Wednesday, December 30, 2009

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 article is here.  In the motion, Birkenfeld states his commitment to cooperating with the Government to pursue UBS clients.


  1. You note that "newspapers have reported that" Birkenfeld disclosed the information to the U.S. government in order to avoid prosecution. This shows that you can't believe all that you read in the papers. He shared this extensive information with the SEC, IRS, U.S. Senate and the DoJ back in 2007, the year before he was even charged. The DoJ hasn't asked him about these issues since June of 2008 according to his attorney.

    Even UBS CFO Mark Branson said before the U.S. Senate that Swiss banking secrecy cannot be used as an excuse to violate other laws. So I don't think that the U.S. would give a hoot over their concerns about "stolen" data, if indeed any data was stolen. In this case, it appears to be more knowledge of the UBS operation, its structure and methods that was shared with the U.S. government (as opposed to computer chips containing thousands of names of clients).

    By the way, the French made copies of all of the data before returning the "stolen" property to the "rightful owners".

  2. Anonymous,

    All of your points are well taken.

    Still, I would think that the Government would have some concern about "stolen" data. Let's suppose a Birkenfeld inspired case: Swiss Banker signs up US Depositor 1 and does all of the US related things Birkenfeld did, and Swiss Banker also helps US Depositor 2 with whom all he does is accept the deposit in Switzerland and has no U.S. activity such as Birkenfelds. US Depositor 1 is thus US "dirty" because of all the US activity other than merely having a Swiss bank account. US Depositor 2 is clean except for the mere fact of having a Swiss bank account.

    Can Swiss Banker disclose and the IRS use both US Depositor 1 and US Depositor 2?

    If Swiss Banker can disclose both and the IRS can use it, then it is open season.

    However, I think the US might say it can use the disclosures about Depositor 1 but not Depositor 2. As to Depositor 2, the US will have to get whatever it can under the treaty in order to use it. Perhaps.

  3. I'm not sure how to suggest a new thread topic, but I hope you'll delete this comment and use it to start a new thread/comment by you for discussion.

    If I correctly understand the 50% FBAR penalty in criminal cases, it is based upon 50% of the highest account value. But doesn't this overpenalize those who left money overseas relative to those who transferred it back into the U.S.? Look at this example...

    For example, if someone has an overseas account with $1,000,000 and makes 10% every year, but takes out the 100,000 profit every year to sneak it back into the U.S., the account will never grow above $1,000,000 and after 10 years they will have snuck $100,000 each year into the U.S. They will pay an FBAR penalty of $500,000.

    But, if someone has an overseas account with $1,000,000 and makes 10% every year (or $100,000), but leaves it over there, at the end of 10 years they will have $2,000,000. They will pay an FBAR penalty of $1,000,000.

    The way they are calculating the penalty is penalizing the people who left their money overseas more than those who engaged in more egregious activity by bringing it back into the U.S.

    The income tax is the same, but the FBAR penalties are wildly different. You get a 50% discount for worse behavior effectively.

    Feel free to delete my comment and/or present it as your own idea or reshape it to start a new thread/topic. I just want to start a discussion on this if I'm correct and hear your thoughts.

  4. Anonymous,

    I will post the above suggestion as a separate blog item later today (hopefully), and, of course, reference you (whoever you are). Feel free, of course, to correspond with me at my email address -- -- but your anonymity may then be compromised.

    For those wishing to comment on Anonymous' comment, hold your comments until I can put that into a separate blog entry and then start the discussion around Anonymous' comment in that separate blog entry.

    Jack Townsend

  5. regarding the french use of stolen swiss bank data: newspaper in europe report that despite that france will give back the data (whatever that means), france does not excluded using the information to prosecute french tax evadors.
    a similar case with stolen bank data hit a liechtenstein bank earlier; the data was passed to the german tax authrorites (possibly even bought) and then used to prosecute.

  6. To followup on your comments about improperly obtained data, how does today's news that Swiss federal courts ruled that the Swiss FINMA regulator "broke the law when it ordered UBS AG to give data on 255 of the bank’s clients to the U.S. last year". While the 4,000+ names later disclosed were legally disclosed, what do you think this implies vis a vis the 255 names? For example, is this evidence just as tainted as the evidence which was stolen in the LGT case a couple of years ago?

  7. Sorry for the double post.
    Here's the link to the story


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