As the fallout from the Panama Papers continues, the U.S. government has recently announced various criminal and civil enforcement initiatives to investigate individuals and companies that may have been involved in U.S. tax evasion, money laundering and other wrongdoing.  In addition, as the U.S. Department of Justice (DOJ) is wrapping up its prosecution of over a dozen Swiss banks, American prosecutors and U.S. Internal Revenue Service (IRS) special agents are analyzing a treasure trove of previously undeclared taxpayer account information that nearly 80 Swiss banks have provided to DOJ pursuant to the DOJ’s Program for Non-Prosecution Agreements or Non-Target Letters for Swiss Banks. Armed with this information, the DOJ and IRS are currently tracing funds and accounts that left Swiss banks and reached other financial institutions and asset managers in the Cayman Islands, Panama, British Virgin Islands and other Caribbean countries to avoid detection by U.S. authorities.


The Swiss Bank Program: A U.S. law enforcement success

Prior to the International Consortium of Investigative Journalists’ publication of the so-called “Panama Papers” in the spring of 2016, one of the largest releases of sensitive information about offshore entities and the individuals behind them occurred, over a period of several months, between Swiss banks and the U.S. government.  Indeed, after clamping down on Swiss banks for allegedly harboring untaxed American assets for several years, on Aug. 29, 2013, the U.S. Department of Justice announced a Program for Non-Prosecution Agreements or Non-Target Letters for Swiss Banks (Program).  Under the Program, many Swiss banks, most of which the department had little or no information about, came forward and admitted to engaging in certain conduct that may have violated U.S. tax laws.  These financial institutions, identified by the Program as Category 2 banks, were required to make a complete disclosure of the potential misconduct, provide detailed information regarding U.S.-related accounts, cooperate in treaty requests, provide detailed information about other financial institutions that transferred funds into their accounts or that accepted funds when Swiss bank accounts were closed, and agree to cooperate in related criminal and civil proceedings.

usaIn addition, pursuant to the Program, each Category 2 bank was required to pay penalties based on the value of their U.S.-related accounts, which could have been reduced if the bank was able to establish, to the department’s satisfaction, that a U.S.-related account was not undeclared, was reported by the bank to the IRS or the Department of Treasury, or that the bank had successfully persuaded the accountholder to participate in one of the IRS voluntary disclosure programs, such as the Offshore Voluntary Disclosure Program (OVDP) or the IRS Streamlined Disclosure Program. Category 2 banks that satisfied these requirements and agreed to the proposed penalties were eligible for non-prosecution agreements.

Pursuant to the Program, between March 2015 and January 2016, the department entered into approximately 78 non-prosecution agreements with nearly 80 Swiss banks, collecting more than $1.3 billion in penalties, receiving a trove of information regarding accounts related to U.S. taxpayers, and ensuring the cooperation of participating banks in the department’s ongoing effort to crackdown on offshore tax evasion.

While the conclusion of the Program’s non-prosecution agreements was a major milestone for the Department, it certainly did not represent the end of the Program.  Indeed, as offshore tax enforcement remains a top priority for the Department, the DOJ Tax Division and the IRS are actively reviewing account information obtained from Category 2 banks and using it to identify and investigate U.S. accountholders who concealed their foreign accounts and potentially evaded U.S. tax, as well as those entities and individuals that assisted them.


Following the money to the Caribbean

As recently announced by Caroline Ciraolo, the DOJ Tax Division’s Acting Assistant Attorney General, DOJ is currently pursuing investigations of foreign financial institutions located in offshore jurisdictions that were referenced in the various statements of facts provided by Category 2 banks in connection with their non-prosecution agreements.  Indeed, armed with detailed information that Category 2 banks have provided to the DOJ about other financial institutions that accepted funds when Swiss accounts were closed (the Leaver Lists), the DOJ and IRS are currently tracing funds and accounts that have left Swiss banks in the midst of the Program and reached other financial institutions in the Cayman Islands, Panama, British Virgin Islands and other Caribbean countries to avoid detection by U.S. authorities.

As part of this enforcement strategy, this year the DOJ has also marked a new achievement for the Department of Justice’s Tax Division: its first ever conviction of a non-Swiss financial institution for tax evasion conspiracy. Indeed, in March 2016, two Cayman Islands financial institutions pleaded guilty in a U.S. federal court to conspiring along with American accountholders to hide more than $130 million in Cayman bank accounts. In particular, according to the Department, after learning about the U.S. investigation of Swiss banks for assisting U.S. taxpayers in evading U.S. tax obligations, these financial institutions encouraged many U.S. taxpayers to open accounts, continued to knowingly maintain undeclared U.S.-related accounts and failed to promptly engage in any significant remedial efforts.  As part of their plea agreement, each financial institution agreed to provide, through treaty requests, account files of noncompliant U.S. accountholders to DOJ prosecutors and pay a total of $6 million in penalties.

