Recent Media Appearances for Rubinstein & Rubinstein

Ken Rubinstein’s article, I’m Not that Kind of Country , will be published in the July/August 2009 edition of the Journal of Taxation and Regulation of Financial Institutions.  This article discusses Senator Levin’s proposed anti-tax haven legislation, the “Stop Tax Haven Abuse Act” (S. 506).  Shortly after the Levin bill was announced, Senator Baucus and President Obama presented alternative legislation.  Ken’s article discusses the future of offshore jurisdictions amidst the pending legislation.

Asher Rubinstein’s article New Switzerland-U.S. Tax Treaty Further Erodes Offshore Banking Secrecy; Questions Remain, but Disclosure Is Prudent  was published in the July 29, 2009 edition of WorldWide Tax Daily .  It will also be published in the July 6, 2009 edition of Tax Notes International.  Asher’s article discusses the recent tax information agreement between Switzerland and the U.S., the IRS legal initiative against UBS, and tax compliance for offshore accounts, including the IRS Voluntary Disclosure Program  and FBAR reporting.

On June 25, 2009, Asher Rubinstein once again was a guest on Pimm Fox’s show, Taking Stock, on Bloomberg television.  Asher discussed offshore banking, tax compliance and the continuing crackdown against non-compliant offshore accounts.

In addition, we’ve recently been interviewed and quoted in many publications, including: Financial Times, the Wall Street Journal and London Times.

For copies of these articles and media appearances, please contact us.

Getting your money back from Madoff

Ken Rubinstein, “wealth protection lawyer”, was recently interviewed and quoted on CNNMoney.com regarding where Madoff may have hidden assets.  Ken pointed out Monaco, which we’ve theorized may be the location of much of Madoff’s money.

Small-scale investors could get compensated fully, thanks to brokerage protections; multi-million dollar victims will certainly take a hit.

By Aaron Smith, CNNMoney.com staff writer
Last Updated: March 18, 2009: 8:02 AM ET

NEW YORK (CNNMoney.com) — Small-scale investors in Bernard Madoff’s Ponzi scheme — claimants with a half-million dollars or less at stake — will eventually get all their money back, according to the Securities Investor Protection Corporation.

“If their losses are less than a half a million dollars, then their losses should be made completely whole by SIPC,” said Steve Harbeck, chief executive of the corporation.

But larger investors are almost certain to take a hit, he said.

Here’s how it works:

SIPC, an organization that protects investors in brokerage firms, will pay up to $500,000 for any eligible claimant who lost money to Madoff. This coverage comes from dues paid by brokerage firms, not taxes, according to Harbeck.

Madoff, in federal court in Manhattan last week, pleaded guilty to operating the biggest Ponzi scheme in history. A Ponzi scam uses fresh investments from unsuspecting investors to make payments to more mature investors, to create the false appearance of legitimate returns. In reality, Madoff never bought securities and therefore never invested the money, according to his courtroom confession.

Madoff, currently locked up in a Manhattan jail, faces a sentence on June 16 of up to 150 years. On Thursday, he will make an appearance in the U.S. Court of Appeals for the 2nd Circuit to appeal the decision to revoke his $10 million bail.

Some investors have said they’re more interested in recouping their losses than seeing this 70-year-old financial menace spend the remainder of his days in prison.

SIPC protection and recovered loot

In addition to the $500,000 from SIPC, anyone who donated more than that to Madoff’s longrunning scam is dependent upon the recovery of stolen funds to get more money. These funds are paid into a pool, and will eventually be divvied to investors, commensurate on how much they put in, according to Irving Picard, the court-appointed trustee who explained the process to victimized investors at a hearing last month.

An investor who gave Madoff millions of dollars is likely to get only a fraction of that, even with the $500,000 from SIPC.

If the investigators recover only one-tenth of the funds, then a million-dollar investor would get back one-tenth of what he put in, which would be $100,000, plus the $500,000 from SIPC, according to an arbitrary example from Harbeck. In a one-tenth recovery, a smaller-scale investor who lost a total of $100,000 would get back $10,000 from the recovered funds, and $90,000 from SIPC, said Harbeck.

If the investors have accepted payments from Madoff, that could further complicate the recovery effort and also reduce their claim.

