Criminal Offences for Wealth Structuring

In June 2008 Igor Olenicoff was offered a plea bargain by the US Internal Revenue Service. His sentence for fraudulent tax evasion would be slashed if he disclosed the identity of those who had helped him evade taxes.

Olenicoff, named Bradley Birkenfeld a senior banker with UBS who had assisted him in evading $200 millions of tax in offshore assets worth $7.26 billion.

In a seven-page deposition, Birkenfeld said that he assisted wealthy Americans to conceal their assets by creating ‘sham’ offshore trusts. Misleading and false documentation, Birkenfeld said, was routinely prepared to facilitate this. The advantage for UBS was that it could then continue to manage $20billion of assets owned by wealthy US individuals, which generated the bank $200 million in fees each year.

The statement read ‘By concealing US clients’ ownership and control in the assets held offshore, [UBS] managers and bankers…defrauded the IRS and evaded US income tax’.

At the time, this story broke, there was a lot of concern about how financial institutions would react to this bullying behaviour of the IRS. One commentator said ‘The US, of all countries, needs foreign investment. It won’t shoot itself in the foot.’

At the other end of the spectrum, there was concern that UBS could lose its banking license if Birkenfeld’s claims were found to be true.

In the fullness of time, neither concerns proved accurate, the IRS fined Swiss private banks a whopping $320 billion, not enough to put them out of business, but enough to hurt.

The IRS then went one step further. It introduced in 2010 the Financial Accounting Tax and Compliance Act which demanded all financial institutions with assets in the US to research and report on all its clients which were US citizens with monies outside the US. They had to report on all financial dealings of all its US clients, or face a massive 30% withholding on US assets.

In 2010, it was thought that there would be a massive disinvestment out of US assets, but instead these financial institutions complied at huge expense. Forbes estimates that the cost to the financial institutions of implementing FATCA has cost them ten times the amount of taxes raised by the IRS; a whopping $200million per annum and a total of $800 billion to set up.

On the back of the success of the IRS, the OECD introduced an automatic exchange of information known as the Common Reporting Standard, whereby financial institutions need to collate and report all financial information of individuals which hold assets outside the country in which they live to the country in which they are tax resident. As part of this information, where a trust is set up, the identity of the settlor, trustee, beneficiary and protector will need to be disclosed.

And now the UK Government has gone one stage further.

On the 1st September 2017, it published its guidance notes on ‘Tackling Tax Evasion: Government guidance for the corporate offences of failure to prevent the criminal facilitation of tax evasion’. In its guidance notes, the offence is aimed at corporations like UBS, in the case above, where one of its bankers, Birkenfeld facilitated tax evasion, in this case US taxes, by introducing their clients – in this case Olenicoff to third parties, with the intention of facilitating the evasion of tax.

What is interesting in the example given, was that Birkenfeld in his deposition said that he ‘assisted wealthy Americans to conceal their assets by creating ‘sham’ offshore trusts’.

There is nothing illegal or morally wrong in holding assets in a foreign jurisdiction and there is nothing criminal in the creation of trusts. Trusts are a legal concept recognised across the globe which have been in existence and used since the eleventh century.

What is wrong and what is now criminally wrong is setting up, or the introduction to any professional with the intention to setting up, a structure with the intention of evading tax i.e. setting up a ‘sham’ trust.

The law of sham is clearly set out in the Rahman case. The Settlor in that case Mr. Rahman, signed the documentation necessary to set up a trust. However, both parties understood that the words in the documentation would not govern their relationship. The trustees would do precisely what the ‘Settlor’ asked, regardless of the fact that they did not have to under the documentation signed by both parties.

The Judge held that the Rahman ‘Trust’ was not a ‘trust’ it was nothing more than a nominee arrangement – it could therefore be ignored for ALL purposes; claims of creditors, rights of forced heirs (as in the case of Rahman), or tax authorities - which can now impose criminal sanctions.

The unknown is how far tax authorities will push the law of sham, once they have all the information they need to pursue it. Are trusts with Protectors vulnerable as tax authorities would have us believe?

Write to us direct if you would like to discuss this Note or have questions relating to de-risking your trust against criminal liability.

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