Tax Fraud, Tax Havens, UBS and Bears ... Oh My!
The U.S. government has come to an agreement with UBS regarding a long-running tax fraud investigation. This has been a fascinating case to watch for several reasons that I will explain.
First, in the interest of full disclosure, I am a tax attorney and I deal with international transactions. As such, I am familiar with many of the jurisdictions involved.
Here is the settlement announcement:
The days of secret bank accounts are numbered for Americans after UBS and the U.S. and Swiss governments agreed to settle a dispute over whether the Swiss bank should be forced to disclose the names of 52,000 rich U.S. clients suspected of tax evasion.
Lawyers involved in the case said Wednesday's settlement could involve the disclosure to U.S. authorities of 3,000 to perhaps more than 10,000 names of American clients suspected of using offshore accounts to evade taxes.While details weren't disclosed, the parties have initialed agreements that will "take a little time to be signed in final form," Department of Justice lawyer Stuart Gibson told U.S. District Court Judge Alan Gold during a brief conference call.
The case is expected to be dismissed once a final agreement is in place. UBS and the government had reached a settlement in principle on July 31.
The deal is also expected to put European tax dodgers on notice as other governments are encouraged to seek out hidden accounts.
Let's back up in history to explain what's going on from a macro-perspective. Starting in the late 1990s, the OECD (Organisation for Economic Co-operation and Development) engaged in a very serious campaign to limit the impact and availability of offshore jurisdictions. The OECD reframed the debate claiming these jurisdictions engaged in "unfair tax competition." The reason is large industrialized countries were seeing their tax base move offshore and they needed to do something to stop it.
After 9/11 the U.S. and other industrialized countries started attacking off shore secrecy, arguing that it promoted terrorism and organized crime. This argument had traction. As a result, many jurisdictions have signed (and will continue to sign) "mutual assistance treaties." These treaties allow one country to access the financial records of an individual in another jurisdiction if the first jurisdiction meets certain standards. While the standards vary depending on the treaty, the end result has been a continued erosion in offshore secrecy. This trend will continue for the rest of our lives.
Let's come back to the present to explain what is going on. The U.S. -- like most industrialized countries -- has a world wide tax system. That means the U.S. will tax a U.S. resident's/citizen's income regardless of the income's location. In addition, we have a self-reporting system, meaning we tell the government where our money goes. When a U.S. citizen moves money offshore he has to file certain documents with the IRS to be in compliance with the law.
Secrecy helps to shield transfers from this system of self-reporting. Once money moves into a foreign bank account that is numbered, and it's located in a country that has strict secrecy laws, the probability is high that the money will fall into a tacking black hole. There will be some kind of record of the money leaving the country (via a wire transfer or a large withdrawal), but then it disappears. Once the money is in one secret bank account, the account holder will probably move the money to another country with strict bank secrecy laws:
On Friday, John McCarthy, a UBS client in California, agreed to plead guilty to one count of failing to file an annual report to the Treasury Department. A document filed with the plea shows the tax scheme relied in part on channeling funds to a Swiss UBS account held in the name of a Hong Kong entity, the second time accounts in the Asian financial hub have figured in these cases......
Between 2003 and 2008, Mr. McCarthy talked with UBS representatives and the Swiss lawyer in Beverly Hills and Switzerland to hash out details of his business, according to the statement. UBS representatives told Mr. McCarthy that "a lot of United States clients don't report their income and just take it off the top."
At one point, the Swiss lawyer recommended to Mr. McCarthy that he set up a Liechtenstein foundation that would serve as an umbrella over a Panamanian or Hong Kong corporation. That "would allow for an extra layer of privacy and help to conceal" Mr. McCarthy's identity, said the statement of facts.
Mr. McCarthy also transferred funds into other UBS accounts from a bank in the Cayman Islands, the statement says. He is due to appear in federal court on Sept. 14. He faces a maximum penalty of five years in prison and fines totaling $250,000.
