On July 17, 2008, in conjunction with a hearing regarding Tax Haven Banks and U.S. Tax Compliance, the Permanent Subcommittee on Investigations of the U.S. Senate released a report (the “Subcommittee Report”) that reads like a spy novel. The Subcommittee Report reviews the “global tax scandal” related to LGT Bank in Liechtenstein, and the “international tax scandal” related to UBS AG in Switzerland.
The LGT scandal erupted after a former employee of a Liechtenstein trust company provided tax authorities around the world with data on about 1,400 persons with accounts at LGT. The UBS AG scandal broke when the U.S. arrested a private banker formerly employed by UBS AG on charges of having conspired with a U.S. citizen and a business associate to defraud the IRS of $7.2 million in taxes owed on $200 million of assets hidden in offshore accounts in Switzerland and Liechtenstein.
LGT Bank in Liechtenstein
LGT Bank in Liechtenstein is owned and controlled by the royal family in Liechtenstein. According to the Subcommittee Report:
LGT employed practices that could facilitate, and in some instances have resulted in, tax evasion by U.S. clients. These LGT practices have included maintaining U.S. client accounts which are not disclosed to U.S. tax authorities; advising U.S. clients to open accounts in the name of Liechtenstein foundations to hide their beneficial ownership of the account assets; advising clients on the use of complex offshore structures to hide ownership of assets outside of Liechtenstein; and establishing “transfer corporations” to disguise asset transfers to and from LGT accounts. It was also not unusual for LGT to assign its U.S. clients code words that they or LGT could invoke to confirm their respective identities. LGT also advised clients on how to structure their investments to avoid disclosure to the IRS . . . .
For many of its U.S. clients, LGT helped establish one or more Liechtenstein foundations. Under U.S. tax law, the IRS generally views Liechtenstein foundations as foreign trusts. U.S. persons with an interest in a foreign trust, including a Liechtenstein foundation, are required to disclose the existence of the trust to the IRS by filing Forms 3520 (Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts) and 3520-A (Annual Information Return of Foreign Trust With a U.S. Owner). Financial penalties for failing to file these forms can be confiscatory.
The foundations provided strong secrecy protections and yet gave substantial control over the foundations to their beneficial owners. In one case, a U.S. citizen pretended to sell his home in New York to what appeared to be an unrelated party from Hong Kong. In fact, the buyer was a British Virgin Islands company with a Hong Kong address, and it was wholly owned by a Bahamian corporation which was, in turn, wholly owned by the U.S. citizen’s Liechtenstein foundation.
The foundations often would not name the grantor or his/her family members as beneficiaries. Instead, the foundation instruments would include a complex mechanism providing for the naming of beneficiaries. Despite these mechanisms, internal LGT documents were clear as to the the true beneficiaries of the foundation.
At times, LGT would set up for the foundation what LGT has sometimes referred to as a “transfer corporation” to help disguise asset flows into and out of a foundation’s accounts. This transfer corporation acts as a pass-through entity that breaks the direct link between the foundation and other persons with whom it is exchanging funds, making it harder to trace those funds.
A strategy employed by LGT to enhance secrecy and client anonymity was to limit the ability of outside parties to trace client communications back to Liechtenstein. To achieve this objective, LGT not only instituted a policy of retaining client mail at the bank in Liechtenstein, or sending mail to locations outside of a client’s home jurisdiction, but also undertook efforts to minimize the ability of outside parties to trace telephone calls back to the bank and even the country itself. One LGT document, for example, providing information on how to contact a client, instructed that calls should be made only from public phone booths outside of Liechtenstein.
The Subcommittee Report stated:
These LGT accounts together portray a bank whose personnel too often viewed LGT’s role as, not just a guardian of client assets or trusted financial advisor, but also a willing partner to clients wishing to hide their assets from tax authorities, creditors, and courts. In that context, bank secrecy laws have served as a cloak not only for client misconduct, but also for bank personnel colluding with clients to evade taxes, dodge creditors, and defy court orders.
UBS AG of Switzerland is one of the largest financial institutions in the world, and has one of the world’s largest private banks catering to wealthy individuals. From at least 2000 to 2007, UBS made a concerted effort to open accounts in Switzerland for wealthy U.S. clients, employing practices that could facilitate, and have resulted in, tax evasion by U.S. clients. These UBS practices included maintaining for an estimated 19,000 U.S. clients “undeclared” accounts in Switzerland with billions of dollars in assets that have not been disclosed to U.S. tax authorities, and assisting U.S. clients in structuring their accounts to avoid U.S. tax reporting requirements.
UBS assured its U.S. clients with undeclared accounts that U.S. authorities would not learn about them, because the bank is not required to disclose them; UBS procedures, practices and services protect against disclosure; and the account information is further shielded by Swiss bank secrecy laws. In November 2002, for example, senior officials in the UBS private banking operations in Switzerland sent a letter to U.S. clients about their Swiss accounts which states in part:
“[W]e should like to underscore that a Swiss bank which runs afoul of Swiss privacy laws will face sanctions by its Swiss regulator … [I]t must be clear that information relative to your Swiss banking relationship is as safe as ever and that the possibility of putting pressure on our U.S. units does not change anything. . . .
The Subcommittee Report indicated that UBS also provided training to its client advisors on how to detect -- and avoid – surveillance by U.S. customs agents and law enforcement officers. A UBS training document provides a series of scenarios designed to train its personnel. An excerpt from one of the scenarios is as follows:
After passing immigration desk during your trip to USA/Canada, you are intercepted by the authorities. By checking your Palm, they find all your client meetings. Fortunately you stored only very short remarks of the different meetings and no names.
As you spend around one week in the same hotel, the longer you stay there, the more you get the feeling of being observed. Sometimes you even doubt if all of the hotel employees are working for the hotel. A lot of client meetings are held in the suite of your hotel.
One morning you are intercepted by an FBI-agent. He looks for some information about one of your clients and explains to you, that your client is involved in illegal activities.
Question 1: What would you do in such a situation?
Question 2: What are the signs indicating that something is going on?
The document does not indicate UBS’ preferred responses to these questions.
The Subcommittee Report is 110 pages long and has many more details of the practices and procedures of LGT and UBS. UBS is currently under investigation by the SEC, IRS, and Department of Justice.