Tax Authority's Use of Stolen Tax Haven Bank Data

The risk that came home to roost in the UBS investigation was that a tax haven banker might disclose bank data to a tax authority. (By bank data, I include both documents and information that might be in a banker's brain.) Disclosure might be a crime in Switzerland and expose the banker to prosecution in Switzerland. But the banker may have strong inducements (threat of prosecution or even whistleblower rewards). (I don't know whether the country receiving and using such data would be morally or legally required to extradite such a fellow, but suspect that sufficient "outs" could be found to protect him from extradition.) The newspapers have reported that Birkenfeld, the UBS banker who disclosed such information in order to avoid (unsuccessfully) criminal prosecution or mitigate the consequence of criminal prosecution has also claimed a whistleblower reward for the taxes, penalties and interest the Government has derived from his disclosures.

It now appears that France also had a similar pattern where a bank employee "stole" Swiss bank (HSBC) data and disclosed it to the French. This created a big diplomatic spat between France and Switzerland, not dissimilar in kind to the spat between the U.S. and Switzerland. (For an article chronicling the spat, see here.)

Recent reports are that France and Switzerland have settled the spat, with France agreeing to return the data to Switzerland. I suppose that means that the French will not use the data. For a report of the settlement, see here.

This raises the question of whether the U.S. would use such data which clearly violated a tax haven bank country law. I don't know whether Birkenfeld disclose information or documents that clearly violated Swiss law, but suspect that he may have. And I suspect the IRS / DOJ used the information, at least for some purposes. I would suspect that the IRS / DOJ would be reticent about using information that was obtained in violation of law in the U.S. (e.g., an attorney's disclosure of confidential client information), but given the egregious fact pattern in which Birkenfeld was involved, could have felt that a more nuanced approach was better.

I have heard recently that a consideration for some people using tax haven banks that the tax haven country's bank system would fail if the information or documents were disclosed to other country's tax authorities. Whether or not that is true (i.e., the bank system would fail) is not the question. Some poeple believed and acted on the belief, because it made them feel safe. Now they have to worry that other tax haven bank employees may find sufficient inducements -- including both financial (whistleblower claims) and perhaps grudge -- to turn over data that tax authorities such as the IRS may and will use to herd taxpayers back into full U.S. tax compliance (with appropriate penalties, including criminal).

Finally, and although not directly on topic, I do note that Birkenfeld has recently filed a motion to extend the time for his cooperation with the Government and to reconsider his sentence.  That motion is here and a law.com article is here.  In the motion, Birkenfeld states his commitment to cooperating with the Government to pursue UBS clients.