New Unreported Offshore Assets case: Bad facts leads to bad results

A resident of Connecticut who was originally from Korea has been hit with a record civil penalty of $14M, a six month prison sentence, and a fine of $100,000 for failing to report Swiss bank accounts totaling around $28M, the US Department of Justice (DoJ) has announced. The sentence is an indication that the US DoJ is seeking to significantly increase penalties it levies against offshore tax evaders.

Under US law, Americans and others with US tax obligations, such as greencard holders, must disclose any foreign financial accounts worth more than $10,000, by filing a FBAR, or Foreign Bank Account Report. Enforcement of this law increased after the signing into law of the Foreign Account Tax Compliance Act, or FATCA, in 2010.

According to a statement issued by the DoJ, Hyong Kwon Kim, a citizen of South Korea and, since 1998, a legal permanent resident of the United States, resided in Massachusetts and later in Connecticut.  Kim, a sophisticated business executive who ran family businesses with operations in the United States and internationally, inherited tens of millions of dollars that he stashed in secret accounts at Credit Suisse, its subsidiaries, and another Swiss bank.  Kim deliberately violated the U.S. bank secrecy laws by failing to report his foreign financial accounts to the Treasury Department.  U.S. citizens, resident aliens, and permanent legal residents with a foreign financial interest in or signatory authority over a foreign financial account worth more than $10,000 are required to file a Report of Foreign Bank and Financial Accounts, commonly known as an FBAR, disclosing the account.

In addition, the DoJ said, Kim “conspired with a host of foreign enablers” including his Swiss attorney and un-named bankers “to conceal his assets and income in Swiss accounts held in his own name, the name of a relative, and in the names of sham corporate entities”, and otherwise to “structure financial transactions in a manner that allowed him to utilize [his offshore-held] funds in the United States, while concealing his ownership and control” of them.

In order to do this, the DoJ said, he had had checks issued to third parties in the United States, in order to purchase a luxury home in Greenwich, Connecticut, a waterfront vacation retreat in Chatham, Massachusetts, and jewelry adorned with multi-carat diamonds, emeralds, and rubies; a “sham entity” was created in order to conceal his ownership of a vacation home.

The amount of the unreported or underreported accounts is over $28 million.  The FBAR penalty is over $14 million.  The sentence is only 6 months.

Although the 50% penalty is high, willful civil violations can result in tax, penalties and interest totaling 325% of the highest balance in the account for the most recent six years period.

The DoJ noted that US district court Judge Brinkema had taken Kim’s “cooperation with the government, which occurred [over] more than a five-year span”, into account in pronouncing the sentence on January 25, 2018.

The facts of this case are bad and unfavorable to the taxpayer, hence the high penalties. Taxpayers with better facts can expect better results and avoid prosecution and high penalties.