Asset Protection Blog

The Death of Bank Secrecy
By Kenneth Rubinstein, Esq.

Much has been written recently about the U.S. government’s successful campaign to obtain the names of American owners of undeclared Swiss bank accounts. Commentators have almost unanimously reported the death of Swiss bank secrecy, while the Swiss have been quick to paraphrase Mark Twain’s quote that reports of his death have been greatly exaggerated.

Sensing a marketing opportunity in Switzerland’s misfortune, bankers, lawyers and service providers in other offshore centers have been quick to remind the world’s investment community that their jurisdictions are still (purportedly) secret. Thus, the internet and the media are full of ads for “secret” Panama foundations and Cook Island trusts. Articles abound speculating that Singapore will be the next Switzerland, or perhaps Dubai or Mauritius. Domestically, “experts” are explaining that there is no need to go offshore; secret corporations and LLCs in Delaware and Nevada will allow clients to hide assets right here in the U.S.A.

Sadly, the more gullible or desperate among us will rush to hide their assets in the next secret jurisdiction, only to learn, perhaps sooner rather than later, that in the twenty-first century you cannot really hide assets and there are no truly secret havens.

To realize and accept this, we need to understand that there are two broad reasons for financial secrecy: one, to hide assets (and income) from our government and two, to hide assets from our adversaries – litigants, creditors, ex-spouses, etc.

With respect to the first reason, we must understand the following:

Over the last twenty-five years, the U.S. government has signed Mutual Legal Assistance Treaties (MLATs) with almost every country in the world. (The exceptions are Cuba, Iran and several other countries which, for political, social or economic reasons, would not constitute safe havens for your money.) These MLATs require each participating country to disclose information – including bank account data – to the U.S. government in connection with the investigation of an individual for commission of a serious crime. Serious crime includes tax fraud. Treaty loopholes, such as what constitutes “tax fraud” in a foreign treaty country, have been effectively closed by the successful U.S. attack on UBS and Switzerland. The MLATs specify that local secrecy laws may not form a basis for refusing to provide the requested information.

More recently, the U.S. Treasury Department has negotiated Tax Information Exchange Agreements (TIEs) with many countries. Virtually every tax haven jurisdiction has either signed a TIE, is presently negotiating a TIE or, under pressure from the OECD (the international organization of the world’s largest economic powers), has announced its intention to sign a TIE shortly. TIEs provide for agency-to-agency exchange of financial information in connection with administrative investigations (i.e., civil tax audits). Again, the TIEs expressly preempt local secrecy laws.

Readers must also appreciate that since September 11, 2001, the entire civilized world has embraced the need to prevent terrorist financing, money laundering and the transfer of proceeds from the drug trade and other criminal activity. Thus, virtually every legitimate financial institution throughout the world collects and keeps on file information identifying the true beneficial owner of each account, as well as the source of funds deposited into each account. Shrouding such accounts under nominee owners or signatories is no longer an option.

Thus, people should not be seduced by “secret” corporations, whether in Panama, BVI, Delaware or Nevada. The fact is that virtually every U.S. state and most foreign countries will register a corporation without disclosure of its shareholders or beneficial owners. Such a corporation is, however, nothing more than an empty shell. The minute you try to put assets into the corporation, it loses its secrecy. No bank will open an account for any corporation without first obtaining documents proving the identity of its beneficial owner and the signatory on the bank account, including passport or driver’s license, address and social security number. Every U.S. bank will also require a tax identification number for the corporation. Before issuing this ID number, the IRS will require the name and social security number of the company’s principal. The corporation may be secret; the identity of the true owner of its assets is not.

Finally, public announcements by various major governments that they are willing to pay handsomely for stolen bank information and, in the U.S., the enactment and publication of tax whistleblower laws, has created a world-wide cottage industry among underpaid bank employees and others, for the theft, sale and bounty collection relating to secret bank data.

Combine the above with the U.S. government’s ability to track all wire transfers into or out of the U.S. banking system, and it should be crystal clear that when it comes to the U.S. government, there is no real bank secrecy. Rather than falling for promises of secrecy from unscrupulous marketers, investors should seek guidance from qualified tax counsel and ensure that their international assets are structured in a tax-compliant manner. There is no U.S. law prohibiting ownership of overseas assets; but such assets must be tax compliant. Strategies exist for the legal minimization of U.S. taxes on overseas income. Such strategies do not rely on mythical secrecy.

With respect to the second reason, protecting assets from civil creditors, we must likewise understand that we cannot really hide assets from our adversaries.

Once a legal adversary obtains a court judgment against us (and sometimes even before that), our legal system gives him the right to discover all of our assets and it gives him the tools to do so. Although MLATs and TIEs require financial disclosure only between governments, and foreign secrecy laws do, in fact, prohibit such disclosure to civil creditors and private litigants, a judgment creditor need not search for our assets offshore – he can force us to deliver that information to his lawyer’s office right here in the U.S.A. Federal law, as well as the laws of all fifty states, entitle a judgment creditor to “post-judgment discovery in aid of enforcement.” A creditor can subpoena our bank records (as well as the records of our “secret” corporations), including deposits, withdrawals, wire transfers and cancelled checks. He can force us to provide sworn financial statements and copies of our tax returns. He can order us, and anyone else who may have information about our assets or income, to testify under oath. He can scrutinize all of our financial transactions, usually for the past six years. If we refuse, a judge will make us comply on pain of contempt of court. If we lie, we commit perjury – a felony offense.

