Panama Papers Leak Another Reminder of Risks for Undeclared Foreign Account Holders

On April 3, 2016, the International Consortium of Investigative Journalists (ICIJ) published an investigation into the secretive world of offshore banking through the use of so-called “tax haven” jurisdictions.  The investigation’s newsworthy list of political leaders and wealthy participants worldwide was generated by the leak of millions of sensitive documents, spanning decades from 1977 to 2015, apparently held by Panamanian law firm Mossack Fonseca.  According to the ICIJ’s reporting, Mossack Fonseca served as a common link between wealthy individuals worldwide and various banks located in traditional secrecy jurisdictions including Hong Kong, Switzerland, and Luxembourg.  The ICIJ investigation reports that Russian President Vladimir Putin, the prime ministers of Iceland and Pakistan, and other world leaders are tied to secret accounts and shell companies created by the law firm. Additionally, those global political figures allegedly share company with more dubious figures such as international drug lords, terrorist organizations, and rogue nations.

The Panama Papers leak should serve to remind U.S. persons with undeclared accounts and assets offshore of the continued risk of noncompliance in this era of eroding data privacy and financial secrecy.  Governments worldwide are continuing to focus on offshore tax evasion and this investigation will only add fuel to the fire.  The Acting Assistant Attorney General for the U.S. Department of Justice’s Tax Division, Caroline Ciraolo, recently delivered a stern warning to foreign financial account holders who are still not reporting their accounts to the Department of the Treasury: “[a]fter three very well-publicized voluntary disclosure programs, nearly 200 criminal prosecutions, ongoing criminal investigations and the increasing assessment and enforcement of substantial civil penalties for failure to report foreign financial accounts, a taxpayer’s claims of ignorance or lack of willfulness in failing to comply with disclosure and reporting obligations are, quite simply, neither credible nor well-received.” Given the publicity of the Panama Papers leak, this opinion on lack of willfulness is not likely to change.

Although this massive leak has grabbed news headlines worldwide due to the high-profile figures linked to the offshore banking industry, the basic blueprint outlined in the investigation is familiar to observers of the United States’ recent global tax enforcement activities.  What began with the historic investigation into Switzerland’s UBS AG in 2009, which signed a deferred prosecution agreement and agreed to disclose U.S. account holders’ identities and account information to the United States, continued with Congress’ passing of the Foreign Account Tax Compliance Act (FATCA).  FATCA was passed, in part, to deal with the prevalence of undeclared foreign bank accounts held by U.S. taxpayers.

Recent developments in the offshore arena include the Department of Justice’s “Swiss Bank Program” as well as the government’s shift to focus on banks in other jurisdictions including India, Israel, and the Caribbean.  The Swiss Bank program alone has resulted in 80 Swiss banks signing non-prosecution agreements with the government and agreeing to:

  • Make a complete disclosure of their cross-border activities;
  • Provide detailed information on an account-by-account basis for accounts in which U.S. taxpayers have a direct or indirect interest;
  • Cooperate in treaty requests for account information;
  • Provide detailed information as to other banks that transferred funds into secret accounts or that accepted funds when secret accounts were closed;
  • Agree to close accounts of accountholders who fail to come into compliance with U.S. reporting obligations; and
  • Pay appropriate penalties.

Companies or individuals with noncompliant offshore accounts have several options available to them including the IRS Offshore Voluntary Disclosure Program (OVDP) and streamlined compliance procedures for taxpayers who can certify their lack of “willfulness.”  U.S. citizens, residents, and legal entities with undeclared foreign accounts should consult counsel experienced in dealing with the IRS and Department of Justice, especially for the fact-sensitive assessment of willfulness.  “Willfulness” is a legal principle that, in theory at least, distinguishes knowing and intentional violations of the tax laws from mistaken or unintentional violations.  Not surprisingly, the government may take a different view than the taxpayer as to whether his or her conduct was willful.  This standard not only impacts the potential civil penalties imposed for failing to file an FBAR (Report of Foreign Bank and Financial Accounts) but will also be evaluated by the IRS and Department of Justice in determining whether to pursue a criminal prosecution.

For example, taxpayers who fail to file an FBAR when required by law face a civil penalty up to $10,000 per violation for nonwillful violations that are not due to reasonable cause. For willful violations, the penalty may be the greater of $100,000 or 50 percent of the balance in the account at the time of the violation, for each violation.  Willfully failing to file an FBAR when required by law to do so can also be prosecuted criminally as a felony offense with a maximum sentence of five years in prison and fines.  The government can proceed with both civil and criminal penalties and, depending on the circumstances and possible charges available, could have up to six years from the date of the violation to bring their case.  That said, taxpayers who qualify to enter the OVDP secure an agreement from the government that they will not be prosecuted criminally in exchange for coming clean and agreeing to pay back taxes and certain penalties.  It is important to consider voluntary disclosure promptly as an opportunity for lenience will likely be lost once you are contacted by the IRS or the Department of Justice.

For more information, please contact Matt Mueller at or 813.347.5142.  Mr. Mueller is a former federal prosecutor with the Department of Justice’s Tax Division and the U.S. Attorney’s Office in Tampa where he handled criminal tax investigations involving, among other things, offshore tax evasion and taxpayers with undeclared foreign bank accounts.  He is Of Counsel in the Tampa office of Guerra King P.A.