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Offshore tax scam unveiled by FBI

Two at US Airways accused of bribery

Sunday, January 28, 2001

By Torsten Ove, Post-Gazette Staff Writer

When the FBI arrested John M. Mathewson in 1996 for laundering money in an interstate cable-piracy scheme, it also meant hundreds of wealthy Americans would soon be exposed for what they were -- major tax cheats.

The former Chicago business executive turned over the encrypted computer records of Guardian Bank & Trust, the money-laundering bank he ran for nearly 10 years in the Cayman Islands.

The detailed accounts of 1,500 Americans proved to be an extraordinary treasure for Internal Revenue Service criminal investigators trying to crack offshore tax havens.

Many of Mathewson's depositors -- doctors, lawyers, business owners -- have since gone to jail for hiding their money in his bank.

Next month, former McMurray travel agent Roy D. Davis Jr., 44, could join them if he loses at trial.

It's a case that has also ensnared two US Airways managers who are accused of taking bribes in exchange for better service from the airline.

Davis, who formerly ran Royal Travel Services Inc., is scheduled to go on trial Feb. 27 before Senior U.S. District Judge Alan N. Bloch on charges of filing false income-tax returns.

On the surface, it's pretty dry stuff.

But the case promises to be more interesting than the typical prosecution for lying on tax forms.

For starters, Mathewson will fly in from his home in Texas to testify, offering a glimpse into the clandestine world of offshore tax shelters and money-laundering in paradise.

In addition, Tom Fitzmorris, the retired head of US Airways' charter service in Pittsburgh, is expected to plead guilty to filing false tax returns on the day before the trial and testify for the government.

The U.S. attorney's office would not comment on the case, and the IRS Criminal Investigations Division said it wasn't allowed to talk about pending cases once they are turned over to prosecutors.

Davis, who now lives in Palm Harbor, Fla., and is no longer in the travel business, didn't return a call.

But his Pittsburgh attorney, Stanton D. Levenson, said the government would try to prove that Davis lied on his tax returns to conceal $100,000 in bribes he paid to Fitzmorris and another US Airways manager in return for their efforts to arrange charter discounts for Royal Travel Services in 1993 and 1994.

Davis is also accused of currying favor with the two airline employees by providing them with free trips to the Cayman Islands.

Levenson said Davis was the victim of extortion.

"The government claims the travel agency was bribing employees to get special favors, to get cheaper flights, better flights," he said. "They were shaking him down for $50,000 a year."

Neither manager has been formally charged, but Levenson said Fitzmorris was expected to plead guilty Feb. 26. The status of the other manager, who is still working for US Airways in Pittsburgh, is uncertain.

US Airways refused to comment.

According to the indictment, the money transactions in the scheme were handled at Mathewson's bank, where all three men had accounts, to keep the income concealed from the IRS.

Grand Cayman, a tiny British colony with nearly 600 banks and 500 insurance companies, is one of the world's largest tax havens and money-laundering centers because of the island government's no-tax policy and its stringent efforts to protect the confidentiality of its lucrative banking industry.

It isn't illegal to maintain an offshore account, nor is it unusual for a travel agency to have one. But all income from offshore accounts, regardless of where the accounts are held, must be reported to the IRS.

In recent years, the tax agency has been stepping up its efforts to crack down on illegal foreign tax shelters, particularly in the Caribbean. By one government estimate, at least $70 billion a year in personal income-tax revenue is lost to tax havens in the Caymans, Antigua and Barbuda, and the Bahamas.

Davis is accused of hiding bribe money inside his business expenses by filing false corporate income tax returns in 1994 and 1995. He is also charged with filing false personal income tax returns in those years.

For tax year 1993, according to the indictment, he sold $11.4 million in tours and tickets, spent $138,180 in advertising and claimed $673,266 in other business deductions. A total of $130,115, sent to the offshore account, was not deductible as he claimed it was, according to the IRS.

For tax year 1994, he sold $9.3 million in tours and tickets, spent $134,940 on advertising and claimed $493,163 in other deductions. The indictment said $48,150 sent to the Cayman account was not deductible as he claimed it was.

