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1982 Bank of Nova Scotia Decision

The Bank of Nova Scotia

is a Canadian chartered bank with branches and agencies in 45 countries, including the United States and the Bahamas. A Federal Grand Jury conducting a tax and narcotics investigation issued a subpoena duces tecum to the Bank calling for the production of certain records ma inta ined at the Bank's main branch or any of its branch offices in Nassau, Bahamas and Antigua, Lesser Antilles, relating to the

bank accounts of a customer of the Bank.

The subpoena was

served on the Bank's Miami, Florida agency on September 23, 1981. The Bank declined to produce the documents asserting that compliance with the subpoena without the customer's

consent or an order of the Bahamian courts would violate

Bahamian bank secrecy laws.

After the district court entered an order compelling the

Bank to comply with the subpoena, the Bank's Miami agent

appeared before the grand jury and formally declined to

produce the documents called for by the subpoena.

The

district court held the Bank in civil contempt and that order was upheld on appeal on the grounds that the importance of the 0.s. grand jury criminal investigative function outweighed the Bahamas' interest in protecting privacy through bank secrecy.

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1984 Bank of Nova Scotia Decision

The bank aga in moved to

quash a grand jury subpoena served on March 4, 1983, and was again held in contempt and the contempt sanction of $25,000 per day (until the bank complied with the subpoena) was

sustained on appeal.

The appellate court agreed with the district court that the bank failed to exercise good faith in complying with the

subpoena:

"On October 20, 1983, 7 months after the grand

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jury subpoena had been served, the only document produced by the Bank was a Xerox copy of a draft..."

In November of 1983, after the Bank insisted that they

iligently searched all ten branches in the Bahamas and had

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produced all documents, the IRS special agent warned Bank's

counsel that more documents sought by the subpoena had not

been produced.

Thereafter, in December of 1983, the Bank

produced photocopies of voluminous records from 1979. The rema ining documents were finally produced on January 25, 1984, almost a year after the subpoena was served.

The Bank of Nova Scotia was fined $1,825,000.

The Gucci Investigation Our successful prosecution of Aldo Gucci demonstrates the results that can be achieved when we are able to pierce the foreign bank secrecy laws. The case also shows

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that bank secrecy is used as a shield by ordinary tax evaders, not

just organized criminals launder ing drug money. Again, we could reach the foreign bank records only because branches of United

States banks (Chase Manhattan and Citibank) were involved.

Gucci used Hong Kong sham corporations, Garpeg Ltd. and FDC

Co. Ltd., as conduits for funds diverted to himself and others.

When the IRS served summonses on Chase Manhattan and Citibank for

the production of records relating to accounts ma inta ined by Garpeg at the Hong Kong branches, Garpeg and the banks all

resisted compliance with the summonses.

The banks were ordered by

the U.S. District Court to produce the records on the grounds that the vital interest of the United States in the enforcement of its

tax laws outweighed Hong Kong's interest in maintainirg

confidentiality of banking records. Although the banks initially refused to follow the District Court order in light of an order

from the High Court of Hong Kong enjoining the banks from

producing Gucci records, the banks eventually complied when Gucci consented to production of the Hong Kong records.

On January 17, 1986, Aldo Gucci pleaded guilty to criminal tax violations on $11,881,022 of income diverted from Gucci's

businesses during the 6 years 1977 through 1982. The additional tax liability is $7,392,512 not counting civil penalties and

interest.

60-672 0 - 86 - 7

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We certainly applaud the results of the Bank of Nova Scotia

and the Gucci cases; however, summonses and subpoenas are an ineffective means of obtaining bank records located outside the

United States unless the records are in the custody of a foreign

branch of a U.S. bank (Gucci) or a foreign bank having a 0.s.

branch (Bank of Nova Scotia).

Cooperation from the government of

the tax haven/secrecy jurisdiction, in the form of treaties or

other bilateral agreements, is the best way to reach the records

of foreign banks that do not have a U.s. branch.

Such agreements

can also reduce the enormous expenditure of time and resources

needed to enforce subpoenas and summonses.

Eraudulent Tax Shelters

Financial secrecy jurisdictions are not only havens for money launderers and individual tax evaders. The privacy, efficiency,

and security of the international financial network has also

proved useful for fraudulent tax shelter promoters. Of the 406 cases involving abusive tax shelters currently under investigation by Criminal Investigation, over 50 percent involve tax haven

countries.

An example is the investigation of the United States Tax

Planning Service, Ltd. (USTPS).

Affidavits for search warrants

regarding USTPS were filed during May of 1984 throughout the Onited States. USTPS was created in the Cayman Islands by several

individuals.

The bank secrecy laws of the Cayman Islands were

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used to facilitate the concealment of the true nature of financial transactions. The scheme was designed to primarily appeal to physicians and other highly educated and wealthy individuals, by

generating phony tax deductions.

An integral part of the overall scheme was the establishment of client-controlled foreign corporations concurrent with the

establishment of offshore bank accounts.

The USTPS scheme also

involved the establishment of client-controlled offshore trusts;

the creation of commodity straddles with offshore foreign

involvement; the creation of transactions appearing to be loans

and/or other non-taxable sources of income from the Cayman Islands; the use of bogus churches for phony charitable

contribution tax deductions; and the creation of fictitious liability insurance, particularly Medical Malpractice Insurance, to permit tax deductions for apparently legitimate insurance premiums. Central to all of these schemes was a return to the investor of approximately 92 percent of the alleged deduction.

The promoters who conceived the scheme charged a fee of 8 percent for their services. USTPS promoters had substantial expertise in monetary and tax matters and knew how to best use financial institutions in furtherance of their fraud. In fact one

promoter, who pleaded guilty to criminal tax charges, was the

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