“The beginning and not the end”
The long running legal dispute between the US tax authority and Swiss bank UBS has been settled with UBS agreeing to hand over the names of 4,450 of its American clients to the Internal Revenue Service (IRS). It marks another milestone in the abolition of worldwide tax evasion and could open the way for many other banks to be forced to reveal the identities of offshore account holders not only to the US, but also to tax authorities in many other countries.
The number of names falls far short of the original 52,000 which the US tried to force out of UBS which at their peak were worth $18 billion in assets. Nonetheless it is a notable victory for the IRS against Swiss banking secrecy, and the 4,450 names are thought to be those holding the largest account balances, valued at around $15 billion. It is believed that these account holders are suspected of committing tax fraud and the terms of the US-Switzerland double tax agreement obliges Switzerland to be co-operative in potential criminal investigations into tax fraud. This is an example of how the many new tax information exchange agreements being signed this year can work to the taxman’s advantage.
IRS Commissioner, Doug Shulman, said: "This announcement today should send a signal - no matter what institution you're with, the IRS is willing to pursue both the institution and the individual."
A former federal prosecutor, Peter Hardy, commented: "The IRS is now gaining institutional skill and knowledge in how to pursue these types of cases and they're going to use that. This is, I believe, the beginning and not the end."
In February, UBS paid the US $780 million and revealed information on 250 US account holders after admitting to assisting around 17,000 American clients to evade taxes between 2000 and 2007. Under US law all offshore accounts with balances of more than $10,000 must be declared to the IRS.
As well as the 4,450 names and those of the 250 account holders, some 5,000 people are expected to voluntarily own up under the US offshore amnesty programme which offers any taxpayer who successfully completes the requirements freedom from criminal charges. The disclosure facility has brought into the spotlight the names of around ten Swiss and European banks where accounts are hidden by wealthy US citizens, including Credit Suisse, Julius Baer, Zürcher Kantonalbank and Union Bancaire Privée.
UBS will warn the 4,450 clients that their names will be given to the IRS. Shulman noted that UBS customers could still take advantage of the IRS’s current amnesty disclosure program which ends on 23rd September. "The letter they receive from the bank will not disqualify them from coming forward to the IRS under our voluntary disclosure program," he said. "But once the Swiss government sends us the name, all bets are off."
Switzerland has always defended its banking secrecy laws but the US lawsuit against UBS is thought to have damaged Switzerland’s reputation. Now that the US case is settled, the Swiss government wants to sell its stake in UBS as soon as possible.
Shulman said that the IRS would pursue other wealth managers from the information provided by UBS clients. “As we get information and pursue investigations, we learn more about where they are hiding assets, what banks helped facilitate it, what advisers were involved,” he said. “You can expect us to continue to be aggressive.”
A partner at law firm Rubinstein & Rubinstein, Asher Rubinstein, said: "For US taxpayers it is going to be impossible to hide money in Switzerland and it is just a matter of time that this is the case also for Germans and Britons. Switzerland will no longer be a tax haven."
In a court filing on 18th August, the US Justice Department revealed that it is pursuing criminal investigations on more than 150 names from some of the 250 names handed over by UBS. The court filing was made as part of a criminal case against former UBS banker Bradley Birkenfeld who pleaded guilty in June 2008 for helping Americans to evade taxes and has been assisting the US government’s pursuit of UBS.
UBS and Credit Suisse have been shutting down bank accounts owned by US citizens. Other jurisdictions including Monaco are reported to be moving accounts to the country where the account holder is tax resident.
Funds hidden in Hong Kong
The crackdown on UBS and information supplied to the IRS has revealed Hong Kong was used to hide assets belonging to some of the wealthy US citizens investigated for tax evasion. Funds were channelled through a UBS account held in the name of a Hong Kong entity.
In a case against a Californian UBS client, John McCarthy, it was revealed that McCarthy controlled a Swiss UBS account set up in 2003 in the name of a Hong Kong entity, COGS Enterprises. Aided by UBS and a Swiss lawyer, McCarthy moved money from a Los Angeles business into a US bank account and then into the COGS account. More than $1 million was directed into the COGS account.
McCarthy also moved funds from a bank in the Cayman Islands into other UBS accounts. The Swiss lawyer suggested that McCarthy set up a foundation in Liechtenstein that would serve as an umbrella over a Panamanian or Hong Kong corporation providing an extra layer of privacy to hide the funds.
In the UK, over 300 banks have been ordered to disclose the identities of UK taxpayers with offshore accounts ahead of the UK’s New Disclosure Facility. The banks include some UK institutions with operations in Switzerland.
In Italy the tax authority has obtained the names of 500 foreign bank account holders from a Swiss lawyer arrested in Milan. In a separate matter, the Revenue is investigating an allegation that undeclared funds amounting to €2 billion are held in Switzerland by the Agnelli family.
The US/UBS deal is a major landmark in the crackdown of offshore tax evasion and sets a precedent for other countries to obtain offshore account information from banks. Investors cannot rely on banking secrecy in the future because at any time offshore banks can be compelled to disclose bank account holders’ details to the taxman. It is far better to reduce the amount of tax you have to pay by using legitimate tax-efficient structures with advice from an authorised and regulated financial and tax adviser like Blevins Franks Financial Management.
By David Franks, Chief Executive, Blevins Franks
21st August 2009