The Swiss government has agreed to turn over 4,450 names of the more than 50,000 individuals who have accounts with UBS, whose identities were kept secret from the U.S. Internal Revenue Service. The U.S. hopes that many of the hitherto unnamed individuals with accounts at UBS or elsewhere will approach the authorities in the hope of being treated more leniently than otherwise might be the case. Indeed the U.S. government has a clever strategy in this regard.
Under U.S. law, “[e]ach United States person who
has a financial interest in or signature or other authority over
any foreign financial accounts, including bank, securities, or
other types of financial accounts, in a foreign country, if the
aggregate value of these financial accounts exceeds $10,000
at any time during the calendar year, must report that
relationship each calendar year by filing this report with the
Department of the Treasury on or before June 30, of the preceding year.”
A U.S. person’s failure to file a TD F 90-22.1 is not a matter of choice. “Civil and criminal penalties, including in certain circumstances a fine of not more than $500,000 and imprisonment of not more than five years, are
provided for failure to file a report, supply information, and for filing a false or fraudulent report.”
In the coming months, the U.S. government is likely to discover that UBS is not alone in holding the “off-shore” accounts of U.S. citizens. There is likely to be a ripple effect as money might be moved from one “safe” jurisdiction from a bank secrecy jurisdiction to another. It is unclear, however, whether this will succeed — but the demand for “private banking” services abroad for U.S. citizens is likely to decline.
After the U.S. enacted (i) the Patriot Act of 2001 with its anti-money laundering provisions after 9/11, and (ii) the Sarbanes-Oxley Act of 2003 after the Enron scandal, other countries adopted stricter laws to combat money laundering and to strengthen corporate governance. Most industrial countries allow the U.S. to take the lead in combating economic crime.
Similarly, the OECD Member-States eventually ratifying an Anti-Bribery Convention in 1997, requiring them to adopt legislation similar to that found in the 1977 U.S. Foreign Corrupt Practices Act, which prohibited the paying of bribes to obtain or retain business. Prior to the adoption of the OECD Convention, U.S. firms complained that they were competing at a disadvantage since they were prohibited from paying bribes, they could not deduct them as business expenses, as was possible in France and Germany.
This experience suggests that many existing tax havens as well as countries like Austria and Lichtenstein, will decide as Singapore has that being known as a place to park “dirty money” is a net negative. As the world’s secret wealthy become known, the question will arise how did they become so rich. Did they simply not declare earned income, or were they shills for others (e.g. corrupt political officials, transnational criminal organizations, etc.).
Within the U.S., this could have significant political ramifications. In the last 25 years, whenever the issue of increasing federal taxes were raised, the Republicans complained that the Democrats were engaged in “class warfare.” This in part explains why there is a cap on earned income for social security tax purposes or that all forms of income (e.g. dividends, earned, and interest payments were taxed at different rates).
Now columnists and journalists may start asking how did such a small segment of the population become so wealthy. This is an explosive question in today’s economic situation, where it it seems that more than one million mortgage borrowers will have their homes in the 2 years successive years. Certainly, those who can maintain off-shore bank accounts do not worry about the absence of universal health coverage.
This present situation raises many issues: (i) does the U.S. government have the will and resources to prosecute all those who violated the law; (ii) to what extent will U.S. and foreign law enforcement authorities study how the funds in these accounts can be linked to other crimes; (iii) to what extent will the U.S. Department of Justice be willing to engage in plea bargaining rather than seek the maximum penalties; (iv) to what extent will American lawyers want to be associated with defending the interests of wealthy criminals at a time of economic hardship; and (v) will U.S. politicians come to the aid of their financial backers.
The U.S. is one of the few countries in the world that tax its citizens who work abroad. Perhaps some of those with off-shore bank accounts simply felt that if they paid taxes in their country of residence, why should they be subject to U.S. taxes. One might sympathize in instances where someone is a dual national or due to the falling dollar, they their living expenses have shot up. I would wager that there are few such cases with respect to individuals with accounts at UBS, but it may be true elsewhere.
It is worth noting that that the criminal RICO (Racketeer Influenced and Criminal Organizations) Act, 18 U.S.C. s. 1961-68, has both criminal and civil provisions.
It has very broad reach. Although originally enacted to deal with organized crime, the way it is written essentially allows it to be used against corporate entities and their personnel.
Professor William S. Laufer of the Wharton School wrote an excellent book called “Corporate Bodies and Guilty Minds.” Interested individuals will find it fascinating.
The U.S. Internal Revenue Service has assigned a large number of people to investigate the beneficial owners of the off-shore bank accounts described above.
Since Civil RICO allows for treble damages, if the federal government does not aggressively pursue all matters that it arguably should, persons victimized by criminal conspiracies should have standing to pursue their own cases.
Private plaintiffs may not be constrained by a shortage of resources or political constrains in efforts to vindicate their rights. This is yet another example of how the private sector is often a useful ally in law enforcement — for example in economic crimes such as securities fraud.
One thing is certain, those who work in the economic crime area should be kept busy for years to come.
<<The piece appeared in the RGE Monitor at http://www.rgemonitor.com/financemarkets-monitor/author_name/eburger/Ethan-S-Burger>>
