According to the IRS (here), their suit against UBS ended with the “successful negotiation of an agreement that will result in the IRS receiving an unprecedented amount of information. . . .  As a result of this agreement, the IRS will receive substantially all of the accounts that it was interested in when it initiated the [suit] against UBS.”  This is an interesting conclusion since the IRS was seeking information behind 52,000 accounts and UBS agreed to turn over “approximately 4,450” names.  This represents less than 1/10^th of the information that was at risk.  Nevertheless, the IRS made it apparent that in those cases where it obtains the information from UBS, it will seek all potential civil and criminal tax remedies. 

Not surprisingly, UBS downplayed the settlement agreement (here).  While not rubbing IRS’s nose in the settlement, UBS was clearly happy with the settlement since it agreed to turn over less then 10% of the information at risk.  What was most unusual with UBS’s stance was the apparent solicitation to its accountholders to voluntarily consent to being one of the 4,450 names.  On its website, UBS told the accounts at risk that “it is possible for you to give us your consent and instruct us to provide to the IRS on your behalf information relating to your account.”  UBS notes that it does not have any views on whether the providing of this information will be treated as a voluntary disclosure. 

The solicitation by UBS raises several questions.  First, how is UBS going to determine which of its 52,000 accounts it is going to turn over to the IRS?  Second, if one of UBS’s accountholders does consent will that automatically be one of the 4,450 names that UBS agreed to turn over to the IRS?  Most importantly, why would an accountholder agree to be one of the 4,450 names when they could just as easily go straight to the IRS before the September 23, 2009 voluntarily disclosure deadline? 

For those with something at stake in the IRS v. UBS settlement, the risks and rewards are approaching the extremes.  If an account holder chooses to roll the dice they have a 1 in 10 chance of having significant problems in the near future.  Given the stance indicated by the IRS, if you roll and lose, you will be going to jail.  Thus, the most important questions is is it worth the risk?

While enforcement actions by the SEC appear to have increased as of late, a recent change in subpoena powers should significantly increase the activity of the enforcement branch.  Previously, the approval of a majority of the five SEC commissioners was necessary prior to the issuance of formal orders of investigation and the accompanying power to subpoena documents or compel testimony.  This requirement ensured that a majority of the Commissioners agreed that an action was appropriate.  In his speech last week before the New York City Bar, Robert Khuzami, the Director of Enforcement for the SEC announced that the Commission granted to him the authority to issue formal orders of investigation and, consequently, the accompanying powers.  Khuzami noted that he intended to delegate this authority to senior officers throughout the Enforcement Division.  Thus, the bottleneck that once slowed down the actions of the Enforcement branch has now been effectively eliminated.  Unfortunately, the control that acted to ensure that an action wasn’t being brought by an over-zealous regulator also no longer exists.  It appears that the checks and balances have been eliminated in favor of increased prosecutions.  Prepare for the SEC to act more rapidly than ever before. 

There is a significant matter, both politically and financially, that is making its way onto the national scene. President Obama has taken a stand on overseas tax shelters and incorporated into his budget the revenue he expects to generate from taxing previously undisclosed foreign tax shelters. He has also announced that the IRS will be hiring almost 800 new agents, many of which will be tasked with enforcing this law. This is bad news for those who believed that their overseas accounts were hidden from Big Brother.

Not only is the President taking a position that could adversely impact these individuals, there is currently a legal proceeding between the IRS and UBS that may also result in bad news for these account holders. The IRS has filed suit seeking the names of 52,000 account holders at UBS that may have avoid paying U.S. taxes. Diplomats from Switzerland are attempting to head off the matter through negotiations with the United States but their success may be difficult given the public position taken by President Obama.

The IRS is allowing individuals that have undisclosed foreign accounts a window of opportunity to come clean thereby avoiding criminal prosecution. Americans that have previously undisclosed offshore accounts have until September 23 to voluntarily admit their transgressions and pay the related taxes. The amount of taxes due, however, will be quite large. According to the IRS website (here), in addition to the past due taxes there will be three components that will financial hit the account holders. First, there will be interest on the taxes due computed from the time they were due. This amount compounds and overtime can often become quite significant. Second, there is an “accuracy-related” penalty equal to 20% of the taxes due. Third, there is an additional penalty equal to 20% of the highest balance in the account. Clearly, when combined, these amounts will represent a large portion of the amount hidden offshore.

