SWISS BANKS ARE A HAVEN FOR TAX CHEATS: UBS GOT CAUGHT, HSBC FEELS THE HEAT, AND CREDIT SUISSE IS NOW UNDER INVESTIGATION

HSBC Holdings PLC is moving to mollify federal authorities investigating how the banking industry has helped U.S. clients evade taxes.

The global banking giant is cutting ties with wealthy American clients who bank offshore, as U.S. prosecutors turn up the heat on the bank to produce information about account holders who may be evading taxes, people familiar with the matter say.

A spokeswoman said the global banking giant will

"No longer offer wealth-management services to U.S. resident private clients from locations outside the U.S."

and that American clients

"Will be better served by our private banking teams in the United States."

At issue are hundreds of clients with accounts totaling as much as $100 million, said a person familiar with the situation. U.S. clients need roughly $5 million in assets to qualify for an HSBC private-client account, another person familiar with the situation said.

The extraordinary move comes as the U.S. Justice Department and Internal Revenue Service intensify crackdowns on offshore tax evasion and look beyond the world of Swiss banking for institutions that might be providing places to hide money.

HSBC is ending the practice of serving wealthy American residents from locations outside the U.S. as a way of cooperating with the U.S. and avoiding the fate of rivals that were fined or threatened with prosecution for assisting tax scofflaws, the people familiar with the matter say. The Justice Department declined to comment.

In a letter sent earlier this month to U.S. customers who have accounts with HSBC India, the bank said it is terminating "private banking services to US persons and certain trusts and non operating companies connected to US persons." Customers have 30 days to close their accounts, according to the letter.

HSBC has been under Justice Department scrutiny since earlier this year, when U.S. prosecutors alleged HSBC India had helped U.S. residents get around paying federal taxes.

HSBC's move to cut off wealthy U.S. clients represents a retreat for an institution that made a splash in the private-banking business in 1999 with the acquisition of Republic National Bank of New York. A new IRS law taking effect in 2011 requires banks with U.S. taxpayers holding offshore accounts to meet stringent and expensive new reporting requirements.

An HSBC spokeswoman said a team of advisers "will help affected clients through the transition process."

HSBC's move could put its clients in a tough spot. Brian Rowbotham, an international tax specialist in San Francisco said. 

"It presents a significant challenge for many investors and business executives, given the short notice of termination." 

The HSBC move comes amid much broader government scrutiny on tax evasion. In 2009, Swiss bank UBS AG admitted to conspiring to defraud the U.S. government of billions in taxes by helping wealthy Americans hide taxes. As part of a "deferred prosecution" agreement avoiding criminal charges, UBS turned over the names of 4,000 U.S. account holders and paid a $780 million fine for its role as part of a settlement between the U.S. and Swiss governments.

Credit Suisse Group AG said Friday that the Justice Department had notified the Swiss bank that it was a formal target of a criminal investigation into how Swiss institutions allegedly helped U.S. citizens avoid paying taxes. The bank said it was cooperating with the probe. Settlement talks between U.S. and Swiss governments aimed at resolving a wide-ranging U.S. investigation into the Swiss banking system are continuing.

In January, prosecutors indicted a New Jersey businessman on charges he conspired to evade U.S. taxes by hiding offshore accounts in India maintained by HSBC.   He pleaded guilty. And in late June, a federal grand jury indicted an HSBC client living in Wisconsin for allegedly filing false tax returns and hiding more than $8.7 million in offshore accounts. The client, a neurosurgeon and a U.S. citizen, pleaded not guilty.

The Justice Department in April asked a San Francisco federal court to let the IRS serve a "John Doe" summons on the Indian unit of HSBC seeking information about possible tax fraud "by people whose identities are unknown." The status of the summons isn't clear.

Federal authorities asked HSBC India to send letters to customers encouraging them to come forward to the IRS, and HSBC has complied with that request via a separate set of letters, said people familiar with the situation. The IRS is offering reduced but still stiff penalties for U.S. taxpayers with secret offshore accounts who voluntarily report them, but that program is to end Aug. 31. The government said it believed "many" of these clients "have hidden their accounts from the IRS."

COMMENTARY:    I love Swiss chocolates and cheese with holes it it, those beautiful Swiss Alps, the athleticism of Swiss downhill skiers, the precision of Swiss cutlery, and I thought Swiss banks represented the highest standards of ethical banking and professionalism, but I was so wrong about the latter.  It is turning out that Switzerland is a haven for tax cheats.

Foreign Bank Account Reporting (FBAR) Program 

So what's the fuss all about?  It's simply this.  The IRS is attempting to close an estimated $300 billion tax gap that has been plaguing the federal government for the past several years.  In 2009, after Barack Obama came into office, the U.S. government budgeted $20 billion to form the Foreign Bank Account Reporting (FBAR) program designed to thwart efforts by US citizens to commit income tax evasion by underreporting U.S. income and then hiding the cash related to the unreported income in undisclosed Foreign Bank Accounts.  In addition the IRS has expanded in sheer size by 40% over the last few years in response to this issue.  And boy, oh boy, the FBAR program is doing a splendid job.  

