Sham firms led to tax evaders
UBS clients followed ‘typical’ path, lawyer says
MIAMI - Wealthy American clients of Swiss bank UBS AG used sham corporations set up in havens from Hong Kong to the British Virgin Islands as part of their efforts to evade US taxes, according to documents filed in Florida and California court cases.
The shell corporations, or “pass-through entities,’’ were key elements of the tax-evasion schemes, but they also helped federal investigators snare the UBS clients.
It’s cheap to set up the shell corporations in countries with little or no income tax and a lenient regulatory system, said Martin Press, a tax attorney with the Gunster law firm in Fort Lauderdale, Fla.
The most recent UBS client to plead guilty to tax charges, John McCarthy of Malibu, Calif., used a Hong Kong-based entity called COGS Enterprises Ltd. to open a UBS account in 2003. A statement of facts signed by McCarthy shows that he had more than $1 million transferred from his US-based businesses to the secret UBS account opened in the COGS name.
“It is absolutely typical. They usually use one or more pass-through entities,’’ Press said. “The common thread of all of them is that it is relatively inexpensive to create. If it wasn’t, you might as well pay the taxes.’’
Hong Kong also figured in the tax-evasion scheme UBS ran for New York businessman Jeffrey Cherkin, who created corporations based there that federal prosecutors said were used to hide from the Internal Revenue Service commissions he was paid by Hong Kong and Chinese toymakers. Cherkin pleaded guilty to filing a false 2007 tax return and faces three years in prison.
Cherkin admitted to another wrinkle: When he needed money, he had bank checks made out to his US company from offshore UBS accounts and would carry them by hand from Hong Kong to the United States. On average, Cherkin brought to the United States about 12 checks a year totaling some $300,000, according to documents filed in Fort Lauderdale federal court.
Two other UBS clients who have pleaded guilty to US tax charges admitted opening accounts using entities in the British Virgin Islands and Panama, respectively, to conceal income from the IRS.
The offshore shell entities are the common element in all four criminal cases. The reason, tax attorneys say, is that the information disclosed by UBS earlier this year for about 300 clients focused on those with corporate bank accounts for apparent shell corporations.
“It is only those cases that are in the pipeline,’’ said George Clarke, attorney with the Miller & Chevalier law firm.
Those accounts were turned over to the IRS as part of a deferred prosecution agreement with US authorities in which UBS also agreed to pay a $780 million penalty.
Because only UBS knew who the real account holders were, investigators used the sham corporations to trace the flow of money and figure out who ultimately benefited - and who wasn’t paying taxes.
The Zurich-based bank and the Swiss government last week finalized an agreement with the Justice Department on a separate US effort to obtain the identities of some 52,000 additional UBS clients, but precise details have not yet been released. It’s likely that some of these cases also will involve shell corporations but others may not when the final agreement is filed as soon as this week in Miami federal court.
McCarthy’s use of a Hong Kong account illustrates how the tax evasion schemes commonly worked.
According to court documents, McCarthy opened an account for his Hong Kong entity at UBS’s operation in the Cayman Islands. He was told by UBS advisers that “a lot of United States clients don’t report their income and just take it off the top.’’
So, beginning in 2003, McCarthy skimmed money from his US bank account and transferred it to the UBS account opened for the Hong Kong entity known as COGS. Later, an unidentified Swiss lawyer set up a foundation in Liechtenstein to “allow for an extra layer of privacy and help to conceal defendant’s liability,’’ according to the documents.
As late as 2008, former UBS representatives and McCarthy’s Swiss lawyer sought to transfer his UBS money to another Swiss bank “in an attempt to continue efforts to hide the funds from the United States government,’’ according to the statement of facts filed last week in Los Angeles federal court.
McCarthy faces up to five years in prison and $250,000 in fines when he is sentenced Sept. 14.