"Mr. McCarthy has accepted responsibility for his conduct," said his lawyer, Steven Toscher. "He, like many other U.S. taxpayers, has made serious mistakes regarding the use of foreign bank accounts. Mr. McCarthy has decided to get right with his tax obligations and his case should serve as a strong signal to other taxpayers."
Jeffrey Chernick of New York, who pleaded guilty in July to filing a false tax return, also used a Hong Kong corporation and offshore bank accounts to conceal from the IRS commissions paid for sales, according to a statement of facts agreed to by the Justice Department and Mr. Chernick. A lawyer for Mr. Chernick declined to comment.
The UBS case has been fascinating from a legal perspective for two reasons.
1.) UBS settled the case. In doing so, they are possibly exposing themselves to Swiss lawsuits regarding a violation of Swiss banking secrecy laws. That tells us a very important fact: the U.S. government had UBS dead to rights.
2.) This is a major crack in the bank secrecy issue. Switzerland is the gold standard of secrecy. If they crack, expect the bank secrecy issue to fall faster than anticipated.
William K. Black: How the Servant Became a Predator: Finance's Five Fatal Flaws
Five fatal flaws in the financial sector's current structure have created a monster that drains the real economy, promotes fraud and corruption, threatens democracy, and causes recurrent, intensifying crises.
Ann Pettifor: Obama Must Tame Finance at G-20 Summit: Here's How
We are in the middle of a monumental political conflict with very high stakes. On one side: politicians and regulators battling for the interests of middle-class Americans. On the other: the banks.
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Well it's better than a stick in the eye. Personally I'd like to see the tree of liberty watered with the blood of these capitalist pigs but I'll settle for fines and jail...
Time to VIOD aggrements with the Swiss and new more open aggrements. The Swiss play both ends against the middle and we can not have that period !
Kick the Swiss out until a new aggreement is signed !
Before anyone comments on this article it would be helpful to read up on the tax treaty between the United States and Switzerland and the domestic laws of Switzerland. It can be found pretty easily with a google search and is somewhat necessary in order to have an informed discussion about what is going on here. Now that the list has been reduced significantly, it does not seem to be as much of a fishing expedition, but I certainly hope that all 3-10,000 names will be handled in accordance with our international treaty. Is there anyone who believes that we should not be held to our end of an agreement with the sovereign nation of Switzerland? The people arguing against releasing these names aren't necessarily trying to protect tax cheats (I'm sure there are some who are), but simply asserting that the government's power should be restricted in accordance with the international agreement that it entered voluntarily and followed for many years.
Thanks to the commenters! I also wondered about the other approx. 42,000 +/- supposed evaders, why they stopped at 3,000-10,000, and why the generosity from the IRS--especially when one of the "little people" could be audited for relatively minor issues. When all is said and done, I would love to know how many extra dollars are recovered. I agree--this is, indeed, fascinating stuff, and I'm amazed that MSM doesn't give it more air time and there isn't so much expressed anger and outrage (as there is, for example, on the still-fuzzy proposals of health care reform :-).
Maybe Obama could offer the proceeds from the collection of taxes from the tax cheats to fund the public option. This would allow the Republicans choice of supporting the public option or supporting tax cheats. However, I’m just waiting to see Phil Gramm’s name on the list.
so it's wrong for the guy who steals from the 7-11, but this guy broke the law, didn't pay taxes, and most likely won't get prison time?
seriously?
and all that tax money he avoided, how much did he invest and how much did he make of that?
he broke the law!!! he's a liar and a crook. he stole hundreds of thousands from the government. and there are at least 52,000 people who did this?
this is not a rare exception, with 52,000 people it becomes the rule for rich people.
Study says most corporations pay no U.S. income taxes - http://www
"The Government Accountability Office said 72 percent of all foreign corporations and about 57 percent of U.S. companies doing business in the United States paid no federal income taxes for at least one year between 1998 and 2005.
More than half of foreign companies and about 42 percent of U.S. companies paid no U.S. income taxes for two or more years in that period, the report said.
During that time corporate sales in the United States totaled $2.5 trillion, according to Democratic Sens. Carl Levin of Michigan and Byron Dorgan of North Dakota, who requested the GAO study."
