Robert L. Schwind and David L. Hill carefully counted the cash that had been dumped on the bed in Room 1532 of Atlanta's Ritz-Carlton Hotel.
It was all there: $100,000 to be laundered through a dummy company in the Cayman Islands, and $16,000 for their fee. Hill said his hands often turned black from counting money, but that this cash was unusually clean.
The Atlanta attorneys placed the money in a laundry bag and gave their two clients a receipt. "There's no use in paying taxes," Hill told them. "That's what you're setting up these things for, so you can get around paying taxes on the transactions."
What Schwind and Hill didn't know is that their April 11, 1984, meeting was secretly recorded by their clients, who were working under cover for the Internal Revenue Service. Nor did they suspect that they were targets of the largest fraudulent-tax-shelter investigation in IRS history.
Schwind and Hill were working with the United States Tax Planning Service (USTPS), a mass-marketing operation that officials describe as the McDonald's of the illegal tax shelter business. According to IRS affidavits filed in court, USTPS sold exclusive franchise rights to American promoters, offered an innovative menu of tax avoidance schemes and attracted lots of customers.
One popular plan involved bogus medical malpractice insurance, in which doctors would take big tax deductions for their "premiums" and secretly get most of the money back, according to the documents. Another called for the client to buy phony consulting studies, again recouping most of the money after deducting the cost, the documents say.
Most IRS investigations involve a single promoter, but this money-laundering probe has attempted to track a loose network of about 20 USTPS associates from Massachusetts to California. The 22-month inquiry has involved more than 30 IRS officials in 10 cities.
This account was pieced together from hundreds of pages of IRS documents filed in various courts and made available by the agency, as well as interviews with IRS officials, shelter promoters, prosecutors and lawyers in the case.
In recent months, Schwind and Hill have pleaded guilty to tax fraud conspiracy, and a USTPS associate in South Carolina has been barred from peddling the tax shelters. More charges are expected. Prosecution of Investors Planned
In a major break with past policy, IRS officials say they plan to prosecute not only the promoters but some of those who invested with USTPS. The agency says at least 3,000 wealthy taxpayers -- a third of them doctors -- invested with American promoters, who bought their franchises for up to $25,000.
The company was founded in the Cayman Islands, a tiny British colony of 17,000 with strict business secrecy laws that have transformed it into the Caribbean's leading tax haven. Half of all IRS criminal investigations now involve such offshore money centers.
The founders aggressively marketed their smorgasbord of tax plans. They took out full-page ads in The Wall Street Journal and paid prominent speakers, including former senator Eugene McCarthy (D-Minn.), to draw people to their tax seminars in the Cayman Islands. McCarthy says he was just a speaker and knew nothing of the company's operations.
IRS officials contend that the company's offerings went far beyond the legal shelters strewn throughout the tax code. They charge in court papers that USTPS advocated the use of bogus transactions to produce fraudulent deductions, largely by moving investors' money through Cayman banks and returning it to them in disguised form.
Each plan involved setting up a Cayman Islands corporation to invest money provided by the American client. The offshore firm is placed under foreign directors, but the client, who is listed as a "consultant," gives the marching orders, according to the IRS. Even if the company does nothing more than invest in bank certificates, the client can hide the account from the IRS and avoid paying taxes on the money.
"You have to be a little deceitful to get involved in this shelter," a USTPS promoter in St. Paul told an undercover IRS agent.
Lynford R. Evans, an accountant who was president of USTPS and now runs a new investment company out of the same Cayman Islands office, said the IRS allegations are untrue and greatly exaggerate the size of USTPS. He described himself as "an innocent bystander" who had only a loose affiliation with the American promoters.
The IRS has no jurisdiction over Cayman citizens such as Evans and is barred by Cayman law from conducting investigations on the islands.
Evans said USTPS was a small firm that never made a profit and was put out of business by the IRS last year. He called the estimate that it had 3,000 clients "so off the wall it's just incredible."
"We dealt with tax avoidance, not tax evasion," Evans said. "We never recommended tax evasion." How Offshore Shelters Are Promoted
IRS affidavits and tape transcripts paint another picture of how offshore shelters are promoted behind closed doors. According to the documents, prime selections on the USTPS menu include:
*The Mastercard Account -- This is one of several ways an American client can gain access to his money after it is placed in a Cayman bank. The client is issued a special credit card to tap the funds, but the account is not listed in his name or reported to the IRS. The money can also be brought back to the United States through loans, gifts and scholarship funds.
