US Senate panel cites FATCA ‘loopholes,’ Swiss barriers to US tax enforcement

At a hearing by the US Senate Permanent Subcommittee on Investigations last week, frustrated Senators skewered executives of financial giant Credit Suisse for facilitating US tax evaders, and scolded top prosecutors from the US Justice Department for lax enforcement of Swiss institutions. Yet the most frequent targets of the Senators’ ire were not even present in the room.

Led by Chairman Senator Carl Levin, Democrat of Michigan, and Ranking Minority Senator John McCain, Republican of Arizona, the Senate panel directed some of the harshest criticism toward the Swiss government, its courts, and the Federal Tax Administrative Authority. A report by the Permanent Subcommittee on Investigations (PSI), issued the same day as the hearings, explains why Swiss authorities came under fire.

The report also reveals how the US Foreign Account Tax Compliance Act, the sweeping financial account reporting law coming into effect in less than three months, may have weaknesses that could allow offshore accounts of US persons to evade taxation.

Swiss government obstructs US investigations

The PSI report, “Offshore Tax Evasion: The Effort to Collect Unpaid Taxes on Billions in Hidden Offshore Accounts,” the report lays bare how Switzerland’s tax agency and government officials inserted themselves between the Department of Justice and the nation’s banks. Swiss authorities limited the data its institutions shared with US enforcement agencies, and blocked access to account holder names.

In the process, US tax enforcement efforts stalled. Thousands of US tax evaders may remain cloaked behind Switzerland’s restrictive financial account information exchange laws, the report alleges, even as international organizations like the Office of Economic Cooperation and Development (OECD) push for global financial account data sharing and tax transparency.

The report also sounds an alarm on ongoing US initiatives to locate the cross-border assets of tax evaders and other financial criminals. It suggests that FATCA and other US tax compliance efforts may fall short if they are not backed by US enforcement agencies willing to use the full array of legal weapons at their disposal.

“The Department of Justice’s (DOJ’S) failure to use US enforcement tools and its decision to go along with Swiss demands that Swiss banks be excused from providing US client names… set a troubling precedent for how DOJ will approach other offshore banks around the world that facilitate US tax evasion,” the report says.

From shell corporations to aggregation, report spotlights FATCA ‘loopholes’

FATCA, which requires non-US financial institutions to report information on accounts they hold for US persons to the IRS, has been held up by some commentators as the law that will end offshore tax evasion. Yet one of the key concerns highlighted in the report is that FATCA contains “loopholes” that “may allow US taxpayers to conceal their accounts in Switzerland and elsewhere.”

The report cites several examples of what it characterizes as FATCA weaknesses, including:

  • “High dollar reporting thresholds” – FATCA only requires accounts to be reported if the balance on accounts held by individuals goes above $50,000 at any point in the calendar year. For legal entities, that figure is $250,000. As the report notes, US persons could potentially use multiple low-value accounts to evade FATCA reporting.
  • No aggregation between institutions – While FATCA requires non-US institutions to aggregate accounts held by the same person for reporting purposes, it has no mechanism for aggregating accounts of the same person at multiple institutions. “A US couple living abroad could maintain three accounts at three banks… together exceeding $1 million, yet legally avoid all FATCA reporting,” the report says.
  • Potential evasion through offshore shell corporationsUnder IRS withholding rules, if an account is held by a legal entity incorporated outside the US, such as an offshore shell corporation, a non-US financial institution can treat it as a non-US account not subject to FATCA reporting. This can be the case even if the entity is actually owned by a US taxpayer. “This loophole,” the report says, “may enable many offshore accounts opened by offshore shell corporations beneficially owned by US persons to avoid FATCA reporting.”

FATCA loopholes are minuscule part of US tax evasion, say experts

Some experts on US tax enforcement were skeptical of the PSI concerns over FATCA’s limitations, saying they were minor aspects of a law that introduces sweeping changes in global tax compliance.

“I’m not sure there’s ever been a law passed by Congress that someone didn’t think had loopholes,” said Jeff Neimann, a former Justice Department prosecutor who led the UBS case and is now a partner at Marcus Neiman & Rashbaum, in Fort Lauderdale. “The reality is, FATCA is a very burdensome law.”

Others noted that despite the level of attention offshore tax evasion at Swiss banks had received, the amounts of money at stake were comparatively small, compared to domestic tax evasion.

A former senior official at the IRS, who requested anonymity because he practices before the IRS, noted that small businesses in the US are estimated to evade some $200 billion in taxes per year. This contributed by far the largest portion of the $450 billion US “tax gap” in 2013, or the difference between taxes owed and taxes collected.

“Tax enforcement is always a little bit of smoke and mirrors,” the former official said, noting that IRS lacked the manpower to audit and recommend for prosecution even a fraction of tax evaders.

PSI says Justice Department surrendered control to Swiss          

The story of how the US Department of Justice has tried, and largely failed, to obtain the names of US tax evaders hiding assets in Switzerland unfolds in the numbers provided in the report.

In 2009, the Justice Department used the threat of criminal prosecution and legal tools like the IRS John Doe summons to force Switzerland’s largest bank, UBS, to turn over the names of about 4,700 US persons with unreported accounts. A John Doe summons allows the IRS to request information on all taxpayers within a certain group, without needing to provide names or identifying information on the persons they are seeking. 71 US individuals who held UBS accounts have been prosecuted.

The UBS employee who disclosed the tax evasion conspiracy at the Swiss institution, Bradley Birkenfeld, received a reward from the IRS of more than $100 million.

In 2011, the Swiss government approached the US Justice Department to negotiate a “global process” for settling the pending investigations into 14 Swiss banks launched in the wake of the UBS case. The Justice Department agreed to cooperate.

US prosecutors began asking for information from Swiss banks using a 1996 US-Swiss tax treaty, which requires requests to be processed through the Swiss tax agency.

“Employing its laws and regulatory authority, the Swiss government effectively took control of the transfer of virtually all information requested by DOJ from the Swiss banks under investigation,” the report states.

“DOJ acceded to the Swiss action, essentially reducing what had been a series of criminal investigations into a prolonged international negotiation.”

Justice Department leaves US court orders unenforced as Swiss cases languish

Since then, enforcement proceedings have slowed to a crawl. After five years, none of the 14 Swiss banks under investigation have faced charges or entered plea agreements with the Justice Department. Credit Suisse, the focus of the PSI hearing, allegedly held 12,000 undisclosed accounts holding as much as $12 billion, but turned over only 238 accountholder names to the Justice Department. Only four have been prosecuted.

Perhaps most surprising, the report details instances in which the Swiss government has shielded its financial institutions from complying with US court orders, with few repercussions.

In 2011, the Department of Justice issued grand jury subpoenas on Credit Suisse, requesting accountholder data and business records detailing services the bank had provided to US persons. At some point in that year, the Swiss government intervened, convincing the Justice Department to submit a treaty request asking for the same information.

That request was later blocked by a Swiss court in 2013. The subpoenas remain unenforced.

‘Play your cards,’ Levin tells US prosecutors

Despite a stream of criticism from both Democratic and Republican Senators, Department of Justice representatives defended their approach at the Feb. 26 hearing. They said the Justice Department took offshore tax enforcement seriously, and they were gradually building strong cases against the 14 banks under investigation.

Senator Levin, the Subcommittee chair, was more skeptical, telling Deputy Attorney General John Cole that he expected action from the Justice Department.

“At some point, you’re going to have to play your cards,” Levin said to Cole. “Or no one will believe you have a strong hand.”

 Read the PSI report here