Precautions for Banks and Other Financial Institutions to Take Now
The world's press is flooded with reports that stolen records from LGT Group, the Liechtenstein bank, have been purchased for as much as $7.4 million by the tax authorities of several nations including the United States, Germany and the United Kingdom. The records reportedly contain data on 1,400 LGT foreign clients, including foundations with more than 4,500 beneficiaries. Despite outrage over the propriety of tax authorities' paying for stolen information, law enforcement is expected to use this information to pursue the holders of (alleged) secret accounts containing untaxed assets. In the United States, Sen. Carl Levin has called for an investigation into whether US citizens are hiding assets in Liechtenstein.
The investigation of US taxpayers with offshore accounts is nothing new. Recently, the IRS conducted an expansive investigation into US taxpayers' use of debit and credit cards issued by financial institutions located in bank secrecy jurisdictions.1 The US Congress is considering legislation to combat perceived abuses by US taxpayers who use offshore structures to avoid or evade US taxes.2 Civil investigations and criminal prosecutions for the improper use of offshore structures are increasing.
US tax authorities have a variety of means for obtaining information regarding US taxpayers' financial transactions with foreign financial institutions. In the LGT case, US authorities have reportedly obtained a DVD containing information stolen from LGT by a former employee of the bank. More traditional means for securing foreign financial information include subpoenas to the US branch of a foreign financial institution, exchange of information under treaties or tax information exchange agreements and the use of informal information exchange protocols between the US and foreign jurisdictions. US courts may even order persons within their jurisdiction to authorize the IRS to secure the information from the foreign financial institution, despite local bank secrecy rules.
US citizens and green card holders who conduct their financial affairs through the use of non-US financial institutions face a multitude of complex US tax reporting requirements, many of which are not familiar to non-specialist US tax advisors. Annual reports regarding foreign financial accounts, controlled foreign corporations and foreign trusts are frequently overlooked. Failure to file these reports can lead to the imposition of additional tax, interest and penalties, which when combined may exceed the income earned on the foreign assets and, in some instances, may exceed the total value of the assets maintained in these foreign structures. Criminal prosecutions may be instituted for failure to file these reports or to report the income earned on the foreign assets.
Banks, especially those with high net worth individuals in their private banking and trust departments, face a challenging environment. At stake are hundreds of millions of Euros and the very nature of "flight capital."
Nations are increasingly putting pressure on "uncooperative tax havens" and their banking sectors. The existence of Financial Intelligence Units and bilateral treaties that allow for access to bank records, as well as the interests of intelligence gatherers in the "War on Terrorism" and money laundering, should be a topic for review and strategic decision making by financial institutions.
The implications of the current Liechtenstein affair are clear. Uncooperative tax havens will be pressured to conform to international standards of increasing transparency and disclosing of financial records to US and non-US tax authorities. US courts may even order persons within their jurisdiction to authorize the foreign financial institution to release their information to the US Department of Justice, IRS or other governmental agencies. Many financial institutions are re-examining the manner in which they conduct their affairs around the world. Some are choosing to restrict investment options available to citizens of particular countries. Others are taking this time to review their various global compliance programs.
For Further Information
Duane Morris attorneys have significant experience in implementing and reviewing global compliance programs and representing financial institutions that receive inquiries from US and foreign governmental agencies regarding foreign and domestic financial and securities transactions. If you have any questions or would like more information regarding governmental inquiries of this nature or corporate compliance programs, please contact:
- Jane Leslie Wexton - International Corporate Compliance
- Jason R. Pickholz - White Collar Trial Practice
- Miriam O. Hyman - International Corporate
- Andrew L. Odell - International Corporate
- Dianne A. Meyer - Chair, Commercial Finance Group
Footnotes
- See Ostrander, "The Offshore Credit Card and Financial Arrangement Probe: Fraught With Danger for Taxpayers," Journal of Taxation, August 2003.
- See Stop Tax Haven Abuse Act, S. 681.
As required by United States Treasury Regulations, you should be aware that this communication is not intended by the sender to be used, and it cannot be used, for the purpose of avoiding penalties under United States federal tax laws.
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.