But, as usual, no individuals were charged.
Apparently, from the DOJ's point of view, if you're a banker, facilitating and participating on a continuous basis in wire fraud, money laundering and tax evasion is just another service you can provide your customers.
And for this American taxpayers gave AIG trillions to give to UBS.
What a great investment Obama made.
One - he was charged.
Two - nobody knows what he did for a living
Three - AIG did not get trillions
Four - AIG did not give money to anybody
Five - if they sell it for a profit, it will have been a good investment.
One - A charge does not equal jail time ... what do you get for robbing a 7-11? Jail time.
Two - What does the source of the illicit profits matter? A lemonade stand in Jamaica bringing in $100,000 in proceeds is as taxable as drug dealing.
Three -- Billions v trillions, psycologically we are unable to estalish a differencee when the number of zeroes stretches the eyes apart ... it simply becomes "a big number."
Four -- Bankrupt companies don't pair their bills. AIG was bankrupt but managed to get their bills paid by the United States Treasury and the Federal Reserve. Essentially circumventing the rule of law in order to give personal friends a massive financial bailout ... yeah, they definitely gave money away.
Five -- If the USG sells AIG for a profit ... hmm, that seems nearly impossible. The value of a dollar at the time of the AIG "investment" and the value of a dollar when we see a penny back from that derivitive black hole will never compare to the return on investment that the government should be getting under a guaranteed return for being the lender of last resort. Just $85 billion in a Government bank would have created $850 billion in new loan money ... then the USG would collect the taxes from the successful new companies, jobs are created, and another insurance company rightfully takes AIG's assets in a bankruptcy sale.
Return to the Rule of Law.
Bankrupt companies MUST be
Sorry, no bankers were charged for their part in a continuing criminal conspiracy. Which is really the point. Obama administration is loathe to pursue corporate co-conspirators.
RICO.
Government gave AIG huge money to act as clearinghouse to pay many banks.
Bernanke "lost" a half trillion. How much went to UBS?
Likelihood of AIG profitable sale is low.
U.S. citizens and residents are taxed on their worldwide income. However, they are allowed a deduction or foreign tax credit for taxes paid in the other country. The concept is for total marginal tax rate not to exceed the highest rate in either of the countries. Therefore, the tax system is NOT more draconian than other tax systems; it does make it more difficult, in theory, for tax cheats and their enablers. Since the U.S. militarily defends the global business system, it is fair that individuals and entities be taxed on their worldwide income. If an entity is actually doing business in more than one country its tax burden is split between countries based on the degree of business activity as variously defined. However, in may instances the other country is a tax haven where NO LEGITIMATE business activity is being conducted. The U.S. Congress has allowed this form of tax cheating to go on for many decades.
52,000 tax cheats and only the names of 3,000 will be released. What is wrong with this picture? Why are not all 52K names being released?
This is another political cover-up to protect many in the top 1% from criminal tax evasion. There is no difference between Argentina and America. They are both owned and run by their respective Oligarchies.
Once again politicians haved tied up the hands of the IRS to protect tax evaders.
Why not simply read up on the subject before spouting off with inane accusations about oligarchs. Firstly, did you simply make it up out of thin air that politicians have tied the IRS hands, if you dont know, why comment. What is the cover up, by who?. The story has been covered in detail in the financial press.
Moreover, after decades of being unable to close this loophole, because of international treaty and YES!!! the independance of other countries, this administration has finally began to close this formidable loophole. One less country for people to hide their money in, But it does not come easy, as Switzerland has been a tax shelter for close to 400+ years, and is protected by it's own laws, for which the swiss hold very dearly. The germans, the french and others have been pressuring switzerland for decades to change their laws, to no avail. Here the IRS has scored a major victory, with the swiss agreeing to close all future avenues to American tax cheats, yet here you are just discovering the story for the first time complaining bitterly.
Why dont you credit where it is due, for people working hard to catch and prosecute these cheats, rather than stoning them.
The facts speak for themselves. 52,000 tax evaders and only 3000 names are going to be released.
