Swiss Banking Secrecy is Fading; Americans with Non-Compliant Offshore Accounts Must Take Immediate Defensive Action
by Asher Rubinstein, Esq.1
Faced with a criminal tax prosecution by the U.S. government, a civil lawsuit by the I.R.S., and criminal indictments against some of its top managers for promoting tax fraud, UBS capitulated on February 18, 2009. In agreeing to a “deferred prosecution”, UBS will pay $780 million to the U.S. and disclose the names of Americans with undisclosed foreign accounts. If UBS fully complies, the U.S. will drop the criminal charges in 18 months. Contemporaneous with the February 18 settlement, UBS disclosed to US authorities the identities of some 250 American account holders. Thousands of additional Americans with undisclosed foreign accounts are still at risk of their identities being revealed by UBS in the civil lawsuit, which was not settled by the deferred prosecution. Various reports estimate that between 17,000 and 52,000 additional non-compliant accounts were created at, or by, UBS, containing both cash and securities.
In a further initiative to access those accounts and determine the identities of their U.S. owners, the day after agreeing to the deferred prosecution of the criminal case, the IRS sued UBS in the parallel civil proceeding for disclosure of account information. In addition, the Senate Permanent Subcommittee on Investigations is conducting hearings regarding the U.S. government’s efforts to uncover the identities of Americans with non-compliant offshore accounts. The Senate Subcommittee hearings will address other foreign tax havens and non-compliant foreign accounts, in addition to the specific initiative against UBS.
The intensity of the multi-pronged U.S. offensive against UBS is further demonstrated by three additional remarkable facts. First, the Swiss Financial Market Supervisory Authority apparently allowed UBS to disclose the American account holders, thereby ignoring long-standing Swiss bank secrecy law and tradition. Second, U.S. prosecutors were given the account information without going through the normal procedure whereby the request for account information is submitted to a Swiss court of law, which then adjudicates whether or not the information should be released. Third, the account holders were not notified before the banking data was released, a further procedure that was ignored. In overcoming these once formidable legal and customary hurdles, the U.S. demonstrated its resolve and ability to discover the identities of Americans with non-compliant offshore accounts.
Credit Suisse and HSBC are also under investigation for promoting U.S. tax fraud, and will likely follow UBS in revealing U.S. client banking information, as will other banks, as the U.S. investigation widens.
UBS’ surrender is the latest event in a continuing, and strengthening, campaign to eliminate bank secrecy and crack down on non-compliant offshore accounts owned by Americans. In 2007, Senator Levin, together with then-Senator Obama, introduced a bill in the Senate to prevent tax shelter abuses and increase disclosure requirements for assets held in offshore jurisdictions. Stop Tax Haven Abuse Act, S-681. President Obama is expected to introduce a law to further crack down on non-compliant offshore accounts. The law will likely include additional measures to reveal the U.S. owners of “secret” offshore accounts. After revealing the American owners of the offshore accounts, the next step is to prosecute them for criminal tax fraud. The failure to timely and properly disclose an interest in an offshore account can lead to large fines and penalties. If the lack of disclosure is deemed intentional, criminal prosecution for tax fraud and jail time is a frightening possibility.
Beneficial owners of undisclosed foreign accounts (including accounts held in the name of nominees) must evaluate their options and take immediate steps to minimize the risk of I.R.S. criminal prosecution for tax fraud.
Option A: Convert to a Tax-Compliant Structure
Our firm has long counseled proper tax disclosure with respect to foreign accounts and the use of tax-compliant strategies to minimize U.S. taxation on foreign assets. We also advise clients on the legitimization of non-compliant offshore assets. We counsel clients with regard to the proper steps to transform a non-compliant offshore account into one that complies with current U.S. law. Although we cannot erase a non-compliant past, we can ensure full compliance going forward. Such steps may significantly reduce the chance of discovery and prosecution for previous violations.
Option B: Pre-emptive, Anonymous Negotiation and Disclosure
Additionally, if you currently have an interest in a non-compliant offshore account, you may consider voluntary disclosure of that interest before the I.R.S. discovers it. Such a pre-emptive disclosure is best made by qualified legal counsel, experienced in offshore compliance and in I.R.S. negotiations. We can approach the I.R.S. on a hypothetical “no-name” basis, demonstrate proper current compliance and negotiate on your behalf to avoid criminal prosecution and reduce fines and penalties for past non-compliance. Although fines and penalties may be significant, they pale before the consequences of an I.R.S. criminal prosecution. We have a very successful track record with the I.R.S.
If you are one of the thousands of American taxpayers with a foreign account that you thought was secret, you have very little time to bring it into compliance. Given that UBS has caved in and already revealed the identities of some U.S. account holders, we can expect that UBS, Credit Suisse, HSBC and other banks will provide a complete list of U.S. account holders in the near future.
Regardless of which strategy you pursue, failing to remedy a non-compliant offshore account puts you at serious risk of harsh penalties, including I.R.S. criminal prosecution, in the event of discovery. As recent events have proven, discovery is very likely. The window of opportunity is closing fast.