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.

On The Trail of Madoff's Money

 On The Trail of Madoff’s Money

By Kenneth Rubinstein, Esq. and Asher Rubinstein, Esq.

 As attorneys experienced in asset protection law and especially in the area of offshore asset protection, we have recently been asked to suggest where Bernie Madoff may have secreted the proceeds of his allegedly gigantic and pervasive financial fraud.

 At the outset we must declare that we do not represent (and have not represented at any time) Bernie Madoff or, to the best of our knowledge, any member of his family or organization, or any victim of his alleged fraud; nor do we have any personal knowledge concerning the nature, extent or location of Mr. Madoff’s assets. This article is based on our opinions, assumptions and conclusions drawn from our detailed knowledge of offshore asset protection jurisdictions, their laws, court systems, banking infrastructure and international treaties, protocols and agreements.

 The first step in our analysis requires that we make certain assumptions as to the nature and size of Bernie Madoff’s assets. The nature of the assets will determine whether they are likely situated in the U.S. or offshore. The size of the assets would suggest the elimination of many lesser offshore jurisdictions as possible secure havens.

 Logic compels us to assume that the Madoff assets are highly liquid and located offshore. If the assets were held in U.S. banks or invested in U.S. real estate, U.S. businesses or U.S. securities, the risk of discovery would be very high. In the event of their discovery, they would be subject to immediate restraint and seizure. Indeed, the mere suspicion that any asset may be somehow related to Bernie Madoff would be sufficient for a U.S. court to order the restraint of that asset. U.S. bank records are subject to subpoena by prosecutors and even by civil creditors. Our systems of recording and registration of real property and securities also place such U.S. assets at significant risk of discovery and, if discovered (or even suspected) at significant risk of restraint.

 It is axiomatic that the only assets that lend themselves to safe, efficient and absolute transfer offshore are assets which are purely liquid – cash, via wire transfer. Deeds, stock certificates and other documents representing ownership of U.S. assets are just that – representations of ownership. The underlying U.S. assets would still be subject to restraint and seizure by U.S. courts. Deeds and stock certificates could be declared void and sheriff’s deeds and new certificates could be issued by court order. We must therefore assume that, in order to avoid such risk of discovery and restraint, Bernie Madoff’s assets are predominantly liquid and offshore.

 The assets lost to Bernie Madoff’s alleged fraud have variously been estimated to range from twenty billion to fifty billion dollars (although at least one commentator has stated the loss to be as high as one hundred billion dollars). For purposes of this analysis, let us assume that the majority of these assets were, in fact, lost through investment failure during the current financial crisis. For many years prior to the current crisis, Mr. Madoff claimed to generate annual net profits of at least twelve percent. If we accept the more conservative estimates of twenty billion dollars under management, such profits, at a twelve percent return, would equal $2.4 billion per annum. If Mr. Madoff received only half of the usual hedge fund manager’s twenty percent incentive fee, he would have received $240 million dollars (ten percent of $2.4 billion) per year. This would be in addition to commissions on trades and other fees and charges. Bernie Madoff has claimed twelve percent net profits per annum for decades. Thus, based upon the above conservative assumptions, Mr. Madoff has probably amassed at least $2.4 billion dollars in personal profits over just the last ten years, and very likely much, much more.

 Where could Bernie Madoff safely store billions (or even hundreds of millions) of dollars? Although dozens of offshore financial havens exist throughout the world (they prefer to be called “international financial centers”), very few are equipped to receive or hold deposits of this magnitude. For most, an influx of deposits of this size, even if gradual, would seriously skew the banking infrastructure and would attract the attention of local and international regulatory authorities (e.g., local central banks, monetary authorities, IMF, FATF, etc.). It would be an understatement to say that such an influx of deposits could not remain invisible. Equally important, in most of these offshore jurisdictions the banks and other financial institutions could not possibly offer Mr. Madoff any reasonable degree of security regarding the safety of such large deposits. For this reason, we can eliminate foreign countries that, although they might welcome Madoff Money, would offer no security or stability, countries like Cuba or Ukraine. Although Kobi Alexander, who fled charges of conspiracy and securities fraud while CEO of Comverse Technology, escaped to Namibia where he remains a fugitive, it is unlikely that Madoff stashed assets in any African country.

 Mr. Madoff could have established his own bank in one of these offshore centers, but such bank would still be subject to the aforementioned regulation and scrutiny, and its (Mr. Madoff’s) deposits would still be vulnerable to the jurisdiction’s economic and financial stability. $2.4 billion on deposit in a country whose total G.D.P. is one or two billion dollars would hardly be inconspicuous.

 We may reasonably conclude, therefore, that all but the largest offshore havens can be eliminated. This narrows our focus to London, Tokyo, Hong Kong, Cayman, Switzerland, Liechtenstein, Luxembourg, Austria, Bermuda, Monaco, Israel and Dubai.

 Each of these jurisdictions offer depositors the security of a substantial banking infrastructure and, more importantly, the promise of bank secrecy. This bank secrecy is based either on statute or on tradition. However, in almost every case such bank secrecy is not absolute; it may be preempted by international treaty or agreement between governments.

 Almost every country in the world has entered into a mutual legal assistance treaty (MLAT) with the U.S. These treaties require the disclosure of financial information in connection with specific investigations of serious crime. Mr. Madoff’s alleged fraud would certainly constitute a serious crime in every jurisdiction subject to such MLAT. In addition, some offshore centers have also signed separate agreements with the U.S. Treasury Department requiring the exchange of financial information in response to IRS administrative requests. Most recently, in December 2008, Liechtenstein, which was already subject to an MLAT, signed an additional tax information exchange agreement with the IRS. In jurisdictions subject to these tax information exchange agreements, a simple IRS request for bank information in connection with a civil audit of Bernie Madoff would override any provision of bank secrecy.

 One commentator has suggested (without support) that because Mr. Madoff is Jewish, he has hidden his assets in Israel. This suggestion has no credibility because Israel is subject to an MLAT with the U.S., has a long and consistent record of recognizing and enforcing U.S. judgments against Israeli assets and has repeatedly refused to provide refuge to U.S. (Jewish) fugitives and their assets (e.g., Meyer Lansky of Mafia fame and Eddie Antar of Crazy Eddie fame).

 Of the substantial offshore financial centers listed above, all but one is subject to an MLAT and/or a tax information exchange agreement with the U.S.. Mr. Madoff would be foolish to hide any significant assets in any of these MLAT jurisdictions.

 Only one of the above-listed offshore havens has a strict bank secrecy law and has no treaty or other agreement with the U.S. requiring financial disclosure – the Principality of Monaco. Although several other countries may also offer absolute bank secrecy due to the absence of an MLAT (e.g., Cuba, Andorra, some lesser African countries), none of them contain a sufficiently safe and significant financial infrastructure. The only country in the world that can offer Bernie Madoff complete bank secrecy together with a large, well-established and secure financial infrastructure (total deposits under management as of December 31, 2008: approximately $120 billion) as well as the security of political, social and economic stability, is Monaco. Does our Attorney-General speak French?



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