U.S. Senate Finance Committee Chair Ron Wyden (D-OR) has announced the release of the findings of a year-long investigation into the largest alleged individual tax evasion scheme in U.S. history, which uncovered the "shell bank" loophole in the Foreign Account Tax Compliance Act (FATCA).

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Wyden Investigation Uncovers Major Loophole In Offshore Account Reporting

Loophole facilitates tax evasion, was key in Brockman $2 billion tax evasion scheme

Washington, D.C. – Senate Finance Committee Chair Ron Wyden, D-Ore., today released the findings of a year-long investigation into the largest alleged individual tax evasion scheme in U.S. history. The investigation uncovered the "shell bank" loophole in the Foreign Account Tax Compliance Act (FATCA), a loophole that allows banks offshore to accept funds from U.S. persons without reporting them to the IRS.

The "shell bank" loophole in FATCA was exploited by billionaire Robert Brockman and his associates to turn their shell companies into IRS approved financial institutions that could self-certify to the IRS reporting of their offshore accounts. This exempted Swiss banks Mirabaud and Syz from FATCA reporting requirements, allowing Brockman to evade taxes on over $2 billion in income. However, the size of Brockman's accounts at Mirabaud and other revelations raises serious questions as to whether Mirabaud should have had "reason to know" that the accounts belonged to Brockman and suspect they were not being properly disclosed to the IRS.

"The Finance Committee has uncovered a glaring loophole in one of our most important tools in the fight against offshore tax evasion," said Wyden. "With little effort, wealthy tax cheats like Robert Brockman are able to convert shell companies into shell banks, and self-certify they are reporting income held in offshore accounts to the IRS. Foreign banks in Switzerland and the Cayman Islands are then exempt from complying with basic FATCA requirements to identify and report U.S. accounts. There are hundreds of thousands of shell companies in offshore tax havens that have been turned into IRS approved banks with virtually no scrutiny by the IRS. It doesn't take a rocket scientist to see how this loophole leads to billions in tax evasion, particularly after Republicans' decade long campaign to gut the IRS. Funding for IRS enforcement in the Inflation Reduction Act should focus on increasing scrutiny of partnerships like the ones Brockman used to evade taxes on $2 billion in income. As Finance Chair I'm also working on legislation to close this loophole."

Key findings

• The committee's investigation uncovered a major loophole in FATCA that allows foreign banks to accept billions from U.S. clients without reporting those accounts to the IRS. Under the current system, a wealthy taxpayer is able to create an offshore shell company, and register the shell company with the IRS as a financial institution. By registering with the IRS as a financial institution, the shell company operates as a "shell bank" and self-certifies reporting of offshore accounts to the IRS for FATCA purposes. This "shell bank" loophole significantly increases the risk that wealthy taxpayers underreport or fail to report large sums of income held offshore.
• Brockman exploited the "shell bank" loophole to astounding effect in carrying out his scheme. Brockman and associates opened up accounts in Switzerland using entities that had valid GIIN numbers approved by the IRS for FATCA purposes. The banks in Switzerland were then able to accept billions in wire transfers from the United States into accounts opened by these entities without having to conduct FATCA due diligence. In one instance, a $799 million wire transfer to Mirabaud and Syz in Switzerland was Brockman's share of the profits from the sale of a software company based out of Atlanta.
• The committee found the process to obtain an IRS GIIN number is alarmingly simple. A shell company submits the short IRS form 8957, or registers via an online portal. Applications to obtain a GIIN number and become a foreign financial institution under FATCA are nearly always approved without meaningful review by IRS personnel. IRS representatives told committee staff the IRS does not contact the financial institution's FATCA Responsible Officer prior to issuance of the GIIN. In addition, the IRS does not ask questions about the entity's assets, source of funds or wealth, beneficial ownership, or business and investment activities.
• There are hundreds of thousands of possible shell banks in offshore tax haven jurisdictions. In the eight countries where entities linked to Brockman were established, there are more than 128,000 entities registered with the IRS as financial institutions under FATCA. In the Cayman Islands alone, there are more than 84,000 IRS approved financial institutions, more than that nation's entire population. Due to persistent budget cuts and decade-long campaign to gut the agency, the IRS does not have the personnel or capabilities to adequately monitor whether these offshore entities are properly reporting accounts belonging to U.S. persons. The $80 billion in funding for the IRS in the Inflation Reduction Act should be used to address this problem.
• The size of Brockman's accounts at Mirabaud raises important questions as to whether the bank should have identified Brockman's ownership interest. Between 2010 and 2011, three Brockman transactions totaling $943 million amounted to nearly half of the bank's net new money inflows. Public reports suggest that around that time the "typical" Mirabaud client had assets worth around $1.5 million, indicating that just one of Brockman's accounts was 600 times larger than the average Mirabaud client's.
• The failure to audit large partnerships allows for proceeds from U.S. investment activity to be illicitly sent offshore. A core component of the alleged scheme carried out by Brockman and Smith was the use of foreign partnerships managed by Vista Equity Partners, a major U.S. private equity firm. The two American billionaires used these partnerships to generate billions in investment income in the United States and wire it offshore without IRS detection for more than a decade. The $80 billion in funding for the IRS in the Inflation Reduction Act should be used to address this problem.

The "Shell Bank" loophole

How to turn your shell company into an IRS approved shell bank

The key steps:

1. Establish a shell company in a FATCA partner jurisdiction, even those in well-known tax haven jurisdictions like Bermuda or the British Virgin Islands.

2. Submit IRS form 8957 to register the shell company as a foreign financial institution and obtain a Global Intermediary Identification Number (GIIN).

3. Open an account at a bank in Switzerland, or other FATCA partner jurisdiction, in the name of the shell company now registered as a financial institution. Use an attorney or other intermediary as the signatory of the account.

4. Invest in private equity firms or other investment vehicles and direct the fund manager to wire proceeds from investment activities in the United States to the shell company's account in Switzerland or elsewhere.

The results:

The Swiss bank is no longer required to report that the account is held by U.S. persons because the account is held in the name of an entity with a valid GIIN number. The Swiss bank is also no longer required to conduct due diligence to determine whether the account has a U.S. nexus.

The shell company is now operating as a "shell bank" and can self-certify reporting offshore accounts to IRS for FATCA purposes.

In the absence of an audit or other federal investigation, is it highly unlikely the IRS will detect whether these accounts are concealing or underreporting assets held by U.S. persons.