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Another Case to Digest

By John Dietz - Email Editor

Date : May 26, 2009

Dear Valued Reader,

Many are concerned that international business, trade and offshore investing will become transactions of the past. We respectfully disagree with this conclusion, but we agree that documenting and reporting have become more stringent and increasingly more important.

Cases like the one in this article may raise eyebrows into the offshore world; and they should. As always, the details will provide as much of the true state of affairs that can be discovered, and only then can we make decisions based on these cases, subpoenas and summons.

Recently there has been a run on Administrative law. Numerous federal and state administrative agencies now make rules that reach into all manners of activities, including licensing, regulation of trades and professions, protection of health, and promotion of welfare. Their powers emanate from legislation, and their decisions and rules are reviewable by the courts.

The IRS is one such agency falling into these categories of law, and as operating size increases, so do the number of critics who oppose the growth. Federal law allows the IRS to compel information from third parties if it suspects there is a tax issue, even if the agency is unsure who precisely it is after. Recently the IRS has chosen to activate this policy.

Therefore, as the story goes, the IRS has demanded a list of merchants and individuals who have made offshore credit card transactions within First Data, a big credit card processer controlled by the New York City based private equity firm Kohlberg Kravis Roberts & Co (commonly referred to as KKR).

Kohlberg Kravis Roberts & Co focuses primarily on leveraged buyouts of mature businesses. Since inception in 1976, the firm has completed over $400 billion of private equity transactions. Their leverage buyout history is rather impressive with companies you are familiar with like Nabisco and Beatrice and worth a look on Wikipedia.

The IRS wants to know if the U.S. merchants are using the credit card processing system to divert Internet sales to offshore accounts and hide taxable profits. For me, the thought that raises my eyebrow of concern is “broad spectrum.” This could be a case where Administrative Law dips into a person’s ability to take advantage of the protection offered in the Bill of Rights and the U.S. Constitution. Does an individual have the right to not be included in this broad-spectrum judicial order even if they have a transaction?

Suppose since the recent UBS scam with the John Doe summons, everyone who had a bank account or transaction with the UBS offshore base had to undergo an audit. The only criterion for the invasion or “search” is the fact that you have an account. A judge in Greenwood Village, Colorado has done just that. In another “John Doe Summons”, the judge has forced First Data to provide the details of all U.S. merchants who have arranged since 2002 to have payments from credit and debit cards deposited in offshore accounts. These transactions are noted to be with the assistance of First Atlantic Commerce, an obscure company headquartered in Bermuda. Prosecutors said they are seeking names, addresses, annual statements and other information from the John Doe clients.

Bermuda’s First Atlantic Commerce calls itself "a leading provider of secure and robust Internet payment processing solutions" and admits no wrong. Of course, looking back neither did UBS at first.

First Data made statements that they believe that they do not have any information that falls within the scope of the summons.

The IRS supported itself in the “John Doe Summons” with a 34-page affidavit including multiple attachments and exhibits of said evidence. Affidavits included written correspondence through the company’s website including information, which openly discussed offshore merchant accounts as a way of “tax avoidance” stating that there is no legal way to use an offshore merchant account for tax avoidance.

The IRS stated in a press release, that it is likely a number of U.S. taxpayers may be under-reporting income, evading taxes and consequently “breaking the law.” "United States taxpayers who operate businesses, either online or from a physical location, and have some or all of their gross income from credit, debit or other payment card sales deposited directly into a bank account maintained outside the United States."

The Canadian CEO of First Atlantic Commerce is Andrea Wilson, an ex-banker. The IRS affidavit claims she helped First Data set up its credit card processing system before co-founding First Atlantic Commerce in 1998. The IRS summons includes a 2001 press release in which Wilson was quoted as offering "the benefits of leveraging corporate tax advantages through payment settlement in Caribbean and Latin America region, including Bermuda." She also boasted of being set-up right in a tax haven. Ms. Wilson claims there is nothing wrong with that. To know this, many details must now come to surface for the information is only vague.

Unfortunately, it does not look good for First Atlantic or First Data, but that is only at a glance before prosecution. Although, it never looks good for anyone the U.S. government is after. More importantly, the other bad news is that it is not good for the privacy of those who are reporting and hopefully in full compliance.

I hope that for them it will just brush over, and justifiably for them, that they will not be placed into the barrels with the bad apples.

Until next time,

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