I have been off the pace for blogging for about a month or so now, not counting the Christmas holidays, but if there were ever a series of new stories that merited a return to commentary, the news over the past weekend was it.

Swiss regulator appeals court ruling on UBS data (Thursday, Jan 21, 2010)

Reuters Article

Germany divided over buying secret Swiss bank data (Sunday, Jan 31, 2010)

Reuters Article

HSBC says ex-worker stole private bank client data ( Wednesday Dec 9, 2009)

Reuters Article

First of all there was news out of Switzerland that one of the individuals affected by the transfer by UBS of information to the Swiss government that was subsequently shared with the US, had won her appeal in Swiss court. Effectively, the court said that the transfer was illegal. Which, given the facts, it probably was. The entire transfer was designed so that UBS could avoid the US John Doe subpoena. The issue here for UBS is that if they fail to comply, the legal entity in the US, which is a branch of the parent entity, will be criminally liable for contempt of court, and probably will be dissolved and all assets will escheat to the state. So this is not good for UBS. However the situation is a little funny, but that is perhaps a consequence of the particular wording of the US-Swiss Tax Treaty.

Most of the tax treaties that I have seen allow the two treaty countries to share information that they have themselves acquired, either spontaneously (“Here, you might find this interesting…” ) or on demand from the other country. How the country sharing the information got the information is irrelevant (e.g. the LGT scandal case, more on that anon). As a result, if UBS provides the information to the Swiss government (UBS was not providing it directly to the US in any event) the Swiss government could make a spontaneous disclosure under the Swiss-US Tax Treaty. Or that is usually the case. The decision reported over past week seems to suggest that the Swiss courts are taking the position that their domestic bank secrecy laws are more important than the government’s rights/obligations to disclose information under the treaty. Perhaps the case is more technical, in that it prevents the Swiss government from making a disclosure of information that was received as a violation of Swiss law.

The question seems to turn on the issue of “tax fraud and the like”. The Swiss court took the position that failure to file a US W9 form (indicating US residency) does not constitute tax fraud for Swiss purposes. OK. Then what does constitute “tax fraud and the like”? If someone is a US citizen or green card holder, or even a non-resident who spends too much time in the US, they are subject to US tax law. If that is the case, they have to file a W9 form when they open the account. Otherwise the individual is in violation of US tax law. I can understand that failure to file the form is not proof of tax fraud. But the only reason for not filing the form is … to be able to get away with not reporting the account, and, effectively, to evade US tax on the income from the account. Honestly, why would any US person not file the W9, given the severe penalties for failing to do so even in innocuous circumstances? Hmm, only one thing springs to mind… tax evasion. Failure to report income is clearly tax evasion on the facts. One would think that tax evasion would fall under the concept of “Tax fraud and the like”, especially the “and the like” part, no?

In any event, I do not think it really matters. If Switzerland decides to make a stand on bank secrecy, the next step is for the US to execute the John Doe’s and just seize UBS US lock, stock & barrel when they fail to comply. Then the US will break the Swiss-US tax treaty. If Swiss think the US are not serious about this, if they may think that their neutrality and role in the global banking system somehow means that they are special, and if they think the US will not go to the wall on this, then I think the Swiss are living in a state of denial. So what if it disrupts the Global Banking System? The days when countries could get away with not sharing information on US tax evaders (regardless of the wording of the respective treaty) are over as a practical matter. The US needs the money, and they are so close to this UBS money they can smell it. The US President needs a popularity boost with the impending failure of his flagship healthcare bill (maybe not failure, but certainly a watering down….), and going after Switzerland, the primary accessory to global tax evasion, would be a very popular move.

But again, all this does not matter. The real issue confronting all private banks is what I refer to as the dawn of the “Age of Tax Privateering”.

Over the weekend, a German newspaper broke the story that the German government had been offered a list of names of UBS clients for the equivalent of US$2.5m by a current or former UBS employee. I imagine that UBS is in the process of an internal investigation as we speak. Actually, given the amount of tax potentially due, recent history with the UBS and LGT scandals, and the US Whistleblower statute, US$2.5m is a bargain.

Lots of people know that an employee of LGT, a Lichtenstein financial institution, sold a list of names and accounts to the German secret service for about US$8m. That disgruntled former low-level employee is now in hiding, with a new identity, name and hopefully a new face, because there are a lot of angry people out there who wish him harm. That list of names has sparked tax and criminal investigations around the world, including Canada (see “Canadian Probe Part of International Sweep” Globe & Mail, Monday December 14, 2009, p. 1). The amount of tax, interest and penalties that will be paid by the clients of LGT is easily 10 times what the Germans paid for it. From the new reports in Canada, I would not be unreasonable to assume that there would be in excess of $8m collected just in Canada.

What people generally do not know is that one of the key players in the UBS scandal, Brad Birkenfeld, the American UBS banker who came forward with all the key information, has made a claim under the US Whistleblower Rewards Program (except the people who saw the 60 Minutes episode on January 4th, 2010) for potentially hundreds of millions of dollars. One report says his claim is for US$34m. Granted, Mr. Birkenfeld is going to spend 40 months in jail (because he forgot to mention some of his clients when he came forward …), but if he survives jail, he should get a significant payday, of about US$1m per month. I think a lot of people would take that deal …

Under the US Whisleblower Reward Program, by statute, people who provide “substantial assistance” to the US IRS in the recovery of tax payable, can receive a reward of up to 30% of the tax payable. There are a couple of caveats, of course, like the fact that the whistleblower’s lawyers will take 40% to 50% of the amount paid, but still, it is a there is a substantial payday involved. What the lawyers do to merit their hefty portion of the reward (frankly, a lot!) will be the topic of another blog, but for now the main point is that there is big money to be made in “outing” tax cheats.

