Swiss Bank Cases

free essayTax evasion is the deliberate non-payment or underpayment of due taxes that also entails the misrepresentation of the facts that lead to less or no taxes being paid to the government. In the US laws, this is a serious offense, and it attracts substantial civil and criminal penalties (Mauldin & Saunders, 2016). However, tax evasion is different from tax avoidance in that the latter is completely legal and it involves using the existing provisions of the law to reduce tax burden. Many reports have linked numerous celebrities and political figures of hiding their assets in offshore markets in bid to evade taxes levied on the income from their assets. Furthermore, tax evasion can be a collusion from the income earner or the financial institution handling such transactions, like in the case of Swiss UBS bank.

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History and Developments of Swiss Bank Cases

The Swiss tax evasion probe on the Swiss bank UBS started in 2008. The probe was prompted by the disclosure by Bradley Birkenfeld, a former employee of the bank. The organization had directed its North American sales employees to recruit Americans with promises that it would provide them with a facility that would make it possible to hide their assets in the offshore markets and subsequently, evade taxes. Birkenfeld contacted the Department of Justice, US Senate, Internal Revenue Service, and Securities and Exchange Commission and provided his testimony (Saunders & Sidel, 2012). He wanted to take advantage of the new laws, whereby a whistleblower would get 30% of the tax amounts recovered from a tax evasion probe. However, he was charged and found guilty of aiding tax evasion and sent to jail. Nevertheless, after serving his jail term, he received his payment and reward for his whistleblowing as the corresponding law required.

The Swiss Banking Act of 1934 on Banking Secrecy prohibited organizations and banks from disclosing personal and banking details of their customers to authorities except for the cases of a criminal investigation. After Birkenfeld’s disclosure of his bank’s activities, the US government pressured the Swiss government to allow them to perform the inquiry to re-coup any taxes that had been hidden in offshore accounts. In addition, Mauldin and Saunders (2016) noted in their study that the examination had disclosed that the tax evasion resulting from the action of UBS was more than the $100B annually. Thus, the US government reached an agreement with the bank to pay for the non-remitted taxes, any interest accrued on such taxes, and penalties on the income lost, by the government from the holders of offshore accounts (Song, 2015). An agreement was reached to pay the $200M to the Securities and Exchange Commission for maintaining undisclosed offshore bank accounts, with penalties for not receiving income that the commission had not received out of the bank’s misdeed.

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The Effect on the Swiss Bank Secrecy Laws

The Swiss Banking Act of 1934 strictly prohibits the sharing of customers and account holder’s information with third parties, including tax authorities or governments, without the express permission of a swiss judge. The privacy of customers is statutorily protected, which has made Switzerland a haven for private bank accounts and consequent tax evaders. Following the aftermath of the UBS case, the Swiss government entered into an agreement with EU that saw the end of the secrecy law and led to a relative sharing of financial information of its customers with other EU members (Song, 2015). Therefore, the Swiss government amended the law, thus ending the special protection, enjoyed by its clients, and aligning the county’s banking practices to those of other countries to encourage a greater business transparency.

In the USA, the Bank Secrecy Act requires that the banking and other financial institutions to share any information with the government if there is any suspicious transaction of money laundering, tax evasion, or any other criminal activity (Shaxson, 2012). At the same time, any daily cash transaction of $10,000 and above to any person should be reported to the US government by the involved financial institution so that the former was able to assess if there were any payable taxes. After the investigations, the Swiss bank program was enacted to resolve potential criminal activities that might have been practiced in Swiss banks. Thus, the program required that the companies pay any accrued penalties and taxes (Grossman, Letzing, & Barrett, 2014). They were required to provide details of the accounts of US citizens in their institutions. Moreover, they were to cooperate with the authorities in providing any information requested and terminate any accounts of the clients who failed to comply with the US banking regulations.

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IRS’ Efforts to Curb Offshore Tax Evasion via John Doe Summons and OVDI Initiative

The implementation of the Foreign Account Tax Compliance Act (FATCA) began in 2014. This act was meant to fix the weak US laws regarding the sharing of information between foreign countries, specifically the Foreign Financial Institutions, regarding tax withholding procedures (The Economist, 2013). The UBS scandal was the precursor to the FACTA enactment. The UBS investigation had showed the problems encountered when the US government sought to access information on the source of income for the US citizens. When the UBS hearings were conducted by the US Senate, the investigative committee identified the current limitations on the IRS to pursue offshore accounts (United States Government Accountability Office, 2010). The existing Qualified Intermediary (QI) program only requires that the declaration is made to the IRS on the US source of income and not the foreign one. This practice forced the House and the Senate to enact FACTA into law in 2010 (Michel, 2011). The FACTA is information exchange program between the IRS and foreign financial institutions that make it possible for the former to identify possible tax evasion by the US citizens. The FACTA provides that foreign financial institutions sign and enter into an agreement with the IRS, while the financial institutions do due diligence on their account holders and avail such information when requested. In addition, they are required to provide annual reports to the IRS regarding their US account holders, including such information as names, account balances, any dividends, interest paid to such account holders and any proceeds from the sale of US securities. Lastly, in some agreed situations, the foreign institution can withhold and pay 30% of the US income to the IRS regardless of the fact that the FACTA is mostly voluntary, but those foreign financial institution that do not enter into such an agreement and comply with the FACTA are subjected to 30% of their gross turnover.

How It Works

Tax evasion is an act that is usually overlooked, but it has cost the US government and many governments around the world much money. Therefore, many governments have devised mechanisms to curb this practice and ensue that there is a stricter tax compliance. They have given amnesties where necessary or enacted laws that reward whistleblowers. Moreover, governments have entered into agreements with other governments in other jurisdictions so that in case they needed their cooperation, such a request did not meet any hindrances. The US government had a mutual agreement with the European Union that would provide the full cooperation of both sides if needed.

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