UBS

On February 18, 2009, UBS, the largest bank in Switzerloand, in a striking admission, said that from 2000 through 2007, some of its private bankers and managers had “participated in a scheme to defraud the United States” and the I.R.S. by helping American clients set up and conceal offshore accounts. 

The IRS discovered that UBS regularly sent its private bankers into the United States to solicit business from and maintain business with U.S. citizens and residents. Those UBS private bankers made thousands of client solicitations and contacts within the United States. The scheme involved falsifying or not properly obtaining or filing certain tax forms required of both the bank and its clients.  Those contacts earned UBS AG more than $100 million in fees. At the same time, that business cost the U.S. Treasury hundreds of millions of dollars in unpaid taxes. 

The bank agreed to pay the IRS $780 million to settle a sweeping federal investigation into its activities.  The U.S. Justice Department had been investigating about 19,000 UBS accounts, but the New York Times reported that the bank may only release a couple hundred names.

The IRS later asked a federal judge to demand that UBS turn over the names of around 52,000 clients. UBS "vigorously challenged" the new request.  Justice Department prosecutors suspected that from late 2002 to 2007, UBS helped American clients illegally hide $20 billion, letting them evade $300 million a year in taxes.  In July 2009,  UBS finally agreed to turn over the names of 52,000 U.S. citizens with accounts at UBS.  According to the IRS, those accounts had a cumulative value of $14.8 billion.

HSBC: How It All Came Down

In August 2010, HSBC, Europe's biggest bank,  reported that data on up to 24,000 Swiss client accounts had been stolen by a former employee and ended up in the hands of authorities in France, where the ex-worker fled.  U.S. authorities supposedly negotiated with the French through a treaty request to get the names of any U.S. HSBC clients involved.  

At that time, Linda J. Osuna, an IRS Special Agent in Charge of the Tampa Field Office, told reporters that the U.S. was building a case against an unnamed foreign bank (HSBC), which she declined to name, for "the same behavior that got UBS in trouble."  

HSBC, in an apparent attempt to avoid deeper Justice Department investigation, criminal charges and fines similar to those suffered by UBS, has given in to U.S. pressure.  However, the names of U.S. citizens whose HSBC bank accounts will be closed have not been provided to U.S. authorites. And, from appearances, HSBC gets away scott free.  

So the question remains, how many of those HSBC customers will step forward and finally comply with FBAR reporting requirements before the November 1, 2011 amnesty deadline, and put themselves at the mercy of the IRS for any wrong doing.  And, how many of those scoundrels will simply take their money and deposit it into another scruplous bank in Europe or flee to another foreign country.

Credit Suisse Now Under Investigation

I thought I was through writing about IRS investigations of these Swiss banks, but as luck would have it, noooo it's not.  I just discovered that on July 14, 2011, Credit Suisse received a letter from the IRS and is the target of an investigation in to FBAR violations.  In case you are counting, this is the third major Swiss bank under investigation by the IRS.  

A target letter is a big deal.  It probably means that a considerable level of investigation has already been done and further criminal investigation is warranted.

Credit Suisse is unlikely to be the only institution in the IRS’s sights.  It has been reported that U.S. authorities are conducting a broader industry inquiry.  Credit Suisse points out that it has obligations under Swiss law, and those are not small.  Credit Suisse says it will continue to cooperate with the U.S. authorities, subject to those rules.

IRS Penalties If Found Guilty of Violating FBAR Regulations

The IRS has given FBAR violators amnesty against criminal prosecution through November 1, 2011, in otherwords you could avoid prison time.  So what exactly happens to a U.S. citizen found to be in violation of FBAR reporting violation?   I went to a lot of trouble to find this out, and it depends if you voluntarily turn yourself in and admit to having an illegal foreign bank account or are later discovered to be a FBAR violator after the amnesty date expires.

Even with amnesty, the amounts owing are still quite painful. In a Frequently Asked Questions released by the IRS on May 6, 2009, the IRS provides the following example based on a $1 million unreported foreign account balance and $300,000 of unreported interest covering five years:

Voluntarily Disclosure Under Amnesty

If the taxpayer comes forward and has their voluntary disclosure accepted by the IRS, they …would pay $386,000 plus interest. This includes:

• Tax of $105,000 [assumes a 35% tax bracket] plus interest.
• An accuracy-related penalty of $21,000 (i.e., $105,000 x 20%). 
• An additional penalty, in lieu of the FBAR and other potential penalties that may apply, of $260,000 (i.e., $1,300,000 x 20%).

In short, the taxpayer under amnesty pays the U.S. 129% of the total income that was earned. However, this is mild when compared to what the government explains will be demanded without amnesty and $300,000 of total unreported income. In short, the amounts owing will almost two times the entire account balance and accumulated unreported income:   

Disclosure After Amnesty Period Expires

If the taxpayer didn’t come forward and the IRS discovered their offshore activities, they face up to $2,306,000 in tax, accuracy-related penalty, and FBAR penalty. The taxpayer would also be liable for interest and possibly additional penalties, and an examination could lead to criminal prosecution.

