Renegade Bank Employees Further Erode Offshore Banking Secrecy

Renegade Bank Employees Further Erode Offshore Banking Secrecy
by Asher Rubinstein, Esq.

In an article from December 2009, titled “Get Ready for a One-Two Punch: More Taxes and More IRS Audits” , I wrote the following:

Taxpayers are not only at risk of discovery by the IRS; they face an increased danger of being turned in by private informants seeking recently enlarged rewards. . . . Foreign tax haven banks offer an opportunity for underpaid employees to get rich by becoming IRS informants. Additionally, taxpayers are at risk of being turned in by ex-partners, ex-spouses, ex-companions, ex-employees, litigation/arbitration adversaries, estranged children, or anyone else with a grudge who senses an opportunity to get even and get a reward.

Back in 1999, John Mathewson, the former owner of Guardian Bank and Trust, a defunct Cayman Island Bank, was charged with money laundering involving his Cayman bank. When Mr. Mathewson was arrested, he gave Federal investigators computer records which he had stolen from the bank and brought to the U.S. These computer records contained information regarding American depositors at the bank who evaded U.S. tax obligations. In that case, the motivation for sharing banking data was not money, but cooperation in criminal prosecution and leniency in sentencing.

In 2008, a renegade employee of LGT Bank in Liechtenstein stole data about client accounts and sold the data to the German intelligence service in return for a few million Euros. With that data, the German government prosecuted Germans for tax fraud. The German government also shared the data with other governments around the world.

In 2009, an employee of HSBC shared bank account data with the French government.

In January 2010, it was reported that an employee of a Swiss bank offered confidential client banking data to the German government in exchange for a multi-million Euro payment. As of today, indications are that the German government will again purchase the banking data in order to investigate tax fraud by German citizens.

An article in Bloomberg, “Swiss Banks Achilles Heel Is Workers Selling Data” , echoes our warnings.

As the events of last year have shown, Swiss banking secrecy laws caved under pressure from the IRS, resulted in the disclosure of account information once thought to be sacrosanct, and led to prosecution of many US taxpayers for tax fraud.

In addition to weakening secrecy laws and greater information exchange among governments, we must add one more threat: the threat by bank employees looking to deliver confidential banking information in return for payment. Thus, last week’s Swiss court ruling that the UBS-IRS settlement violated Swiss law becomes only a secondary issue if the underlying foreign account data is sold by a renegade bank employee. Exchange of account information at the governmental level is sidelined when an inner employee of the bank poses a more immediate and direct threat to banking secrecy.

As we have long-counseled, any of these threats – – whether from weakening bank secrecy laws, exchange of information by governments, or from renegade bank employees – – is not material if the foreign account is tax-compliant. It is completely legal to have funds offshore, for many reasons, so long as the funds are disclosed and taxes are paid on the income. If the accounts are compliant, the threat of information sharing, from whatever source, is eliminated. The lesson: if you have assets in foreign banks, make sure they are tax compliant. As the window of banking secrecy closes further, taxpayers with tax-compliant accounts need not worry.

Update: Changes in the Offshore Banking World

Update: Changes in the Offshore Banking World
by Asher Rubinstein, Esq.

We take this opportunity to update readers about recent developments in the Offshore world. Readers are reminded that the IRS Foreign Account Voluntary Disclosure Program expires very soon, on September 23, 2009.

Austrian bank confidentiality laws are written into Austria’s constitution, which had resulted in a higher level of secrecy.  Amending those constitutional secrecy provisions requires a two-thirds vote of the Austrian Parliament.  A proposal to loosen those secrecy laws failed in July.  Thus, it appeared that Austria might be the last European holdout.

However, on September 1, the Austrian parliament voted, by the required two-thirds majority, to relax Austria’s constitutional bank secrecy regulations.  We have not yet read an official summary, but we have read reports that under the new laws, information will be released to foreign authorities for civil, criminal or administrative tax inquiries (i.e., including civil audits).  Specific taxpayer names must be named.  Presumably, John Doe summonses (a/k/a “fishing expeditions”), such as the summons at issue in the recent UBS case, will not be honored.   However, this is not definite, pending release of the actual amendments.  Austria’s recent legislation was enacted in order to get Austria off of the OECD’s “grey list”.