*The Medical Malpractice Plan -- An American doctor writes a large check to a small Caribbean insurance company selected by USTPS. The doctor deducts the insurance "premium" as a business expense, although the IRS says no real insurance was involved.
The Caribbean company keeps 10 percent as its fee and forwards the rest to a "friendly" reinsurance company, which is secretly directed by the doctor. He can reclaim 90 percent of his money at any time through loans and other means.
A USTPS promoter in Dallas with 300 doctors as clients told an IRS agent that he refers to this plan as "naked insurance" because nothing exists.
*The Consulting Study -- The client buys a bogus study of European video games or some other topic, deducts the fee as a research expense and secretly gets most of his money back. A promoter in Humble, Tex., told an IRS agent that USTPS had companies in six countries to do the studies, including "a Swiss corporation with a German name, a Bahamian corporation with a French name, a Liberian corporation with a South African name, a Panamanian corporation with a Spanish name."
*The Congregational Church of Human Morality -- The client buys a "parish" at this church, whose address is a post office box in South Carolina. The tax-deductible "donation," minus a 10 percent handling fee, is deposited in a Cayman Islands account and can be reclaimed at a later date.
*The Payroll Plan -- The client enrolls in a plan that purports to transform his wages into tax-free "gifts." His salary, minus the standard 10 percent, is moved to an offshore trust and then secretly returned to him. The Justice Department recently obtained a court order barring George D. Sprague, a USTPS associate in Charleston, S.C., from operating this and other tax shelters.
Evans said that if some of his American associates promoted illegal shelters, they did so without his knowledge or after they had broken off relations with him. He said the medical malpractice plans promoted by USTPS involved bona fide insurance, and that many of the offshore shelters he recommended were backed by legal opinions.
Richard Wassenaar, assistant IRS commissioner for criminal investigations, called such arguments "a bunch of hogwash."
"Not every offshore corporation is illegal, but the vast majority are," Wassenaar said. "If you or I set up a bank account in the Caymans, chances are we would do it only for the purpose of evading taxes. Why would we want an account 3,000 miles away when we could have one around the corner?"
USTPS was born several years ago when California economist James G. Bryan moved to the Cayman Islands and teamed up with Evans. They began holding daily tax seminars at the Grand Cayman Holiday Inn, where visiting Americans got to see a videotape of Bryan touting various tax avoidance schemes.
Early last year, an IRS agent on vacation noticed magazine and billboard advertisements for the seminars and stopped in at one of the sessions. It wasn't long before an investigation was under way. Attorney Was Early Government Target
One of the government's first targets was Robert Schwind, whose name had turned up on a list of USTPS associates.
Schwind knew the banking business; he had supervised 350 banks in Georgia, Florida and South Carolina as regional counsel for the Comptroller of the Currency in the 1970s. He is also an old friend of Bert Lance, President Jimmy Carter's first budget director.
In 1980, Schwind became enmeshed in the controversy involving Carter's brother Billy and his ties to Libya. The Atlanta attorney tried to strike an agricultural export deal with Libya that could have brought Billy Carter huge commissions.
After attending a USTPS seminar, Schwind started working on offshore tax shelters from his Peachtree Street office, where he was later joined by David Hill, an Atlanta tax expert.
On March 15, 1984, IRS undercover agent James P. Lewis met with Schwind and Hill in Atlanta on behalf of a fictional client. Schwind and Hill told him about the malpractice insurance plan and other offshore ventures, according to tape recordings later cited by Lewis in an affidavit.
Hill said he and Schwind had a close relationship with a Cayman Islands bank that "can't be blackmailed at all." Schwind said one of their clients was an Alabama doctor who earns $800,000 a year.
"A big key is the secrecy of it . . . . It ain't for big talkers," Hill said.
Schwind assured Lewis that his client's money would be safe. "With some of our clients, I think that if we stole from them, you might just end up in the trunk of a car at the airport," he said.
Lewis gave them $5,000 to open an offshore account, but the investigation was aborted, the IRS says, when Schwind and Hill apparently became suspicious and returned the check.
Meanwhile, another IRS sting was unfolding in Missouri. The agency had recruited a businessman, known as Mr. A, to pose as a wealthy developer. Agent One, a flamboyant IRS veteran from the St. Louis office, pretended to be his son-in-law.
