Senate Staff Report on Offshore Tax Evasion for Hearings on 2/26/14 (2/25/14)

I previously blogged that the Senate Permanent Subcommittee on Investigations (a subcommittee of the Committee on Homeland Security and Governmental Affairs) would be conducting an investigation commencing tomorrow, February 26.  See U.S. Senate Committee Investigation of Crackdown on Offshore Tax Evasion (Federal Tax Crimes Blog2/20/14), here.  The Majority and Minority Staffs of the Subcommittee have produced a report, titled Offshore Tax Evasion: The Effort to Collect Unpaid Taxes on Billions in Hidden Offshore Account.  The report is available for download here.

The report is 181 pdf pages.  I cut and paste below the Executive Summary, pp. 1-8 of the report (footnotes omitted).  I will follow through with further comments on the balance of the report and the hearings and aftermath from time to time.

I. EXECUTIVE SUMMARY 

This investigation arises from the Permanent Subcommittee on Investigations’ longstanding focus on offshore tax abuse, including U.S. taxpayers using hidden offshore accounts. In 2008 and 2009, the Subcommittee held three days of hearings and released a bipartisan report examining how some tax haven banks were deliberately helping U.S. customers hide their assets offshore to evade U.S. taxes. The hearings focused on two tax haven banks, UBS AG, the largest bank in Switzerland, and LGT, a private bank owned by the royal family of Liechtenstein. On the first day of the hearings, UBS acknowledged its role in facilitating U.S. tax evasion, apologized for its wrongdoing, and promised to end it. It later entered into a Deferred Prosecution Agreement with the U.S. Department of Justice, paid a $780 million fine, and turned over about 4,700 accounts with U.S. client names that had not been disclosed to the Internal Revenue Service (IRS). It also committed to disclosing to the IRS all future accounts opened for U.S.  persons. 

Since then, significant progress has been made in the effort to combat offshore tax abuses. World leaders have declared their commitment to reduce cross border tax evasion. Tax havens around the world have declared they will no longer use secrecy laws to facilitate tax dodging. In the United States, over 43,000 taxpayers joined a voluntary IRS disclosure program, came clean about their hidden offshore accounts, and paid over $6 billion in back taxes, interest, and penalties. In addition, Congress enacted the Foreign Account Tax Compliance Act (FATCA), which requires foreign banks to either disclose their U.S. customer accounts on an automatic, annual basis or pay a 30% tax on their U.S. investment income. Just this month, at the request of G8 and G20 leaders, the Organisation for Economic Co-operation and Development (OECD) issued a model agreement that, like FATCA, will enable countries to automatically exchange account information to fight cross border tax evasion.

On the negative side of the ledger, despite evidence of widespread misconduct by Swiss banks in facilitating U.S. tax evasion, Switzerland has continued to severely restrict the ability of Swiss banks to disclose the names of U.S. customers with undeclared Swiss accounts. As a result, the United States has obtained few U.S. names and little account information. In addition, despite the passage of five years, the U.S. Justice Department has failed to hold accountable the vast majority of the 4,700 UBS accountholders whose names were given to the United States. Aside from UBS, it has prosecuted only one of the Swiss banks suspected of misconduct, while setting up a program for hundreds of Swiss banks to obtain non-prosecution agreements without disclosing the names of a single U.S. customer with a hidden account. The promise of FATCA to disclose hidden offshore accounts has also dimmed due to regulations that opened disclosure loopholes which may enable many offshore accountholders to continue to conceal their accounts from U.S. authorities. 

In this Report, the Subcommittee’s investigation chronicles these developments and provides an assessment of U.S. efforts to combat offshore tax evasion through hidden foreign accounts. It examines, in particular, ongoing roadblocks erected by the Swiss   overnment to block bank disclosure of the names of former U.S. customers with undeclared Swiss accounts. It uses as a case study a major Swiss bank, Credit Suisse, that was deeply involved in facilitating U.S. tax evasion and whose unnamed U.S. customers continue to owe unpaid U.S. taxes on billions of dollars in hidden assets. 

A. Subcommittee Investigation 

After the 2008 hearing on UBS, the Subcommittee initiated an informal bipartisan review into whether Switzerland’s second largest bank, Credit Suisse, had also helped U.S. customers evade U.S. taxes. At that time, Credit Suisse representatives acknowledged having U.S.-linked Swiss accounts that had not been disclosed to the IRS, but also said that the bank was in the process of closing those accounts or disclosing them to the IRS. Three years later, in 2011, after seven Credit Suisse bankers were indicted by the U.S. Justice Department for aiding and abetting U.S. tax evasion, the Subcommittee opened a formal bipartisan investigation into the status of the bank’s cleanup efforts and found that they were still far from complete.  

