201711.05
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FBAR Offshore Penalty of $14M – Tax Scam from Korea to Switzerland

FBAR Offshore Penalty of $14M - Tax Scam from Korea to Switzerland

FBAR Offshore Penalty of $14M – Tax Scam from Korea to Switzerland

FBAR Offshore Penalties

Over the past week, we received numerous inquiries as a result of a recent $14 million penalty (and potential prison time) that was issued against a South Korean citizen who was a Legal Permanent Resident of the United States (Connecticut).

(Partner Jenny Golding is originally from South Korea and we represent numerous clients of all different levels of wealth throughout South Korea and Asia as a whole.)

You Don’t Have to Be Famous

One thing to take away from this recent case is that you don’t have to be famous to get hit with criminal offshore penalties. Hyung Kwon Kim was not like Wesley Snipes nor Paul Manafort.

He was not an artist or politician — he was a wealthy man who tried to avoid US tax by willfully not filing his annual FBAR Statement and he got caught.

Also, please keep in mind that these high dollar cases land in the news and it’s easy to say – hey, I don’t have $28 million overseas so why would the IRS try to catch me? You’re right. The IRS is not out there proactively trying to catch small fish. And if you are making only $50,000 between yourself and your spouse as a straight W-2 with only $10,000 overseas, you’re probably going to be able to fly under the radar. But, that’s not a typical taxpayer.

Many taxpayers tend to have some other red flags with their tax returns — itemized deductions, charitable contributions, six-figure combined salaries, businesses, etc. — all of which can lead to an innocent audit of something else which automatically may trigger an audit of foreign accounts

Background

Hyung Kwon Kim (“Defendant”) was originally from South Korea but was residing in the United States as a Legal Permanent Resident. Kim lived in Greenwich, which you may know is an exclusive, affluent area of Connecticut. He was an international businessperson who had money scattered throughout many different countries.

Specifically, his biggest concern was how he was going to receive transfers of money without being detected by the United States government. Therefore, Defendant opened up various bank accounts at some pretty well-known shady financial institutions in Switzerland including Credit Suisse, UBS, Bank Leu, Clariden Leu, and Bank Hofmann.

Statement of the Facts

A brief statement of the facts as provided in the charging papers:

  • Starting in 1998, Defendant opened up multiple bank accounts in Switzerland
  • The accounts were often opened in the name of Nominee Offshore Entity to avoid detection
  • Defendant requested that the banks not send any mail to his U.S. address
  • Defendant travelled to Switzerland often to discuss the status of his accounts
  • Defendant had money transferred from the 3rd party nominee companies into the bank accounts
  • The income was not reported to the U.S. Government and FBARs were not filed (or FBARs were intentionally misrepresented)
  • Defendant had upwards of $28 million in the foreign accounts

The Scam

In order to avoid detection, Defendant worked with various bankers throughout Switzerland and other countries in order to facilitate the transfer of money to locations outside the United States. To further perpetuate his crime (similar to Manafort and Gates) he opened up shell companies and other false companies in other countries to receive funds.

These companies were primarily located in Panama, the British Virgin Islands and Liechtenstein. In other words, he wasn’t very smart about his crime.

Stated another way, if you’re going to go forward with an attempt to avoid tax by moving money offshore, you can’t follow textbook maneuvers. Opening up “Swiss bank accounts” using “BVIs” and other common types of tax provision entities is going to get you caught sooner or later.

Transfers to the United States

What’s the fun of having $28 million offshore if you can’t enjoy the money while you are living in United States. As a result, throughout the years, Defendant travelled throughout the world using cash that he received offshore to finance his trips.

He purchased gems and jewelry, as well as an 8.6 carat ruby ring, and a $3 million house in Greenwich, Connecticut.

**When people are on the run, jewelry is one of the best methods for transferring money without being detected (aka, if you are on the run, then opening an account at your local bank – especially with FATCA – is probably not the best idea).

Defendant Continued to Move Money

Throughout the years, Defendant continued to transfer money to different foreign financial institutions. At some point, once the United States government put on a full-court press against many of the Swiss banks, the banks informed defendant that he should move the money to other institutions (or spend it).

It sounds like he picked a little bit from column A and a little bit from column B. He spent lots of money and moved lots of money and in the end, he got caught.

His Harsh FBAR Penalty

Defendant may end up in prison (5 years maximum), along with a $14 million FBAR penalty and additional unspecified fines and penalties. Why such a harsh FBAR penalty? Because the IRS found him to be willful in tax evasion and he did not disclose any of his accounts. It’s almost aggravating to see so many of these newer attorneys, with no criminal or litigation tax experience, telling individuals that they will never get caught; it is just not the case.

Once the IRS believes you are willful, it could be $28 million (where you land yourself in the news) or $280,000 (usually not reported in the news) – but if they catch you in a lie, they’re going to try to take as much of your money as they can from you.

So sure, a $400,000 offshore bank account might not seem like a $20 million foreign investment… except to the person who is hoping to retire on that $400,000 savings account and now may be subject to a $200,000 or more penalty because they did not properly voluntarily disclose.

Offshore Voluntary Disclosure

The traditional OVDP program is designed for individuals such as this – people who were willful. Now, one thing to keep in mind is that in order to enter the program the money has to be legally sourced. In other words, if the defendant was washing illegal money, then he cannot turn around and enter traditional OVDP to try and clean them. But, it was just a case of someone being a bit greedy, then often times, entering traditional OVDP would have helped.

In this case, the defendant would have still paid a 50% penalty under OVDP, but would not be facing several years behind bars for his crime. In addition, he will have many other fines and penalties to pay before it is all over.

Alternatively, if he was audited but not indicted (no criminal charges), then he could have been hit with 100% FBAR penalty (which is a 50% penalty over a multi-year audit capped at 100%). In years past, that max penalty was 300% but it has been reduced to 100%.

IRS Offshore Enforcement – A Key Priority

As provided by the Department of Justice’s statement regarding the case:

“For more than a decade Hyung Kim concealed his wealth in secret offshore accounts, evading reporting requirements and the payment of income taxes due,” said Acting Deputy Assistant Attorney General Goldberg.  “With his guilty plea, he is now held to account for his criminal conduct.  Offshore tax evasion is a top priority for the Tax Division, and we will continue to work with our partners at IRS to follow the money and actively pursue those who persist in thinking that they can safely hide their income and assets offshore.”  

“Mr. Kim’s plea is another example of what happens to those who dodge their tax obligations by utilizing offshore tax havens,” said Chief Don Fort, IRS Criminal Investigation. “We owe it to the vast majority of honest U.S. taxpayers to tirelessly search for and prosecute those who avoid paying their fair share, regardless of how they may try to disguise their income.”

Want to Learn More About Offshore Voluntary Disclosure?

Before making any affirmative representation, or past filing to the IRS it is important to speak with an experienced offshore disclosure where to learn the pros and cons of each different approach.

At Golding & Golding, we limit our entire law practice to Offshore Voluntary Disclosure, which includes FBAR and FATCA reporting.