(Bloomberg) -- Houston tax lawyer Carlos Kepke had been tutoring rich Americans like Robert F. Smith for decades on how to move assets offshore when an undercover agent posing as a bar owner turned up in 2018.
The goal was to gather evidence for a tax fraud case against Kepke. It wasn’t hard. As the wired agent recorded the conversation, Kepke bragged about placing assets in offshore trusts, notably in the Central American nation of Belize. Clients move money and claim to yield control, in keeping with federal law. But they decide how it’s used, not the foreign trustees.
“You never lose control,” Kepke assured his visitor. “You’re just playing with bank accounts.”
That assurance, and others like it, are spelled out in a newly public affidavit in Kepke’s case. It sheds light on the Internal Revenue Service’s two-decade pursuit of Kepke, a player in the global network of lawyers, accountants and financial advisers who help hide billions of dollars in offshore money havens. And it opens a rare window into how the schemes function.
“The enablers are very important,” said Victor Song, former chief of IRS Criminal Investigations, where he saw hundreds of undercover operations. “Without them doing the illegal acts, taxpayers wouldn’t get their money offshore. In these types of cases, it’s critically important to show that the trust structure was a sham.”
Kepke, 82, has pleaded not guilty and is scheduled to go on trial in November. The charges are conspiracy and aiding in the preparation of false tax returns by Smith, founder of Vista Equity Partners, which manages $96 billion in assets. Smith could be called as a prosecution witness.
Kepke was paid about $1 million by Smith, according to the indictment. An attorney for Kepke declined comment.
A pair of whistle-blowers -- a Vista finance officer and a divorce investigator hired by Smith’s first wife -- also gave information to the IRS, the affidavit reveals.
The richest Black American, with a net worth of $8.9 billion, Smith admitted in 2020 that he used Kepke’s playbook to evade taxes on more than $200 million. Under a non-prosecution accord, he agreed to pay $139 million in back taxes and penalties and cooperate with prosecutors.
Smith and a Vista representative declined to comment on the record. Vista and its employees have not been accused of wrongdoing.
Initially filed under seal in 2018 by IRS special agent Trista Merz, the Kepke affidavit was used by the Justice Department to convince a federal judge it had probable cause to search his red brick Houston townhouse and a storage locker.
By the time Kepke met Smith, the lawyer had been working for years for the family of Robert T. Brockman, a software entrepreneur. Brockman is facing trial on charges of evading taxes on $2 billion in income and laundering money. As Vista’s original backer in 2000, he’s accused of generating most of that income by investing in Vista’s tech-focused funds through a Bermuda-based entity called Point Investments.
Brockman, 81, is the former chief executive of Reynolds & Reynolds, an auto dealership software vendor. After he pleaded not guilty in 2020, his lawyers told the court he was suffering from dementia and incapable of aiding in his defense. A judge rejected the claims and scheduled a trial for next February. Defense attorneys indicated in June that Brockman’s health has declined further and he is receiving home-hospice care.
An attorney for Brockman declined to comment.
Kepke is a graduate of the University of Texas Law School who early in his career advised high net worth clients at a prominent Houston firm specializing in tax law. In 1992, he set up his own practice with a singular focus -- “the use of foreign structures for United States tax savings and/or asset protection,” according to his website.
Three years later, Kepke filed for Chapter 11 bankruptcy protection to discharge $1.5 million in debt he owed the IRS, according to the 2018 affidavit and court records.
This wasn’t the first time the IRS went after Kepke. After an audit of his tax returns, IRS criminal investigators opened a case on him in 1999. An undercover agent recorded the loquacious lawyer saying he had used a foreign trust and corporation for the past 27 years, and he explained how he set them up for clients. Kepke said he advised them to use a non-US citizen or elderly American to pose as their “creator.”
“What I basically try to do is take your wealth and make it a foreigner,” Kepke told the undercover agent in 1999. “Make it owned by a foreigner so that you, so that your wealth, your dollars, enjoy the tax benefits that you would enjoy if you were a foreigner.”
The agent determined that 20 of Kepke’s 102 clients, including Brockman, appeared to have created such offshore structures. But the IRS decided around 2002 against referring a criminal case to prosecutors. The 2018 affidavit doesn’t explain why.