The DOJ’s focus on Cayman Islands banks and asset managers, however, should not come as a surprise. Indeed, with banking assets worth approximately $1.4 trillion as of June 2014, and hosting more than 200 banks, 140 trust companies, 100,000 registered company and approximately 11,000 mutual and other funds with an estimated net asset value of $2.1 trillion, the Cayman Islands, along with other Caribbean countries, present a particularly suitable pool for potential U.S. tax and criminal enforcement actions. Furthermore, in addition to being identified by many Leaver Lists submitted by Category 2 banks pursuant to the Program, Cayman Islands, Panama, British Virgin Islands and other Caribbean banks have previously been recognized as potential targets of investigations by U.S. authorities because of their countries’ perceived secrecy and what the department views as a “historical” lack of strong internal compliance programs that, according to DOJ, still affects many of the region’s financial institutions.


Implications for financial institutions and asset managers

As a result of numerous leads received from various sources, including tax whistleblowers, responses to treaty requests, cooperators, and Leaver List information that the Department has collected from Category 2 banks, the DOJ and IRS have ramped up their efforts to crack down on offshore tax evasion and successfully pursued foreign entities and individuals that assisted U.S. taxpayers in concealing their assets.

Thus, Cayman Islands, Panama, British Virgin Islands and other Caribbean banks and asset management firms that may have accepted Swiss bank “leavers” over the past years should consider the potential implications that a Caribbean-focused DOJ crackdown on offshore tax evasion may have on their operations and, perhaps more importantly, their reputation and ability to conduct business with their counterparts within the U.S. financial industry.

Indeed, while it has now been rumored for years that another Swiss-like DOJ tax program may be in the works for other countries, the recent guilty pleas by two Cayman Islands financial institutions clearly indicate that American prosecutors seem to be relying on a more direct criminal tax enforcement approach toward banks and asset managers in the Caribbean.  To that effect, the Department of Justice has also recently confirmed that Caribbean-based entities that assisted U.S. accountholders to conceal foreign accounts and potentially evade U.S. tax will not improve their situation by delaying disclosure in the hope of an announcement of another program, particularly as the Department and the IRS are actively reviewing information received by Category 2 banks and starting additional criminal investigations in the region.

Therefore, financial institutions in the Cayman Islands, Panama, British Virgin Islands and other Caribbean countries that may have received potentially high risk funds from Swiss accounts should take immediate steps to determine the scope of their potential exposure and devise an effective and comprehensive forward-looking strategy.  In particular, among other things, these institutions should identify Swiss-source founds and potentially high risk “leaver” accounts, identify current and former employees, along with any third party, responsible for onboarding Swiss bank “leavers,” retrieve and preserve onboarding documentation and know-your-customer materials related to Swiss-originated “leavers,” including relevant documents not in the bank’s possession or overseas, assess and potentially remediate high risk “leaver” accounts, and implement robust tax, know-your-customer and anti-money laundering compliance programs, as appropriate, along with related internal controls and employee trainings.



While the Panama Papers will enable the DOJ and IRS to identify taxpayers who may not have declared their offshore assets, it also provides American prosecutors with an additional road map to the jurisdictions where financial institutions may have assisted individuals in potentially evading U.S. tax obligations.  Therefore, as the DOJ is opening additional criminal tax investigations around the world, banks and asset management firms in the Cayman Islands, Panama, British Virgin Islands and other Caribbean countries should take immediate steps to assess their potential exposure to U.S. criminal tax liability and develop an effective remediation and mitigation strategy in the event of a potential U.S. government investigation.

Indeed, even if the DOJ decides not to implement a full-scale program similar to the Program for Swiss banks in every Caribbean jurisdiction, it now has access to a treasure trove of critical information to easily require financial institutions and asset managers in these countries to conduct a rigorous review of accounts for potential tax evaders, or face the prospect of a lengthy U.S. government investigation for allegedly aiding and abetting tax evasion.  In sum, as evidenced by the DOJ’s latest enforcement action against Cayman Islands institutions, inaction is no longer an option.

Previous articleNever mind Brexit – The EU responds to British vote with more centralization and increases its campaign against tax competition
Next articleTrustees and the protection of private client confidentiality
Fabio Leonardi
Fabio Leonardi is a Corporate Investigations and White Collar Defense attorney with the international law firm of Pillsbury Winthrop Shaw Pittman LLP and is based in the firm’s Washington, DC and Palm Beach, Florida offices. His practice is focused on representing companies and individuals charged or investigated for various white collar crimes, including tax evasion, securities fraud and money laundering, and conducting internal and government-initiated investigations. He has represented several Swiss banks in probes by the DOJ and IRS into offshore accounts held by American taxpayers and was part of the small legal team that negotiated the third smallest fine out of all banks participating in the DOJ tax program for Swiss banks. In addition, prior to joining Pillsbury, Mr. Leonardi served in the Division of Enforcement of the U.S. Securities and Exchange Commission where he handled securities fraud and insider trading investigations. He may be reached at [email protected]