The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Butterfield Bank (Bahamas) chairman yesterday described as “complete news to me” the Internal Revenue Service’s (IRS) probe into alleged tax evasion using accounts at the bank and its regional affiliates.

Ian Fair was responding after Tribune Business informed him that the IRS on Tuesday obtained a court order allowing it to serve summonses on five major US banks who act as Butterfield’s correspondents.

These documents require Mellon, Citibank, JP Morgan Chase, HSBC and Bank of America to provide to the US tax authority the identities, and any other information they hold, on US taxpayers who may be using undisclosed accounts at Butterfield’s subsidiaries in the Bahamas and elsewhere to evade due taxes.

The other Butterfield Bank subsidiaries impacted by the IRS investigation are those in Barbados, the Cayman Islands, Guernsey, Hong Kong, Malta, Switzerland, and the UK.

Contacted by this newspaper in Abaco, Mr Fair said he was unaware of both the IRS investigation and the court order it obtained in the southern district of New York on November 12.

“It’s complete news to me and is the first I’ve heard of it,” Mr Fair told Tribune Business. “Something of this serious a nature, our legal people will look into it. It’s obviously a matter for the lawyers, and will be dealt with appropriately.”

The IRS’s investigation into Butterfield comes amid increasing speculation that the Bermuda-headquartered bank is poised to merge with CIBC FirstCaribbean International Bank.

Mr Fair declined to comment when asked about this by Tribune Business, but this newspaper understands that talk of a region-wide merger is ‘all the rage’ in the Cayman Islands and Bermuda - the jurisdictions where Butterfield has the largest presence.

“What you’ve heard, they’ve heard,” one source said of Butterfield’s staff.

Speculation about a FirstCaribbean merger is given credence by the fact its parent, CIBC, together with the Carlyle Group private equity house, are jointly the largest equity voting power holders in Butterfield.

Both hold 19 per cent after leading the capital injection/takeover that effectively bailed out the Bermuda-based bank, and Tribune Business understands that key ‘trigger dates’ and timelines related to the deal are set to be reached in the 2014 first quarter.

This is the same timeframe in which the purported ‘merger’ between Butterfield and CIBC FirstCaribbean is to be completed, sources suggesting that a March 2014 deadline had been established.

Several observers, though, have questioned the wisdom of a merger for CIBC FirstCaribbean, given that it is embarking on a restructuring exercise as a result of reduced profitability, which could result in jobs losses in the Bahamas and elsewhere.

Butterfield has a smaller operation in the Bahamas, where total assets stood at $114.023 million at end-September 2013, up 37.9 per cent from $87.212 million at year-end 2012.

For 2013 third quarter, Butterfield’s Bahamian operations generated $347,000 in net income on $1.364 million in revenues, a more than $600,000 turnaround from the $256,000 loss suffered in the same quarter last year.

And for the first nine months of 2013, Butterfield Bank (Bahamas) generated $848,000 in net income on $4.428 million worth of revenues, producing a more than $1.25 million improvement over the $373,000 loss incurred during the 2012 comparative period.

Tribune Business, meanwhile, also understands that Butterfield Bank (Bahamas) has been seeking a buyer for its 25 per cent equity stake in the Montague Sterling Centre, the East Bay Street property that houses its offices.

However, sources close to the situation have suggested there is no link between this move and the speculated CIBC FirstCaribbean merger.

It is understood that the Montague Sterling Centre stake was inherited from Thorand Bank & Trust, which Butterfield Bank acquired as its means of entering the Bahamian financial services market.

Banks generally do not like to own real estate, especially properties that house their offices, because of the negative effects associated with depreciation and other issues.

The IRS action over Butterfield is not the first time a Bahamian bank, and its regional affiliates, have been hit with so-called ‘John Doe’ summonses.

A similar tactic was employed against CIBC FirstCaribbean earlier this year, with the IRS seeking information from its US correspondent bank, Wells Fargo, on US taxpayers who may be using Caribbean accounts to evade federal taxes.

In Butterfield’s case, a release issued by the Manhattan district attorney said US taxpayers had identified 81 previously undisclosed accounts held with Butterfield’s regional subsidiaries. And US citizens who owned accounts with Butterfield have previously admitted failing to report their interest to the IRS

District attorney Preet Bharara said: “These actions show that the use of foreign banks for tax evasion remains a high investigative priority of this Office, and US citizens should understand that loud and clear.

“By issuing these John Doe summonses, we continue our joint efforts with the IRS to identify and hold accountable those who try to evade their legal responsibility to pay taxes.”

Assistant Attorney General, Kathryn Keneally, said: “These cases once again demonstrate the Department’s resolve to uncover and identify taxpayers who tried to hide money overseas as a way to avoid federal taxes.

“These John Doe Summonses will provide information about individuals using financial institutions from Switzerland to the Cayman Islands to Hong Kong to avoid their US tax obligations. US taxpayers still holding accounts who have not come clean should come forward and do the right thing before it’s too late.”

IRS Acting Commissioner Danny Werfel said: “International issues remain a major focus for the IRS, and we are continuing our efforts to fight tax evaders who use offshore accounts to skirt the law.

“These John Doe summonses for correspondent account records show our determination to pursue evaders using offshore accounts, even if the person hiding money overseas chooses a bank that has no offices on US soil.”