Some of the SIPC payments have already gone out. Harbeck said that twelve — out of the estimated thousands of investors — have received a total of $6 million from SIPC.

“It’s my understanding that these people were easy claims, that they each put more than half a million in, and they did so very recently, and they never took money [out,]” said Harbeck.

The deadline to file claims is July 2. After that, investigators should have a better understanding of how much money was stolen from how many victims.

Also, the Internal Revenue Service on Tuesday issued tax-filing guidance for Madoff victims. The IRS said it provides safe harbor procedures for taxpayers to deduct theft losses from criminally fraudulent investment arrangements.

Madoff: his (and her) money

According to a recent courtroom filing, some $823 million worth of assets have been recovered from Madoff, with much of it under the name of his wife Ruth.

A spokeswoman representing the prosecution declined to comment as to whether Ruth’s items are subject to seizure. The court document, filed by the prosecution, inventories all items, his and hers, implying that all items are vulnerable to forfeiture.

Ira Lee Sorkin, an attorney representing the Madoffs, sees it otherwise. “If it’s Ruth Madoff’s money, it’s not subject to seizure,” he told CNNMoney.com on Tuesday.

The bulk of the tally comes from the $700 million valuation for the firm, Bernard L. Madoff Investment Securities, which is being liquidated.

“The view that we’re going to take is that every paper clip found in that office was paid for with stolen money,” said Harbeck of SIPC.

More than $17 million in cash was deposited at Wachovia under Ruth’s name and investigators also recovered $45 million worth of municipal bonds. The real estate includes their $7 million Manhattan apartment and his wife’s properties in Montauk, N.Y., and Palm Beach, Fl., as well as a collection of yachts, luxury cars and other pricey possessions, like Ruth’s silverware and her Steinway piano.

Court documents filed Tuesday at the Southern District of New York add to the inventory of items the prosecution is asking to be forfeited. The additional items they want to seize include Madoff’s ownership in 20 companies, $9.55 million worth of loans to Andrew Madoff, and $22 million worth of loans to Mark Madoff.

The court documents also cite more than $2.6 million worth of jewelry owned in Ruth’s name and around 35 sets of watches and cufflinks, value unspecified.

The government is still trying to track down Madoff’s money, and the tally is expected to run into the billions of dollars. The largest estimate, of approximately $65 billion, is almost certainly erroneous, as it was based on Madoff’s statements to investors tallying their returns, which were based on securities that he never bought.

In a recent interview with CNNMoney.com, Raymond Spungin, a 77-year-old investor, said he and his wife invested $700,000 to Madoff’s firm, and received statements saying that their assets appreciated to about $1.8 million.

“The estimates that come from customers’ statements are completely fictitious,” said Harbeck.

Where’s the rest of the money?

There is little doubt that some of Madoff’s money is yet to be recovered or will never be recovered. Investigators are scouring various parts of the world looking for it, including France and Gibraltar, based on recent court filings.

This has lead to much conjecture — still unproven — that Madoff placed money into offshore accounts, protected from the outside world.

Kenneth Rubinstein, wealth protection lawyer, theorized that Monaco, unlike smaller tax havens in Africa and other parts of the world, is the only country “with a banking infrastructure large enough to swallow Madoff’s money without raising a red flag.”

Robb Evans, partner at Robb Evans & Associates, has hunted down scammed money all over the world, including the South Pacific archipelago of Vanuatu, where he’s been trying to recover funds for years.

“Finding [the money] and recovering it are two different things,” said Evans, who served as a trustee hunting down funds in hundreds of cases, including the fraud-ridden Bank of Credit and Commerce International in the 1990s.

Evans said his success rate varies widely, from 20% to 70%, for the recovery of funds. One of the problems is that some of the money has already been scattered among investors under the guise of profits. This, he said, is the very essence of Madoff’s scam.

“Inevitably, in a Ponzi scheme, the bulk of the money goes to other investors,” said Evans.

Kenneth Rubinstein discusses Senator Carl Levin’s proposed “Stop Tax Haven Abuse Act”, the implications of the legislation, and what offshore jurisdictions should do about it.

I’m Not That Kind of Country
-by-
Kenneth Rubinstein, Esq.

