UBS, IRS and Swiss Cheese

Goody! Goody! Relishing in other peoples’ misfortune might seem a little devilish but with the unfolding battle between the U.S. Justice Department and Swiss bank UBS there’s a childish delight in me that wants the wealthy Americans who have gotten away with fraud and tax evasion for decades may get their just deserves.

The chapters that have taken place to identify those sly dogs of greed began in earnest in February when UBS agreed to pay the IRS $780M to avoid criminal charges for making it possible for a select class of Americans to avoid paying taxes on nearly $20B they have tucked away in offshore accounts. The initial 285 names provided by UBS were just the tip of the fraud claims as the U.S. sought to have nearly 52,000 Americans names divulged.

While negotiations were being held between UBS and the Justice Department, the Swiss government had been steadfast in swearing allegiance to hidden account holders, stating they wouldn’t allow the bank to hand over the names because Swiss secrecy laws specifically prohibits client disclosure. Since then, talks have been held to avoid the U.S. from filing suit against the Swiss government and taking the matter to court.

Earlier this year Jeffrey P. Chernick, owner of a New York-based company that represents toy manufacturers in China and Hong Kong, pleaded guilty to a charge of filing a fraudulent tax return in 2007 by concealing more than $8M in reportable income.
John McCarthy, who set up a manufacturing business in Hong Kong in 2003, funneled $1M in Swiss accounts. Both men face up to five years in prison, a $250,000 fine, back taxes, interest and penalties.

The Justice Dept. is clients the opportunity to “turn themselves in” by a Sept. 23 deadline to lessen the criminal charges against them. Penalties will be reduced to a maximum of 20% of their value while those who don’t disclose their assets by the deadline could face penalties of up to 50% of their average account balances held over the past three years. Fines are expected to be in the range of $4B.

The drama that befell Mr. Chernick unfolded when transactions were traced to a former UBS manager who had set up accounts with NZB, a smaller private bank in Zurich, with the belief that by doing so would subject clients to less scrutiny by the IRS. There was a tinge of espionage going on with many of the transactions done with bank officials traveling to the U.S. as tourists rather than consultants.

A Swiss lawyer and a director at NZB, who had worked as a private banker for UBS until 2002, have been indicted for conspiring to defraud the IRS. This will prove to be just the beginning of a long process to prosecute participants of the financial institutions that have taken part in tax evasion not only in the U.S. but many of the 27-country European Union. Italy and Germany have also initiated an amnesty program while the EU has negotiated a 35% tax rate to bank accounts in Swiss Banks.

In an agreement announced this past week, UBS will turn over to the Swiss Federal Tax Administration the names of 4,450 U.S. major accounts suspected of holding undeclared assets, giving the clients an opportunity to appeal to the Swiss courts before their names are released to the IRS, a process that may take years before full disclosure is realized.

The Organization for Economic Co-operation and Development website lists 38 ‘Jurisdictions Committed to Improving Transparency and Establishing Effective Exchange of Information in Tax Matters’. As of August 14 there are no longer any countries on the ‘Uncooperative List” although Costa Rica, Malaysia, the Philippines and Uruguay were recently removed from the list but have yet to pass legislation to achieve that status.

So, according to the OECD, there are longer any tax havens but the International Monetary Fund, Tax Research Org and the U.S. Stop Tax Havens Abuse Act have their own lists as does the Tax Justice Network and taxresearch.org, all of which are in dispute with the OECD claim. In 2005, estimates of offshore tax havens held $11.5 trillion in funds globally. Hit by the worldwide recession, the figure is now approximately $7 trillion socked away.

Still, smaller Swiss banks have been brash in an attempt to assure foreign clients that new strategies are being developed to keep their accounts hidden from future scrutiny. As thousands of account holders are moving huge amounts of funds out of Swiss banks and seeking legal representation from tax consultants.

As the IRS focuses on identifying tax evaders through a program called the Offshore Identification Unit, the names may not be well known but my spiteful joys will nonetheless be forthcoming.