Peter Macfarlane & Associates

Only a couple of days ago I commented on the case going on in the US at the moment involving UBS, the international banking giant headquartered in Switzerland. Today, more news emerged. UBS publicly apologized to the US senate for helping Americans avoid taxes. Furthermore, they promised to cease providing offshore banking services to Americans.

As I have just written for The Q Wealth Report, however, we need to drill down a little deeper behind the usual hysteric media reports. My initial interpretation of the news is that it’s one big publicity stunt.

UBS has a significant business in the USA which has absolutely nothing to do with offshore or tax evasion. That is why they have to toe the line and apologize. The same senate report also pointed the finger at another bank, LGT, which has no significant presence in the US and has therefore been much quieter on the matter. There might be a lesson there.

Second, UBS has both US regulated and US-unregulated banking business. Again, heavy US presence. UBS are not withdrawing from their wealth management and private banking service for US clients. What they are doing is asking American clients to transfer business from branches in Switzerland to the entities which are subject to US regulation.  “UBS Wealth Management Americas continues to operate as it always has and is not affected by today’s announcement, except that some clients who used to have their accounts in Switzerland may transfer their accounts into that business,” the bank said in a statement quoted by Reuters.

In other words, if as an American you had a bank account in UBS in Switzerland covered by Swiss law, you are now going to be asked to move that account to the business known as UBS Wealth Management Americas which is fully under the jurisdiction of the IRS and the SEC, or to one of two other UBS entities subject to similar regulation. (Needless to say, don’t do it!)

Reuters reports, quoting Mark Branson, chief financial officer for UBS Global Wealth Management and Business Banking: ‘While UBS is winding down the business of providing offshore banking and securities services to U.S. residents, there will be “no new accounts opened.”‘ What is perhaps new policy is that ‘client advisers based in Switzerland will not be allowed to travel to the United States “for the purpose of meeting” with U.S. clients.’

Actually, this is nothing new. For years, the doors of Swiss banks have basically been closed to Americans. I would imagine that the affected account holders have either had their accounts for many years, or they are Americans who actually went to Switzerland, enlisted the help of a local, and opened accounts. It is not as if just any American could have easily opened one of these controversial accounts anyway. Of course, money talks.

The system above is quite routine procedure in other European banks. Jyske Bank of Denmark, which  I’m choosing as an example based on their recent presentation at an offshore event in Panama, have also set up an SEC-regulated asset management subsidiary to deal with their existing and new American clients.

I’m actually quite sure UBS has not been actively encouraging evasion of American taxes. Working in the offshore business, I would notice such things. There are banks that are “guilty” and UBS is certainly not one of them. UBS are being targeted because they are big, (80,000 employees worldwide) high profile, and most of all an easy target due to their US businesses. There might have been one or two isolated cases of UBS employees going that extra step trying to help individual, extremely wealthy clients in a customer service capacity.

There might also have been American clients who actively sought services in Switzerland which, by anyone’s normal ethical and moral standards, would have been provided under Swiss law. But in that case, it was the individual taxpayers who were doing wrong if they failed to declare the accounts, and it doesn’t seem to me appropriate to suggest that UBS are somehow responsible for enforcing American laws in Switzerland. But of course, in the real world they are, appropriate or not.

Here’s a good one:  “We can’t get every bank in front of us to do what they did,” said Senator Carl Levin of Michigan, who led the attack on UBS, claiming surprise after they stood in front of the committee and apologized. Yeah right, Senator, that’s why you picked on UBS in the first place!

I also have anecdotal evidence that UBS was not directly seeking the business of American tax evaders. A private banker I know from Austria who flew transatlantic late last year to visit us in Panama, by complete coincidence met two different UBS employees on different legs of her journey. She told me that UBS was trying to “offload” its US clients back then, and they even promised to send some to her!

Here’s something else which deserves comment from the news reports:

“Client identity is generally protected from disclosure under Swiss law,” Branson said. But those protections do not apply in connection with an investigation of tax fraud and when requests are presented to the Swiss government through legal channels, he said.

Those words are very carefully chosen. What Branson did not say is that Swiss law does not regard failure to declare as tax fraud. US authorities will be forced to show wilful tax fraud, for example creation of fake invoices, before they can penetrate the secrecy of the Swiss accounts. They know that, Branson knows that. It is all politics and show.

So basically what will happen is the UBS Swiss accounts in question will quietly be closed and transferred to other banks. Not much else will happen, but the US government will consider it a success in their political propoganda war on tax havens.

If you do happen to be one of the persons affected, or if you are worried your bank could be next on the hitlist, talk to a suitably-qualified and experienced professional… but not one in your own country! You should definitely be looking at putting the assets into a trust or foundation if you haven’t already.