What loopholes are you referring to here? What treaties are you refering to? Tax treaties? You are the one who writes about what you know very little about.
I have disagreed with Mr. Stewart before, and I do so again.
whatever source, is true.
It is not true, as Mr. Stewart implies that "most industrialized countries tax a citizen's income regardless of the income's location." His implication is that most industrialized countries have the same systems and tax the same income in the same way the U.S. does. This couldn't be further from the truth.
The U.S. has the most draconian tax system of any industrialized country on the planet. The U.S. taxes its citizens on any income, earned in any method, anywhere, all as if it were all earned in the US, at US rates. This practice is indisputably the exception in the industrialized world.
And, this US practice explains why American expatriates are at a competitive global disadvantage compared to expatriates from virtually every other industrialized country. Most industrialized countries do not tax income earned in another country by one of its citizens as it was earned in their home country. Thus, when US expatriates are competing with other industrialized country expatriates for a position in a very low tax rate jurisdiction, the US expatriates will need to make more money than their competitors to end up with the same amount net. This means that the employer will have to pay more, or the US expatriat will have to to less, and the competitive expatriate will be in a better position
The following is from Checkpoint, the database I use for international tax research:
Georgia: A resident company is subject to tax on its worldwide income, including capital gains. The rules described in A.1.3. generally apply.
Germany: Corporate income tax is imposed on worldwide income and capital gains.
Greece: Resident companies are subject to tax on their worldwide income and capital gains.
Ireland: Resident companies are subject to corporation tax on their worldwide income and capital gains.
Austria: A resident company is subject to tax on its worldwide income and capital gains.
Belgium: Resident companies are subject to tax on their worldwide income and capital gains.
Italy: A resident company is subject to corporate income tax on its worldwide income
Montenagro: Resident companies are subject to tax on their worldwide income and capital gains
Norway: Resident companies are subject to corporate income tax on their worldwide income, including dividends (but see below), interest royalties and capital gains (but see below).
I could go on, but I think you get the idea.
Most Western European countries exempt foreign source dividend income of a foreign subsidiary of a European company from local (European) taxation. This exemption is often referred to in tax language as "participation exemption".
Clever. But alas, we are discussing PERSONAL INCOME TAX are we not. Please provide the Checkpoint information for comparative PERSONAL INCOME TAX if you would be so kind.
The way the law reads, The US citizen pays the marginal difference between, what he did pay to local tax authorities and what he would have paid under U.S. tax law. So for clarity, if local taxes are 30% for said income bracket, and the U.S. equivalence is 45%, then that taxpayer owes uncle Sam 15% of their income.
The logic is that if your a citizen of the U.S. then your bound by the social contract of the country, to help fund it's operating budget, by paying your share of the tax burden irrespective of where or how you earned it, since you will be eligible for social security or Medicare, or the protection of the armed services, etc. If you chose to earn in Pounds, or Yen that is your choice, and an accommodation is made for the primacy of local tax jurisdiction, but you cannot shop jurisdictions. Their is always the choice to become a citizen of that jurisdiction and enjoy the services and benefits that go with citizenship of that nation.
The true scandal is about the ability of many U.S. corporations to HQ themselves in low tax jurisdictions yet still benefit from U.S. citizenry.
The simplest solution is to apply for citeznship for that couuntry, then yo dont have to pay uncle sam h dues. Otherwise, the support of the entire
Precisely. And the other OECD nationals only have to pay the 30% in total. That's my point. Using your example above and assuming $100,000 annual income-the US person would pay 30% to the local tax authorities, and 15% to the US under a tax treaty for a total of $45,000 in tax. THE OECD national would pay $30,000 to the local tax authorities. Period. Nothing to his/her home country. Thus, same job, same pay, the US national nets $55,000 while the OECD national nets $70,000.
The problem is that the local employer can get an OECD national for $100,000. And, that person will net $70,000. Paying the US national the same pay as an OECD national nets $55,000. So, the American must take a 22% net pay cut to take the position-only due to US tax policy.
The local employer would need to pay the US national $127,500 for the US national to net the same amount as the OECD national-$70,000 based on the US tax policy.