In September, 2009, Liechtenstein signed a tax information exchange agreement with Germany.  The agreement follows the OECD model exchange of information agreement, which eliminates the distinction between tax fraud and tax avoidance.  The agreement will take effect in 2010.

Likewise, in August, 2009, Liechtenstein signed a tax accord with the United Kingdom.  Under the agreement, British taxpayers with non-compliant accounts in Liechtenstein must come forward and report those accounts to the UK tax authority, or else Liechtenstein will close those accounts.

Liechtenstein signed a tax information exchange agreement with the United States in December, 2008.

While these changes mean that Liechtenstein will no longer be a safe haven for undeclared funds or accounts which are otherwise not tax compliant, Liechtenstein still remains one of the top jurisdictions for tax compliant asset protection from civil creditors.

Following weeks of three-party negotiations between the US Department of Justice, UBS and the Swiss Government, the parties reached a settlement which ended the civil litigation in federal court.  Pursuant to the settlement, UBS will release approximately 4,500 names of American account holders to the US Government.  The account holders will be able to utilize the Swiss legal process to appeal the disclosure of the information, but must disclose their appeal to the U.S. Justice Department.  IRS investigations, and civil and criminal charges are certain to follow.  Despite reassurances from Swiss government and banking officials that Swiss privacy laws remain strong, it is clear that the once-sacrosanct Swiss banking secrecy is seriously weakened, if not entirely undone.

Following the U.S., which signed a Tax Information Exchange (TIE) agreement with Switzerland in June, France signed a tax treaty with Switzerland in August, 2009. The new tax treaty between France and Switzerland adopts the latest OECD standards on financial transparency.

Days after the French-Swiss tax agreement was signed, it was reported that Switzerland divulged the identities of some three thousand French citizens with Swiss accounts that may not be tax-compliant. Two points are particularly intriguing about this latest development. First, the information divulged by the Swiss is reported to be precise and particular, containing names, account numbers and dollar amounts. Second, the provision of this information appears to be quick and relatively effortless. Compare, for example, two rounds of litigation (civil and criminal), months of motions and court proceedings, and months further of settlement negotiations between the U.S., UBS and the Swiss Government, which led to the disclosure to the IRS of names of Americans with Swiss accounts. France obtained the information from Switzerland with comparative ease.

Monaco had been perhaps the most secretive offshore tax haven. For this reason, we’ve speculated that Bernard Madoff may have hidden the proceeds of his fraud in Monaco. However, on September 8, 2009, Monaco and the U.S. signed a TIE. Pursuant to that agreement, the US will be entitled to request banking and financial information in criminal tax investigations and civil tax audits.

Canada is following the US lead on pressuring UBS to release the names of account holders.  It is believed that some Canadians are on the list of the 4,500 names which UBS will provide to the US in order settle the legal action against UBS.  Like the US, the Canadian government is offering an amnesty for taxpayers to come forward with non-compliant foreign accounts.

The Connecticut Attorney General has asked the federal government for information on whether any taxpayers from Connecticut are on the UBS list.  With many hedge funds headquartered in Connecticut, this might prove to be a lucrative target for Connecticut tax investigators.  We fully expect other states to follow suit.

What does this all mean?

It means that you should have no expectation of secrecy vis-a-vis the U.S. government regarding a foreign bank account.  If you have a foreign bank account that is not tax-compliant, now is the time to come forward and take advantage of lowered penalties and the promise of no criminal prosecution for tax fraud.  The IRS Voluntary Disclosure Program expires very soon – on September 23.  Please read “Do You Have a Foreign Bank Account?

Of course, it is legal for US taxpayers to have foreign accounts, and there are many good reasons for doing so, including Asset Protection.  But the foreign accounts must be tax-compliant, which means: (1) properly reporting the existence of the accounts to the government, and (2) paying taxes on income earned in those foreign accounts.  Provided that these obligations are met, the offshore accounts are tax-compliant and, if held in an offshore asset protection trust, will offer unparalleled asset protection from future creditors.

Please contact us  for additional information regarding the Voluntary Disclosure Program, asset protection or other tax questions.



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