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.
Whistle-Blowers
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.
Singular Focus
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.