On March 2, 2009 America declared war on 34 countries around the world.  Some of these countries are well-known European jurisdictions with hundreds of years of sovereign history, like Switzerland and Luxembourg.   Some are world-famous Asian financial centers, like Hong Kong and Singapore.  A few are tiny island specks in the Pacific ocean, like Nauru and Vanuatu.  In between are lots of sun-drenched Caribbean island nations, like Bermuda and Aruba, best known as vacation spots for honeymooners, snorkelers and Jimmy Buffett fans.

This war is an economic war, declared in Congress by Senator Carl Levin when he introduced the “Stop Tax Haven Abuse Act” of 2009, a new and improved version of the same legislation, introduced in 2007 by Senators Levin and Obama in the Senate and by Congressman Rahm Emanuel and 48 others in the House of Representatives.

The opening shot was actually fired by the U.S. against Switzerland several months earlier, when the U.S. accused Switzerland’s largest bank, UBS, of soliciting and conspiring  to commit U.S. tax fraud.  The U.S. sued UBS for the disclosure of 52,000 Swiss accounts with alleged U.S. beneficial owners.  Although skirmishes are still ongoing, the outcome of this first battle is clear: Switzerland will surrender.

The weapons in this war are obviously not bombs or bullets.  They are amendments to our tax code and statements on the floor of Congress.  The objectives: to prevent the outflow of dollars from the U.S. and increase U.S. tax revenues.  The tactics: intimidation – of U.S. taxpayers, foreign banks and sovereign governments.

Senator Levin has unilaterally declared each of these 34 countries a “secret tax haven” and any American who does business with them a “tax cheat.”  Using these two unsubstantiated and over-broad premises as its foundation, the Stop Tax Haven Abuse Act (S.506) creates a statutory presumption that any U.S. taxpayer who transfers or receives money (or assets) to or from any of the 34 “listed countries” or who causes a company, trust or other entity to be formed in a listed country has committed tax fraud.  The burden would fall upon the taxpayer to rebut this presumption by presenting “clear and convincing” evidence to the IRS in an administrative tax proceeding (where the IRS is prosecutor, judge and jury).

The effect of these provisions is clear;  U.S. taxpayers will be totally intimidated against moving their money or, indeed, doing business in (or with) any listed country.  Never mind that our banks are failing, our markets are crashing and our money may soon not be worth the paper it’s printed on; keep your money here or face the IRS.

If any U.S. taxpayers withstand this intimidation, the Bill puts the onus of reporting them on foreign banks and U.S. correspondent banks.  The IRS may require U.S. banks that provide correspondent banking services to foreign banks to produce information on all customers of those foreign banks.  In addition, the Treasury Department may prohibit U.S. banks from providing correspondent banking services to foreign banks and from authorizing or accepting

credit card transactions involving any foreign jurisdiction or foreign bank.  The effect would be to completely cut off foreign banks from the U.S. banking system.

Other, more esoteric provisions of the Bill are designed to decimate the offshore hedge fund industry, penalize foreign corporations that utilize U.S. managers, and facilitate IRS “fishing expeditions” overseas.  These provisions merit separate discussion beyond the scope of this article.

When the allies (UK and EU) join the war (based on the pronouncements of Gordon Brown and other European leaders, there is no doubt that they will), the consequence of the provisions directed against foreign and U.S. correspondent banks may well be to cut off foreign banks from the world-wide banking system, effectively shutting them down.

The consequences of the Bill, by cutting off the flow of foreign capital to the listed countries and excommunicating their banks from the world-wide banking system, will be catastrophic.  Economies will be destroyed.  Many small democracies will become impoverished.  Sugar cane and bananas will not sustain the small Caribbean island nations.  We will create dozens of Cubas, and Mr. Chavez will welcome them with open arms.

Messrs. Levin, Obama and Emanuel conveniently ignore the fact that the U.S. is actually the world’s biggest tax haven.   Our banks offer secrecy to millions of foreign account holders and our tax code exempts foreigners from almost all tax on U.S. investment income.  Perhaps the Bill should be more aptly named “The Do As I Say, Not As I Do”Act.  Our desperate need for revenue to pay for stimulus plans, TARPS and bailouts does not justify this sort of hypocrisy.

