Post by Sapphire Capital on Jul 22, 2008 3:58:37 GMT 4
Monday, 21 July 2008
Senate subcommittee takes aim at offshore tax havens.
“Follow the money,” Deep Throat’s counsel to Woodward and Bernstein in All the President’s Men, is a critical piece of advice relevant not only to investigating political scandals, but the uncovering of criminal and terrorist networks.
Since 9-11 legal, technological and forensic tools have given law enforcement and counter-terror officials far better means than ever before to follow the global money trails that supply established and burgeoning terror operations. Major blind spots, however, still exist, most troublingly in the offshore tax havens which allow large amounts of money to escape documentation.
Last week the Senate Homeland Security and Governmental Affairs Committee’s Permanent Subcommittee on Investigations released a major report entitled Tax Haven Banks and US Tax Compliance which provides the most detailed picture to date both of the progress made in tracking rogue offshore tax monies and how far we still have to go. Click here to see full report.
Outlining the scope of the problem the report begins by observing that, “Over the past 30 years, dozens of countries have declared themselves tax havens and have authorized nominal or no taxation of assets transferred to their financial institutions by residents of other countries.” Among the key venues for this activity, the report notes, are Switzerland, Liechtenstein, Cyprus, Liechtenstein, Panama and Singapore.
‘These countries,” according to the report,“have enacted laws enabling nonresidents to form at minimal cost companies, trusts, foundations, and other legal entities to hold their assets in financial accounts protected by secrecy laws and practices enforced with criminal and civil penalties. Trillions of dollars in individual and corporate assets have since been deposited at financial institutions within these tax havens, too often as part of an effort by the beneficial owner to hide assets and dodge taxes in their home jurisdictions.”
The report focuses on two case histories, involving LGT Bank in Liechtenstein and UBS AGof Switzerland, that, it says, lend insight into how foreign banks work with US clients and execute their US tax compliance obligations.
“The LGT Group (“LGT”),” the committee discovered, “which includes LGT Bank in Liechtenstein, LGT Treuhand, a trust company, and other subsidiaries and affiliates, from at least 1998 to 2007, employed practices that could facilitate, and in some instances have resultedin, tax evasion by US clients. These practices have included maintaining US client accounts which are not disclosed to US tax authorities; advising US clients to open accounts in the name of Liechtenstein foundations to hide their beneficial ownership of the account assets; advising clients on the use of complex offshore structures to hide ownership of assets outside of Liechtenstein; and establishing “transfer corporations” to disguise asset transfers to and from LGT accounts.”
Continuing, the report notes that it was common for LGT to assign its US clients code words that they or LGT could invoke to confirm their respective identities, as well as advise clients on how to structure their investments to avoid disclosure to the IRS. Of the accounts examined by the Subcommittee, none had been disclosed by LGT to the IRS.
The report cites one dramatic example involving the shielding of tens of millions of dollars. “Jorge and Conchita Gonzalez, and their son Ricardo, operated a car dealership in the United States for many years,” the report recounts. “Beginning in 1986, LGT helped them form two Liechtenstein foundations and two Liechtenstein corporations primarily to assist their car dealership, which was located in Puerto Rico and specialized in selling Volvos. Two of these Liechtenstein entities provided financing for the dealership. One of the Liechtenstein corporations, Auto und Motoren AG (“AUM”), represented itself to Volvo as a “guarantor” of the dealership’s debts, apparently without revealing that AUM and the dealership were both beneficially owned by the Gonzalezes. As a result, Volvo sent AUM copies of the invoices it sent the dealership for the cars being purchased for sale in Puerto Rico. As disclosed in a civil lawsuit Volvo, the dealership, and the Gonzalezes had fraudulently overcharged for certain cars.”
“AUM had not merely taken receipt of the Volvo invoices,” the report continues, “ but had sent additional invoices to the dealership for selected cars, specifying a higher cost for them than Volvo had charged. Because of this “double invoicing scheme,” a jury found Volvo liable and assessed damages of $130 million.14 The court applied the same damages to the dealership and Gonzalezes. The dealership declared bankruptcy, and the Gonzalezes formed a new Liechtenstein foundation to better hide their assets. LGT documents show that the bank was aware of the litigation and, “[f]or the purpose of protection from creditors, who are litigating the family in Puerto Rico,” helped the Gonzalezes transfer assets from the prior foundation and companies to the new entity.”
