Are cryptocurrency exchanges the new Swiss banks?


There’s a nearly $ 1 trillion gap between the amount of taxes the Internal Revenue Service owes and what it actually collects. The IRS officer has spoken publicly about the need for increased tax enforcement and has identified several goals that such enforcement efforts will be directed towards.

One headline that makes headlines is cryptocurrency, amid the perception that some are using cryptocurrency’s anonymous features to commit tax evasion and other crimes. To fully appreciate what is likely to come, cryptocurrency exchanges need only look back on the enforcement efforts of the IRS and the Department of Justice targeting foreign accounts and foreign financial institutions, particularly in Switzerland.

On July 1, 2008, a federal district court judge issued an order that allowed the IRS to obtain information about US taxpayers’ accounts from UBS AG, Switzerland’s largest bank. The order empowered the IRS to serve a “John Doe” subpoena on the bank for information about possible tax fraud from individuals and legal entities whose identities are unknown to the government.

The UBS subpoena should be viewed as the first shot in a multi-year battle against tax evasion by US taxpayers and financial institutions that the US government regards as participants or agents in such tax evasion. As part of the overall settlement agreement between UBS and the United States, UBS agreed to pay US $ 780 million to resolve criminal charges against them. Five years later, Credit Suisse pleaded guilty to the “conspiracy to assist and assist US taxpayers filing false tax returns” and agreed to pay a total of $ 2.6 billion in fines.

Following the UBS-Credit Suisse comparisons, the IRS ran three separate voluntary disclosure programs for individual taxpayers and, as part of those enforcement efforts, gathered information about the role of certain financial professionals and financial institutions in promoting tax evasion. In response to this information, the Justice Department’s tax department announced the Swiss Bank Program, which provided appropriate banks with a mechanism to avoid a full investigation.

In the end, almost 80 Swiss banks took part and received declarations of cease and desist from the Department of Justice against payment of substantial fines, among other things. In total, the participating banks paid more than $ 1.3 billion. Banks that were ineligible because their investigations were underway have fined more than $ 38 billion.

The success of these efforts has resulted in increased regulatory compliance at both taxpayer and institutional levels. With the international banking community already turned upside down, the US government turned its attention to holders of cryptocurrencies as well as certain exchanges. Without the challenges previously posed by international relations or local banking secrecy laws, the IRS can move more freely and faster. Step one: Issue a John Doe subpoena to Coinbase Inc. in late 2016. More recently, the IRS has served additional John Doe subpoenas to Circle Internet Financial Inc. and Payward Ventures Inc. (d / b / a / Kraken).

While the current target of the IRS’s increased enforcement efforts on cryptocurrencies is individual taxpayers, the IRS has already received a wealth of information that will improve its understanding of the gaps in know-your-customer measures that U.S. taxpayers may have to circumvent their tax and reporting obligations.

After reviewing the information provided by Coinbase, the IRS is still unable to identify more than 750 taxpayers. The use of pseudonyms, mailboxes or other fictitious or falsified information by account holders makes it extremely difficult to identify these people. The IRS’s ability to fight tax evasion is made even more difficult by exchanges like Kraken, which do not require tax identification numbers to be provided for all accounts. The 750 unidentified taxpayers with Coinbase accounts generated gross proceeds of more than $ 100 million from cryptocurrency sales between 2013 and 2015 alone.

At some point, the persistence of these deficiencies in KYC measures and due diligence will result in liability for the exchanges themselves and raise the suspicion that these deficiencies are deliberate. And as we have seen with Swiss banks, the IRS and the Justice Department are ready to prosecute financial institutions for their role in facilitating tax evasion.

In order not to get swept up in the enforcement whirlpool in the years to come, cryptocurrency exchanges and other financial institutions should take immediate action to ensure that their customer due diligence and associated compliance procedures are legally sufficient.

A look back at how the IRS and the Department of Justice acted against unreported overseas financial accounts and overseas financial institutions provides significant insight into how cryptocurrency exchanges can prepare and potentially minimize any risks they may face should the Justice Department investigate Stock exchanges that are suspected of tax evasion begins.

Many of the Swiss banks that eventually participated in the Swiss Bank Program made significant efforts to revise their policies and procedures for dealing with US clients following the UBS settlement. These banks paid fewer fines as a result of these proactive measures. By comparison, Swiss banks that have not implemented revised policies or procedures or that have acted as a haven for US clients who have left UBS or other major Swiss financial institutions have undoubtedly paid higher fines.

There is no question that cryptocurrency will remain at the forefront of the IRS’s enforcement efforts for some time to come. And with new regulations recently enacted or pending by the Securities and Exchange Commission, the Commodity Futures Trading Commission, the IRS, and the Financial Crimes Enforcement Network, the regulatory landscape will continue to get confused and burdensome in the near future.

Taking the time now to improve internal procedures for KYC files, customer communications and, if necessary, customer compliance will be significantly less of a hassle than doing all of these under the control of a government-appointed independent auditor or monitor with the Justice Department waiting in the wings. Working to ensure that proper logs are in place to protect against customers seeking to exploit loopholes or loopholes in KYC policies will go a long way in keeping control of the U.S. government’s tax enforcement efforts focused solely on customers, not financial institutions .