Who's on the List?

By: John Rubino | Wed, Aug 19, 2009
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Yesterday's Wall Street Journal ran an article on Washington's ongoing attempt to discover where its citizens keep their money. Here's a quote that illustrates the complexity of the cat-and-mouse game:

"At one point, the Swiss lawyer recommended to Mr. McCarthy that he set up a Liechtenstein foundation that would serve as an umbrella over a Panamanian or Hong Kong corporation. That 'would allow for an extra layer of privacy and help to conceal' Mr. McCarthy's identity, said the statement of facts."

And three observations:

1) The deal between the IRS and UBS apparently requires the latter to hand over thousands of names of U.S. citizens. It's a safe bet that hundreds of those are major donors to the campaigns of the politicians currently running the country -- and a few dozen are the politicians themselves -- which creates some amusing moral dilemmas for the enforcement folks and the media.

2) In the wake of the UBS fiasco, it's going to be even harder for U.S. citizens to get foreign bank accounts, which is exactly what Washington wants.

3) China might be a little harder to push around than Switzerland.

UBS Tax Crackdown Widens to Hong Kong
By CARRICK MOLLENKAMP

The U.S. crackdown on clients of UBS AG is widening into a global hunt, with the government detailing in court documents how the Swiss bank and outside advisers helped Americans hide money using enterprises set up in Hong Kong.

For the first time in the government's long-running bid to ferret out the names of U.S. tax-evaders from the Swiss bank's client list, plea agreements entered in the case are providing a clearer picture of UBS's sophisticated efforts to help Americans hide income or the existence of foreign bank accounts.

On Friday, John McCarthy, a UBS client in California, agreed to plead guilty to one count of failing to file an annual report to the Treasury Department. A document filed with the plea shows the tax scheme relied in part on channeling funds to a Swiss UBS account held in the name of a Hong Kong entity, the second time accounts in the Asian financial hub have figured in these cases.

The Hong Kong link is important because the Justice Department and Internal Revenue Service are apparently using that as a clue of wrongdoing as they plow through some 250 names that UBS turned over to the U.S. government, say people familiar with the Justice Department probe. The bank handed over the names as part of a criminal settlement it agreed to in February.

Separately, the U.S. has been pursuing a civil case against UBS. Last week, the two sides reached a settlement that is expected to lead to the Swiss bank handing over the names of thousands of U.S. account holders. Lawyers representing UBS clients believe the bank will turn over names associated with 5,000 to 10,000 accounts. Details on the settlement are expected this week.

UBS declined to comment on Mr. McCarthy's case, as it has with other individual cases.

Documents filed on Friday in the U.S. District Court for the Central District of California in Los Angeles underscore Swiss advisers' role in helping clients sidestep U.S. financial regulators. As part of his agreement to plead guilty, Mr. McCarthy and the Justice Department agreed to a statement of facts that details the UBS tax structure.

The documents state that Mr. McCarthy, of Malibu, Calif., controlled a UBS account opened in Switzerland in 2003 in the name of a Hong Kong entity, COGS Enterprises Ltd. Mr. McCarthy, with the help of UBS and an unnamed Swiss lawyer, moved funds from a Los Angeles business into an unidentified U.S. bank account and then into the COGS account at UBS. He directed the transfer of more than $1 million to the COGS account, the statement of facts said.

Between 2003 and 2008, Mr. McCarthy talked with UBS representatives and the Swiss lawyer in Beverly Hills and Switzerland to hash out details of his business, according to the statement. UBS representatives told Mr. McCarthy that "a lot of United States clients don't report their income and just take it off the top."

At one point, the Swiss lawyer recommended to Mr. McCarthy that he set up a Liechtenstein foundation that would serve as an umbrella over a Panamanian or Hong Kong corporation. That "would allow for an extra layer of privacy and help to conceal" Mr. McCarthy's identity, said the statement of facts.

Mr. McCarthy also transferred funds into other UBS accounts from a bank in the Cayman Islands, the statement says. He is due to appear in federal court on Sept. 14. He faces a maximum penalty of five years in prison and fines totaling $250,000.

"Mr. McCarthy has accepted responsibility for his conduct," said his lawyer, Steven Toscher. "He, like many other U.S. taxpayers, has made serious mistakes regarding the use of foreign bank accounts. Mr. McCarthy has decided to get right with his tax obligations and his case should serve as a strong signal to other taxpayers."

Jeffrey Chernick of New York, who pleaded guilty in July to filing a false tax return, also used a Hong Kong corporation and offshore bank accounts to conceal from the IRS commissions paid for sales, according to a statement of facts agreed to by the Justice Department and Mr. Chernick. A lawyer for Mr. Chernick declined to comment.

Hong Kong, of course, can be used as a legitimate tax-planning jurisdiction and gateway to mainland China. But tax lawyers say the former British colony's corporate legal system allows structures to be assembled with ease, mirroring in many ways how corporations are formed in the U.S. or Europe. These lawyers say the IRS might also face challenges investigating corporations set up in Hong Kong, which has come under fire in the past for not sharing tax information with other jurisdictions.

In a statement, a spokesman for the Hong Kong government said Hong Kong has "stringent and effective anti-tax avoidance legislation" and doesn't have laws protecting bank secrecy. A law that would align Hong Kong with international standards on exchange of tax information was submitted to lawmakers last month.

According to a person familiar with the UBS structures, a number of outside fiduciary advisers offered templates for setting up offshore structures on behalf of UBS clients.

In a statement Friday, U.S. Attorney Thomas P. O'Brien said the Justice Department and IRS were "aggressively pursuing those who shirk their federal tax obligations by hiding funds in secret bank accounts in Europe and Asia."

Before the settlement was reached last week in the civil proceedings, UBS and the Swiss government had claimed that UBS couldn't provide account identities to the U.S. because it violated Swiss privacy law.

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John Rubino

Author: John Rubino

John Rubino
DollarCollapse.com

John Rubino is author of Clean Money: Picking Winners in the Green Tech Boom (Wiley, December 2008), co-author, with GoldMoney's James Turk, of The Collapse of the Dollar and How to Profit From It (Doubleday, January 2008), and author of How to Profit from the Coming Real Estate Bust (Rodale, 2003). After earning a Finance MBA from New York University, he spent the 1980s on Wall Street, as a currency trader, equity analyst and junk bond analyst. During the 1990s he was a featured columnist with TheStreet.com and a frequent contributor to Individual Investor, Online Investor, and Consumers Digest, among many other publications. He now writes for CFA Magazine and edits DollarCollapse.com and GreenStockInvesting.com.

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