UBS AG of Switzerland, one of the largest financial institutions in the world, also, according to the subcommittee, “ made a concerted effort from at least 2000 to 2007 to open accounts in Switzerland for wealthy US clients, employing practices that could facilitate, and have resulted in, tax evasion by US clients.”
“From at least 2000 to 2007,” says the report, “UBS maintained Swiss accounts for thousands of U.S. clients with billions of dollars in assets that have not been disclosed to U.S. tax authorities. Although UBS AG signed an agreement with the United States in 2001, UBS has never filed 1099 Forms reporting these accounts to the IRS, contending that these US client accounts fall outside its QI reporting obligations.”
Indeed, the subcommittee found, that of UBS’s estimated 20,000 accounts in Switzerland for US clients only roughly 1,000 are declared accounts and 19,000 are undeclared accounts that have not been disclosed to the IRS. The total estimated value of US client accounts was said to be about 18.2 billion in Swiss francs or about $17.9 billion of which the vast majority were undeclared accounts.
Further, “UBS not only allowed US clients to open undeclared accounts in Switzerland, it also took steps to ensure that its Swiss bankers serviced their US clients in ways that minimized disclosure of information to US authorities.”
These examples, while dramatic are, in the subcommittee’s judgment merely the tip of the iceberg. At the root of the problem are not just a few greedy international bankers but very loosely written US tax laws, which enable the owners of offshore corporations to shield their identities from IRS scrutiny, thereby providing U.S. persons a mechanism to exploit for sheltering their income from US taxation.
Under current US tax law, the report explains, corporations, including foreign corporations, are treated as the taxpayers and the owners of assets of their assets and income. Because the owners of the corporation are not known to [the] IRS, individuals are able to hide behind the corporate structure. Thus it remains alarmingly easy for US based operations to evade taxes by masquerading as foreign corporations.
Based upon its investigation and factual findings, the Subcommittee staff makes the following recommendations:
1. Strengthen Reporting of Foreign Accounts Held by US Persons. In addition to prosecuting misconduct under existing law, the Administration should strengthen the Qualified Intermediary Agreement by requiring QI participants to file 1099 forms for: (1) all US persons who are clients (whether or not the client has US securities or receives US source income); and (2) accounts beneficially owned by U.S. persons, even if the accounts are held in the name of a foreign corporation, trust, foundation, or other entity. The IRS should also close the “QI-KYC Gap” by expressly requiring QI participants to apply to their QI reporting obligations all information obtained through their know-your-customer procedures to identify the beneficial owners of accounts.
2. Strengthen 1099 Reporting. Congress should strengthen the statutory 1099 reporting requirements by requiring any domestic or foreign financial institution that obtains information that the beneficial owner of a foreign-owned financial account is a U.S. taxpayer to file a 1099 form reporting that account to the IRS.
3. Strengthen QI Audits. The IRS should broaden QI audits to require bank auditors to report evidence of fraudulent or illegal activity.
4. Penalize Tax Haven Banks that Impede US Tax Enforcement. Treasury should penalize tax haven banks that impede U.S. tax enforcement or fail to disclose accounts held directly or indirectly by US clients by terminating their QI status, and Congress should amend Section 311 of the Patriot Act to allow Treasury to bar such banks from doing business with US financial institutions.
5. Attribute Presumption of Control to U.S. Taxpayers Using Tax Havens. Congress should amend U.S. tax laws to create a presumption in enforcement proceedings that legal entities, such as corporations, trusts, and foundations, are under the control of the US persons who formed them, sent them assets, or received assets from them, where those entities are located or operating in an offshore secrecy jurisdiction.
6. Allow More Time to Combat Offshore Tax Abuses. Congress should extend from three years to six years the amount of time IRS has after a return is filed to investigate and propose assessments of additional tax if the case involves an offshore tax haven with secrecy laws and practices.
7. Enact Stop Tax Haven Abuse Act. Congress should enact the Stop Tax Haven Abuse Act to strengthen the United States ability to combat offshore tax abuse.
While at first blush the existence of secret financial networks designed to shelter assets of the super-wealthy might seem a bit far afield from counter-terror. The very loopholes the subcommittee has exposed, however, can and in all likelihood do allow rogue funding pipelines for international terror networks to flow undetected to and from US borders. Closing these porous zones will take the forging of a higher level of coordination between DHS, intelligence agencies, law enforcement and the IRS going forward.
