Monday, February 24, 2014

U.S. Authorities Focus on Swiss Insurance Products Used to Hide U.S. Taxpayer Assets and Income (2/24/14)

A reader, under the pesudonym GobalCapitalism, here, called the following article to my attention.  John Letzing, U.S. Examines Swiss Insurance Products In Tax Crackdown (WSJ Markets 2/23/14), here.  Excerpts:
U.S. authorities are scrutinizing Americans' use of Swiss insurance products to determine if they have been used to hide assets, signaling a potential new direction in the U.S. legal crackdown on tax evasion in the Alpine country, according to people with knowledge of the matter.
The U.S. Justice Department and the Internal Revenue Service are looking at the use of private placement life insurance, or PPLI, a product that meshes banking and insurance by linking the value of a client's policy to assets held in a Swiss bank account, these people say. 
Swiss insurers offering the product, which can be used legally by Americans to defer taxes, have nonetheless sought to reduce ties to U.S. clients. At least three big insurers say they aren't accepting new U.S. clients. In December, Swiss Life Holding AG SLHN.VX -0.15%  returned funds to hundreds of Americans who had invested in PPLI policies. Those policies were linked to accounts at Bank Frey & Co. AG, which is among a number of Swiss banks that have disclosed being under criminal investigation in the U.S. for allegedly aiding tax evasion, according to people familiar with the matter. 
* * * * 
PPLI policies are generally a lawful way for clients to defer taxes on wealth as it grows. But policies can be problematic for their owners and carriers if they haven't been set up in compliance with tax laws in a client's home country, or if they are loaded with undeclared assets. 
* * * * 
The Swiss banks that partner on PPLI once happily accommodated wealthy U.S. clients, but have more recently jettisoned Americans to avoid drawing unwanted attention from the Justice Department. Unlike banks, insurers are contractually bound to hold policies and pay out for a specific event, such as death. Only an unusual circumstance like Bank Frey's closure allows an insurer to prematurely dump a PPLI policy. 
Hundreds of Swiss banks have applied to a U.S. program in which they exchange information about dealings with Americans for guarantees they won't be prosecuted. Insurers aren't able to participate in the program.
I don't think it is a surprise that insurance products can mimic the essential features of financial accounts and thus should be treated as financial accounts, but provide an added guise in the form of appearing to be an insurance product or have some blended features of an insurance product.  If the IRS and DOJ Tax were not interested in those products, that would be an easy way of avoiding the gains made in transparency with banks.

The article also notes that "Hundreds of Swiss banks have applied" to the U.S. Swiss bank initiative.  The later authoritative source information I have seen indicated that 106 banks joined as Category 2.


  1. One thing that bothers me is that "hiding assets" and "hiding income" are lumped together. I understand that FBAR reporting requirements exist. But there is in my view a huge difference between unreported assets and unreported income.

    Also, the article said "Unlike banks, insurers are contractually bound to hold policies and pay
    out for a specific event, such as death. Only an unusual circumstance
    like Bank Frey's closure allows an insurer to prematurely dump a PPLI
    policy. " If this is the case then it seems to me that a contract in Switzerland isn't worth the paper it's written on, if it can be ended unilaterally. My understanding is that these products are similar to a deferred variable annuity in the US; gains accumulate for a number of years and are then distributed either as a lump sum or in installments (these are often used as a retirement savings vehicle.) Typically early withdrawals are not permitted or subject to penalty. But now it seems that the insurance companies can end these contracts, potentially subjecting policyholders to a huge tax bill in one year.

  2. I will comment more after I read the report but for now ...
    State of residence of OVDP participants has the obvious high correlation with most populous states, as well as states where immigrants are likely to settle.
    Countries is correlated with places where Americans reside (though I don't see Mexico there) and countries where bank secrecy is being lost (Switzerland.) Noticeably absent are banking havens other than HK such as Singapore, Isle of Man, Bahamas, Bermuda, Cayman Islands, Turks and Caicos (the last four geographically close to the US, English speaking, and protected by the powerful British Commonwealth.)

  3. I question why time was spent creating this report. The big picture questions are whether the program's one size fits all approach is fair to good actors, and whether the penalty structure is driving those with foreign accounts underground instead of promoting compliance. With 5-7 million Americans abroad, plus many more immigrants with ties to their birth country, I would not call a total of under 30,000 disclosures to date from all OVDP programs a success.

  4. Good article.

    Page one states that "the word on the street" is that the IRS is revamping the 2012 program because of the high cost of administering OVDI. I wonder whether the high cost (much higher for optouts than for those who stay in the program) is a motivating force behind the IRS' lack of transparency regarding what happens in optouts, how optout penalties are calculated, scaring people about the possibility of a 300% penalty, are all designed to avoid the work of optouts, and if people pay excessive penalties, so what?

    On page 4 it states that the tax loss was generally low, and that some have said that the Swiss banks were selling "not yield but secrecy. I believe that in other cases they were selling safety, availability of foreign currency accounts (not available at US banks) and convenience for those living, working, or with family in Switzerland. You can't pay for your groceries at Migros with a check on a US bank account!

    Page 5 "How many jurors have foreign bank accounts?" Fair enough, but how many jurors inherited money when their foreign parents died, or had a foreign home before moving to the US, or live and work in Canada or Switzerland and do not have a "foreign bank account in the US" but a "local bank account located in Canada or Switzerland?" People with such foreign ties and such good reasons for having a foreign account are a minority (but not 0%) of those prosecuted.

    Page 6 states that a 50% FBAR penalty is significant punishment even if there is no incarceration. I would question whether the motivation is to punish, or to get money. Incarceration actually costs the government money, whereas collecting a fine does the opposite, and most people frobably prefer paying a fine.

  5. Post on in connection to the PSI or senate subcommittee hearing on wednesday :

    Offshore Tax Evasion: The Effort to Collect Unpaid Taxes on Billions in Hidden Offshore Accounts

    ....The PSI is the chief investigative subcommittee of the Senate Homeland Security and Governmental Affairs Committee (formerly the Governmental Affairs Committee) and has the jurisdiction has jurisdiction to conduct investigations into a broad range of issues, including federal waste, fraud and abuse, corporate crime, offshore banking and tax practices, energy markets, corruption, and national security. Senator Carl Levin of Michigan is the Chairman of the PSI and Senator John McCain of Arizona is the John McCain, Ranking Minority Member of the PSI......

  6. ‘Chaotic’ US tax stampede overwhelms specialists

    “Tax preparers and accountants are being deluged with non-stop requests
    from US citizens to help them,” Jacqueline Bugnion, Director of the
    Swiss chapter of the American Citizens Abroad (ACA) organisation.

    The IRS is shaking trees, and it is not coconuts that are falling out,
    but Americans,” he told “Some of these people may have
    been born in the US, but moved to Switzerland as infants. They have no
    US passport, no social security number and no idea that they should have
    been filing tax returns to the IRS.”

  7. What this means is that US citizenship is not worth the trouble that the US government forces upon expats living outside of US jurisdiction.

  8. Recent
    Statements Of IRS Deputy Commissioner (International), IRS Large
    Business And International Division Suggest Possible Changes To The
    Offshore Voluntary Disclosure Initiative And Greater Cooperation Among
    Foreign Treaty Partners

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