When an undercover agent acting as a club owner showed up in 2018, Houston tax attorney Carlos Kepke had spent decades teaching wealthy Americans like Robert F. Smith how to move assets abroad.
The objective was to acquire proof to accuse Kepke of tax fraud.
It was simple. Kepke boasted about putting money in offshore trusts, particularly in Belize, as the wired agent taped the talk.
According to federal law, clients move money while claiming to relinquish control. However, they, not the foreign trustees, decide how money is spent.
Kepke reassured his guest, “You never lose control.” You’re only messing around with bank accounts,
This promise and others like it are included in an affidavit in Kepke’s lawsuit that was recently made public.
It clarifies the Internal Revenue Service’s two-decade-long hunt for Kepke, a participant in the global network of attorneys, accountants, and financial advisors that assist in the concealment of billions of assets in tax havens abroad.
Additionally, it provides a unique perspective into how the schemes work.
Victor Song, a former head of the IRS Criminal Investigations, who oversaw hundreds of undercover investigations, stated that “the enablers are highly crucial.”
“The taxpayers wouldn’t receive their money offshore if they hadn’t engaged in the illicit activities. It’s crucial in these kinds of cases to demonstrate that the trust structure was a fraud.
Kepke, 82, has entered a not guilty plea and will stand trial in November. The allegations against Smith, the creator of Vista Equity Partners, which oversees $96 billion in assets, are conspiracy and assisting in the preparation of fake tax returns. Smith might be asked to testify for the defence.
Smith gave Kepke a payment of around $1 million, according to the indictment. Kepke’s lawyer declined to comment.
Whistle-Blowers
The affidavit states that the IRS also received information from two other whistle-blowers, a Vista finance officer and a divorce investigator hired by Smith’s first wife.
Smith, the richest Black American with an $8.9 billion net worth, acknowledged using Kepke’s strategy to escape taxes on more than $200 million in 2020.
He consented to cooperate with prosecutors and pay back taxes and penalties totalling $139 million as part of a non-prosecution agreement.
Both Smith and a Vista spokesman declined to make an on-the-record statement. No wrongdoing has been levelled against Vista or any of its employees.
The Kepke affidavit was used by the Justice Department to persuade a federal judge that it had probable cause to search his red brick Houston townhouse and a storage locker. It was originally filed under seal in 2018 by IRS special agent Trista Merz.
The attorney had been representing the family of software pioneer Robert T. Brockman for years by the time Kepke first met Smith. Charges against Brockman include money laundering and tax evasion involving $2 billion in income.
He is charged with earning the majority of that money by making investments in Vista’s tech-focused funds through a Bermuda-based company called Point Investments as the company’s original backer in 2000.
Former CEO of auto dealership software provider Reynolds & Reynolds, Brockman, 81, served in that position. His attorneys informed the court in 2020 that he had entered a not guilty plea and was unable to assist in his defence due to dementia.
A judge dismissed the allegations and set the trial date for February of 2019. In June, defence attorneys claimed that Brockman’s health had gotten worse and that he was now receiving hospice care at home.
Brockman’s legal counsel declined to respond.
Solitary Focus
Kepke, a graduate of the University of Texas School of Law, began his career as a high-net-worth client advisor at a renowned Houston tax law firm. According to his website, he established his own business in 1992 with a single focus: “the utilisation of foreign entities for United States tax savings and/or asset protection.”
According to the 2018 affidavit and court documents, Kepke filed for Chapter 11 bankruptcy protection three years later to pay off the $1.5 million in debt he owes the IRS.
The IRS wasn’t just now going for Kepke. IRS criminal investigators started an investigation into him in 1999 following an audit of his tax returns.
The talkative attorney was caught on camera by an undercover agent confessing that he had been using a foreign trust and corporation for the previous 27 years and outlining how he put them up for customers.
According to Kepke, he suggested that they masquerade as their “founder” by using a foreign national or an elderly American.
In 1999, Kepke said to the undercover agent, “What I basically aim to do is take your riches and make it a foreigner.” Make it a foreigner’s property to receive the tax advantages that would accrue to you if you were a foreigner.
The agent found that Brockman and 20 of Kepke’s 102 clients appeared to have established such offshore arrangements.
But in 2002, the IRS made the decision not to refer a criminal case to prosecutors. The 2018 affidavit makes no mention of this.
On Tuesday, November 16, 2021, Robert Brockman, the software executive accused in the largest-ever tax prosecution against a U.S. person, appears for a competency hearing at the federal courthouse in Houston, Texas.