At a resort hotel in Osage Beach, Mo., they made contact with two Missouri real estate men, Galen Heritage and Pat McNally, who said they were working with USTPS. The March 1984 conversations were recorded and later described in an IRS affidavit.
"We can eliminate your tax liability pretty much completely from this day forward," McNally told the prospective clients.
Heritage described a medical malpractice plan, saying that "you can dump about all the money you want in that thing. It's just simply an overfunding of some insurance."
McNally said the client can tap his offshore funds through a Gold Mastercard with a $100,000 credit limit. He said the client would serve as a "consultant" to the offshore company holding his money. 'Consultant' Would Decide on Loans
That money, McNally said, "can be loaned out based on recommendation of the client, or the consultant . . . . If the consultant recommends that foreign corporation loan that money to Howdy Doody, that foreign corporation's, by God, gonna make a loan available to Howdy Doody."
They soon got down to business. Agent One said he had $150,000 in cash from a real estate deal; McNally said he knew someone who could handle it. "As a matter of fact," he said, "the attorney will fly here to get it. Anytime I want."
He called Schwind in Atlanta.
On April 8, 1984, Schwind and Hill met in Missouri with McNally and his two clients. Schwind said they liked to ensure a "double layer of secrecy" by forming a company with offices and directors in the Cayman Islands, but registered in the Turks and Caicos Islands, another Caribbean tax haven.
Their fee was the same whether they were moving $100,000 or a much larger sum, Schwind said, because "we are putting our necks on the chopping block each time."
He would not say how they moved money out of the country, but noted it was "nothing as romantic" as flying it out on a small plane.
Schwind said he typed all correspondence himself because "you never know when [a] secretary might leave, might attempt to intimidate you or extort money out of you."
At a meeting with McNally the next day, Schwind and Hill said they would charge a 12 percent fee to launder $100,000 offshore, and another 4 percent to bring the money back into the United States as a loan.
Two days later, Schwind and Hill met with their newest customers at Atlanta's Ritz-Carlton Hotel. The IRS men handed over the $116,000.
They agreed that the funds would be wired to Agent One's bank account in Houston after an offshore firm called MEAK Realty Co. was set up. "We're the attorneys for the corporation," Hill said. "But if someone subpoenas us, we say, 'Hey, we don't know who the shareholders are.' "
In the following days, Schwind put the agent's money in an Atlanta bank account in the name of Escrow Services Inc. He incorporated MEAK Realty Co. in the Turks and Caicos Islands. And to create the appearance of a foreign transaction, he generated fictitious loan papers showing a $100,000 debt to a Cayman Islands bank. This would make the laundered money look like a legitimate loan to Agent One.
The $100,000 was then wired from Atlanta to the agent's account in Houston. On April 20, the transaction was complete.
Three weeks later, armed IRS agents with search warrants raided the offices of Schwind and Hill and other USTPS promoters across the country. The probe was now out in the open.
James R. Wyrsch, an attorney representing Heritage and McNally, said that "the two of them deny that they thought they were doing anything illegal." He said the IRS' taped excerpts "failed to disclose things that Heritage and McNally said that we said were favorable to them and showed a lack of criminal intent."
David W. Russell, Wyrsch's partner, said that McNally "was a sales agent involved in the selling of some programs. He relied on the expertise of others and says he hasn't done anything wrong." Federal Investigation Continues
Schwind and Hill pleaded guilty last May. Prosecutors said the pair had also laundered $766,000 through a Cayman Islands company for a Georgia cocaine trafficker, John Robert Jones.
On Sept. 3, Schwind was sentenced to one year in jail, Hill to four months. Both were disbarred as lawyers.
The investigation is far from over. In Atlanta, assistant U.S. attorney James E. Fagan Jr. has given a federal judge the names of 25 affluent businessmen who worked with Schwind and Hill; the clients are suing to keep their names secret.
In Washington, IRS officials are pressing legal action against several USTPS promoters.
And in the Cayman Islands, Lynford Evans sits at his desk in the half-empty building near the airport that once housed 30 USTPS employes. He and his attorney complain that the IRS has been using "Gestapo tactics."
Evans said he knew nothing of the money-laundering by Schwind and Hill. Like many of his American associates, he said, "They just wanted to know what we were doing and to do it themselves. They simply plagiarized us. Most of these guys met with us and then started their own deal."
Evans said the IRS is "wasting their time and the taxpayers' money" by continuing the investigation. Pointing to a box full of metal stamps, each emblazoned with a different corporate seal, he said: "That's all that's left of USTPS.