The U.S. Justice Department has lost almost 30 percent of itstax prosecutors in the past month, slowing a U.S. crackdown onoffshore banks that enabled tax evasion, according to four peoplefamiliar with the matter.

Twenty-five of the 95 prosecutors in the tax division leftheadquarters in Washington for six-month “details” with U.S.attorneys around the country, and another three took permanentassignments, according to the four people, who declined to beidentified because they aren't authorized to speak publicly.

Many of the lawyers handled cases involving foreign banks orfinancial advisers suspected of helping U.S. clients cheat ontaxes, the people said. The transfers came amid criminal probes ofat least 11 Swiss financial institutions, including Credit SuisseGroup AG, with the tax division leading or assisting eachprosecution.

“To move one-third of these people from that effort willsignificantly compromise such enforcement at the very time it isneeded to deal with the huge amounts of offshore cases coming tothe tax division,” said Nathan Hochman, a former assistant attorneygeneral who oversaw the tax division under President George W.Bush.

The prosecutors “have significant experience, training andknowledge when it comes to the enforcement of tax laws pertainingto overseas accounts,” said Hochman, now a partner at BinghamMcCutchen LLP in Santa Monica, California.

The division also investigates identify theft, illegal taxshelters and other crimes, while approving every tax case filed bythe 94 presidentially appointed U.S. attorneys serving the JusticeDepartment around the country.

“Offshore non-compliance by U.S. taxpayers remains a toppriority for the Justice Department's Tax Division,” said CharlesMiller, a Justice Department spokesman. “We will continue to pursuethose cases vigorously.”

The offshore tax crackdown has expanded since 2007, when theJustice Department and the Internal Revenue Service began focusingon Zurich-based UBS AG, the largest Swiss bank. UBS avoided U.S.prosecution in 2009 by admitting it aided tax evasion, paying $780million and handing over data on 250 accounts. It later disclosedinformation on about 4,450 more accounts.

Prosecutors have since filed criminal charges against at least21 foreign bankers, advisers and attorneys and at least 40 U.S.taxpayers. The clients' banks included UBS; Zurich-based CreditSuisse, the second-largest Swiss bank; and London-based HSBCHoldings Plc, Europe's biggest bank, prosecutors said.

Credit Suisse Probe

On July 15, Credit Suisse said it was a target of a criminalprobe over former cross-border private-banking services for U.S.customers. Six days later, seven current and former Credit Suissebankers were indicted on a charge of conspiring to help U.S.clients evade taxes through secret accounts. That case was led byprosecutors in the Eastern District of Virginia.

Prosecutors in the Manhattan-based Southern District of New Yorksecured an indictment on Feb. 2 against Wegelin & Co., the270-year-old private bank that was the first Swiss lendercriminally charged.

The IRS said 30,000 U.S. taxpayers with offshore accounts haveavoided prosecution since 2009 by entering a limited amnestyprogram, paying back taxes and saying who helped them hide theiraccounts from authorities. Hundreds of taxpayers in the programgave prosecutors information that has helped build criminal casesagainst bankers and advisers.

Moving prosecutors “slows the whole process down considerably,”said Robert Katzberg, a tax attorney at Kaplan & Katzberg inNew York.

“You have fewer personnel going through all of the potentialcharges and the enormous amount of evidence that's been obtainedover the last three years,” Katzberg said. “While the SouthernDistrict of New York has been very, very active in a lot of thesethings, that's no substitute for the tax division in Washingtonquarterbacking these cases.”

The prosecutors left under a program offered on Jan. 13 by theJustice Department, which said it would “detail” as many as 100attorneys and support staff to the U.S. attorney's offices throughSept. 30, or the end of the fiscal year.

The move was intended to help the offices “address theirshort-term workforce needs resulting from the Department's ongoinghiring freeze,” according to a memo by H. Marshall Jarrett of theExecutive Office for U.S. Attorneys. The U.S. attorneys weren'tobligated to hire prosecutors permanently, according to thememo.

Another memo listed 155 attorney positions available around thecountry through the program. Lawyers could help on cases involvingnarcotics, immigration, organized crime, child trafficking andmajor frauds, according to the memo.

Senate Hearing

The subject arose at a March 20 hearing before the SenateFinance Committee's economic growth and fiscal responsibilitysubcommittee, which examined identity theft and tax fraud.

Senator Richard Burr, a North Carolina Republican, asked aboutthe impact of the moves on the department's effort to work with theIRS to combat identity fraud.

“We've redoubled our efforts to offer resources from the TaxDivision to U.S. attorneys in terms of prosecutors and informationabout how these schemes are working in other jurisdictions,”testified Ronald A. Cimino, deputy assistant attorney general forcriminal matters in the tax division.

“Do you think it's wise to divert a significant portion of thecriminal component of the tax division to deal with a non- taxissue?” Burr asked.

“What we in the tax division did, senator, is to place for sixmonths our prosecutors and our civil litigators — there areactually both — of the numbers that you referred to across thecountry,” Cimino said. “In part, when this was done, some of themare working more on their own cases in the jurisdiction.”

President Barack Obama's second nominee to succeed Hochman astax division chief, Kathryn Keneally, a New York-based partner atFulbright & Jaworski LLP, has yet to win Senate confirmation.An earlier choice, Mary L. Smith, was blocked by lawmakers who saidshe lacked experience in tax law. Keneally, who was approved by theJudiciary Committee in December, hasn't received a vote from thefull Senate.

The job is an important one, Hochman said.

“It serves a leadership role within the organization, apolitical role in lobbying for additional resources for thedivision and a symbolic role in promoting the tax division'smission to the general public,” Hochman said. “Not having someonein that role for that period of time undermines the tax division'smission.”

Jeffrey Neiman, a former Justice Department prosecutor whoworked on the UBS case, likened the transfers to getting rid ofhalf a baseball team on the eve of the championship.

“Between the government's recent efforts to crack down onoffshore tax evasion and the identity-theft epidemic plaguing theIRS, criminal tax enforcement is at a critical point,” said Neiman,who now practices in Fort Lauderdale, Florida.

Bloomberg News

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