Tackling tax evasion
America the not so brave
CRACKING down on tax evasion “has been a core piece of President Obama’s agenda” since before he took office, according to a spokesman. His administration’s campaign to that end has been a “groundbreaking” success, according to the Department of Justice, the agency that has led it. Indeed, the DoJ considers it nothing short of “historic”.
There is some truth in all this. In 2010 Congress knocked a hole in the once-impregnable secrecy of Swiss banks by passing the Foreign Account Tax Compliance Act (FATCA). It forces financial firms around the world to disclose their American clients or face penalties. Swiss banks have paid billions in fines for helping Americans evade tax; Wegelin, the country’s oldest private bank, had to close its doors in 2013 after pleading guilty to conspiracy to evade taxes. A dozen big Swiss banks are still under investigation, and 100-odd smaller ones have joined a programme that will let them avoid indictment by coming clean and paying fines.
But the American government has been nowhere near as energetic and effective as it claims. It has been slow to chase tax evaders exposed by data leakers; it has failed to follow promising leads on some of the biggest fish; it has pulled punches with the biggest banks, for fear of destabilising markets; it botched the most prominent prosecution of a Swiss banker to date; and it has treated whistleblowers shoddily.
Start with the information on tax evaders leaked by Hervé Falciani, a former IT engineer in the Geneva office of HSBC, a big international bank. This became known as the Lagarde List, as it was first leaked to Christine Lagarde, France’s former finance minister. America has brought a few prosecutions against clients of the bank, but apparently none based on those files, and no tax case has been brought against HSBC itself—which raises the question of what the government has been doing with data it has had since 2010.
The tax-dodging exposed by Mr Falciani was not factored in when America negotiated a $1.9 billion settlement with HSBC over allegations of facilitating money-laundering. Loretta Lynch, the chief prosecutor on the case and now the attorney-general, has said she was not aware of the tax files at the time, even though the government had been in possession of them for two years. At best this looks like a regrettable lack of co-ordination.
The absence of visible progress in bringing cases related to the files looks all the more glaring when set against the alacrity with which some European countries exploited them. In April a former client of HSBC revealed by the Falciani leak, the heir to the Nina Ricci perfume dynasty, received a three-year prison sentence in France. French magistrates have put the bank under criminal investigation and ordered it to post €1 billion ($1.1 billion) bail.
When the American administration has acted, it has not always been severe. It makes much of the $780m that UBS, the biggest Swiss bank, agreed to pay to end the DoJ’s investigation into its aiding of tax evaders. Yet before the crackdown, UBS held an estimated $20 billion offshore for 19,000 Americans. Even if only half of that was undeclared (experts think it was more), the settlement amounted to just 8% of dodgy client funds. In France, UBS faces potential fines of several times that.
By the same token, Credit Suisse, the second-biggest Swiss bank, told investors that the $2.6 billion in fines it paid when admitting it had abetted tax dodgers was not “material”. Although it pleaded guilty to conspiracy to aid tax evasion (unlike UBS), it did not have any licences withdrawn, a step that should technically follow. The bank is also set to receive a waiver from a rule stipulating that firms with criminal convictions cannot manage or advise American retirement funds.
Credit Suisse had up to 22,000 tax-dodging American clients. In 2011 prosecutors obtained subpoenas to force it to reveal their names. But these weren’t enforced, in part because officials worried that would set off a chain of events that could seriously harm the bank: doing so might have caused the Swiss government to order the bank not to comply, and American courts might then have found it in contempt and levied hefty daily fines. Ultimately, the bank gave up only 238 names.
The government denies having gone soft, pointing out that since 2009 it has brought criminal cases against more than 100 account-holders and “dozens” of facilitators, at least ten of whom are fugitives. Last year the DoJ boasted of achieving “favourable outcomes in over 95 percent of all civil and criminal [tax] cases”.
But that number is misleading because prosecutors only tend to bring cases when the odds of winning are high. Some of their victories have been questionable, such as the case of a 79-year-old who inherited her husband’s Swiss account. She faced six years in jail despite having come forward to confess to $670,000 of unpaid tax. Bemoaning prosecutors’ heavy-handedness, the judge gave her a few seconds of probation and urged her to seek a pardon.
The biggest case of all—against Raoul Weil, UBS’s global head of private banking—was an embarrassing failure. Mr Weil was extradited to America in 2013 after being arrested in Italy. The main prosecution witness at his trial last November was Martin Liechti, UBS’s former private-banking head in the Americas, who testified that his erstwhile boss was aware as far back as 2002 that thousands of the bank’s accounts did not comply with American tax laws. Defence lawyers accused Mr Liechti, whom the government had promised not to prosecute if he helped in other cases, of lying to save his skin. The prosecution was widely criticised; the jury acquitted Mr Weil after barely an hour of deliberations.
