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January 4, 2010updated 29 Jan 2016 4:03pm

US Special: Off Shore, Out of Mind?

By Christopher Silvester

Tax havens have nowhere to hide now that America has turned on them, says Christopher Silvester

IN EARLY NOVEMBER 2009, a British-born yacht broker in his fifties and living in Florida, Robert Moran, became one of the first US citizens to be prosecuted for filing a false tax return as a result of information disclosed by UBS, the world’s largest private bank. Moran expects to forfeit his broker’s licence, which is likely to result in the bankruptcy of what his attorney described as ‘an international powerhouse in the yacht brokerage business’.

With offices in Antibes and Moscow, Moran Yacht and Ship described itself as ‘without doubt the yachting industry leader for the sale, construction and charter of large yachts throughout the world’. In return for providing what his attorney called ‘voluntary and early cooperation’ in the government’s probe into ‘this tawdry affair known as UBS’, Moran was sentenced to two months in prison.

Moran had been concealing the sum of $3.7 million in an undeclared UBS account through an offshore entity he had set up in Panama. Judge Cohn said ‘Why does one open an offshore bank account?… I have found that offshore accounts are set up for one reason, it’s not necessarily the amount involved, but it is the deception.’

Many have said that the current global economic crisis has sounded the death knell of banking secrecy, especially for citizens of leading G20 nations such as the United States and the United Kingdom. G20 leaders seeking scapegoats for the crisis have identified ‘tax havens’ as an easy target.

This process began a couple of years ago when a whistleblower in Liechtenstein sold confidential lists of account holders’ names to the tax authorities in the US, Germany, and Britain. In the wake of this revelation, Liechtenstein signed a Tax Information Exchange Agreement (TIEA) with the US. Back in March of this year, Gibraltar, a British low tax jurisdiction, signed a similar TIEA with the US, and other offshore jurisdictions have followed suit.

But the big cahuna was Switzerland, where banking secrecy has been enshrined in law since 1934, and in particular UBS AG. Back in February, UBS admitted that it had assisted a number of US citizens to evade tax. In the early summer, the US Government agreed to settle its case with UBS, in which the Department of Justice (DoJ) had demanded on behalf of the Internal Revenue Service (IRS) that the Swiss bank hand over the names of 52,000 of its American customers, while the Swiss government threatened to seize this information to prevent its disclosure.

AS PART OF a deal to avoid prosecution, it agreed to pay a fine of $780 million and to hand over the names of 250 clients. But it was reluctant to go further without government-to-government negotiations, because of the conflict between Swiss banking secrecy laws and the requirement under US law that all offshore accounts of its citizens containing more than $100,000 are reported to the IRS. Those negotiations ensued and a deal was struck.

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In October it emerged that over 7,500 US citizens had come forward to declare back taxes as part of an amnesty. A leading Democrat, Senator Carl Levin, whose committee had exposed the UBS violations, felt vindicated by the response to the amnesty. ‘The fact that more than 7,500 US taxpayers took advantage of the IRS voluntary disclosure programme to disclose hidden foreign accounts at more than 100 banks in 70 countries suggests that our efforts to end tax-haven abuses may be making progress,’ he said.

‘Some evidence of that progress is that many Americans are losing confidence in the ability of tax havens to hide their assets. But it is also clear that thousands of other taxpayers are still in the shadows, working to keep their offshore accounts hidden.’

One outcome of the UBS negotiations that irked the US authorities and offered some consolation to the Swiss authorities was the agreement that information would only be supplied by Swiss banks when the IRS presented provable evidence of a tax fraud by a US account holder. Since then, however, the US has devised a new means of bringing Swiss banks to heel.

In November, a pair of US Congressmen proposed a new law that would penalise foreign banks that refuse to disclose the identity and contents of accounts held by US citizens. Sponsored by two Democrats, Senate Finance Committee chairman Max Baucus of Montana and House Ways and Means Committee chairman Charles Rangel of New York, the bill lends force to an existing IRS programme, the Qualified Intermediary programme, whereby foreign banks agree to confirm the identities of US depositors and inform the IRS of income earned in their accounts. It was the violation of this programme by UBS AG that sparked the entire assault on offshore banking secrecy for US citizens.