The Bill’s sponsors also overlook the fact that virtually every one of the 34 “secret tax havens” has signed a Mutual Legal Assistance Treaty (“MLAT”) in which it has agreed to assist the U.S. in the investigation and prosecution of serious crimes, including tax fraud.  Some have even entered into Tax Information Exchange (“TIE”) Agreements directly with the U.S. Treasury Deparatment, requiring cooperation in civil audits of U.S. taxpayers.  If any of these countries have violated their MLAT or refused to honor their TIE Agreement, our government should certainly go after them, as we have done in the UBS matter.  But, if they haven’t, calling them “secret tax havens” and threatening them with economic destruction is not very different from the tactics of another Senator named McCarthy.

So, what’s a small financial center to do when it is forced onto its back by a heavily-muscled USA?  Probably not much, except protest that it’s not that kind of country.  Foreign jurisdictions need to clarify their commitments to the letter as well as the spirit of their MLATS and TIEs with the U.S.  Those countries that do not yet have TIEs with the U.S. might consider offering to sign them in return for removal from the “secret tax haven” list.

Offshore financial centers must deflect the US attack by clarifying their positions on secrecy, tax fraud and tax evasion.  They must define their constituency for offshore services as:
1. Individuals and entities seeking to protect their assets from potential civil claimants; and
2. Individuals and entities seeking to engage in tax compliant financial planning.

Confidentiality laws must be amended to eliminate ambiguity.  Countries need to declare that every person is entitled to financial privacy and confidentiality from every other person; but not from government inquiry when there is a bona fide suspicion that the person has committed a serious crime.

The definition of “serious crime” should be clarified to include the violation of income tax laws in an individual’s home country.  This would go far toward eliminating current ambiguities between tax “fraud” and tax “evasion.”  Such clear and unequivocal pronouncements should do much to deflate the thrust of Senator Levin’s proposed Bill.

The battlefield might thereby be narrowed to the definition of “bona fide suspicion” of serious crime.
It is evident from the current lawsuit brought by the US against UBS (which is actually a proxy for Switzerland) that this is what the IRS really wants – the ability to extract wholesale financial information from foreign countries.  It does this by engaging in “fishing expeditions”; the service of “John Doe” summonses upon a foreign country seeking financial information about masses of unnamed persons, even when there is no “bona fide suspicion” about anyone in particular.   In the UBS case, the US government, on behalf of the IRS, served a “John Doe” summons on UBS seeking information on 52,000 unnamed individuals who may have Swiss accounts.  The fear of being swept up in such an amorphous net and the subsequent inevitable audit where, again, the IRS serves as prosecutor, judge and jury, would certainly intimidate even innocent people from transferring assets offshore.

The chances are that even countries who loudly declare their banks’ doors closed to criminals and “tax cheats” may nonetheless remain on Senator Levin’s “secret tax haven” list unless they also declare their acquiescence to US fishing expeditions a/k/a/ “John Doe” summonses.

So, how do you fight an 800 pound gorilla?  You don’t; at least not alone.  No single country can withstand the combined pressure of the US, UK and EU and their threat of economic extinction.  The only defense available to the offshore financial community is unification.  If offshore centers coalesce into a cohesive group with a common goal, common strategy and common voice, together they might achieve sufficient critical mass to stand up to the gorilla and avoid total defeat.

In the late 1990s, the OECD’s infamous campaign against “ring-fencing,” the alleged unfair tax competition from no-tax/low-tax countries was thwarted when the offshore centers of the Caribbean basin organized just such a united front.  The resurrection of this organization and its expansion to include as many of the listed countries as possible may give the offshore financial community the needed leverage to reach some reasonable compromise with the US.  Such compromise might include assurances that financial center doors will indeed be closed to criminal assets, including the proceeds of tax evasion, together with a mechanism for policing continued compliance with such assurances.  Perhaps such compromise may even require limited recognition of “John Doe” summonses when they apply to a clearly defined, discreet group and the US can prove to a financial center’s court that there is probable cause to believe that the group, or at least most of its members, has committed a serious crime.

Such compromise may be hard to accept, but without such compromise, the war will not end well for the offshore financial community.  As the philosopher Sancho Panza once said, “Whether the stone hits the pitcher or the pitcher hits the stone, it will not be good for the pitcher.”