Over the course of the next few years, the Subcommittee collected approximately 100,000 documents from Credit Suisse, as well as extensive documents from 16 additional parties, conducted 23 interviews of personnel at the bank, the U.S. government, and other sources, as well as U.S. taxpayers who had evaded U.S. taxes using hidden Credit Suisse accounts. The Subcommittee also received 18 briefings from both the bank and various U.S. government agencies with expertise in U.S. taxes, U.S. tax enforcement, cross-border travel, and illicit money flows. 

The materials reviewed by the Subcommittee included Credit Suisse filings with the Securities and Exchange Commission (SEC) and other investor disclosures, Credit Suisse internal memoranda, meeting minutes, emails, as well as legal pleadings and media reports. The Subcommittee also reviewed bank statements and financial documents related to some former accountholders. Additionally, Credit Suisse briefed the Subcommittee about the findings of an internal investigation conducted by outside lawyers in 2011, and provided statistics about its U.S.-linked accounts. The Subcommittee also examined U.S. and Swiss agreements, statements, legal pleadings, and other materials related to disclosing the names of U.S. clients with undeclared Swiss accounts. 

B. Investigation Overview 

Using the Credit Suisse case study, the Subcommittee investigation examined the bank’s past actions, including the opening and servicing of undeclared Swiss accounts for U.S. customers, and subsequent actions to close those Swiss accounts, as well as the status of U.S. enforcement efforts to collect unpaid taxes and hold accountable the tax evaders and the banks that aided and abetted them. 

22,000 U.S. Customers with 12 Billion Swiss Francs. The investigation found that, as of 2006, Credit Suisse had over 22,000 U.S. customers with Swiss accounts whose assets, at their peak, exceeded 12 billion Swiss francs (CHF). Although Credit Suisse has not determined or estimated how many of those accounts were hidden from U.S. authorities, the data suggests the vast majority were undeclared. To date, due to Swiss Government restrictions, the United States has obtained the names of only about 230 U.S. clients with hidden accounts at Credit Suisse.  

Recruiting U.S. Clients and Facilitating Secrecy. The investigation found that, from at least 2001 to 2008, Credit Suisse recruited U.S. clients to open Swiss accounts, and employed a number of banking practices that helped its U.S. customers conceal their Swiss accounts from U.S. authorities. Those practices included sending Swiss bankers to the United States to secretly recruit clients and service existing accounts; sponsoring a New York office that served as a hub of activity on U.S. soil for Swiss bankers; and helping customers mask their Swiss accounts by referring them to “intermediaries” that could form offshore shell entities for them and by opening accounts in the name of those offshore entities. One former customer described how, on one occasion, a Credit Suisse banker travelled to the United States to meet with the customer at the Mandarin Oriental Hotel and, over breakfast, handed the customer bank statements hidden in a Sports Illustrated magazine. Credit Suisse also sent Swiss bankers to recruit clients at  bank-sponsored events, including the annual “Swiss Ball” in New York and golf tournaments in Florida. The Credit Suisse New York office kept a document listing “important phone numbers” of intermediaries that formed offshore shell entities for some of the bank’s U.S. customers. Credit Suisse also encouraged U.S. customers to travel to Switzerland, providing them with a branch office at the Zurich airport offering a full range of banking services. Nearly 10,000 U.S. customers availed themselves of that convenience. The bank’s own investigation indicates that Swiss bankers were well aware that some U.S. clients wanted to conceal their accounts from U.S. authorities, and either turned a blind eye to the accounts’ undeclared status, or at times actively assisted those accountholders to hide assets from U.S. authorities.  

Weak Oversight. The investigation also found that Credit Suisse exercised weak oversight of its own policies for U.S.-linked accounts in Switzerland, facilitating wrongdoing. A 2002 bank policy called for U.S.-linked accounts to be opened by a single Swiss  office, SALN, whose bankers were given special training in U.S. regulatory and tax requirements. Despite that policy, a majority of U.S.-linked accounts were spread throughout other business areas of the bank; by 2008, over 1,800 Credit Suisse bankers were  opening and servicing Swiss
accounts for U.S. customers. Some of those Swiss bankers assisted U.S. clients to open undeclared accounts, buy and sell U.S. securities, and structure large cash transactions to avoid U.S. cash reporting requirements, in violation of U.S. law and the bank’s own policies which prohibited those activities. The Swiss bank also used third party service providers to supply U.S. clients with credit cards and travel cash cards that enabled them to secretly draw upon the cash in their Swiss accounts. In addition, Credit Suisse restricted compliance, risk management, and audit oversight of all U.S. customer accounts in Switzerland to Swiss personnel due to Swiss secrecy laws, limiting the oversight that could be conducted by bank personnel in the United States. Credit Suisse extended those limitations even to the U.S.-linked accounts at SALN which was organizationally part of the Credit Suisse Private Bank for the Americas. On February 21, 2014, Credit Suisse paid a $196 million fine to the U.S. Securities and Exchange Commission (SEC) to settle securities law violations by its Swiss bankers for conducting unlicensed broker-dealer and investment advice activities in the United States and by the bank for failing to prevent that misconduct due to poorly implemented controls and ineffective monitoring. 