QUITE APART FROM the US Department of Justice’s recent campaign against UBS and the Swiss government, the proposed Baucus-Rangel law would levy a 30 per cent withholding tax on income from US assets held by foreign institutions that provide information about US account holders. As Philip West, a Washington tax lawyer and former international tax counsel at the US Treasury, puts it: ‘It’s basically a fee for maintaining bank secrecy. The IRS has a very legitimate interest in knowing if there are Americans holding assets offshore in an undisclosed account.’

The legislation is expected to force foreign banks to comply rather than pay the withholding tax. Its sponsors hope that it will generate $3.1 billion in tax revenue over the next decade. Since Switzerland is the largest offshore financial centre in the world, according to the Boston Consultancy Group — it accounted for $1.8 trillion (28 per cent) of offshore wealth in 2008 — it remains the primary target of the US authorities.

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In Switzerland, banks will face the prospect of violating their nation’s own banking secrecy laws or paying the US withholding tax. ‘This really becomes a fight between two countries over bank secrecy,’ says Reuven Avi-Yonah, a tax law professor at the University of Michigan.

The head of UBS, Oswald Grübel. has told Swiss radio that ‘banking secrecy is not disappearing’, but that customers will ‘no longer be able to hide their money from their home governments’. Other Swiss bankers agree. ‘Banking secrecy will continue to exist, but not for tax reasons. says Boris Collardi, chief executive of Swiss private bank Julius Baer. ‘Private banks will have to offer services on a fully compliant basis.’

At the same time as the US has been throwing its weight against Switzerland, the Tax Justice Network, a British organisation that campaigns against financial secrecy, has compiled a Financial Secrecy Index which ranks the US state of Delaware — the political base of US vice-president Joe Biden — as number one offender when it comes to hiding wealth. With high levels of banking secrecy, Delaware does not make details of trusts, company accounts, and beneficial ownership a matter of public record and it allows companies to re-domicile within its borders with minimal disclosure. However, Delaware’s banking secrecy is not available to US citizens.

Delaware is party to numerous international tax information sharing agreements signed by the US, but how effectively it responds to requests made under such agreements is open to question. ‘Secrecy in Delaware has been a massive problem and has been for some time,’ says Jack Blum, a former US senate staff attorney who worked on the BCCI fraud investigation. ‘They have a lot of rules that… make it so advantageous to be there that it is breathtaking… The requests [for information] pile up in district courts. It’s beyond embarrassing. It’s a disgrace.”

WHILE THE SITUATION in Delaware lays the US federal government open to charges of hypocrisy over its vigorous assault on offshore tax havens, it has not helped Switzerland resist the remorseless US power-play in negotiations. If your banks wish to continue to do business in the US, the Americans have told the Swiss, you will either have to release hitherto confidential information about our citizens or pay a financial levy.

But will tax-compliant banking secrecy vitiate the business model of the Swiss banks? Surely, some argue, the raison d’être of banking secrecy will disappear. Indeed, according to the Tax Justice Network, modern banking secrecy began ‘when Swiss banks offered secrecy, for a fee, to aristocrats who were sending money abroad during the French Revolution. From its inception, banking secrecy existed for one central reason: the rich wished to avoid taxes. In its various formulations today, from shell corporations to numbered bank accounts, this remains the primary motivation for banking secrecy.’

But just as there are other improper motives behind banking secrecy — such as money laundering by organised crime, the hiding of bribes by public officials, and the facilitation of terrorist funding — so there are also legitimate reasons why ultra-high-net-worth individuals and corporations value banking secrecy, foremost among them being privacy, the ability to generate capital flows offshore for international business purposes, and security from politically unstable regimes.

‘Transparency for tax purposes does not mean that bank secrecy does not remain an important need of today’s wealth-owning family,’ says Philip Marcovici, a Zurich-based partner at global law firm Baker & McKenzie. ‘A wealth owner needs and wants to play by the tax rules of their home country and this doesn’t compromise his or her ability to retain privacy in relation to their financial affairs.’

Banking secrecy will continue to exist for US citizens who have other motives for offshoring money than tax evasion. To borrow from Mark Twain, rumours of its death have been greatly exaggerated.

Cartoon by Anthony Haden-Guest. Click here to see more of his work.

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