Underground economy meets overseas economy

Last week, the U.S. government announced its deal with UBS to settle a case that could have thrown the Swiss bank into bankruptcy. At issue was whether UBS would – or could – hand over the names of tens of thousands of American citizens believed to have used their UBS accounts to hide assets and dodge paying taxes. The amounts are said to add up to billions.

In February, UBS paid $780 million in penalties and unpaid taxes. The IRS and the Department of Justice then decided to go after the account holders—and that’s what last week’s settlement was about. The bank will hand over 4,550 instead of the 52,000 the government reportedly wanted. But the problem of tax evasion isn’t limited to UBS, or even to Switzerland. U.S. loses $100 billion in tax revenue every year due to “offshore tax abuses.”

UBS agreed to pay $780 million in taxes and penalties, and “disgorgement of the profits” of its offshore business. The bank admitted that its employees operated in the U.S. without licenses and in apparent violation of the Securities Exchange Act. The company also admitted that it helped its U.S. clients conceal income from the IRS by referring them to lawyers and consultants who, the bank knew, would help them set up sham offshore companies.

The IRS has said that hundreds of people with overseas accounts have applied to a voluntary disclosure program, which allows some errant taxpayers to escape prosecution by paying their taxes and penalties. UBS is not the only bank that has offered accounts to American taxpayers. Two other large banks, Credit Suisse and HSBC, have asked clients to waive their rights under bank secrecy laws.

Tax experts say the UBS case will ricochet through the industry. Other banks dread becoming the next UBS, said Ethan Burger, a Georgetown law professor who specializes in international crime.

While the aggressive actions against UBS have caused optimism among some tax experts, they point out that cracking down on Switzerland or UBS alone won’t solve the problem of rich Americans avoiding taxes.
“There are lots of other jurisdictions that are offering bank secrecy,” said Raymond Baker, at the Center for International Policy. “Indeed, Switzerland is still offering bank secrecy, so it isn’t going to end tax evasion through tax havens.” While many people have rushed to get their finances in order as a result of the UBS prosecution, others have already moved money elsewhere, Baker said.

“There’s also been some flow of money out of Switzerland into Dubai and Singapore as people continue to look for an alternative,” he said. “This issue isn’t finished."

--- Extracted from UBS and the Taxpayers' Hidden Billions from ProPublica, journalism in the public interest.

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One can extrapolate that Canada loses about $10 billion per year in tax revenue through overseas tax evasion. British Columbia's share would be about $1 billion annually. Canada Revenue Agency has refused comment on whether or not it is pursuing enforcement actions similar to those of the American IRS.

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