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US crackdown on foreign bank accounts


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Bill Blevins is Managing Director of Blevins Franks. He has specialised in expatriate investment and tax planning for over 35 years. He has written books and gives lectures on this subject in Southern Europe and the UK.

SWISS BANK UBS is shutting down all private bank accounts held by American residents following pressure from the US government to unveil the secrets of UBS bank accounts belonging to US clients.

Switzerland’s banking industry has thrived on its confidentiality laws making it illegal to reveal details of bank accounts, including the account holders’ names and addresses, except in cases of tax fraud.

The decision to close down offshore accounts to the US was announced at a Senate hearing into tax evasion after it emerged via a recent report that a considerable proportion of wealthy US citizens are avoiding taxes by concealing their assets in offshore accounts in Switzerland.

Chief financial officer for UBS Global Wealth Management and Business Banking, Mark Branson, said:  “We have decided entirely to exit the business. UBS will no longer provide offshore banking or securities services to US residents through our bank branches.

“While we are winding down this business there will be no new accounts opened and Swiss-based client advisers will not be permitted to travel to the United States for the purpose of meeting with US clients.”

Branson was also keen to point out that the closure of Swiss accounts to American citizens will not affect business relation between the two countries. UBS’s general wealth management business in the US would continue to offer US based services through three subsidiaries.

The US had attempted to put pressure on UBS with an unprecedented court summons for the bank to hand over the details of 19,000 US clients with around 18 billion US dollars stashed undeclared in Switzerland. The US Treasury claims it loses up to 100 billion US dollars in tax payments every year as a result of schemes designed to conceal assets from the Internal Revenue Service (IRS) in offshore accounts. An investigation revealed that only 1,000 of the 19,000 US bank clients with Swiss bank accounts had declared their accounts to the IRS.

Tax fraud

Branson added: “We are working with the US government to identify the names of US clients who may have engaged in tax fraud. Client identity is generally protected from disclosure under Swiss law. But such privacy protections do not apply when disclosure of client names is requested in connection with an investigation of tax fraud and where the requests are presented to the Swiss government.”

In a report by the US Senate Permanent Subcommittee on Investigations, UBS and Liechtenstein’s LGT Group, a private wealth and asset management group owned by the royal house of Liechtenstein, were accused of colluding in the region’s “culture of secrecy and deception” to aid the 19,000 account holders to pay less tax.

The report says that several methods were used to make detection more difficult, which included moving money through a maze of accounts, opening accounts in the name of foundations and bank staff using public payphones when calling clients.

Liechtenstein, a so-called tax haven, and LGT are being pursued by a number of other countries to reveal client details following tax evasion scandals last year.

America’s latest crackdown in offshore tax evasion was triggered when a former manager at UBS, Bradley Birkenfeld, pleaded guilty to helping a UBS client, a Californian billionaire property developer, to evade taxes. Birkenfeld said that he conspired with a Liechtenstein banker to conceal about 200 million US dollars on behalf of clients.

A US federal judge then issued an order authorising the IRS to investigate UBS and retrieve information on US citizens who may be evading taxes. US law requires taxpayers to report all foreign based financial accounts if the total value of the accounts exceeds 10,000 US dollars. The penalty for failing to comply could be up to 50 per cent of the amount in the account at the time.

In 2000, new US tax rules under the Qualified Intermediary (QI) programme necessitated foreign banks to reveal the names of clients holding US securities to the IRS. More than 2 billion US dollars held in such assets by US clients of UBS in Switzerland were sold to avoid disclosure.

External audits

Banks participating in the QI programme were offered guaranteed access to the US market, and to withhold tax on client income at a lower rate. Currently, banks in the programme are subject to an external audit every three years, but the IRS believes that the system lacks teeth since the rules do not require auditors, usually one of the major accounting firms, to report suspicious activity. There have also been suggestions that some banks escape audit altogether because the rules allow for waivers in certain situations.

Now the IRS is set to beef up the QI programme as part of a new crackdown on tax evaders using foreign bank accounts.

According to reports, under the new rules, foreign banks would have to tell the IRS who was the ultimate holder of the account and the beneficiary of interest income, and if that individual was an American, file a tax form with the agency and withhold tax at 28 per cent. Failure to comply with the new rules could result in criminal prosecution.

Reports have also suggested that the IRS will allow foreign banks in the programme to use third-party databases, such as those maintained by credit reporting firms, to help determine the identity of their clients. The new rules are also expected to place a stronger obligation on audit firms to report cases of suspected fraud or tax evasion to the US authorities.

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