Thus, US tax policy makes US expatriates competitively disadvantaged when competing against OECD nationals. Which, is very stupid. As, I think we'd all agree, American expatriats are ambassadors, and we should promote their global employment. Not to mention that it is a positive payment into our economy.
A step in the right direction, but let's face it, that means about 42,000 to 49,000 tax cheats get off. Kind of makes your blood boil, no?
This just means more money will flow into countries like the Cayman Islands. The reason UBS was brought down was that they had billions of dollars of assets within the United States and thereby those assets could have been seized/confiscated by the United States. The banks in the Cayman Islands don't keep assets or operations inside the United States and therefore are completely outside U.S. jurisdiction. In other words, outside of military intervention, the Cayman Islands and similiarly situated countries and institutions are totally untouchable by the United States.
"In other words, outside of military intervention, the Cayman Islands and similiarly situated countries and institutions are totally untouchable by the United States."
And the disadvantage of looming over the Cayman Islands is?
The cayman islands and other caribbean states will be easier to pressure than Switzerland was. When anti-money launderiing laws were passed after 9-11 the caymans and others caved in very quickly, as a vast majority of their offshore funds come from the U.S. as compared to Lat Am clients. Switzerland on the other hand, could and has said no to the U.S. many times in the past.
But your larger point is true, new havens will pop up all the time, for this extraordinarily lucrative practice. The U.K. has been actively defending the Channel Islands, despite the centrality of London to the financial industry. But i can imagine the billions of Chinese Yuan that will need off-shoring n the future will keep many a haven employed in the future.
So what kind of taxes must a person owe to pay a fine of $250k? Is that the whole amount in back taxes plus a fine or is that just a portion of what he actually owes?
I pay a few thousand in federal taxes every year. But if I were to falsify my tax returns you can bet your sweet a$$ they would want all the money I owed as well as interest and penalties. Even when rich tax cheats get caught they get off easy.
And what kind of prison are we talking about? Maybe a Federal Super Max is too much but I really don’t want these people going to a country club prison where they get to play tennis or watch Bloomberg all day long.
You would have to read the entire plea agreement. One article said he owed "more than $200,000 in income taxes" on the transferred money. He would owe the back taxes plus interest and penalties on that actual amount. In addition, he would owe a penalty for failing to declare his foreign accounts to the IRS, which I believe is a pretty substantial penalty.
To get him to plead guilty, his lawyers would possibly be able to get the IRS to waive some of the amount he owed them. The IRS is hoping that the other people who were involved will see the example of what could happen to them, and voluntarily file amended returns in which they declare their income and pay the back taxes, penalties, and interest, and declare their foreign accounts. Avoiding 51,999 trials does save the IRS quite a bit of money.
Yes, it is $250,000 in fines plus:
Failure to file, 5% of the tax owed per month, up to a maximum 25% penalty
Failure to pay penalty is only 1/2% per month, and the maximum total penalty is 25%, so it can be ignored. However, there is a tax on subsequent assessments which tops out at an additional 25%, and this may apply in this situation.
Interest is "120 percent of the applicable federal midterm rate," which is lucky for tax dodgers, as it has been 2-3% this year.
Now the sort of money you have to earn to make this worthwhile is noticable, figure over a million in taxes saved. So they have to pay back the $1,000,000 of evaded taxes, plus $250,000-500,000 in penalties, plus interest (call is $30K, it is piddling), plus the $250,000 in fines, for a total of $1,530,000
Con't
Personally I think there should be a 1% per month penalty after the 25% cap, otherwise you are giving people a good reason to evade taxes. Why? Figure this is a worst case scenario since the more income you shield the less the $250K fine matters, you are risking an X% chance of paying $7 for a 100-X% chance of saving $4, if X is less than 36% you should evade taxes. In other words, congress has set penalties so that an intelligent person who is not constrained by honesty should evade taxes if the chance of getting caught is less than 36%!!!
Make it 10% and you will see a lot less cheating, and a lot more tax revenue.
Also, one of the articles said he was facing as much as 5 years in the pen.
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