Experienced and qualified lawyers who specialize in asset protection law understand that the effective protection of assets from civil adversaries does not involve “hiding” those assets. It is based upon the use of the laws of various jurisdictions, domestic as well as offshore, to legally protect assets while they are in plain view. Proper asset protection erects a crystal clear bullet-proof shield around your assets. In fact, the knowledge that your assets are legally protected often serves to discourage litigation or to force a settlement on favorable terms.

Secrecy did not die in Switzerland or anywhere else; it never really existed.

The following is a question-and-answer exchange between Asher Rubinstein and a journalist from Switzerland, regarding recent developments effecting Swiss banking, exchange of confidential bank account data, the US Government litigation against UBS, and the German Government’s purchase of confidential bank account data.  The journalist’s questions appear first, followed by Asher Rubinstein’s comments.

The question I will be attempting to answer is: “Can Switzerland hold out in their efforts to protect banking secrecy – and the connected legal distinction between tax evasion and fraud?”

I believe that the events of 2009 (IRS v. UBS litigation, anti-tax haven offensive by the Organization for Economic Cooperation and Development (OECD), multiple Tax Information Exchange (TIE) Agreements with “tax haven” nations, etc.) have demonstrated that banking secrecy vis-a-vis governmental tax authorities is no more. While banking privacy and  asset protection vis-a-vis private civil creditors may be ongoing, there can be no expectation of banking secrecy in the context of tax reporting and disclosure.

With respect to the Swiss distinction between tax evasion and tax fraud, I likewise think that the distinction has limited ongoing viability. Under the new Swiss-U.S. TIE  signed in 2009, Switzerland would be obligated to disclose information to US authorities in connection with a US audit or investigation, whether civil or criminal. The tax fraud / tax evasion distinction under Swiss law would not be relevant to Switzerland’s obligation under the TIE to provide information to US authorities.

How will the US respond if the UBS deal falls flat on a Swiss legal technicality?

If UBS takes the position that Swiss law (i.e., the recent court ruling) prevents disclosure of the account information, the US would argue that UBS is in violation of the settlement agreement. The US might also argue that UBS is in contempt of court, and the US would move to re-open the civil litigation against UBS in US Federal Court in Miami. UBS’ defense to the contempt of court charge would be impossibility of performance, i.e., that it is impossible for UBS to comply and hand over account information, because the Swiss court ruling prevents UBS from complying.

I am not certain that impossibility of performance would be a persuasive argument to the US Federal Judge. Inability to hand over confidential banking data, because of Swiss law, has been UBS’ position all along, even before the settlement. Thus, the argument that UBS’ hands are tied is not new. We have had a hint as to the Judge’s possible response when, prior to the settlement, he asked attorneys for the US government whether they would be prepared to enforce a ruling by seizing UBS assets within the US.

UBS’ presence in the US gives rise to another vulnerability, independently of the legal proceeding. The US government could revoke UBS’ banking license, which would have far-reaching effects for UBS, its customers, and the international banking system.

Could we expect demands for data from other Swiss banks in the future?

Absolutely. We believe that the UBS is the “tip of the iceberg”. The 15,000 US taxpayers who have already made voluntary disclosure to the IRS about their foreign accounts, and the US taxpayers who have been indicted for tax fraud and have been cooperating, have provided the IRS with much information about other banks, in Switzerland and other countries, which have aided and facilitated tax non-compliance by US taxpayers. The IRS will not stop with UBS, but will use its public relations victory against UBS as leverage to pursue other banks. We know that other banks, including HSBC and Julius Baer, are already the subjects of investigation.

How does the issue of  Germany buying bank data change the international tax evasion landscape?

There is no absolute banking secrecy. Theft of banking data by a bank employee is one threat, and it’s not a new threat. Multiple threats to banking secrecy exist, on many levels.

The first level is institutional; for example, a bank like UBS disclosing account information to a tax authority like the IRS. The second level is governmental: the relaxation of banking secrecy laws, TIEs and increased transparency of former tax havens like Switzerland, Liechtenstein, etc.

A third level is the individual level: renegade bank employees looking to sell confidential bank data for a price. But this is nothing new. In 1999, the head of Guardian Bank in Cayman provided banking data to the US government in return for leniency in his criminal prosecution. In 2008, an employee of LGT bank in Liechtenstein sold banking information to Germany. In 2009, an HSBC employee provided banking data to France.

Thus, a foreign government purchasing once-confidential banking data is not a new development. Rather, it highlights yet another threat to banking secrecy.

Is it justified for country A to flagrantly break laws because country B is encouraging people to violate country A’s criminal code?

This question seems more a moral question than a legal question, but the law does shed some light. Under the law in the US, stealing from a thief is still theft. In other words, focusing on the second crime, i.e., the purchasing of stolen bank data, is merely a distraction from the first crime, i.e., facilitating the violation of tax law. The focus on country A’s actions do not undo the first issue, which is country B’s encouragement of tax violations.

Is there any chance that this issue will blow over if Switzerland sits tight?

I don’t think so. The IRS obtained tremendous public relations in bringing UBS to settlement, and scared thousands of Americans to come forward and voluntarily disclose their offshore accounts. The recent Swiss court decision has undercut that momentum, and I don’t see the IRS allowing that situation to continue. Rather than “blowing over”, I think there will be tremendous diplomatic activity between the US and Switzerland. I also think that it is likely that the IRS will re-commence the litigation against UBS in federal court in Miami, in order to try to get additional leverage. This will continue to be an ongoing diplomatic and judicial issue.