Switzerland and Beyond: DOJ's Mounting Pressure on Cross-Boarder Tax Evasion

February 8th, 2012

About three years ago, the U.S. Internal Revenue Service (IRS) caught wind that Swiss bankers from Swiss banking giant, UBS, were traveling to the United States and systematically offering wealthy Americans the opportunity to evade taxes. They also learned UBS formed offshore non-U.S. companies for investors’ assets and then engaged in an aggressive cover-up to conceal these activities.

After an intense investigation by the IRS, the United States Department of Justice (DOJ) pursued both criminal and civil charges against the giant Swiss bank. Federal prosecutors dropped criminal charges eighteen months later, however, after the bank admitted to fraud and conspiracy, paid a $780 million fine, and satisfied DOJ prosecutors that it had dismantled its offshore banking operations.

In August 2009, UBS agreed to a settlement with DOJ on the civil charges and as part of the deal, offered to hand over the names of 4,450 tax evading Americans to the IRS. For a moment, it looked like the Swiss government—in a grasping act of self-preservation—would step in and forbid UBS from handing over the names. But at the last minute, the two houses of Swiss Parliament agreed to stick to the deal.

The historic vote laid the groundwork for more legal action by the United States against several other Swiss banks—likely what the Swiss had feared.  These included Credit Suisse, Switzerland’s second largest bank, and HSBC, which is based in London, but has extensive Swiss operations under its Private Bank. There are now at least eleven Swiss banks under criminal investigation by the Justice Department’s tax division.

But DOJ’s approach and tone has shifted in recent months. Early last week, for the first time ever, “U.S. authorities have charged a bank rather than individuals with helping Americans evade taxes.” The bank was Wegelin & Co.; it is Switzerland’s oldest private bank.  According to the indictment filed last week, Wegelin helped Americans evade U.S. taxes on more than $1.2 billion in assets and after DOJ’s prosecution of UBS, “deliberately set out” to capture its counterpart’s lost cross-boarder illegal banking business.

Bryan Skarlatos, an attorney with Kostelanetz & Fink in New York, noted the indictment “shows the [United States] is willing to go after Swiss banks themselves if they don’t turn over names of U.S. taxpayers who are account holders.” It also puts pressure on the Swiss government to agree to a settlement involving all Swiss banks.

In many ways, Swiss banks have born the largest share of DOJ scrutiny on tax evasion. The reason for that is relatively clear—Switzerland holds nearly one-third of the estimated $7 trillion in global wealth kept offshore.

But what about the other two-thirds? Switzerland is not the only place in the world to hide tax-evading money.  Some spooked depositors are sending it somewhere even more secretive, like Singapore, Hong Kong, and the United Arab Emirates. So should—and by extension—when should the DOJ pursue banks in other jurisdictions as aggressively as it has in Switzerland?

Prosecutors are already investigating banks in Asian jurisdictions. None have seen the level of DOJ involvement with Switzerland, but that doesn’t mean they’re safe. Nor should they be. As long as these banks continue to aid American citizens violate American laws, they should be held accountable. While Switzerland may hold a bulk of the world’s offshore tax-evading deposits, if DOJ pursues only the Swiss, they risk pushing the deposits to other, more secretive havens. So the answer is yes: DOJ should pursue tax evaders in other countries. And they should probably do it soon.

Written by Ann Hollingshead

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