The civil liabilities potentially include:

• The tax and accuracy-related penalty, plus interest, as described above. 
• FBAR penalties totaling up to $2,175,000 for willful failures to file complete and correct FBARs (2003- $100,000, 2004 - $100,000, 2005 - $100,000, 2006 - $600,000, 2007 - $625,000 and 2008 - $650,000).
• The potential of having the fraud penalty (75 percent) apply.
• The potential of substantial additional information return penalties if the foreign account or assets is held through a foreign entity such as a trust or corporation and required information returns were not filed.

Note that if the foreign activity started more than six years ago, the IRS may also have the right to examine additional years.

If these monetary amounts were not enough, here is the IRS description of the criminal charges without the amnesty program:

Possible criminal charges related to tax returns include:

• Tax evasion (26 U.S.C. § 7201), 
• Filing a false return (26 U.S.C. § 7206(1)). 
• Failure to file an income tax return (26 U.S.C. § 7203) 
• The failure to file an FBAR and the filing of a false FBAR are both violations that are subject to criminal penalties under 31 U.S.C. § 5322.

A person convicted of tax evasion is subject to a prison term of up to five years and a fine of up to $250,000. Filing a false return subjects a person to a prison term of up to three years and a fine of up to $250,000. A person who fails to file a tax return is subject to a prison term of up to one year and a fine of up to $100,000. Failing to file an FBAR subjects a person to a prison term of up to ten years and criminal penalties of up to $500,000.

Ugly isn't it?!!

FBAR Violators Renouncing U.S. Citizenship

I can't believe the extent well educated, intelligent and professional U.S. citizens (okay, they are crooked U.S. citizens) will go to hide their money earned overseas in foreign bank accounts.  In fact, some of these punkasses have gone as far as to renunciate their U.S. citizenship in order to avoid filing the required Report of Foreign Bank and Financial Accounts (FBAR) report and avoid prosecution.   Now that's what I called dedication to crime.  According to the IRS, 1,534 Americans renounced their U.S. citizenship.

Keep in mind that the FBAR is just getting started. It has taken about a year to hire and train investigators, setup the organization, gather evidence and conduct investigations, and targeted banks have not exactly been very cooperative, so it is just recently that the full extent of FBAR violations are beginning to surface.  

UBS, HSBC and Credit Suisse are not small banks. According to Global Finance Magazine's "World's 50 Biggest Banks" for 2010, ranked according to assets, HSBC is #3 ($2.364 trillion), UBS is #20 ($1.301 trillion), and Credit Suisse is #27 ($1.001 trillion).  

I look forward to reporting on the developments concerning the IRS's investigation of Credit Suisse, the newest member of the Swiss tax cheat banks.  

Courtesy of an article dated July 20, 2011 appearing in The Wall Street Journal Business, an article dated February 18, 2009 appearing in The New York Times, an article dated July 20, 2011 appearing in Forbes, and an article appearing in HGExperts.com

 

Comments

[diane]

I agree with your thoughts here and I really love your blog! I've bookmarked it so that I can come back & read more in the future.

[merchant account]

This article is so much informational about processing Rates analytic for offshore credit card merchant accounts and what to use it for. Actually I am thinking to open a merchant account in UK so that I can make easy transactions and payments there.

[Anon]

Are you willfully not reading what I wrote?

I didn't say you'd made up the $10k reporting requirement. I said you invented a connection between these renunciations and the crime of failure to report it. You imply that everyone who renounces is a tax cheat. Plainly that's not the case, even though you'd like it to be so in order to bolster your flimsy arguments.

Note that under the "amnesty" the US will generously fine an accidental American -- that is, someone who is for some reason unaware that they are a US citizen -- a mere 5% of their assets. OVDI FAQ 52. Proud? Your country should hang its head in shame.

Finally, ask yourself whether an exponential rise year on year of US citizens wishing to break their ties with the US sends a good or a bad message to the rest of the world?

[Tommy]

Not making stuff up at all. The facts are there, if you care to check it out yourself. The law says if you have more than $10K in a foreign bank account, you are supposed to report this to the IRS. I didn't make up that law. The least you could've done is identified yourself. Oh,Yes, I am very proud of my country.

[Anon]

"In fact, some of these punkasses have gone as far as to renunciate their U.S. citizenship in order to avoid filing the required Report of Foreign Bank and Financial Accounts (FBAR) report and avoid prosecution. Now that's what I called dedication to crime."

You're making stuff up. How exactly do you conclude that these folk renounced (that's the word, by the way, not "renunciate") US citizenship to avoid prosecution for tax evasion?

Your country is the only developed nation on the face of the planet to tax its citizens even when they live abroad. You must be so proud.