Four charged with USVI tax evasion, conspiracy

More of the EDC story, this time from Bloomberg:

Published on Wednesday, March 28, 2007 Email To Friend Print Version

By Ryan J. Donmoyer

WASHINGTON, USA (Bloomberg): A federal grand jury has charged a St Louis car dealer, two Texas men and a US Virgin Islands resident with using a US Virgin Islands economic development program to evade $74 million in taxes.

The East St Louis, Illinois grand jury indicted James A. Auffenberg Jr. of Swansea, Illinois, charging him with illegally sheltering $300 million through Kapok Management, L.P., a St Croix-based partnership that qualified for tax benefits from the US territory. James W. Ferguson III of Amarillo, Texas, Peter G. Fagan of De Leon, Texas, and J. David Jackson of St Croix were also charged with promoting the scheme.

"People tempted to file federal income tax returns based on falsehoods should be aware of the serious consequences of doing so," said Eileen J. O'Connor, assistant attorney general for the Justice Department's Tax Division in a statement Tuesday in Washington.

The indictments cap a four-year investigation that began with a federal raid of Kapok Management and touched off new federal scrutiny of the US Virgin Islands' tax incentives.

Approved by the US Congress, the program permits qualified taxpayers to cut their federal bill by 90 percent.

A 2004 federal law placed new restrictions on the tax program and chased off a burgeoning hedge fund industry attracted by the incentives, the Virgin Islands government says.

To qualify for the US Virgin Islands tax incentives, firms must invest at least $100,000 in the territory, buy products such as office supplies and computers in the US Virgin Islands, contribute to area charities and hire at least 10 people, 80 percent of whom must be natives of the islands.

Company owners must live in the territory for at least half of the year, under federal requirements. They have to undergo five examinations a year by the territory's Economic Development Authority.

Auffenberg, Fagan, Ferguson and Jackson are charged with income-tax evasion, conspiracy, wire fraud and filing, aiding and assisting in the filing of false individual and corporate income tax returns. The indictment seeks forfeiture of about $16.2 million in cash.

The indictment claims Auffenberg, a St Louis-area car dealer, and other partners in Kapok never actually became bona fide residents of the Virgin Islands and used the St Croix-based Kapok to launder funds they earned in the United States. They improperly filed tax returns with the Virgin Islands' Bureau of Internal Revenue instead of with the Internal Revenue Service, according to the indictment.

Jeffrey Demerath, a lawyer for Auffenberg, a St Louis-area car dealer, said his client only followed the advice of tax lawyers and accountants in deciding to invest in the Kapok partnership and file his tax returns with the territory.

"He did everything with the full intent of following the law, and that will be his defense," Demerath said. He said Auffenberg received an opinion letter from accounting firm KPMG LLP verifying he could participate in the program.

Demerath disputed charges in the indictment that Auffenberg never became a true resident of the US Virgin Islands, saying Auffenberg was in the territory at least once a month, owned real estate there and registered to vote.

Gordon Rhea, a lawyer for Jackson, similarly denied the charges. Jackson was an employee of Kapok, not a partner, Rhea said. He said he was "confident" Jackson would be exonerated.

Messages left for Ferguson and Fagan in Texas were not immediately returned. The indictments were issued three years after another Kapok partner, a Massachusetts life insurance executive named Gary Payne pleaded guilty to tax evasion in February 2004. He has not been sentenced.

If convicted, the men named face up to five years imprisonment on the conspiracy charge; up to five years imprisonment on each income tax evasion charge; up to five years on each wire fraud charge; and up to three years on each false tax return charge. The men face up to $32.5 million in fines.

The case has major ramifications for the territory's economic development program, which has struggled to regain legitimacy since the raids on Kapok four years ago and the subsequent law change, Virgin Islands Governor John deJongh said.

"Whatever steps need be taken by the local government to safeguard this program which is essential to our economic future will be taken, and wrongdoing will be investigated and prosecuted by the appropriate government, local or federal," DeJongh said.

The territory's government says the program is needed to boost the local economy. The three principal US Virgin Islands -- St Croix, St John and St Thomas -- have a population of 108,605. Per capita income in the territory is $18,652, less than half the average in the continental US and $7,000 less than in Mississippi, the poorest state.

In addition to pledging more oversight of companies that currently are collecting tax benefits, the territory also has been trying to lure technology companies to the islands by touting an abundance of Internet bandwidth off the coast of St Croix.