Ethics and governance in the European Financial centers

Associated Press has reported that Swiss banking giant UBS AG agreed today to turn over to the IRS the details of 4,450 accounts suspected of holding undeclared assets by American customers, ending an intense trans-Atlantic legal fight. UBS had feared that it might be forced to hand over as many as 52,000 clients.

In return, US authorities are to abandon their lawsuit against UBS in the US.

Despite the agreement is for only 8.5% of the target, it is a turmoil for banking secrecy.

The deal will give the Internal Revenue Service thousands of long-sought account names, and is expected to provide even more UBS clients who voluntarily disclose their financial details. UBS's American customers have until September 23 to confess to the IRS about offshore bank accounts

"This issue is not going away, and people hiding assets and income offshore will find themselves increasingly at risk due to our efforts in this area," IRS Commissioner Doug Shulman said.

The US Attorney’s Office in California has recently released details of a case involving a man from Malibu whose name is John McCarthy that used the services of UBS to evade tax.

According to court documents, Switzerland’s largest bank, UBS AG, turned over records showing that McCarthy was the beneficial owner and, therefore, had a direct financial interest in a UBS bank account opened in Switzerland in 2003 in the name of COGS Enterprises, Ltd., a Hong Kong entity. In court documents, McCarthy admitted skimming money from his domestic business and, after funneling the money through a U.S. account, wire transferring the skimmed funds into his COGS Enterprises account in Switzerland. McCarthy admitted that, with the assistance of UBS representatives and his Swiss lawyer, he directed the investment activities and transfers of funds into and out of the COGS UBS Swiss bank account, as well as from other UBS Swiss accounts he controlled. UBS representatives worked closely with his Swiss lawyer to keep McCarthy's funds from leaving Switzerland and helped McCarthy move additional monies out of the United States undetected by the federal government, according to the plea agreement

McCarthy admitted that he transferred more than $1 million of money skimmed from his business to the COGS Enterprises account at UBS in Switzerland. As a result of the money transfers, McCarthy admitted that he failed to pay at least $200,000 in federal income taxes and that he now owes the government interest and penalties.

“Tax prosecutors in my office, working with IRS-Criminal Investigation agents and Department of Justice attorneys, are aggressively pursuing those who shirk their federal tax obligations by hiding funds in secret bank accounts in Europe and Asia,” said United States Attorney Thomas P. O’Brien.

Eileen C. Mayer, Chief of IRS-Criminal Investigation, stated: “The prosecution of John McCarthy is the tip of the iceberg. In conjunction with the United States Attorney’s Office here in Los Angeles and prosecutors around the country, our agents continue to investigate existing leads, as well as develop and follow-up on additional leads uncovered in the course of their investigations on others similarly situated. Today's actions show the IRS is committed to pursuing people hiding income offshore. Anyone in this situation needs to immediately come in through our voluntary disclosure process and get right with your government or face stiff criminal and financial penalties”.

John McCarthy Plea Agreement was circulated on the internet.

Richard Murphy has analysed the agreement between UBS and its client John McCarthy.

He observes:

First, active involvement of UBS in what they knew to be tax evasion.

Second, active involvement of a Swiss lawyer in what he or she knew to be tax evasion.

And third repeated money laundering offences in Switzerland, Hong Kong, Cayman, Liechtenstein and the BVI.

As Richard says, this is not just a matter of a bank not identifying an offence: this is evidence of a bank being an active party in criminal behaviour.

A bank that was supported by TI for its Corporate Social responsibility:

“UBS was instrumental in creating the Wolfsberg Group, named after their own management training center in Switzerland. With the help of the anti-corruption organization, Transparency International, 12 of the worlds largest banks – banks which would normally be guarded about sharing internal procedures with their competitors, collaborated to develop and publish the “Anti Money Laundering Principles” called the “Wolfsberg Principles” …which have received worldwide recognition as good practice – filling gaps in national laws and regulations.”  (Jermyn Brooks, Director, Transparency International)

The AP has reported that the  U.S. government and Swiss banking giant UBS AG have reached a long-awaited agreement in a case over secret Swiss bank accounts for alleged American tax evaders, lawyers for both sides told a federal judge Wednesday.

The deal was announced during a telephone conference with the judge that lasted only long enough for lawyers to say an agreement had been reached. No details were announced.

However OBAMA tax views are clear enough: as a US law firm observes:

The Qualified Intermediary ("QI") program seeks to ensure that appropriate U.S. withholding is imposed on foreign persons. The proposed rules would require foreign financial institutions to withhold and report on foreign income and accounts of U.S. and foreign persons. Foreign financial institutions would be required to enter into agreements with the IRS to share information about their U.S. customers. Currently, the IRS has the burden to show that an account holder of a QI is a U.S. person if the account holder attests to being a non-U.S. person.

The President's plan would require QIs to identify all account holders that are U.S. persons and file IRS Form 1099 with respect to payments to U.S. account holders, including income from foreign sources. Any withholding agent making a payment to a nonqualified intermediary would be required to withhold 30 percent. Withholding agents paying gross proceeds from the sale of any security to a non-qualified intermediary not located in an income tax treaty jurisdiction would be required to withhold 20 percent. To get a refund of the amount withheld, account holders would be required to disclose their identities and demonstrate compliance with U.S. tax laws.

As Richard Murphy observes, this wording looks like something close to Automatic Information Exchange. If so, why not roll it out? After all, once people have systems in place for the US the extra cost for the rest of the world is marginal.