Senate subcommittee takes aim at offshore tax havens.
“Follow the money,” Deep Throat’s counsel to Woodward and Bernstein in All the President’s Men, is a critical piece of advice relevant not only to investigating political scandals, but the uncovering of criminal and terrorist networks.
Since 9-11 legal, technological and forensic tools have given law enforcement and counter-terror officials far better means than ever before to follow the global money trails that supply established and burgeoning terror operations. Major blind spots, however, still exist, most troublingly in the offshore tax havens which allow large amounts of money to escape documentation.
Last week the Senate Homeland Security and Governmental Affairs Committee’s Permanent Subcommittee on Investigations released a major report entitled Tax Haven Banks and US Tax Compliance which provides the most detailed picture to date both of the progress made in tracking rogue offshore tax monies and how far we still have to go. Click here to see full report.
Outlining the scope of the problem the report begins by observing that, “Over the past 30 years, dozens of countries have declared themselves tax havens and have authorized nominal or no taxation of assets transferred to their financial institutions by residents of other countries.” Among the key venues for this activity, the report notes, are Switzerland, Liechtenstein, Cyprus, Liechtenstein, Panama and Singapore.
‘These countries,” according to the report,“have enacted laws enabling nonresidents to form at minimal cost companies, trusts, foundations, and other legal entities to hold their assets in financial accounts protected by secrecy laws and practices enforced with criminal and civil penalties. Trillions of dollars in individual and corporate assets have since been deposited at financial institutions within these tax havens, too often as part of an effort by the beneficial owner to hide assets and dodge taxes in their home jurisdictions.”
The report focuses on two case histories, involving LGT Bank in Liechtenstein and UBS AGof Switzerland, that, it says, lend insight into how foreign banks work with US clients and execute their US tax compliance obligations.
“The LGT Group (“LGT”),” the committee discovered, “which includes LGT Bank in Liechtenstein, LGT Treuhand, a trust company, and other subsidiaries and affiliates, from at least 1998 to 2007, employed practices that could facilitate, and in some instances have resultedin, tax evasion by US clients. These practices have included maintaining US client accounts which are not disclosed to US tax authorities; advising US clients to open accounts in the name of Liechtenstein foundations to hide their beneficial ownership of the account assets; advising clients on the use of complex offshore structures to hide ownership of assets outside of Liechtenstein; and establishing “transfer corporations” to disguise asset transfers to and from LGT accounts.”
Continuing, the report notes that it was common for LGT to assign its US clients code words that they or LGT could invoke to confirm their respective identities, as well as advise clients on how to structure their investments to avoid disclosure to the IRS. Of the accounts examined by the Subcommittee, none had been disclosed by LGT to the IRS.
The report cites one dramatic example involving the shielding of tens of millions of dollars. “Jorge and Conchita Gonzalez, and their son Ricardo, operated a car dealership in the United States for many years,” the report recounts. “Beginning in 1986, LGT helped them form two Liechtenstein foundations and two Liechtenstein corporations primarily to assist their car dealership, which was located in Puerto Rico and specialized in selling Volvos. Two of these Liechtenstein entities provided financing for the dealership. One of the Liechtenstein corporations, Auto und Motoren AG (“AUM”), represented itself to Volvo as a “guarantor” of the dealership’s debts, apparently without revealing that AUM and the dealership were both beneficially owned by the Gonzalezes. As a result, Volvo sent AUM copies of the invoices it sent the dealership for the cars being purchased for sale in Puerto Rico. As disclosed in a civil lawsuit Volvo, the dealership, and the Gonzalezes had fraudulently overcharged for certain cars.”
“AUM had not merely taken receipt of the Volvo invoices,” the report continues, “ but had sent additional invoices to the dealership for selected cars, specifying a higher cost for them than Volvo had charged. Because of this “double invoicing scheme,” a jury found Volvo liable and assessed damages of $130 million.14 The court applied the same damages to the dealership and Gonzalezes. The dealership declared bankruptcy, and the Gonzalezes formed a new Liechtenstein foundation to better hide their assets. LGT documents show that the bank was aware of the litigation and, “[f]or the purpose of protection from creditors, who are litigating the family in Puerto Rico,” helped the Gonzalezes transfer assets from the prior foundation and companies to the new entity.”
