The SSRN abstract is:
This article examines the recent series of criminal prosecutions against tax professionals and offshore bankers. These criminal cases, brought against the largest Swiss bank (UBS), the oldest Swiss bank (Wegelin), one of the largest accounting firms in the world (KPMG), as well as numerous lawyers and accountants, was a dramatic shift for the U.S. Department of Justice. After decades of tolerating abusive tax shelters and tax haven banks, the Government changed its policy. However, rather than indicting the individuals and corporations who invested in tax shelters or hid money in offshore accounts, the Justice Department indicted the lawyers, accountants, and bankers who advised them. This article will analyze those prosecutions from a theoretical, historical, and practical perspective, and will examine the impact the new prosecution policy will have on the legal professional, the tax system, and international relations.
This is the first article to examine these issues, and it is a combination of my prior scholarship involving tax shelters and criminal tax matters, including my casebook TAX CRIMES. The article will be of great interest to anyone teaching or practicing in the areas of taxation, criminal law, and criminal theory. It will also appeal to those interested in the role of lawyers and other professionals within the legal system. It therefore should have wide appeal amongst faculty readers, as well as practitioners and policy-makers.The following is from the Introduction (footnotes omitted):
In this article, I will examine the government’s decision to pursue the professionals, instead of the clients the professionals represented, and the impact this revised prosecution policy has had on the tax system. In so doing, I will examine both the tax shelter and the tax haven prosecutions and analyze why these cases were brought by the government. I will also examine these cases in historical context and analyze whether they are unique to their facts or whether they are a turning point in tax prosecution policies. Finally, I will examine whether these investigations and prosecutions represent sound policy and whether changes in policy should be made going forward.
In Part I of the article, I will examine the history of criminal prosecutions in both the tax shelter and tax haven areas. This history demonstrates that very few people, whether taxpayer or professional, were charged criminally for investing in tax shelters or hiding money in tax havens. This tolerance by prosecutors led to their continued use and expansion. Part II will then discuss the recent criminal prosecutions brought against tax lawyers, accountants, and bankers for their role in assisting their clients and customers in evading taxes. These cases will provide the necessary backdrop for what appears to be a fundamental shift in prosecution policy.
Part III of the article will analyze the theory underlying criminal prosecutions. In this Part, I will show that federal prosecutors enjoy wide discretion as to whom to charge. Given this discretion, it is essential that line prosecutors are guided by clear prosecution policies and that those policies be consistently followed. These policies, while not crystalline, require prosecutors to determine the culpability of the person charged, including the person’s relative culpability in relation to other actors not charged; the deterrent effect (particularly general deterrence) that would result from the prosecution; the retributive effect of the prosecution, in particular whether the victim of the crime has been compensated and their injuries have been addressed; and whether the prosecution will serve to protect the integrity of the civil tax system.
Finally, in Part IV, I will examine whether the recent prosecutions are consistent with the criminal theory and the government’s prosecution goals discussed in Part III. I will argue that both the tax shelter and tax haven cases were generally consistent with criminal theory and the goals of prosecution policies and have for the most part been very successful. The most successful, indeed ingenious, aspect of the policy, whether intended or not, comes from the leveraging of general deterrence. By prosecuting professionals, rather than the taxpayers, the government has magnified the deterrent effect of the prosecutions. In so doing, the revised prosecution policies have fundamentally changed tax compliance.
That being said, the new prosecution policy is not beyond criticism. The tax professionals who marketed the tax shelters created the shelters and sold them to their clients as a prepackaged transaction at a handsome profit. Thus, without the professionals, no taxpayer would have invested in these shelters, and they have at least a colorable claim of relying on their professional advisor. By contrast, the tax haven banks are no more culpable (and arguably less culpable) than many of the U.S. taxpayers who hid money in those accounts, and who escaped prosecution. More significantly, while the tax haven prosecutions address the losses suffered by U.S. taxpayers, little has been done for the true victims of tax haven abuse – the developing world. I will provide a brief review of the devastating impact of tax havens on the developing world. Thus, while prosecuting bankers may make sense from a pragmatic standpoint, more must be done to protect the integrity of the tax system and to ensure that the injuries of the true victims of this conduct are redressed.The following is the Conclusion:
The decision to bring a criminal prosecution is one of the most significant decisions a government can make. In deciding to employ its limited prosecutorial resources against any person, the government must ensure that it is charging only clear violations of the law and that prosecution goals will be fulfilled by the indictment. Merely because the government can successfully bring a criminal prosecution does not necessarily mean that it should. In making decisions whether to prosecute, and not to prosecute, a determination of guilt by the defendant is not sufficient. Only those cases that satisfy all of the stated goals should be advanced.
Going forward, future investigations and prosecutions should focus more explicitly on the purposes for which criminal tax prosecutions are brought: to punish wrongdoers (the correct ones), to promote the integrity of the tax system (such as it is), and to redress the wrongs inflicted on the victims (all of them). While the tax shelter prosecutions satisfied each of these, the tax haven prosecutions did not; not because the offshore bankers were innocent, but because the prosecutions left so many problems unaddressed. Most banks, including U.S. banks, still do not provide information about their depositors to other governments. Trillions of dollars remain squirreled-away offshore, with much of that money coming from the countries least able to deal with the outflow of cash. Accordingly, despite the Senate Permanent Subcommittee on Investigation belief that there is “newfound international determination to contest tax evasion facilitated by a tax haven bank,”339 it does not appear that there is unanimity that bank transparency is an attainable, or even a desirable, goal. Until such unanimity can be reached, criminal prosecutions of offshore banks will be suspect.
That being said, significant progress has been made. The recent prosecutions of professionals have introduced – and proven – a powerful new tool for the government. Prosecuting professionals magnifies the deterrent effect of these prosecutions; shutting down the service-providers is more effectual than prosecutions against clients. Accordingly, where professionals of any kind facilitate criminal activity, focusing on the enablers should be a viable, if not the primary, target.