Five Year Exit. Beginning in 2008, after the UBS scandal broke, Credit Suisse initiated a series of “Exit Projects” to identify Swiss accounts that had been opened for U.S. customers, and ask the customers to either disclose their accounts to the United States, or close them. The Exit Projects took an overly incremental approach, delayed reviewing key groups of accounts, and took over five years to complete. The projects included, in chronological order, the Entities Project, Project Tom, Project III, Project Tim, Legacy Entities Project, Project Titan, and Project Argon. The 2008 UBS scandal and 2011 indictment of seven Credit Suisse bankers spurred the account closing efforts represented by those projects, but they continued to take years to implement. 

From 2008 to 2011, the Credit Suisse Exit Projects focused exclusively on Swiss accounts held by U.S. residents, ignoring the over 6,000 accounts opened by U.S. nationals living outside of the United States. The early projects also focused on the conduct of bankers at SALN, the office that was supposed to have been in charge of opening U.S.-linked accounts in Switzerland, even though the majority of U.S.-linked accounts were actually located in Swiss offices outside of SALN, including Credit Suisse’s private bank subsidiary Clariden Leu. By the end of 2010, the Exit Projects had closed accounts held by nearly 11,000 U.S. clients, an indication of how extensive the problems were with the accounts. It was not until 2012, that the bank expanded the Exit Projects to include a review of the thousands of Swiss accounts opened by U.S. nationals living outside of the United States. At the end of 2013, five years after the UBS scandal broke, Credit Suisse data indicated that the bank had closed Swiss accounts for approximately 18,900 U.S. customers and retained accounts for about 3,500 U.S. customers  with assets totaling about $2.6 billion. These figures represent an 85 percent drop in the number of the bank’s U.S. customers in Switzerland. 

Lax U.S. Enforcement. Credit Suisse has been under investigation by the U.S. Department of Justice (DOJ) since at least 2010. In 2011, seven of its Swiss bankers were indicted by DOJ for aiding and abetting U.S. tax evasion. Despite the passage of almost three years, however, none of those bankers has stood trial, instead remaining overseas. In 2011, the bank itself was served with a target letter by DOJ, indicating that Credit Suisse, not just some of its bankers, was under criminal investigation. The letter signifies that DOJ believed it had substantial evidence of criminal wrongdoing by the bank at that point, although no indictment was filed in the years that followed.  

In 2011, as part of the DOJ investigation, the bank was asked to produce a variety of documents through Grand Jury subpoenas and other requests. In response, the Swiss Government intervened, took control of the document production process, and limited the documents that the bank produced to DOJ. When, at the request of the Swiss, the United States submitted a treaty request for names and account information related to U.S. persons with undeclared Swiss accounts at Credit Suisse, a Swiss court ruled that parts of the request did not meet the requirements of the U.S.-Swiss tax treaty, requiring the United States to submit a revised request. After roughly two years, the Swiss Supreme Court permitted about 230 U.S. customer files, or substantially less than 1 percent of the over 22,000 U.S. accountholders with Swiss accounts at Credit Suisse, to be provided to U.S. authorities. During that same period, the DOJ did not use any of the authorities and remedies available to it in U.S. courts, such as enforcing the outstanding Grand Jury subpoenas or using a John Doe summons, to obtain U.S. client names and account information directly from Credit Suisse. 

DOJ’s decision to refrain from taking enforcement action against Credit Suisse over the past five years is part of a larger failure by the United States to obtain from the Swiss the names of the tens of thousands of U.S. persons who opened undeclared accounts in Switzerland and have not yet paid taxes on their hidden assets. Despite constructing a 2013 program to enable hundreds of Swiss banks to apply for non-prosecution agreements or non-target letters, DOJ did not obtain any agreement in return from the Swiss Government to permit any of those Swiss banks to furnish U.S. client names to the United States. To the contrary, DOJ explicitly surrendered the right of the United States to obtain U.S. client names from the banks given nonprosecution agreements and non-target letters under the new DOJ program, and may have implicitly surrendered the right to use remedies available in U.S. courts to obtain those names directly from those banks, including through Grand Jury subpoenas or John Doe summonses.  

