Offshore banking secrecy, already weakened in recent years by new tax treaties, changing laws, IRS investigations and legal challenges, is now virtually non-existent. Liechtenstein, once the most secretive of tax havens, will soon provide bank account information to U.S. authorities.
In December 2008, Liechtenstein signed a treaty with the United States to share banking information regarding U.S. tax payers with accounts in Liechtenstein. At the time, the treaty explicitly did not allow for “fishing expeditions”, i.e., broad requests from the IRS for information on a class of unknown U.S. taxpayers. Rather, Liechtenstein was only to provide information if asked about a specific, known taxpayer identified by name.
However, under U.S. pressure, and without any publicity, Liechtenstein recently amended the 2008 treaty and passed an internal law, the result of which is that “fishing expeditions” are now allowed. As a result, the U.S. Department of Justice (DOJ) has already requested, and Liechtenstein will provide, banking information for accounts with a U.S. beneficial owner held in Liechtensteinische Landesbank (LLB). LLB has already provided the banking information to the Liechtenstein government, which will soon provide it to the U.S. Similar requests to other Liechtenstein banks are expected to follow.
Following this amendment and change in law, in May, 2012, the U.S. targeted Liechtensteinische Landesbank with a request for banking information regarding any accounts with a value in excess of $500,000 beneficially owned by U.S. persons. Liechtensteinische Landesbank, like Credit Suisse, HSBC and other Swiss and Israeli banks, is already under examination by DOJ for facilitating U.S. tax fraud by providing non-compliant “secret” accounts. LLB is cooperating with the U.S. request and providing the requested information.
Liechtenstein was once the vanguard of offshore banking secrecy, and it was said that Swiss bankers kept their own money in Liechtenstein. Significantly, if the U.S. pressured the Government of Liechtenstein to amend the 2008 tax agreement to allow for “fishing expeditions”, then it can be expected that other foreign governments will follow suit. In practical terms, DOJ will not have to issue subpoenas or “John Doe Summonses”, as it did with great success against UBS, and more recently HSBC in India. Now, DOJ can avoid going to court, and requests for broad banking information on “secret” accounts can now occur government-to-government.
LLB account holders have an opportunity to challenge the release of banking information in Liechtenstein courts until June 15th. Similar legal challenges have had mixed results in Switzerland. It is expected that a legal challenge in Liechtenstein will buy some time, but ultimately, the account data will be revealed to the IRS. DOJ will then begin prosecutions of U.S. taxpayers who failed to disclose the LLB accounts and report foreign income. There have been approximately fifty such criminal cases since 2009, involving accounts in Switzerland, Liechtenstein, Jersey, Isle of Man and other former “tax havens”.
Against this background of tax investigation and criminal prosecution, the IRS re-opened its Offshore Voluntary Disclosure Initiative (OVDI) in January 2012 in order to encourage owners of non-compliant foreign accounts to come forward and become tax compliant. The OVDI provides a means to declare the foreign account to the IRS, bring the account into tax compliance and avoid criminal prosecution. Back taxes and penalties will be due, but the penalties would be far lower than the civil and criminal penalties that would ensue if the IRS learns of a foreign account from other sources and the taxpayer is prosecuted.
Owners of accounts at LLB have a very short window to apply for the OVDI. In light of the ongoing erosion of foreign banking secrecy, the inability of foreign governments to withstand U.S. pressure and the willingness of former tax havens to cooperate with the IRS, U.S. taxpayers with non-compliant accounts, in Liechtenstein and anywhere else, should meet with qualified tax counsel immediately to discuss tax compliance.