And, of course, get a subscription to The Q Wealth Report. We are committed to keeping you informed on such matters. You’ll find a lot of information on subjects like this in my Q Practical Offshore Banking Guide 2008, which is available for free download in the password-protected Members’ Area over at www.qwealthreport.com. You can learn more, too, at our Q Wealth Events such as Recipes for Success in Panama this November.

The US Department of Justice recently filed papers in a US Court seeking to allow the IRS to ask for what is known as a John Doe Summons, otherwise known as a ‘fishing expedition.’

They claim a violation of US law migt have occurred and are thereforeasking the court to let them get into Swiss bank records, violating bank secrecy and completely disrespecting Swiss law, to find any guilty party. In this case they are looking for possible tax fraud for by unknown parties that are US citizens.

The IRS is trying once again to make a foreign sovereign state comply with a requirement that would destroy the integrity of their banking system, built up over centuries. All so that maybe a handful of people can be convicted for tax fraud.

The Swiss have some bad tax treaties with the USA. The things that UBS did were apparently stupid - and worst of all, they did them inside of the USA at that which gives the USA jurisdiction. It appears as if Germany started a chain reaction when they obtained data stolen from a bank in Liechtenstein. For a regular person that would be a crime – possession of stolen property - but the Germans consider themselves to have an exemption from criminal statutes regarding possession of stolen property even when they knowingly buy the stolen property.

The Swiss Banks provide excellent service, but their jurisdiction (Switzerland) is faulty and has been faulty for some time. It was years ago that Bill Hill, of PT fame, wrote that Swiss banking secrecy had “more holes than Swiss cheese.” We have been warning people about the lack of real secrecy and privacy in Switzerland for years.

USA citizens, when accepted at all as clients by Swiss banks, have been asked to provide their social security numbers for some years, alongside signing a disclaimer and waiving bank secrecy rights. Other serious offshore banks never ask for this information. It is all based on the underlying tax treaty calling for cooperation in the instance of a person failing a false tax return by intentionally understating income on the tax return.

The use of the “John Does Summons” is unlikely to work with the Swiss authorities, which will reduce the case to a few individuals who the USA may have specific information about. The John Doe Summons does, however, serve its intended purpose which is to scare US citizens into full compliance. The mainstream media does not accurately report the facts, nor do they discuss the law. What the USA courts say or do still has little effect if any on what the Swiss government allows. This simply contributes to the atmosphere internationally making it very difficult for Americans to get offshore accounts in their own personal names. This makes IBCs and foundations more popular, and drives productive American citizens towards renunciation of citizenship and acquiring a second passport.

It’s no news that accountants have been drafted as spies in the “War on Privacy”. What’s new this week, though, is that the IRS is beginning to put pressure on the big international accountancy firms with presence in the US (Deloitte, KPMG and the like) to in turn apply pressure to their overseas associates who are auditing foreign banks - all to spy on US citizens!

This clearly breaks a whole raft of laws around the world. First of all, accountants auditing foreign banks are there to check up on the bank’s own accounts and compliance, not that of the bank’s clients. But apart from disrespecting bank secrecy laws, the IRS wants the auditors to disregard their legal and ethical professional secrecy obligations too!

According to an article on Tax-News.com, the US Government Accountability Office supposedly “identified USD19 billion flowing to countries that could not be identified, and USD7 billion flowing to individuals that could not be identified.” That is quoted as the reason for this latest intrusion. Now I don’t know about you, and I don’t have great confidence in the efficiency of governments, but the theory that 19 million dollars could just disappear from the USA and the government cannot figure out even what country it went to, doesn’t hold much water with me.

Naughty Foreign Banks!

“We are concerned generally by what we are seeing and hearing” about the conduct of some foreign banks, the IRS told the audit firms in an email, which was quoted by Bloomberg News in an article published on 3rd July.

In June, former UBS Banker Bradley Birkenfeld pleaded guilty to conspiring with an American billionaire real estate developer, Swiss bankers and his co-defendant, Mario Staggl, to help the developer evade paying USD 7.2 million in taxes, by helping to hide USD200mn of assets in Switzerland and Liechtenstein. Meanwhile, on 1st July, a federal judge in Miami issued an order authorizing the IRS to request information from Switzerland-based UBS about US taxpayers who may be using Swiss bank accounts to evade federal income taxes.

The so-called “Qualified Intermediary” (QI) program allows foreign banks to report certain details about their US clients to the IRS in return for a more lenient rate of withholding tax on client income. However, the big loophole is that the system covers individuals and not companies. Many wealthy clients of offshore banks have been encouraged (often by the banks themselves) to set up offshore corporations and foundatons to legally sidestep the reporting requirements.

While QIs participating in the program are audited by an outside audit firm, these auditors are there to ensure strict compliance with the letter of the law, not to report suspected cases of tax evasion or fraud.  But it is understood that the IRS is keen to draft the big six audit firms as global financial spies.