Tax Analysts Blog

Catch Me If You Can: Lessons From UBS

Posted on Mar 25, 2010

The wave of offshore tax scandals sweeping across America and Europe reinforces an old adage: Sometimes it's better to be lucky than smart.

Some voices in the tax community have been quick to point at these events as proof that our tax enforcement rules are functioning properly. Some have claimed victory in the global war against tax havens and bank secrecy. Personally I'm not so sure the situation merits celebration.

Criticizing the tax havens is fine -- they get no sympathy here. My concern is that we don't mask a separate problem. The fact that some UBS accountholders were brought to justice should not be interpreted as proof the current tax system adequately deals with offshore tax evasion. If anything, the events of the last year prove the opposite. Our laws governing crossborder information exchange are rather inept when it comes to snagging tax cheats.

In short, the UBS affair happened in spite of our tax enforcement rules, not because of them.

There are various rules that -- in theory -- should detect or discourage offshore tax evasion. These include the Qualified Intermediary (QI) regime, the Report of Foreign Bank and Financial Accounts (FBAR) filing requirements, Know-Your-Customer (KYC) banking regulations, and the information exchange provisions in our bilateral tax treaties. But none of those rules were responsible for revealing the offshore tax scandals we see in the headlines.

So then, how did we learn about them?

• In the case of UBS it was an ex-private banker (Bradley Birkenfeld) who spilled the beans. U.S. prosecutors have admitted that without Birkenfeld divulging his insider secrets, the UBS affair would never had happened.

• Europe went through a similar offshore scandal resulting from the actions of a lone disgruntled employee (Heinrich Kieber) of LGT, a prominent Liechtenstein bank. He stole bank data and sold it European tax collectors. Take away Kieber and the LGT scandal doesn't happen.

• Another offshore scandal is now unraveling; this one involves a Swiss branch of HSBC, the large British bank. Another batch of 24,000 previously secret bank accounts is being disclosed. How did the tax cheats get found out? You guessed it, a former HSBC employee (identified as Herve Falciani) stole private bank data and sold it to the German and French governments.

You don't have to be Einstein to see a pattern here. In each case tax officials received information -- otherwise unavailable via our tax and banking rules -- courtesy of some malcontent bank employee. I suppose that's one form of information exchange, but you can't tell me that's how the system is supposed to operate.

Should the enforcement of U.S. tax laws be so haphazard; so accidental; so dependent on the whims of others?

The cynical among us would conclude the so-call safeguards in our legal system were never really designed to catch tax cheats. They provide the superficial trappings of information exchange, but not the substance. Responsible citizens should expect better.

Should we really be claiming victory over the tax havens, or did we just get lucky?

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