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Tax Cheats Need A New Place To Hide Their Money

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CARIBBEAN TAX SHELTER
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For the discerning American tax evader, there once was no more desirable location than Switzerland to stash cash.

Swiss banks were prized for their ironclad secrecy, and Swiss bankers for their impeccable English and reassuring manner. The country is easily accessible by air. The skiing is terrific.

But a long-running campaign by United States investigators to crack the famously secretive system -- an effort that will soon lead to additional fines and disclosures of American account holders -- has significantly eroded Switzerland's appeal, offshore experts say. More than ever, American tax evaders are choosing less familiar and potentially riskier locales to stash their money.

"Now you are looking at a 15-hour plane ride followed by a conversation with a guy with a parrot on his shoulder," said Jeffrey Neiman, a former federal prosecutor who worked on the first criminal case brought by U.S. authorities against a Swiss bank for aiding tax dodgers.

John Christensen, the director of the Tax Justice Network, said that tax advisers are promoting Singapore, Hong Kong and the Cayman Islands as alternatives to Switzerland. Deposits in these countries have increased significantly in recent years, though there is no firm data on growth.

All told, the nonprofit estimates that wealthy individuals are hiding between $21 trillion and $32 trillion in offshore accounts. This means that governments worldwide are deprived of hundreds of billions of dollars in tax revenue in an era of increasing austerity. The issue became fodder for debate during last year's presidential campaign, when then-Republican presidential nominee Mitt Romney's tax returns revealed investments through a blind trust in entities established in the Cayman Islands.

The Huffington Post recently reported that 82 of the top 100 U.S. companies, including banks like Citigroup, have stashed $1.2 trillion offshore to avoid paying taxes on it. These entities benefit from a friendly tax code, written in some instances by their own lobbyists, that allows money to be parked offshore indefinitely.

Individuals don't enjoy this same privilege. U.S. citizens are required to report and pay income and other taxes on all holdings, domestic and abroad.

While it is not illegal to have an offshore account, it is illegal to use those accounts to shield money from taxation. The hope of U.S. tax authorities is that Americans will eventually determine that the risk of sheltering their money overseas is not worth the risk of getting caught. There is some evidence that this strategy is working.

In 2009, UBS AG, a Swiss financial services company, reached a landmark deferred prosecution agreement with the U.S. government and agreed to turn over the names of more than 4,000 American account holders. In the aftermath, the Internal Revenue Service has netted more than $5 billion from 38,000 Americans who came forward under a voluntary disclosure program.

Since then, U.S. authorities have aggressively pursued Swiss banks they suspect of sheltering American tax cheats. A pending deal described by Justice Department officials on Wednesday between U.S. and Swiss authorities could provoke another surge of recovered tax dollars, Nieman said. The agreement would require Swiss banks to disclose records showing outgoing transfers from American account holders. Authorities likely will use that information to pressure financial institutions in other popular offshore destinations, he said.

"Americans with overseas accounts are finding it continually more difficult to keep their money out of the global financial system," he said.

A U.S. tax law in effect since 2010 requires foreign financial institutions to report information on U.S. account holders, a measure that is leading some banks to conclude it simply isn't worth the trouble of accepting American deposits.

Yet many banking secrecy experts said it is too soon to conclude that the tide is turning in favor of tax authorities. Tax cheats have become incredibly sophisticated. Offshore banking centers like the Isle of Man, between England and Ireland, permit account holders to sock away holdings behind an endless maze of trusts. Offshore bankers for the most part have no interest in aiding U.S. authorities.

"It is a very difficult slog as an investigator without help from banks on the other side," said Paul Pelletier, a federal prosecutor for 25 years, now in private practice at the law firm Mintz Levin.

And even in those situations when U.S. investigators have been able to build persuasive cases, they've had trouble winning in court.

In 2010, for example, the Securities and Exchange Commission filed a damning 78-page complaint against the founders of the Michaels craft store chain, alleging the two men disguised their control of accounts on the Isle of Man and in the Cayman Islands.

Samuel Wyly and Charles Wyly, the SEC claimed, used these accounts to trade shares in public companies without disclosing their ownership -- a $550 million insider trading scheme. They used the proceeds from offshore stock sales to purchase tens of millions of dollars worth of art and jewelry, according to the SEC.

But a federal judge recently dismissed some of the claims, ruling that the agency had waited too long to bring its case.

For now, Swiss banks remain the destination of choice for people outside the United States, with an estimated $2.1 trillion in their vaults, according to a report from the Boston Consulting Group. Hong Kong and Singapore banks combined hold roughly half that amount.

But with French and German investigators also probing Swiss banks, and the once-unthinkable disclosures to U.S. authorities now a reality, the Switzerland is undergoing something of an identity crisis, offshore experts said.

"Secrecy to the Swiss is what the First Amendment is to the United States," Neiman said. "This is a huge shock to their system. They are asking, 'what are we going to do now?'"

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