United States of America vs. UBS: A Step Too Far?

Let's start from the facts: UBS (United Bank of Switzerland) is the world's largest money manager and has naturally developed that business in the United States. Being a Swiss bank, they offer not only US bank accounts but also Swiss bank accounts to their U.S. clients. Most foreign banks offer the same services in the United States. This is not illegal, neither is it tax fraud. Where the fraud starts is when U.S. taxpayers do not disclose the revenues they earn from foreign accounts. The United States is the only country that taxes worldwide revenues. Until June 30 of this year, foreign bank accounts had to be disclosed if they collectively reached $10,000 or more.

There are perfectly legitimate motivations for opening foreign accounts, partly due to the absence of specific international competencies of the U.S. brokerage community. However, for many U.S. foreign account holders, one of the key motivations is to avoid taxation. UBS had gone too far by building sophisticated mechanisms that allowed revenues to be concealed and substantial amounts of taxes to be avoided. For this, UBS paid $780 million in fines to the IRS and was forced to restructure its business on a model that no longer creates incentives for tax fraud. They also communicated the identity and information on about 300 US clients who are currently being sued by the IRS. Two were fined last week and the IRS is pursuing at least 150 more of them, with threats of jail sentences.

As everything seemed to be settled, the IRS sued UBS in Miami to obtain confidential information on 52,000 US account holders. This prompted the Swiss Government to step in because such communication would violate the laws of Switzerland and threatened to seize that information.

Eventually, the US and Swiss Governments came to a settlement whose terms remain secret, but seems to include the disclosure of a few thousand account holders and the case was sent for arbitration to the US regulator, FINRA. UBS and the Swiss Government will communicate information on 4,550 more accounts. Further changes to the Swiss banking secret regulations were agreed, but I would be very surprised if they were approved by the Swiss voters. (Such changes are submitted to the "votation" that takes place at least once a year in Switzerland.)

At the core of this lawsuit lies a much broader issue: the United States has behaved intrusively and has shown little respect for Swiss sovereignty. When I studied law (yes, I am a non-practicing lawyer as well) one of the key principles of international private law was the territoriality of law. The same applies to Governments' taxation powers. In the last few years, the United States has shown a growing tendency to ignore those principles and to exert its authority beyond its borders.

A recent example was the Sarbanes Oxley Act of 2002. While there was no reason to extend its application to foreign stocks, fears that U.S. companies would migrate to offshore centers led lawmakers to violate the principles of international law. I was in charge of the foreign companies listed on the NYSE at that time. It took a year to ensure that the SEC would apply this act in a way that would not create a conflict of law. Companies, even if they are listed in the United States, are first and foremost regulated by their national authorities. However, nothing could be done to prevent a wave of delistings of foreign companies from the United States. The net loser was the United States capital markets themselves. Sarbanes-Oxley gave a huge boost to the City of London, which became the place of choice for foreign listings.

Tax shelters have become a hot topic in international politics. President Sarkozy, Prime Minister Brown and Chancellor Merkel decided to make offshore tax shelters a key issue in the G20. The U.S. reluctantly followed course, not because they are indifferent to tax evasion, but because they know that no international venue can do anything in this matter. The issue merely offered a convenient opportunity for the Europeans to point fingers outside of their borders. The decision was taken to insolate those tax shelters that, according to the OECD, were on the black list. Three months later, it was announced that no country in the world is on that blacklist any longer. They all had "taken measures" to apply the OECD principles.

While I condemn tax fraud as illegal and immoral, I do not believe that the United States has the right to extend its tax arm beyond its borders. This attitude is most unnerving even to our allies. The IRS is empowered and entitled to prosecute U.S. tax frauds and U.S. taxpayers, not to pursue changes in foreign rules and regulations or to threaten foreign financial institutions (unless they commit such frauds).

There are legitimate reasons to limit taxation powers to national borders. Imagine the reverse: taxes would be levied on individuals and companies worldwide in a completely disorderly way. All countries negotiate tax rulings or rebates to attract foreign investors. Taxation is a global competitive weapon. They need to feel confident that international legal norms and national sovereignty will be respected.

It is also not in the interest of the United States to disrupt international tax laws. The fact that New York has lost its global capital market leadership is not favorable to the country. Those activities are taxed and produce substantial IRS revenues. Delistings have hurt U.S. tax revenue. Ask Mayor Bloomberg how he would balance its budget without the taxable revenues of foreign companies and employees in New York.

Last but not least, it is a question of respect: sovereign states are sovereign states. They deserve to see their sovereignty recognized. The Swiss Government candidly admitted today that they accepted this unprecedented move to avoid a sovereignty conflict with the United States.

The IRS statement that it is a "historic agreement" says it all. Diplomacy, not the assertion of tax powers abroad, is the way to address international tax issues. This settlement is a shame for all parties: the US Treasury for having exercised its power rather than its right to force that settlement that does not respect the basic principles of international private law. The Swiss Government for having opened the way for future such investigations and bent its own laws under U.S. pressure. UBS betrayed their customers who trusted their advice to rescue their U.S. knowing that the IRS will seek imprisonment. There is no winner when fundamental rule of law and customer loyalty are not respected. This will have major ramifications outside of Switzerland and the United States.

