On December 18, 2014, U.S. District Judge Vernon S. Broderick entered an order authorizing the IRS to issue summonses requiring the following companies to produce information about U.S. taxpayers who allegedly evaded federal taxes by using the services of Sovereign Management & Legal Ltd. (Sovereign):
• Federal Express Corporation, doing business as FedEx Express,
• FedEx Ground Package System Inc., aka FedEx Ground,
• DHL Express (DHL),
• United Parcel Service Inc. (UPS),
• Western Union Financial Services Inc.,
• the Federal Reserve Bank of New York (the FRBNY),
• Clearing House Payments Company LLC, and
• HSBC Bank USA National Association (HSBC USA
The court authorized the IRS to serve what are known as “John Doe” summonses on each of these companies. What are John Doe summonses?
The IRS uses John Doe summonses to obtain information about people who the IRS suspects are involved in tax “hanky panky” (i.e., tax fraud), but whose identities are unknown to the IRS. The John Doe summonses ordered these companies to turn over records. The IRS anticipates that these records will reveal the identities of U.S. taxpayer who used Sovereign’s services to engage in one or more of the following activities:
• establish, operate or control foreign financial accounts or other assets;
• establish, operate or control any foreign corporation, company, trust, foundation or other legal entity; or
• establish, operate or control any foreign or domestic financial account in the name of such foreign entity.
At the press conference, Deputy Assistant Attorney General Hubbert said:
“This summons action is but the latest step in the Department of Justice’s efforts to identify and hold fully accountable U.S. taxpayers who have sidestepped their tax obligations by hiding money overseas.”
“The world is getting smaller for tax cheats, and we will work with our partners at the IRS to vigorously enforce the nation’s tax laws against those who seek to avoid paying their fair share.”
U.S. Attorney Bharara also weighed in:
“This action demonstrates our Office’s commitment to pursuing tax evaders who use offshore service providers to avoid their U.S. tax obligations.”
“By issuing these John Doe summonses, we continue our joint efforts with the IRS to identify and hold accountable those who conceal their foreign assets in order to dodge their legal responsibility to pay taxes.”
And last but not least was IRS Commissioner Koskinen:
“The IRS remains committed to continuing our priority efforts to stop offshore tax evasion wherever it is found.”
“We have made tremendous progress in this area, working cooperatively with other agencies. The John Doe summons remains an important tool in our efforts to find international tax evaders and those who help them.”
Let’s deconstruct the allegations to see exactly what the wrongdoing is. According to the government, Sovereign assists its clients in forming anonymous corporations in Panama as well as offshore entities. Related services provided by Sovereign include the following: maintaining and operating offshore structures, mail forwarding, establishment of virtual offices, re-invoicing, and recruitment of professional managers to oversee the client’s business while the client maintains ultimate control over the assets.
The DEA investigation that led to the summonses was nicknamed, “Operation Adam Bomb.” As a result of Operation Adam Bomb, the IRS learned that Sovereign was involved in assisting U.S. clients evade their taxes.
During the investigation, the IRS was able to validate their suspicions by obtaining critical information from a taxpayer, who decided to “cooperate” with the government in exchange for immunity from prosecution.
The information provided by the taxpayer proved invaluable to the government’s investigation: specifically, the taxpayer acknowledged that Sovereign had helped him to form an anonymous corporation in Panama, which he then used to control the disposition of assets without revealing his identity as the true owner.
The IRS investigation also revealed that Sovereign used other companies to perpetuate the alleged fraud. Specifically, Sovereign relied upon Federal Express, UPS, and DHL to deliver sensitive information to U.S. clients. Western Union was used to transmit funds to and from clients in the United States.
While it’s not difficult to discern the role that delivery companies and wire service companies had in a scheme like this, the alleged roles of FRBNY, Clearinghouse, and HSBC are not so obvious. In this regard, the IRS suspects that wire services operated by FRBNY and Clearing House, and the U.S. correspondent bank accounts that HSBC USA holds for Sovereign’s banks in Panama and Hong Kong, hold records of financial transactions between Sovereign and its clients in the United States.
By using John Doe summonses to seize information from these entities, the IRS expects to identify Sovereign’s U.S. clients who may be evading taxes. We’ll have to wait and see whether the summonses reveal valuable information.