Global Policy Forum

Taking Aim at Tax Havens: IRS Seeks


By David Cay Johnston

New York Times
October 20, 2000

The Internal Revenue Service, struggling against Caribbean havens it suspects of draining away at least $70 billion a year in personal income tax revenue, has set its sights on a new target — the credit card slips of suspected tax evaders. The agency has asked a federal judge in Miami to issue summonses for two years' worth of records of MasterCard and American Express card transactions in the United States that were billed to bank accounts in Antigua and Barbuda, the Bahamas and the Cayman Islands.

Using the Internet and other outlets, banks in those nations openly solicit tax evasion in ways that the I.R.S. says have proved attractive to corporate executives, business owners, doctors and other wealthy people in the United States. Americans can legally move their assets offshore but are required to notify the I.R.S. of those transactions and to pay taxes on their income worldwide.

Some Caribbean countries offer an alluring tax haven, however, because they impose no income tax and do not generally cooperate with I.R.S. efforts to track down incomes. But Americans who shelter income offshore face the problem of putting their money to use. That is where a credit card or charge card billed to an account at a Caribbean bank comes in handy, investigators say. Banks in tax refuges issue MasterCards and Visa cards, which can be used anywhere to draw cash and to pay expenses. The bill is then paid automatically from the bank in the tax-haven country, leaving no record of income or spending except for the transaction reports from the networks that MasterCard, Visa and American Express operate.

Credit cards with $1 million monthly charge limits are being offered by some of these banks, according to documents filed by the I.R.S. in United States District Court in Miami. A federal judge there is expected within days to decide whether to issue the summonses requested by the I.R.S. MasterCard International, which like Visa licenses banks to issue credit cards, said yesterday that it would try to cooperate with the government, but might not have the records the I.R.S. seeks. A spokeswoman, Sharon Gamsin, said MasterCard would also weigh the privacy interests of customers in deciding whether to fight a summons, if it is issued.

Ms. Gamsin said she did not know of any banks that had been dropped from the MasterCard system for helping tax evaders. The company's contract, she added, requires member banks "to comply with all local laws." It is not a crime in the Caribbean tax-haven countries to help an American citizen evade American tax law. The charge-card unit of American Express declined to comment yesterday on how it would respond to the court action.

Visa, the other big credit card issuer, was mentioned in the court papers, but the I.R.S. is not seeking its records. Officials would say only that the scope of the investigation was widening. John Buchanan, one of the I.R.S. managers supervising the campaign against tax evasion, said the request for credit card records was part of a widening inquiry into tax evasion using offshore banks. He said the agency was stepping up its efforts both to combat such evasion and to educate people that Congress taxes their worldwide income.

The $70 billion estimate of lost tax revenue was in an affidavit by Jack A. Blum, a Washington lawyer who has long experience investigating drug dealers, money laundering and tax evasion for the United States Senate and other clients. He said that figure was his low estimate. If the $70 billion proves to be correct, it means that close to a dime of each dollar individual Americans pay in federal income tax is used to make up for offshore tax cheating.

The Organization for Economic Cooperation and Development in Paris and the United Nations have tried in recent years to ascertain the extent of worldwide tax evasion through offshore accounts. They say they can only guess that in total it runs in the hundreds of billions of dollars. Joseph C. West, an I.R.S. special agent, said in an affidavit seeking the payment records that "credit, charge and debit cards are a common and purportedly a nontraceable method of accessing offshore funds in any location where the card is honored."

The request for records relies heavily on evidence supplied by John Mathewson, a Chicago executive who set up Guardian Bank in the Cayman Islands, which was used by more than 1,000 Americans to evade taxes. Mr. Mathewson, 72, a convicted money launderer who received probation in return for helping convict his bank's customers, told investigators that 95 percent of his customers used credit, charge and debit cards. "Mr. Mathewson advised that he promoted the use of credit/debit cards so that his clients could covertly access funds stored in the Cayman Islands," Mr. West wrote in his affidavit. That affidavit also described a mechanism used by the Royal Bank of Canada to routinely help wealthy Americans set up accounts overseas and arrange for them to get American Express cards.

A Royal Bank spokesman in Toronto, Joe Konecny, confirmed that the bank helps some big clients obtain American Express cards, but said he was unaware of any evidence that it was helping Americans evade taxes. The bank is an investor-owned corporation, not a Canadian government agency.

A variety of Web sites feature the logos of MasterCard, Visa and American Express and describe ways to get around United States tax laws. The Web site of the Travelers Holding Company in the Bahamas, for example, notes that Americans must report assets being moved offshore, but adds that "there are several ways to establish an offshore account" without having to inform the I.R.S. The site of Corporate Trust Services (Caribbean) Ltd. in Antigua says under the heading "tax avoidance" that "although there is in the United States the legal requirement to report holdings in offshore companies to the local tax authorities, no matter how restrictive these rules may be a greater tax savings may be achieved by the use of an offshore company."

All three credit and charge card companies said they were unaware that their logos were being used in advertisements soliciting tax evasion. Mr. West said that the charge slips sought by the I.R.S. would advance a number of investigations, including one into 77 stock brokerage accounts established in tax-haven countries, 66 of which use charge cards for access to funds in the accounts. He said the I.R.S. was also investigating a Medicare billing technique involving the use of an offshore bank to evade taxes on the sale of medical devices to the government at huge markups.

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