned over to the U.S. information on nearly 5,000 of its U.S. customers.

The Justice Department's suit against HSBC confirms the government's widening probe of international tax evasion by U.S. taxpayers through the use of offshore bank accounts. In a press release issued yesterday, IRS Commissioner Douglas Shulman stated that "[t]he IRS continues to focus its attention on international tax evasion," and added, "[a]s I've said all along, our international efforts are not about just one country or one bank – it's about our wider effort to ensure compliance with the nation's tax laws." The Justice Department Tax Division's website similarly states that its "top litigation priority is the concerted civil and criminal effort to combat the serious problem of non-compliance with our tax laws by U.S. taxpayers using secret offshore bank accounts – a problem that a 2008 Senate report concluded costs the U.S. Treasury at least $100 billion annually." According to the Justice Department, its enforcement efforts in the offshore area have been highly successful to date:

• 150 grand jury investigations of UBS clients have been initiated, of which 26 cases have been charged, with 4 awaiting trial and 22 guilty pleas having been entered.
• a number of foreign nationals who helped clients hide assets offshore at UBS and other banks have been indicted, resulting in four clients and one adviser being charged and convicted, and another eight bankers, lawyers, and financial advisers being charged and awaiting trial.
• grand jury investigations have been opened into eight additional offshore banks across the world.

In the meantime, on February 8, 2011, the IRS announced its 2011 Offshore Voluntary Disclosure Initiative, a long-awaited second amnesty program designed to encourage taxpayers with undisclosed foreign bank accounts to come into compliance with U.S. tax laws and avoid possible criminal prosecution. This program follows a highly successful amnesty offered during 2009, and will be available only through August 31, 2011. In announcing the new amnesty program, IRS Commissioner Shulman warned that "[a]s we continue to amass more information and pursue more people internationally, the risk to individuals hiding assets offshore is increasing. This new effort gives those hiding money in foreign accounts a tough, fair way to resolve their tax problems once and for all. And it gives people a chance to come in before we find them."

With both the IRS and Justice Department ramping up their efforts to curtail ­offshore tax avoidance and evasion, individuals with undeclared foreign accounts can no longer assume that they will remain undetected or protected by foreign banking secrecy laws. The new IRS amnesty program offers a relatively easy path for U.S. taxpayers holding secret accounts to avoid criminal prosecution and to come back into compliance with U.S. tax laws. Taxpayers who continue to hide assets offshore and choose not to participate in the 2011 amnesty program can face substantial civil penalties as well as the possibility of criminal prosecution for tax evasion.

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