Meanwhile, whistleblowers complain that American officials have made life strangely hard for them. One who worked at HSBC, John Cruz, claims to have been stonewalled. Bradley Birkenfeld, a whistleblower from UBS, helped to instigate the crackdown on Swiss banks in 2007 when he came forward with lurid tales of moneymen smuggling diamonds in toothpaste tubes on behalf of clients. He eventually received a $104m award from the IRS, reflecting his central role in uncovering mass tax evasion—but only after suffering for his good deeds. He is the only employee of a Swiss bank to have spent time in an American jail for helping tax evaders. And he has served more time—over two years—than any of his former clients.
Mr Birkenfeld ended up behind bars (he is now on supervised release) because prosecutors said he did not provide information on one of his biggest clients, Igor Olenicoff, a property developer, and thus had not co-operated fully enough to be treated as a whistleblower. Mr Birkenfeld insists he was keen to provide the data, if only the DoJ would demand it in a subpoena. This was to cover his back: he lived in Switzerland and feared arrest there for breaking secrecy laws if he handed over data that had not formally been requested. Prosecutors refused, obliging the Senate to step in with a subpoena request instead.
The government’s treatment of Mr Birkenfeld was much harsher than its treatment of the tax-shy Mr Olenicoff. Despite the seriousness of his offence (he held $200m in unreported accounts), Mr Olenicoff got two years’ probation after cutting a plea deal in which he agreed to pay $52m in back-taxes, interest and penalties.
The government was no less forgiving of Mr Liechti. Described by Mr Birkenfeld as the chief architect of the UBS tax fraud, he got away with a rare, highly coveted non-prosecution deal after agreeing to co-operate—a fact that the DoJ did not reveal for years. He refused to answer questions put to him by a Senate committee in spite of the deal requiring him to co-operate with all government inquiries.
Mr Birkenfeld also claims that America has failed to act on data he provided or help he offered. In a court filing, his lawyers asserted that on the first day of his co-operation with the DoJ in 2007, Mr Birkenfeld provided detailed information about the largest UBS account-holder living in America, with offshore assets in excess of $400m. However, he “was told that the government was not interested in pursuing a tax-fraud investigation regarding this individual, despite being advised that this UBS account holder had made profits from illegal oil sales with Saddam Hussein”.
Mr Birkenfeld says prosecutors spurned his offer to wear a wire to entrap colleagues. He also says he told them in 2007 about the use of bearer bonds (unregistered, anonymously owned securities) to hide untaxed money, yet only in the past couple of years has the government probed this method of concealment. European investigators, by contrast, are more responsive: “I have to go 4,000 miles away to be taken seriously,” he sighs.
Some wonder if America’s punch-pulling might have had something to do with the long tentacles of Swiss banks. They have certainly spent large sums raising their profile in Washington, DC. Credit Suisse, HSBC and UBS have spent $91m since 2002 on lobbying and political contributions in America, according to the Centre for Responsive Politics
Moreover, numerous officials and political figures have close past or present ties to the banks—including the president himself. Mr Obama has a well-publicised friendship with Robert Wolf, who ran UBS’s American operations until 2012. The IRS’s chief counsel, William Wilkins, is a former lobbyist for the Swiss Bankers Association. Eric Holder, the recently departed attorney-general, represented UBS when he worked in a private legal practice; for that reason, he avoided any involvement in the DoJ’s probe of the bank. (The revolving door spins the other way, too: prosecutors often move into private practice on leaving government, working with tax-challenged banks and companies.)
Officials dismiss any suggestion that such links have affected the government’s response. The DoJ “makes its decisions based on law-enforcement considerations and nothing else,” says Kathryn Keneally, the former head of its tax division.
Another former official argues that America’s efforts to curb tax evasion have been effective, if you consider that the aim is not necessarily to maximise convictions but to scare those hiding money to come forward. The IRS’s voluntary-compliance programme is deemed a success, having brought in $7 billion in back-taxes and penalties from 50,000 individuals. But it is controversial because it allows for anonymous payment and no admission of guilt.
America’s tax investigators continue to focus mainly on Switzerland, even as the returns on their efforts diminish. The 100-bank programme is bogged down, with only three banks having settled with the DoJ when most were expected to have done so by now. One obvious way to make the crackdown more effective would be to broaden it to tax havens that have so far been given an easy ride. Law firms in Panama, for instance, are giant incorporators of shell entities used by tax evaders, and the country has been slow to sign bilateral deals to exchange information on taxes. If federal prosecutors do eventually train their sights on such places, their experience with Switzerland has provided plenty of mistakes from which to learn.