DOJ also appears to have decided to rely solely on the treaty process to obtain documents from the 14 Swiss banks under active investigation for facilitating U.S. tax evasion. For years, DOJ has not enforced a single Grand Jury subpoena directed at the 14 targeted banks, nor assisted the IRS in using a John Doe summons to obtain critical information from them in Switzerland. Instead, since 2011, DOJ has made treaty requests involving at least two of the targeted banks. After nearly three years, those treaty requests have produced few U.S. client names and little account information. By relying on the restrictive treaty process and refraining from using U.S. remedies enforceable in U.S. courts to obtain information directly from the 14 Swiss banks, DOJ essentially ceded control of the document process to Swiss regulators and Swiss courts that value bank secrecy and are willing to prohibit disclosure of bank information essential to effective U.S. investigations and prosecutions of U.S. tax evasion involving Switzerland. 

In addition, since 2009, aside from UBS, DOJ has indicted only one Swiss bank, Wegelin & Co. When Wegelin pled guilty, DOJ accepted its guilty plea without obtaining a single client name that could be used to seek unpaid taxes from the U.S. clients that used the bank to escape  their tax obligations. When DOJ used U.S. prosecution tools and IRS John Doe summons against UBS, the United States obtained about 4,700 accounts with U.S. client names, and DOJ prosecuted 72 taxpayers. In contrast, without those tools, when DOJ used only the treaty process to seek information from the 14 targeted banks, DOJ obtained only a few hundred U.S. client names and prosecuted less than a handful of U.S. taxpayers for having a hidden account. DOJ’s reduced effectiveness can be attributed, in part, to its reliance on the treaty process under Swiss control instead of on U.S. tools enforceable in U.S. courts. Further, while DOJ has indicted 34 Swiss banking and other professionals for aiding and abetting U.S. tax evasion, the vast majority of those defendants have yet to stand trial. Most continue to reside in Switzerland, without facing any public U.S. extradition request to require them to face U.S. criminal charges. As a result, DOJ has made little progress in collecting the unpaid U.S. taxes that continue to be owed on billions of dollars of assets hidden in Swiss accounts. 

While Switzerland sometimes claims that there is no need to obtain client names from Swiss banks, because U.S. clients with hidden Swiss accounts will be named over the next few years under FATCA, FATCA will not, in fact, solve the disclosure problem. FATCA’s implementing regulations have created multiple loopholes, with no statutory basis, in the law’s disclosure requirements. Among other problems, the FATCA regulatory loopholes will require disclosure of only the largest dollar accounts; they will permit banks to ignore, in most cases, bank account information that is kept on paper rather than electronically; they will allow banks to treat accounts opened by offshore shell entities as non-U.S. accounts even when the entity is owned by a U.S. taxpayer; and the remaining disclosure requirements can be easily  circumvented by U.S. persons opening accounts below the reporting thresholds at more than one bank. Switzerland has also sometimes claimed that additional client names can be obtained through the revised U.S.-Swiss tax treaty which has yet to be ratified by the Senate, but that treaty applies only to requests for accounts that were open after its signing date in September 2009, which excludes the years in which the bulk of misconduct by Swiss banks and their U.S. clients took place. The treaty also has a convoluted process for obtaining the names of accountholders who can seek to block disclosure in Swiss courts, and Swiss law has created new evidentiary burdens for U.S. requests seeking information about unnamed U.S. taxpayers with accounts at Swiss financial institutions. 

Neither FATCA nor the revised U.S.-Swiss tax treaty nor the DOJ non-prosecution program for Swiss banks can be relied on to produce the names of U.S. clients who used Swiss accounts to hide assets, evade taxes, and dodge U.S. efforts to collect the taxes they still owe. Unless DOJ is willing to use available U.S. legal remedies to obtain those U.S. client names, many of the most egregious cases of tax evasion using hidden offshore accounts will escape accountability, while tax haven banks continue to profit from U.S. clients dodging U.S. taxes. Allowing tax cheats to dodge accountability for their actions would not only weaken the incentive for other U.S. taxpayers with hidden accounts to enter into the IRS Offshore Voluntary Disclosure Program, it would also send the wrong message to other tax haven banks and governments, and give up on unpaid U.S. taxes on billions of dollars in hidden assets. 