Robert Brockman, the software executive charged in the largest-ever tax case against a U.S. individual, arrives for a competency hearing at the federal courthouse in Houston, Texas, U.S., on Tuesday, Nov. 16, 2021. Brockman was indicted on tax evasion and money laundering charges that accused him of using a complex trust structure in the Caribbean to hide $2 billion in income over two decades.
Criminal investigators became interested in Kepke again after receiving tips about Smith beginning around 2013. The Justice Department launched a program that year for Swiss banks to avoid US prosecution by sharing information.
Bank Bonhote soon informed the agency that Smith and his wife held two accounts there and that Smith was the beneficial owner of eight more, Merz’s affidavit says. The bank said by email that it complies with applicable laws in the US and Switzerland.
Suzanne McFayden-Smith filed for divorce the same month the program launched. Weeks later, a private investigator working for her divorce attorney applied for an IRS whistle-blower award, according to the affidavit.
Around the same time, Denise Davis was working as Vista’s director of finance. Her duties included setting up wire transfers from the bank account of Vista’s first fund to Flash Holdings, a corporation Smith had created and secretly controlled with bank accounts in the British Virgin Islands.
No Taxpayer ID
Davis noticed that Flash had no taxpayer identification number, according to the affidavit. Her boss, Vista Chief Financial Officer John Warnken-Brill, told Davis that Flash was Smith’s “offshore entity” but that she should never associate one with the other. He gave Davis similar instructions regarding Brockman and Point Investments. Davis filed two applications for IRS whistle-blower awards, according to the affidavit.
Davis, who left the firm in 2015, couldn’t be reached for comment. Merz did not respond to requests for comment.
In 2016, a grand jury began investigating Smith in a probe that led back to Kepke, the affidavit says. Warnken-Brill testified before the panel, according to the filing. The longtime finance chief, who retired from Vista in March and has not been accused of wrongdoing, didn’t respond to requests for comment.
By 2017, the IRS had expanded its probe to include Brockman and launched its second undercover operation targeting Kepke. Two agents were involved, including one who posed as a Pennsylvania auto broker who said his grandmother intended to leave him a farm. He wanted to protect it from creditors and his future wife.
Kepke replied that some of his clients’ wives had no idea how much money they had offshore, the affidavit says. The lawyer also indicated that he’d once favored setting up entities in Bermuda but no longer did so because it had “become a sieve to the US Internal Revenue Service.” He recommended Belize.
The second undercover agent posed as the bar owner and friend of the auto broker. During a meeting at his home office, Kepke introduced Emil Arguelles, a Belizean attorney who said he’d worked with Kepke for 15 years and also did business with attorneys in New York, Florida and Los Angeles. Arguelles didn’t respond to requests for comment.
When the agent pressed Kepke about his largest clients, he described a pair of billionaires he advised as having made their fortunes in private equity and at a computer company that serviced auto dealers.
“Bob has made so much money, he’s made … I mean, he’s a, a multi-billionaire,” the affidavit quotes Kepke as saying in an apparent reference to Brockman.
Kepke advised the agent to fund a Belize trust through a relative in a way that was “nearly identical to the entities and structures Kepke created and organized for Smith and Brockman,” the affidavit says. Smith enlisted an uncle of his first wife. A UK resident with a grade-school education, the uncle told prosecutors he believed Smith wanted him to be a “sleeping partner.”
In a 2013 deposition, the uncle testified that he’d lacked the means to put up the $7,500 used to set up Smith’s trust, despite the existence of an affidavit purportedly bearing his signature and indicating he was the source of the funds.
McFayden-Smith later acknowledged creating an amended affidavit on her computer. She altered it to identify her husband as the source of the $7,500 “in case she ever needed it for leverage against Smith,” the IRS agent’s affidavit says. In his 2020 non-prosecution agreement, Smith acknowledged putting up a portion of the money.
An attorney for McFayden-Smith declined to comment.
Among Kepke’s more than 100 clients, the 2018 affidavit identified only three, other than Smith and Brockman. They included a pair of steel industry executives. Both acknowledged working with Kepke to set up offshore entities to avoid taxes and entered the IRS’s Offshore Voluntary Disclosure Program in 2009, according to the affidavit.
When IRS agents arrived at Kepke’s door in August 2018 with their search warrant, he was no more reserved than he’d been during the undercover meetings and no more nervous, according to a memo one of the agents filed in court. Kepke asked his visitors why they hadn’t just requested documents from him and provided handwritten consent for them to seize a broad range of files. Then he left to walk his dog.