If the accountholder decides to roll the dice and hope they remain undetected, the penalty could be much worse. First, past due taxes plus interest will still be due. Second, the accuracy-related penalty will also be due. Third, there is a penalty associated with failing to file a Report of Foreign Bank and Financial Accounts (FBAR). This penalty is the greater of $100,000 or 50 percent of the balance in the account – on an annual basis. In other words, the FBAR penalty can be 50% of the balance of the account for each year. In three years, the penalty will be 150% of the account’s balance. In addition to the civil penalties, the accountholder is also subject to criminal penalties of up to $500,000 or ten years in prison or both. Paying a fine is bad enough; going to prison is even worse.

To quote a line from Clint Eastwood, the question for the accountholders is simple – Do you feel lucky?

It is always good to learn from ones’ mistakes.  It is even better to learn from someone else’s.  CFO’s and controllers should remember that axiom and the lessons learned from the fraudulent scheme that recently shook the District of Columbia. 

A longtime manager in the D.C. tax office engaged in a scheme whereby the tax office issued fraudulent property tax refund checks that were deposited by co-conspirators, many of whom were her relatives.  The scheme lasted for about two decades and cost D.C. almost $50 million.  The fraud was detected only after one of the co-conspirators argued with a bank manager who questioned her about a deposit of over $400,000.  She hired an attorney and the bank subsequently contacted the FBI and the investigation began.  If she hadn’t complained, there is no telling how much longer the scheme would have lasted. 

The lesson to be learned form D.C.’s mistake is that fraud happens and in these tough economic times, it will probably happen more often.  The scheme was not overly complicated and it would have been detected if proper internal controls were in place or a compliance review was performed.  The objective should be to minimize the losses that these schemes bring.  If the fraudulent activities had been caught after two years instead of after twenty years, the loss to D.C. would have been a fraction of what it ultimately incurred.  Fraud happens – catch it quickly .

The jobless rate was released today showing a rise to 8.9%, representing an additional 539,000 people who joined the ranks of the unemployed.  This represents almost 14 million people, the highest rate since 1983.  While these numbers alone are difficult to grasp, the impact to the internal controls within these corporations may be even more serious.  History, supported by recent research, indicates that fraudulent activities will be increasing as we make our way through the current economic situation.

There are two important points that businesses and CFOs need to remember when they are agonizing over which of their employees are the next to go.  First, the internal controls that were put in place over the years to protect these companies and their shareholders are needed now more than ever.  Many controls are accomplished through the separation of duties and responsibilities.  Factors other than seniority need to be considered when the financial group is given a layoff target.  Clearly, when management is selecting which employees are to be let go, they must keep those controls in mind.

Second, fraud rises in tough economic times.  The Association of Certified Fraud Examiners recently released a study that confirmed this fact.  Fraud generally occurs when three factors are present, namely, pressure, opportunity, and rationalization.  These factors obviously rise during periods of economic hardship.  A person who believes that they are facing an uncertain financial future may rationalize actions that they would not normally contemplate.  If the opportunity presents itself, these individuals may engage in fraudulent activities.  Unless corporate leadership is careful in its approach to employee reduction, they may be creating an environment where opportunity is rampant – and the tough economic times get much worse.

In an appearance before members of the D.C. Bar on March 18th, SEC Commissioner Luis Aguilar described three significant changes that he was proposing to the other commissioners… Read the rest of this entry »

In May 2007, Prabhat Goyal, the former CFO of Network Associates, was found guilty of committing securities fraud, filing false reports with the Securities and Exchange Commission, and making false statements to auditors. .. Read the rest of this entry »

At a recent seminar put on by the D.C. Bar, SEC Commissioner Luis Aguilar was questioned about the value of self-reporting by a corporation. It is the dilemma faced by a corporation when it uncovers illegal or corrupt behavior; should it inform on itself to the SEC thereby opening up the door to favorable treatment for “cooperating” or should it take the chance that the SEC will never find out about its actions. .. Read the rest of this entry »

At a luncheon put on by the D.C. Bar, former SEC Commissioner Roel Campos and current SEC Commissioner Luis Aguilar gave their insight to some changes on the horizon for the SEC. One of the more interesting perspectives concerned the expected increase in enforcement actions. .. Read the rest of this entry »

In 2008, former Securities and Exchange Commissioner Christopher Cox announced the SEC’s intention to move from FASB (Financial Accounting Standards Board) to IASB (International Accounting Standards Board).  Although American companies have followed Generally Accepted Accounting Principles (GAAP) for the past sixty years, the goal of the move to IASB was to unify accounting on a world-wide basis, thus making financial statements more comparable.. Read the rest of this entry »