Which is why the news reports of someone wanting a measly $2.5m for UBS data is such a bargain. And the harbinger of things to come. Yes, there will be a chill on Whistleblowers now that Brad Birkenfeld has gone to jail. But frankly, what happened to him is a cautionary tale – coming clean means coming clean about everything, not just some things. So I do not think the parade of individuals coming forward with information to the US tax authorities is going to come to a halt. There is just too much money involved. Also, many of the people who come forward, unlike Brad, have no direct involvement in the tax fraud – former spouses, former business partners, disgruntled employees, and even gruntled employees, who know where the money is hidden. All kinds of people come forward, not just people who have also committed crimes, because of the money being offered. Also, the US tax whistleblower system does not require that the informant ever become known to anyone but the lead auditor for the government. Even in criminal tax cases, the identity of the informant remains completely anonymous, and their name will never be revealed to the taxpayer being prosecuted.

So from my perspective, it does not matter if UBS’ clients win their case and Switzerland does not disclose the information to the US. It does not matter if other banks in Switzerland, or other countries, decide they want the US tax cheats that some of the Swiss banks are dumping. It does not matter what the banks and governments do to maintain control of the information, because sooner rather than later, the US will get information on every significant non-US account held by a US person. The US will get everything they want because the US offers big rewards, and those rewards do not require going to jail, or losing your job or anyone ever knowing it was you that sold the taxpayer(s) out.

But this is not just a US issue. Sooner or later, other countries will begin to see that if you want something done right, you have to inject the spirit of free enterprise into the process. The twin drivers of all markets, including the market for information, are fear and greed. Other countries have tried to make people provide information about their income and tax due using fear of punishment. The US is, so far, the only government consistently using both drivers as a matter of policy– the US also uses greed (of other people other than the taxpayer) to make rich taxpayers afraid of not fully reporting their income. Germany has paid for such information once, and I do not know why they would not do so again, and again, and again … Once other countries catch on, and make the reward process more transparent and less ‘cloak & daggar’, the Age of Tax Privateering will truly be upon us.

In the 16th to 19th centuries, nations could not afford to pay for standing navies of any size, so they would often provide “letters of marquee” to private ships in times of war. The Letters of Marque would authorize the ship’s captain to attack the shipping (and ports if possible) of the enemy. Everyone made out like bandits (or rather pirates) as the government could often sell the Letters, and would often receive a portion of the proceeds, or at least would benefit from the increased commerce to their ports when the privateers brought home their booty to sell. The US’ blanket offer of a reward for information leading to the collection of tax owed is about as close to privateering as you will get in the modern world.

OK, I admit you could refer to it as “Tax Bounty Hunting”, because that is effectively what is being offered, a reward or bounty, for turning in the bad guys. But personally, I do not think “Tax Bounty Hunter” sounds as cool. Dog the Bounty Hunter is cool, but that is the wrong image for me. I think “Tax Privateer” just seems to have more style, in a ‘Captain Jack Sparrow’ kind of way. It also has a certain Monty-Pythonesque quality of sophisticated farce to it. In the prologue to their 1983 film, The Meaning of Life, “The Crimson Permanent Assurance”, a British Assurance company mutinies, and the building, with the entire ‘crew’ of underwriters aboard, sails off on the wide ‘accountan-sea’ to attack their new (American) owner, the Very Big Corporation. This daydream image of tax lawyers as swashbuckling tax privateers, assisting the hard-done-by of the world to get even (and rich!) by informing on one’s employer, clients, et. al., sticks in my mind as both lyrical and ridiculous at the same time. Tax Privateer also makes the whole process seem more like good fun rather than the abetting of cold-hearted betrayal that it is!

I often work for the banks and other financial institutions that cater to the world’s wealthy, but my practice is focused on helping everyone stay onside and compliant with Canada’s tax laws. Or, if there is an issue, I assist individuals and institutions get everyone back onside and compliant from where they (accidentally, of course) happen to be, by making a proper voluntary disclosure, and formulating a tax-compliant plan for going forward once the client has paid what they owe to the Crown. So like any lawyer, I have to deal with conflict of interest issues whenever I consider taking on any case. However, if you know anything that a US someone would rather that the US IRS did not, please let me know. If you know a lot about a lot of people that they would rather any particular government not know, also please get in contact. I know the people who can make it happen, and I would be more than happy to raise the Jolly Roger and take up Tax Privateering …

… yo-ho, yo-ho, a tax privateer’s life for me …


Jonathan Garbutt

Barrister & Solicitor (Ont.), Attorney & Counselor-at-law (NY)

Garbutt Tax Law

TD Canada Trust Tower, Suite 2700

161 Bay Street

Toronto, Ontario

M5J 2S1 Canada

ph. +1-416-572-2063

fax. +1-416-572-2201

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