Not all the unreported money went to bribes, according to government documents, but much of it did.

In addition, Davis is charged with underreporting his personal income for 1993 and 1994 by hiding $228,265 in the offshore account.

The penalty for filing false returns is a maximum of three years in prison, so Davis faces up to 12 years in prison if found guilty on all counts. He also could be ordered to pay a $1 million fine.

Levenson said the government would have to prove only that Davis lied on his tax forms, not that he avoided paying taxes, which requires a higher burden of proof and carries a stiffer penalty.

"It's a false-reporting case, not a tax-evasion case," he said. "They don't have to prove tax loss, just that he falsified records. Our defense is that our client acted in good faith and did not misrepresent himself."

According to court documents, prosecutors will try to show that Davis transferred the bribe money from his secret account at Guardian to the private Guardian accounts of Fitzmorris and the other US Airways manager, which Davis set up for them.

"The evidence will further establish that Davis Jr. wanted to open foreign accounts for the USAir employees because he needed better times and bigger planes," wrote Assistant U.S. Attorney Paul E. Hull in a pretrial motion. "Davis Jr. indicated that the IRS was not to know about these foreign accounts."

To bolster the case, Mathewson is expected to provide specifics about the bank accounts and how they were managed. It's the same role he has played in cases in Florida, New York, Philadelphia, California and other federal jurisdictions across the country.

Mathewson, 72, who lives with his Caymanian wife and three children in San Antonio, has become a star for the government, severely damaging the veil of secrecy surrounding banking in the Caymans.

In 1999, federal prosecutors in New Jersey called him "the most singularly important government cooperator in tax haven prosecutions in the history of the Internal Revenue Service."

Mathewson, once a construction company owner in Chicago, moved to the Caymans in 1982 and set up Guardian in 1986 with some business associates. The bank eventually acquired deposits of $350 million. In 1995, according to his own court testimony, a Caymanian government regulator asked him for a $250,000 bribe. When he refused, the bank was investigated and eventually taken over by the island government.

Mathewson left the islands and moved to Texas.

But the IRS was already on to him, and soon the FBI would be, too.

The IRS case began in 1994 when a New York City surgeon, Dr. Jeffrey Lavigne, was charged with tax evasion. He revealed that he had flown to Grand Cayman and met with Mathewson, who set up a shell corporation for him at Guardian and told him to send his money in plain brown packages with no return address.

As court records later show, that was standard procedure at Guardian. In all, Lavigne used his shell account to evade $160,000 in taxes.

By 1996, the FBI was closing in on Mathewson in another case in which he was laundering money for a ring of cable TV pirates in Florida, California and New Jersey.

In June of that year, agents arrested him after a grand jury in Newark, N.J., handed up an indictment. The agents didn't know it at the time, but Mathewson had in his possession encrypted computer tapes which contained electronically stored records from Guardian for 1994 and part of 1995. He also had an "electronic Rolodex" of all his customers and the shell corporations he had created for each of them.

He turned over the tapes and the customer list and started talking.

The Caymanian government, concerned about protecting its industry, tried to retrieve copies of the tapes and refused to help the FBI in decoding the encrypted records. It took agents 18 months to read the files, but when they did, they had a laundry list of suspects and detailed account statements to turn over to the IRS.

"It was, in effect, the functional equivalent of having the records of an offshore bank available in the United States for the first time," New Jersey prosecutors wrote in asking a judge for leniency in sentencing Mathewson in 1999.

Because of his cooperation, Mathewson received a light sentence of five years' probation.

The IRS continues to track down his depositors.

The largest catch was Mark Vicini, a New Jersey businessman who owned a computer company called Micro Rentals & Sales.

From 1991 to 1994, Vicini deposited about $9 million at Guardian, $5.9 million of which was undeclared income concealed from the IRS. By hiding his money, Vicini evaded paying $2.1 million in taxes.

He pleaded guilty in 1997 when he realized Mathewson was going to testify against him.



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