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August 13, 2009 - Phil Hodgen

What the Swiss settlement means

Jack Townsend has — as usual — a thoughtful analysis of the implications of the UBS settlement in which UBS will cough up a few thousand names of U.S. taxpayers.  (Exact details of the settlement haven’t been publicized yet.)

It seems clear to me (and to Mr. Townsend) that the settlement depends on the Swiss government’s own tortured reinterpretation of Swiss bank secrecy laws.  (Translation: they’re scrambling for a fig leaf). Jack says:

I focus on the legal construct that the Swiss will reportedly use to justify the limited disclosures under the exchange of information provision of the U.S. / Switzerland treaty. Switzerland has long distinguished between tax evasion and tax fraud which in U.S. law are synonymous terms. Under Swiss law as interpreted (it’s all about interpretation), tax evasion is not criminalized in Switzerland, but tax fraud is. I don’t know the precise distinction between the two in Swiss law, but gather that tax fraud (crime) is some egregious form of tax evasion (otherwise civil). The egregious form involves more affirmative steps to hide, evade and deceive. So, looking at the speculated shape of the settlement, if the depositor was an ordinary tax cheat setting up a directly owned UBS account, his name and account will not be disclosed, but if the depositor injected gossamer entity structures to further obscure, his name and account will be disclosed. Apparently, Switzerland will now interpret the latter more egregious conduct as tax fraud, permitting it to disclose at the request of the United States.

If, indeed, this is a reinterpretation of Swiss law and mutual assistance treaties (or provisions of treaties), then the reinterpretation would logically apply not just to UBS but to all Swiss financial institutions. Some other Swiss financial institutions have apparently claimed that they are not like UBS (smaller and did not exploit their enablement activity on U.S. soil) and thus that their U.S. depositors’ accounts will not be disclosed. (See the allegations in the Jeff Chernick indictment discussed here.) I am not sure that level of assurance can be given where entities are part of the structuring for the account. And, I expect that the IRS may be licking its chops to make the requests for mutual assistance with respect to other Swiss financial institutions.

Here is what I predict. It has been a long-standing assumption among tax practitioners that bad dog taxpayers should only do business with financial institutions which have no physical presence in the United States. If (hypothetically) you are a foreign bank but you have branches in the U.S., then the U.S. government can play the game of “Tell me a secret or I revoke your bank charter.”

With this settlement (and perhaps a re-negotiation of the treaties between Switzerland and the United States) Swiss banks with no U.S. presence whatsoever will not be immune. The IRS then says “Tell me a secret or the Swiss government will revoke your bank charter.”

So what will people do? Sorry to bring in this analogy but just look at the U.S. diplomatic and military strategy of the last decade or so. How successful has the application of massive military and diplomatic force been in eliminating terrorist organizations? Or if you are young and remember playing with mercury, remember what happens when you have a blob of mercury and you push it with your finger. It breaks up into a bunch of tiny blobs, disburses, and goes in 50 different directions.

Just sayin.’ Moralize all you want. But people are people. Don’t expect the world to conform to what Congress thinks is right.

Let me be clear about me and what I do professionally. Life is too short to mess around. I help people get clean and stay clean. My professional work involves being able to put everything on the table in front of a government agent and get a “You’re completely clean” answer if my client is examined. We’re on the planet once and I don’t intend to spend any of my time in a prison or on the run (mentally or in reality). kthxbai.

You want clean? You want private? You want legal? You want tax-efficient? Call me. Mobile phone +1-626-437-2500.

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