Brockman was accused of utilising a convoluted trust structure in the Caribbean to conceal $2 billion in revenue over a two-decade period when he was indicted on counts of tax evasion and money laundering.
After acquiring information regarding Smith starting in or around 2013, criminal investigators started to show renewed interest in Kepke. That year, the Justice Department established a mechanism to help Swiss banks cooperate with one another to prevent US prosecution.
According to Merz’s declaration, Bank Bonhote promptly informed the agency that Smith and his wife both maintained two accounts there and that Smith was the beneficial owner of an additional eight. The bank said through email that it conforms with all US and Swiss legal requirements.
The same month the programme began, Suzanne McFayden-Smith announced her divorce. Weeks later, the affidavit claims, a private eye employed by her divorce lawyer submitted an application for an IRS whistle-blower award.
Denise Davis was serving as Vista’s director of finance at the same time. Wire transfers from the bank account of Vista’s first fund to Flash Holdings, a company Smith had established and secretly controlled with bank accounts in the British Virgin Islands, were among her responsibilities.
No Taxpayer ID
According to the affidavit, Davis observed that Flash didn’t have a taxpayer identification number. Flash was Smith’s “offshore entity,” according to Davis’ employer, Vista Chief Financial Officer John Warnken-Brill, but she shouldn’t mix the two together.
Similar instructions were sent to Davis regarding Brockman and Point Investments. According to the affidavit, Davis applied for two IRS whistleblower awards.
Davis, who quit the company in 2015, was not available for comment. Requests for comment from Merz went unanswered.
According to the affidavit, a grand jury started looking into Smith in 2016 as part of an inquiry that eventually reached Kepke.
According to the complaint, Warnken-Brill testified in front of the panel. Requests for comment from the longstanding finance director, who left Vista in March and has not been implicated in any wrongdoing, went unanswered.
In 2017, the IRS initiated its second undercover operation with Kepke as the focus and broadened its investigation to include Brockman.
Two agents were involved, one of whom pretended to be an auto salesman from Pennsylvania who claimed his grandmother had planned to leave him a farm. He wanted to keep it safe from his future wife and creditors.
According to the affidavit, Kepke retorted that some of his clients’ wives didn’t know how much money they had stashed away.
The attorney further stated that although he had previously preferred doing so, he no longer did so because Bermuda had “become a sieve to the US Internal Revenue Service.” He suggested Belize.
The second undercover agent pretended to be a buddy of the vehicle broker and the proprietor of a bar. Emil Arguelles, a Belizean lawyer who had worked with Kepke for 15 years and had also conducted business with lawyers in New York, Florida, and Los Angeles, was introduced by Kepke at a meeting at his home office. Requests for comment from Arguelles were not answered.
Kepke identified two billionaires he advised as having built their riches in private equity and at a computer business that served auto dealers when the agent quizzed him about his biggest clients.
Bob has amassed so much wealth that he’s… The affidavit quotes Kepke as remarking, “I mean, he’s a, a multi-billionaire,” in an apparent reference to Brockman.
According to the affidavit, Kepke suggested to the agent funding a Belize trust through a family member in a manner that was “almost identical to the businesses and structures Kepke developed and organised for Smith and Brockman.”
Smith hired his first wife’s uncle. The uncle, a UK resident with only a basic education, told the prosecution that he thought Smith wanted him to be a “sleeping partner.”
Although an affidavit ostensibly having his signature and suggesting he was the source of the cash was present and purportedly bearing his signature, the uncle said in a 2013 deposition that he lacked the resources to contribute the $7,500 required to establish Smith’s trust.
Modified Affidavit McFayden-Smith admitted subsequently that she had used her computer to draught the amended affidavit.
According to the statement of the IRS agent, she changed it to name her spouse as the source of the $7,500 “in case she ever needed it for leverage against Smith.” Smith admitted contributing some of the funds in his 2020 non-prosecution agreement.
McFayden-lawyer Smith’s declined to comment.
In addition to Smith and Brockman, the 2018 affidavit named just three of Kepke’s more than 100 clients.
Two executives from the steel sector were among them. According to the affidavit, both admitted participating in Kepke’s efforts to create offshore businesses to evade taxes and participated in the IRS’s Offshore Voluntary Disclosure Program in 2009.
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According to a memo one of the IRS agents submitted in court, Kepke wasn’t any more reserved or anxious when the officers showed up at his house in August 2018 with their search warrant.
Kepke asked his visitors why they hadn’t merely asked him for the documents and gave them his scribbled permission to seize a variety of documents. Then he walked his dog and departed.
