My last blog post discussed the disclosure of bank documents from Liechtensteinische Landesbank to the U.S. Department of Justice (DOJ). Today’s post offers additional comments as to why this is a significant event in terms of IRS enforcement and DOJ prosecutions related to offshore accounts.
The 2008 Liechtenstein-USA tax treaty was itself significant, because until that point, Liechtenstein offered very strong banking secrecy laws. However, in light of the events at that time – –
- DOJ success against UBS,
- erosion of Swiss banking secrecy laws,
- the OECD initiative against tax haven jurisdictions,
- the proliferation of tax information exchange agreements with many tax havens, and
- the theft of “secret” bank documents by an employee of Liechtenstein’s own LGT bank and sale to the German government
– – Liechtenstein saw the writing on the wall, so to speak, and realized that tax secrecy was a thing of the past and was no longer going to be tolerated by countries like the US, UK, Germany, etc.
However, while Liechtenstein agreed to tax information exchange and cooperation, Liechtenstein specifically did NOT agree to IRS “fishing expeditions” – – broad requests for information on a class of unknown taxpayers. Under the 2008 treaty, Liechtenstein was only to provide information if asked about a specific, known taxpayer identified by name. In other words “we are investigating John Smith, who we believe has an account at Bank XYZ” – that was an allowable request that would give rise to cooperation and exchange of bank information. “We want all records on all US taxpayers with accounts at Bank XYZ” – – that is “a fishing expedition” and would not give rise to cooperation and exchange of information under the treaty.
DOJ’s May 11, 2012 request to the Liechtenstein Tax Administration was not a specific request for information about known, named taxpayers. It was a broad request for unnamed, unknown taxpayers. And yet, the Liechtenstein Tax Administration is cooperating with this DOJ request.
Liechtenstein is cooperating with this DOJ request because, under U.S. pressure, and without any publicity, on March 21, 2012, the Liechtenstein Parliament passed an internal law and quietly amended the 2008 treaty, the result of which is that “fishing expeditions” are now allowed.
This is a game changer in terms of IRS/DOJ enforcement. It means that broad requests will now give rise to governmental assistance. It means that DOJ need not issue “John Doe” summonses, which require court approval, as DOJ did against UBS in 2008 and HSBC in 2011. Instead, DOJ can ask for, and presumably get, banking records quickly (in Landesbank’s case, one month), government-to-government. If Liechtenstein, formerly one of the world’s most secretive jurisdictions, can succumb to US pressure, it means that other countries will do so also.