UBS AG of Switzerland, one of the largest financial institutions in the world, also, according to the subcommittee, “ made a concerted effort from at least 2000 to 2007 to open accounts in Switzerland for wealthy US clients, employing practices that could facilitate, and have resulted in, tax evasion by US clients.”
“From at least 2000 to 2007,” says the report, “UBS maintained Swiss accounts for thousands of U.S. clients with billions of dollars in assets that have not been disclosed to U.S. tax authorities. Although UBS AG signed an agreement with the United States in 2001, UBS has never filed 1099 Forms reporting these accounts to the IRS, contending that these US client accounts fall outside its QI reporting obligations.”
Indeed, the subcommittee found, that of UBS’s estimated 20,000 accounts in Switzerland for US clients only roughly 1,000 are declared accounts and 19,000 are undeclared accounts that have not been disclosed to the IRS. The total estimated value of US client accounts was said to be about 18.2 billion in Swiss francs or about $17.9 billion of which the vast majority were undeclared accounts.
Further, “UBS not only allowed US clients to open undeclared accounts in Switzerland, it also took steps to ensure that its Swiss bankers serviced their US clients in ways that minimized disclosure of information to US authorities.”
These examples, while dramatic are, in the subcommittee’s judgment merely the tip of the iceberg. At the root of the problem are not just a few greedy international bankers but very loosely written US tax laws, which enable the owners of offshore corporations to shield their identities from IRS scrutiny, thereby providing U.S. persons a mechanism to exploit for sheltering their income from US taxation.
Under current US tax law, the report explains, corporations, including foreign corporations, are treated as the taxpayers and the owners of assets of their assets and income. Because the owners of the corporation are not known to [the] IRS, individuals are able to hide behind the corporate structure. Thus it remains alarmingly easy for US based operations to evade taxes by masquerading as foreign corporations.
Based upon its investigation and factual findings, the Subcommittee staff makes the following recommendations:
1. Strengthen Reporting of Foreign Accounts Held by US Persons. In addition to prosecuting misconduct under existing law, the Administration should strengthen the Qualified Intermediary Agreement by requiring QI participants to file 1099 forms for: (1) all US persons who are clients (whether or not the client has US securities or receives US source income); and (2) accounts beneficially owned by U.S. persons, even if the accounts are held in the name of a foreign corporation, trust, foundation, or other entity. The IRS should also close the “QI-KYC Gap” by expressly requiring QI participants to apply to their QI reporting obligations all information obtained through their know-your-customer procedures to identify the beneficial owners of accounts.
2. Strengthen 1099 Reporting. Congress should strengthen the statutory 1099 reporting requirements by requiring any domestic or foreign financial institution that obtains information that the beneficial owner of a foreign-owned financial account is a U.S. taxpayer to file a 1099 form reporting that account to the IRS.
3. Strengthen QI Audits. The IRS should broaden QI audits to require bank auditors to report evidence of fraudulent or illegal activity.
4. Penalize Tax Haven Banks that Impede US Tax Enforcement. Treasury should penalize tax haven banks that impede U.S. tax enforcement or fail to disclose accounts held directly or indirectly by US clients by terminating their QI status, and Congress should amend Section 311 of the Patriot Act to allow Treasury to bar such banks from doing business with US financial institutions.
5. Attribute Presumption of Control to U.S. Taxpayers Using Tax Havens. Congress should amend U.S. tax laws to create a presumption in enforcement proceedings that legal entities, such as corporations, trusts, and foundations, are under the control of the US persons who formed them, sent them assets, or received assets from them, where those entities are located or operating in an offshore secrecy jurisdiction.
6. Allow More Time to Combat Offshore Tax Abuses. Congress should extend from three years to six years the amount of time IRS has after a return is filed to investigate and propose assessments of additional tax if the case involves an offshore tax haven with secrecy laws and practices.
7. Enact Stop Tax Haven Abuse Act. Congress should enact the Stop Tax Haven Abuse Act to strengthen the United States ability to combat offshore tax abuse.
While at first blush the existence of secret financial networks designed to shelter assets of the super-wealthy might seem a bit far afield from counter-terror. The very loopholes the subcommittee has exposed, however, can and in all likelihood do allow rogue funding pipelines for international terror networks to flow undetected to and from US borders. Closing these porous zones will take the forging of a higher level of coordination between DHS, intelligence agencies, law enforcement and the IRS going forward.