Showing posts with label tax avoidance. Show all posts
Showing posts with label tax avoidance. Show all posts

Tuesday, February 16, 2010

Offshore Tax Evasion: Swiss Court Upholds Swiss Bank Privacy Laws

Approximately, two years ago, the U.S. began investigating offshore tax evasion schemes focusing on certain operations involving Swiss bank UBS AG (UBS). I commented on the details of the U.S. Justice Department (U.S.), and Internal Revenue Service (IRS) investigation regarding UBS and Citigroup last fall. It is available here. The U.S. and IRS reached a settlement with UBS in which, UBS agreed to pay $780 million to the U.S. and IRS as part of a deal to avoid criminal prosecution for helping wealthy Americans evade taxes. A central part of the settlement was a special agreement between the U.S. and the Swiss Government to permit UBS to disclose the identities of approximately 4,450 of its American clients who are suspected of hiding assets in offshore Swiss bank accounts. This disclosure was a major shift in the historical policies and existing Swiss law regarding Swiss bank privacy laws.


The Swiss principle of bank secrecy is derived from statutorily enforced privacy laws. Swiss law strictly limits any information shared with third parties, including tax authorities, foreign governments or Swiss authorities, except when requested by a Swiss judge's subpoena. The law only permits a bank to share information with third parties in cases of severe criminal acts, such as identifying a terrorist's bank account or tax fraud, but not simply for non-reporting of taxable income, otherwise known as tax evasion. A bank employee who violates a banking client's privacy is subject to severe punishment under Swiss law. Recent bilateral treaties negotiated between Switzerland and a number of countries are designed to weaken Swiss law privacy protections related to tax evasion. The bilateral treaties are analogous to the disclosure provisions contained in the special agreement between the U.S. and Switzerland concerning the disclosure of American UBS clients.

However, last month a Swiss Court, the Federal Administrative Court in Switzerland, ruled that Swiss authorities may not disclose the bank account details of a wealthy American who used UBS’ private bank to evade American taxes. Some commentators believe that the Swiss Court’s ruling may nullify the special agreement between the U.S. and Switzerland regarding the disclosure of American UBS clients. In the ruling, the Swiss Court noted that Switzerland is an independent democratic country with a clear separation of powers, and it is the court’s responsibility to maintain said independence by adhering to Swiss national law, and not provide confirmation of external political pressures. As such, the Swiss Court issued a ruling forbidding UBS to disclose information to the U.S. or the IRS regarding approximately 4,500 American UBS clients. Furthermore, the Swiss Court ruled earlier last month that Switzerland's financial regulator violated Swiss law when it turned over data regarding 255 UBS American clients last year. The Swiss Court’s decision cannot be appealed. The ruling has placed the special arrangement between the U.S. and Switzerland regarding American UBS clients in jeopardy. It is unlikely that the Swiss Government wants a confrontation with the U.S. One possible remedy would be an emergency decree by the Swiss Government to enforce the original special agreement between the U.S. and UBS. The decree would arguably be beyond the scope of the Swiss Court’s jurisdiction. However, this all remains to be negotiated or it may all lead to an international legal battle.

Wednesday, October 14, 2009

Citigroup Fined $600,000 for Implementing Tax Avoidance Strategies that Defrauded IRS of Billions in Taxes

Citigroup Inc. was fined $600,000 by the Financial Industry Regulatory Authority (FINRA) formerly known as the National Association of Securities Dealers, a private-sector regulator of U.S. broker dealers with supervisory authority over 4,800 U.S. brokerages, which determined that Citigroup Global Markets assisted their clients to avoid paying billions of dollars of U.S. taxes.

The recent fine against Citigroup is part of a larger U.S. Senate investigation regarding global tightening on tax evasion schemes as numerous governments attempt to close widening budget gaps fueled by economic weakness. At the center of the U.S. Senate investigation and tax recovery effort has been the U.S. Department of Justice’s case against UBS AG, a Swiss banking conglomerate. In October 2008, UBS AG agreed to pay $780 million to settle criminal claims that it helped U.S. citizens evade taxes.

In the case against Citigroup, FINRA determined that Citigroup employed two main trading strategies to help their clients avoid paying U.S. taxes. The first trading strategy Citigroup employed from 2000-2004 to help their clients avoid paying U.S. taxes, was designed primarily to enrich Citigroup. The strategy involved Italian stock trades and loaning the stocks to Citigroup’s Swiss affiliate to avoid paying U.S. withholding taxes.

The second strategy that Citigroup employed from 2002-2005 involved buying U.S. stocks from foreign broker-dealer, selling the U.S. stocks back to the foreign broker-dealers before dividends were paid. After a series of interim steps, including using a derivative contract commonly known as a total return swap, the foreign clients would receive an amount equal to the dividends as a “dividend equivalent” free of withholding taxes. The “dividend equivalent” is not subject to U.S. withholding taxes. In 2006, Citigroup paid approximately $24 million to the Internal Revenue Service for using this strategy.

FINRA’s Executive Vice President and Chief of Enforcement, Susan Merrill, stated that “Citigroup’s inadequate supervision resulted in improper trading… increasingly complex trading strategies must be governed by supervision that is equally sophisticated.” FINRA determined that Citibank lacked written procedures to govern total return derivative swap transactions. FINRA also determined that Citigroup employees deviated from the procedures that Citigroup did implement. Furthermore, Citigroup failed to report certain stock trades to the New York Stock Exchange, as required by securities regulators.

In an era of heightened corporate governance, in part due, to the adoption of Sarbanes-Oxley as result of corporate misconduct by former Wall Street darlings such as Enron, K-Mart, Adelphia Communications et cetera, it is shameful that corporate misconduct of this magnitude continues to proliferate in the markets. I find myself repeatedly asking why major corporations engage in such reprehensible conduct. Citigroup’s implementation of total return dividend swap-links, intentionally designed to deceive the IRS, is not only manipulative and fraudulent, it is also illegal. However, FINRA’s fine of a mere $600,000 seems grossly under representative of the magnitude of Citigroup’s conduct.

FINRA stated that the amount of the $600,000 fine was influenced by Citigroup’s willingness to report the violations to FINRA. Citigroup neither admitted nor denied wrongdoing in agreeing to settle the investigation.

Lydie Nadia Cabrera Pierre-Louis
St. Thomas University School of Law
lplouis@stu.edu