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cartoon by Chris Rosebrough

PART IX

NORTH AMERICAN ONSHORE-BASED LAWYERS
AND ACCOUNTANTS ARE RUNNING SCAred




U.S. PROSECUTORS ARE ATTACKING OFFSHORE PLANNERS.

It is becoming extremely dangerous to offer offshore planning services in the United States (and increasingly so in Canada). Using ever-widening theories of "money laundering", "tax fraud" and "conspiracy", federal prosecutors and Crown Counsel are going after attorneys, tax planners and others offering offshore planning services, for crimes committed now by their clients at an alarming rate. Often the planner is prosecuted based on the testimony of his client, who gets a reduced sentence, or may even be paid for his cooperation.

Example:

A respected tax and asset protection attorney based in California, but also licensed in England and Hong Kong, made the mistake of representing the large customer of a bank that eventually failed. Prior to this he had constructed an offshore structure that he believed was both legal and would provide tax advantages to his client. However, the client had borrowed large amounts from that bank. When the bank went collapsed, prosecutors went looking for people to hold responsible and found the bank president and the large customer client.

The large customer pleaded guilty to the charges and agreed to testify against the attorney in return for the prosecutors’ request for leniency at sentencing. Based in part on this testimony, our attorney (a friend of the editor) was convicted on money laundering, conspiracy and tax fraud charges. He now faces up to 103 years in prison. Unless his conviction is overturned on appeal (this was as of February, 1999) he will most likely be disbarred as an attorney, after a career of 30 years; yet he would never engage knowingly in money laundering.

This situation underlines the risk that all offshore planners based in the United States face - if they represent their clients too vigorously they may go to jail. Yet if they fail to represent their clients as best they know how they risk being censured for violating their code of professional conduct, and being sued for malpractice.

CANADIAN FEDS PROPOSE CIVIL PENALTIES FOR THIRD PARTIES (ACCOUNTANTS) PREPARING INCOME TAX RETURNS

The budget introduced by the federal government on February 16th contained a proposal to create civil penalties for misrepresentations of tax matters by third parties. Such a measure could have serious implications for accountants (and lawyers) and the Senior Canadian accounting body has embarked on a series of initiatives to respond to this issue.

A meeting between the Joint Taxation Committee of the CICA and the Canadian Bar Association and the Department of Finance was held on March 3rd to discuss, among other budget items, the issue of civil penalties. During the meeting Finance officials indicated that it is their intent to develop penalties not only just for tax shelter promoters and offshore advisors, but also to deal with some abuses in the tax preparation area. Their rationale for the latter was explained as follows: while government can go the route of criminal penalties for the "outrageous" cases, it needs a civil route addressing the "middle-ground" cases where those who knowingly, or in circumstances amounting to gross negligence, make false statements or omissions regarding another person’s tax matters. They made it clear that their concerns are related to the gray area of a "should have known" standard and that they would want to see the penalty provisions narrowed to focus only on clear areas of abuse in tax preparation. Officials were left with a better understanding of what accountants as tax preparers currently do - i.e. that they do not audit the information contained in a return. They made it clear that should this be required, fees for preparing a return would not remain at current levels and that there was a possibility that liability insurance carried by accounting firms would not cover civil penalties.

CAN YOU STILL OBTAIN COMPETENT OFFSHORE PLANNING IN THE UNITED STATES? ATTORNEY-CLIENT PRIVELIGE A SAFEGUARD STILL?

Due to the vastly increased danger of civil or criminal liability posed for the offshore planners, you can expect a through grilling of your background and your motives from any planner based in the U.S. Too often the client has become the planner’s adversary if things went wrong. Most unfortunately it has become equally common for attorneys to turn on their clients in the U.S.! The U.S. Department of Justice is on record and has publicly defined and has validated the use of attorneys as informants!

Though you can take advantage, when working with your attorney, of attorney-client privilege (the right of the attorney to refuse to divulge what you have told him), remember this privilege is not absolute. Attorneys who become informants against their clients do not necessarily violate attorney-client privilege.

Accountants however lack any similar protection under both U.S. and Canadian law. Even conversations with an attorney you hire through an accounting firm are ordinarily not protected (An accountant that performs work at the direction of the attorney, however, may be covered by the attorney’s privilege).

Continued in part ten of ten

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