A recent announcement by the U.S. Department of Justice serves as a reminder that the DOJ and the IRS continue to treat offshore accounts as a hot issue and will relentlessly pursue foreign banks and U.S. taxpayers hiding money in foreign banks.
On March 12, 2019, the Department of Justice announced that Mizrahi-Tefahot Bank (Mizrahi-Tefahot) entered into a deferred prosecution agreement (DPA), admitting to assisting U.S. taxpayers to conceal income and assets, and agreeing to pay $195 million to the U.S. to avoid criminal prosecution.
Mizrahi-Tefahot is one of Israel’s largest banks, which had branches in Los Angeles, the Cayman Islands, and London, and subsidiaries in Switzerland. In the DPA and related court documents, Mizrahi-Tefahot admitted that from 2002 until 2012 the actions of its bankers, relationship managers, and other employees defrauded the United States and specifically the Internal Revenue Service (IRS) by conspiring with U.S. taxpayer-customers and others. The bank specifically acknowledged several badges of fraud, which we’ve seen in other offshore account cases:
- Opening and maintaining accounts in the names of pseudonyms, code names, Mizrahi Trust, and foreign entities in offshore locations, such as St. Kitts and Nevis, Liberia, Turks & Caicos, and the British Virgin Islands;
- Opening customer accounts at Mizrahi-Tefahot for known U.S. customers using non-U.S. forms of identification, and failing to maintain copies of required identification and account opening documents;
- Opening and maintaining foreign nominee bank accounts for certain U.S. clients holding U.S. securities, enabling those U.S. taxpayers to evade U.S reporting requirements on securities’ earnings;
- Entering into “hold mail” agreements with U.S. customers whereby Mizrahi-Tefahot employees held bank statements and other account-related mail in their offices in Israel and Switzerland;
- Until 2008, providing U.S. customers at Mizrahi-Tefahot’s Los Angeles branch use of their funds through back-to-back loans, while excluding any record of the offshore pledge account at its Los Angeles branch;
- Until 2008, periodically sending representatives to the United States to solicit new customers and to meet with existing U.S. customers in Los Angeles, California, New York, and other locations in the U.S.
According to the terms of the DPA, the bank agreed to pay the U.S. $195 million, consisting of: (1) restitution in the amount of $53 million, representing the approximate unpaid pecuniary loss to the United States as a result of the criminal conduct; (2) disgorgement in the amount of $24 million, representing the approximate gross fees paid to the bank by U.S. taxpayers with undeclared accounts at the bank from 2002 through 2012; and (3) a fine of $118 million.
Even more importantly, especially for Mizrahi-Tefahot’s former customers, the bank agreed to cooperate fully with the DOJ, the IRS, and other U.S. authorities. The DPA also requires Mizrahi-Tefahot and its subsidiaries affirmatively to disclose certain material information it may later uncover regarding U.S.-related accounts, as well as to disclose certain information about U.S. account holders and their accounts, consistent with the DOJ’s Swiss Bank Program.
Enforcement of the offshore tax schemes and foreign account compliance remain one of the top priorities for the IRS and the DOJ. The government still has several voluntary disclosure options available for those taxpayers who want to come into compliance and avoid criminal prosecution and exuberant fines.
Former IRS Attorneys of Holtz, Slavett & Drabkin, APLC, have successfully represented numerous clients in voluntary disclosure cases, FBAR audits and criminal investigations. To schedule a consultation, please contact us at (310) 550-6200.