Comments

[jake1492]

It's not about money earned from foreign accounts, it's about money laundered into foreign accounts without income tax being paid on it first. It seems likely that the author understands this but neglects to mention it. He seems quite concerned about the USA not respecting Swiss sovereignty, I wonder if he is as concerned about the Swiss respect US sovereignty. Keep in mind, what we are talking about is tax cheats who cheat you and me out of hundereds of billions of dollars per year. The author also touts certain "principles" of international law which his interpretation conveniently somehow justifies these bold criminals simply from paying income tax. Apparently it's OK to pay virtually no income tax if you make billions of dollars per year, whereas if you make $100,000 per year you can expect to pay in the neighborhood of 30%. Nail these guys to the wall.

[wm1066]

What do you want to bet this guy is on that list?

[Troubledwawa]

Why can't these UBS bank account holders just pay their taxes?

[FloresdelaHoz]

Switzerland is worlds's most sophisticated rogue nation. The mafia are choir boys compared to Swiss bankers. UBS should be expelled from doing business in the US. If UBS had been caught doing this in Brazil, there would be indictments of Swiss banking executives. Brazilians don't play around with foreign criminals, they indict them and their local attorney if there is clear evidence of tax evasion. Tax evasion is not a crime under Swiss law. It is a crime everywhere else in the West (including LatAm).

The next time a Swiss banks is caught breaking our laws, we should terminate our tax treaty with Switzerland. This would severely harm their economy for their disrespect of American law. The IRS deserves great credit for having the courage to take on such a powerful institution and their powerful American clients (rich democrats and republicans).

The American oligarchy not only doesn't fight and die to defend the Stars and Stripes, some want to evade paying taxes on their income. Shameful and unpatriotic!

[Ozarks]

Your statement "The Swiss Government for having opened the way for future such investigations" indicates that the US had the Swiss Government cold on violating the "Rule of Law" bud

[strangelet]

So, you "condemn tax fraud as illegal and immoral", but you think it's wrong to enforce the laws against it. Apparently, you also think that violating loyalty to customers is on a moral par with persistently violating tax laws. Hmm.

BTW, it may have escaped your attention, but the US has a pretty robust history, post WW2, of using various kinds of pressure to influence (and sometimes replace) other governments. If you really think the Treasury's negotiated settlement with the Swiss is so bad a use of power, I wonder what you thought of the installation of the Shah, the overthrow of Allende, Iran-Contra, intervention in the Balkans, various embargoes, the invasion of Iraq, etc, etc.

Or is it only bad when the IRS does it?

[AJH]

An agreement was entered into by an administrative agency of the US federal government with another foreign government for that government to provide account records of US citizens. Seeing as both the US federal government­(Executive authority) and the Swiss federal government are the internationally recognized legally competent entities to enter into binding agreements with each other no foul.

Now there may be a question of whether the settlement constitutes a treaty that should be submitted to congress for approval. I'ld like to see the republicans try and vote that down actually.

If it was a state prosecuting the case I'ld agree but then it wasn't. And since the swiss government interceded it also wasn't an agreement with the company.

[jsgaetano]

UBS was caught promoting tax evasion... and we knew over 50,000 instances of them doing so.

Last time I checked, it was illegal to help people break the law. And since UBS has a presence here in the US, it means they are in our country, breaking our laws.

It's amazing how many people are shedding tears for tax dodgers. Typical Goopers.

[WorkingClass]

Poor people are forced to pay their taxes. Rich people should do the same or go to prison. Why do the Marines always have to go to hell holes like Afghanistan. Lets send them to beautiful and prosperous Switzerland.

[mikep]

"There are perfectly legitimate motivations for opening foreign accounts, partly due to the absence of specific international competencies of the U.S. brokerage community.­"

Certainly there are. But there are absolutely no legitimate reasons for any individual or company to not want their foreign (or other) accounts disclosed so that regulators can make sure that no laws are being broken. The only possible reason that anyone would support continued secrecy of financial transactions is so that they can engage in illegal activities. That is why all honest businesspeople around the world strongly support transparency and disclosure of all financial transactions. It is absolutely essential if we are to regulate and oversee international corporations. The argument about sovereignty is just a red herring, and is being used to support obsolete and outdated policies that once allowed the rich to avoid responsibility for their actions.

As far as disclosure and transparency violating "basic principles of international private law", there is no such thing. There is no democratically elected international legislature or government with the power to pass any legislation, and no democratically elected executive or judiciary to enforce such laws. The myth of international law is just something used by giant corporations to avoid having to obey the law, and it's time we called them on it. The myth of "international law" is something created by the elite as a way of furthering their power, but it has no legitimacy.

[woodsywizz]

An article like this makes me feel sorry for the people who make billions from America and it's opportunities, then refuse to honorably support the same nation which made them wealthy.

[TomTheAlmostUgly]

He's defending the "right" of tax cheats to not pay their legal obligation. Boo freaking hoo for the four thousand or so names that UBS will turn over to the IRS.

This sure wouldn't have happened during Bushie's eight years.

[jsgaetano]

Darn right. Conservatives are all in favor of zero accountability.