WASHINGTON - A Senate subcommittee report due out today will accuse financial institutions doing business in the United States of aiding citizens and companies in using offshore accounts to avoid paying taxes and filing necessary disclosures.
The report, obtained by American Banker on Monday, criticizes Bank of America Corp. and to a lesser degree HSBC Holdings for failure to follow proper anti-money-laundering procedures.
Representatives from both companies are scheduled to appear today before the Senate Permanent Subcommittee on Investigations to defend themselves. Several sources said B of A plans to acknowledge that it made mistakes but to stop short of admitting it broke the law.
B of A could get a frosty reception. The subcommittee's chairman, Sen. Norm Coleman, R-Minn., and Sen. Carl Levin of Michigan, the lead Democrat, have assailed banks in the past for not following anti-laundering requirements.
Observers said that the hearing makes clear that banks are being drawn into a fight over the use and legality of certain tax shelters and that it may signal more scrutiny of financial institutions involvement in such activities.
The 401-page Senate subcommittee report rips Bank of America for its role in an alleged scheme by two Texas billionaires, Sam and Charles Wyly, to hide assets and shift income offshore in an effort to avoid paying U.S. taxes.
The report claims that Bank of America willfully ignored its responsibility under the U.S. Patriot Act to formally identify the ownership of certain offshore entities that were being controlled by the brothers.
"Bank of America was repeatedly told in an informal way that the offshore entities were associated with the Wylys, but when it sought to get this information formally … the offshore entities refused to cooperate," the report says. "Despite being pressed for nearly a year by its clearing broker … Bank of America never obtained the beneficial ownership information required by the Patriot Act."
The company also accepted forms from the offshore entities representing that they were the beneficial owners of account assets, "when the bank knew that U.S. taxpayers, the Wylys, were directing the offshore entities' investments," the report said. If the bank had followed through on its requirements, the Wylys would have had a harder time disavowing ownership and control of these entities for tax and securities purposes, the report said.
A Bank of America spokeswoman declined to comment for this article but said it would provide more details today at the hearing. She said B of A had fully cooperated with the subcommittee's investigation.
But sources said Bank of America does not feel it acted illegally. Still, it is expected to acknowledge it did not follow its own internal policies regarding the Wyly accounts. It also is expected to detail changes it has made to beef up its anti-laundering compliance, including hiring Bill Fox, the former director of the Financial Crimes Enforcement Network, and taking disciplinary action against employees involved with the Wyly accounts.
At issue are Patriot Act money-laundering provisions that require an institution to know the identity of any customer or company with which it does business. Financial institutions are also required to help guard against tax evasion by reporting client account income to the Internal Revenue Service.
Bank of America first acquired the Wyly accounts in 2002, when it hired Louis Schaufele as a broker in its private banking unit. Mr. Schaufele, who had previously managed the accounts for Lehman Brothers, which he left to join B of A, knew and informed Bank of America that the offshore accounts were associated with the Wyly family, but insisted each account be treated as an independent legal entity, according to the report.
By 2004, Bank of America was in a dispute with its clearing broker, National Financial Services, on exactly who owned the accounts. NFS repeatedly sought to identify the beneficial ownership of the accounts, but was rebuffed by Mr. Schaufele and Bank of America's securities unit.
NFS warned Bank of America by e-mail that "not knowing the names of the beneficial owners does not allow us to fulfill our Patriot Act obligations." It told Bank of America officials it was "extremely nervous" about the accounts, and feared regulatory scrutiny, threatening to file suspicious-activity reports on the accounts.
Even some Bank of America officials grew nervous, according to the report.
"I share NFS' concern that we are exposed here," wrote Barry Harris, who was Bank of America Investment Services' general counsel then. "While we frequently have benefit of facts/knowledge … we don't know the identities of the beneficiaries."
Mr. Schaufele said demanding the information could threaten the bank's relationship with the Wyly family, who he said pay fees to the private bank of more than $1.2 million a year. The issue was settled at the end of 2004, when the New York district attorney subpoenaed Bank of America for information on the accounts, and the accounts were closed.
Mr. Schaufele, who no longer works for Bank of America, is scheduled to appear today at the hearing as a witness along with Michael Conn, the president of B of A's private bank unit for the Northwest.
Also expected to testify is George T. Wendler, senior executive vice president and chief credit officer of HSBC Bank USA in Marlboro, N.J.
The report scrutinized HSBC Bank for its role in transactions conducted between 2000 and 2002 involving Quellos Group LLC, an asset manager based in Seattle that had designed and promoted several tax shelters in conjunction with KPMG LLP.
Quellos designed a shelter known as Point - an acronym for personally optimized investment transaction - that it sold to five individuals in six transactions. The primary purpose of the complex scheme was to create artificial securities losses that the individuals could deduct from investment gains in order to lower taxes on the gains.
"Together, the tax shelters were used in an effort to erase over $2 billion in capital gains that would otherwise have been taxed, costing the U.S. Treasury lost revenue of about $300 million," the report said. HSBC was one bank that "provided financing for the Point transactions, without conducting adequate due diligence into the underlying transactions."
The report included evidence that principals behind the transactions deliberately hid their purpose from HSBC. Steve Cohen, an HSBC spokesman, said that the bank would testify at the hearing and that officials would be "available to answer any questions the subcommittee may have."