C. Findings of Fact and Recommendations 

Findings of Fact. Based upon the Subcommittee’s investigation, this Report makes the following findings of fact. 

(1) Bank Practices that Facilitated U.S. Tax Evasion. From at least 2001 to 2008, Credit Suisse employed banking practices that facilitated tax evasion by U.S. customers, including by opening undeclared Swiss accounts for individuals, opening accounts in the name of offshore shell entities to mask their U.S. ownership, and sending Swiss bankers to the United States to recruit new U.S. customers and service existing Swiss accounts without creating paper trails. At its peak, Credit Suisse had over 22,000 U.S. customers with Swiss accounts containing assets that exceeded 12 billion Swiss francs.  

(2) Inadequate Bank Response. Credit Suisse’s efforts to close undeclared Swiss accounts opened by U.S. customers took more than five years, failed to identify how many were undeclared accounts hidden from U.S. authorities, and fell short of identifying any leadership failures or lessons learned from its legally-suspect U.S. cross border business. 

(3) Lax U.S. Enforcement. Despite the passage of five years, U.S. law enforcement has failed to prosecute more than a dozen Swiss banks that facilitated U.S. tax evasion, failed to take legal action against thousands of U.S. persons whose names and hidden Swiss accounts were disclosed by UBS, and failed to utilize available U.S. legal means to obtain the names of tens of thousands of additional U.S. persons whose identities are still being concealed by the Swiss.  

(4) Swiss Secrecy. Since 2008, Swiss officials have worked to preserve Swiss bank secrecy by intervening in U.S. criminal investigations to restrict document production by Swiss banks, pressuring the United States to construct a program for issuing non-prosecution agreements to hundreds of Swiss banks while excusing those banks from disclosing U.S. client names, enacting legislation creating new barriers to U.S. treaty requests seeking U.S. client names, and managing to limit the actual disclosure of U.S. client names to only a few hundred names over five years, despite the tens of thousands of undeclared Swiss accounts opened by U.S. clients evading U.S. taxes.  

Recommendations. Based upon the Subcommittee’s investigation and findings of fact, this Report makes the following recommendations. 

(1) Improve Prosecution of Tax Haven Banks and Hidden Offshore Account Holders. To ensure accountability, deter misconduct, and collect tax revenues, the Department of Justice should use available U.S. legal means, including enforcing grand jury subpoenas and John Doe summons in U.S. courts, to obtain the names of U.S. taxpayers with undeclared accounts at tax haven banks. DOJ should hold accountable tax haven banks that aided and abetted U.S. tax evasion, and take legal action against U.S. taxpayers to collect unpaid taxes on billions of dollars in offshore assets.  

(2) Increase Transparency of Tax Haven Banks That Impede U.S. Tax Enforcement. U.S. regulators should use their existing authority to institute a probationary period of increased reporting requirements for, or to limit the opening of new accounts by, tax haven banks that enter into deferred prosecution agreements, non-prosecution agreements, settlements, or other concluding actions with law enforcement for facilitating U.S. tax evasion, taking into consideration repetitive or cumulative misconduct.  

(3) Streamline John Doe Summons. Congress should amend U.S. tax laws to streamline the use of John Doe summons procedures to uncover the names of taxpayers using offshore accounts and other means to evade U.S. taxes, including by allowing a court to approve more than one John Doe summons related to the same tax investigation.  

(4) Close FATCA Loopholes. To obtain systematic disclosure of undeclared offshore accounts used to evade U.S. taxes, the U.S. Treasury and IRS should close gaping loopholes in FATCA regulations that have no statutory basis, including provisions that allow financial institutions to ignore account information stored on paper, and allow foreign financial institutions to treat offshore shell entities as non-U.S. entities even when beneficially owned and controlled by U.S. persons. 

(5) Ratify Revised Swiss Tax Treaty. The U.S. Senate should promptly ratify the 2009 Protocol to the U.S.-Switzerland tax treaty to take advantage of improved disclosure standards.

One thing that sticks out is the criticism of "Lax U.S. Enforcement," focusing on Credit Suisse as emblematic of the large Swiss bank problem.  It is ironic that the Senate thinks the U.S. initiatives (DOJ Tax and the IRS) are far too lenient to Swiss banks while the Swiss and their cheerleaders think that the U.S. initiatives are far too harsh.  (See particularly many of the comments on this blog.)  Both the U.S. on the one hand and the Swiss banks are operating from their own economic self-interest, but another way of saying that is that the U.S. has an economic interest in compliance with the law, whereas the Swiss banks have an economic interest in noncompliance with the law.