Why holding undeclared assets in Switzerland, the United Kingdom or the United States is inadvisable - Global Wealth Management Consulting - Turning your financial success into a family tradition

Why holding undeclared assets in Switzerland, the United Kingdom or the United States is inadvisable

This article will show that global exchange of information mechanisms are far more complete and functional for Switzerland, the United Kingdom and the United States than commonly assumed. It also makes the point that taxpayers using these (and most other) jurisdictions to hold their undeclared assets are risking to be subject to seizure of their assets and harsh criminal liabilities in the respective jurisdiction. This in addition to tax liabilities for the (already seized) unpaid taxes, back-taxes and penalties as well as possible criminal liability in their domicile country.

In the current times of crisis with economic, political, legal, financial and fiscal risks, it is more important than ever to hold a portfolio of asset classes that is well-diversified over different jurisdictions and currencies. Often, the most efficient way of doing so in terms of diversification and liquidity will be to hold a portfolio of securities booked in one of the major international financial centers. Many of these financial centers have historically also strongly promoted the legal confidentiality framework of their financial sector as a possibility to shelter taxpayer’s assets not only from all kind of uncertainties in taxpayer’s domicile countries, but also from the taxpayer’s domestic tax authorities. This article will show that while this may have been a successful strategy for certain jurisdictions in the past, this certainly is not the case anymore today. The article will focus on three of the most important financial centers, Switzerland, the United Kingdom and the United States. Although only three are discussed here, most of the mechanisms described are based on global initiatives and will therefore apply to most financial centers per analogy.

I. International Co-operation on Legal Assistance

International co-operation on Legal Assistance has a long tradition. Initially it was used to investigate coordinated international crimes like drug trafficking, money laundering and terrorism. In the US for example letters rogatory were forwarded to a court in the receiving country via diplomatic channels.

The US then signed Mutual Legal Assistance Treaties (see below) for example with Switzerland in 1977, upgraded with an addendum permitting information sharing related to US stock trading offenses.

II. Exchange of Tax Information

Exchange of financial information among separate sovereign government authorities can take place automatically or upon request, usually based on some kind of bilateral and/or multilateral agreement between two or more jurisdictions. It can also be exchanged spontaneously (without any request), sometimes based on a treaty, or, depending on the laws of the providing jurisdiction, even without a treaty. This article will only focus on the most frequently used ways of exchanging tax information.

1. Tax Information Exchange Treaties (TIEAs) and Double Tax Treaties (DTTs)

Both Tax Information Exchange Treaties and Double Tax Treaties are agreements made between (normally) two jurisdictions. Under the links below, you can find a list of tax information exchange agreements entered into by Switzerland, the UK, and the US.

a) Tax Information Exchange Agreements (TIEAs)

The purpose of Tax Information Exchange Agreements is to promote international co-operation between (two or more) countries in tax matters and enhance tax compliance of taxpayers through exchange of tax-relevant information. Information can be exchanged upon request, or for treaties based on the OECD model of 2015 also automatically. There is also a Multilateral Competent Authority Agreement (MCAA) on Automatic Exchange of Information (AEOI) which may also permit spontaneous exchange of information. Switzerland and the UK have signed up to this multilateral treaty – the full list of signatories can be found here.

Page 8f.:Swire.docx
For example:Oecd releases guidance on the spontaneous exchange by no or onlynominal tax jurisdictions.
Informations austausch aufersuchen.
Tax treaties (TIEAs below)
The tools on page 2 and 3: EOICUP_20.1_01R.pdf
Some tools per country as per 2018: update-ustreaties-status-tmij.pdf
Treaties
Tax information exchange agreement stieas.
MCAA-Signatories.pdf

b) Double Tax Treaties (DTTs)

Double tax treaties (DTTs) prevent or mitigate the double taxation of income for individuals and legal entities with an international nexus in the area of taxes. Whereas most of the provisions of a DTT have the purpose of avoiding or mitigating double taxation, DTTs also contain rules relating to the exchange of tax-relevant information upon request.

c) Privacy and actual cases based on Tax Information Exchange Treaties and Double Tax Treaties

i. Switzerland

In Switzerland, historically individual financial privacy rights have enjoyed strong legal protection since the 18^th century. This specifically also applies to banking secrecy which has a long tradition, especially in the French speaking part from where bankers traveled to France during World War I to advertise banking secrecy. The following years of political and economic instability and increased taxation for financing the recent world war then led to capital movements into Switzerland as well as pressure from foreign governments on Swiss banks to disclose information of their clients.Therefore in 1934 it became a criminal offense in Switzerland to violate banking secrecy. In 2009 however, Switzerland decided to apply the standards of the (then) OECD model information exchange agreements into its double tax treaties, thereby keeping the strict rules of banking secrecy, but not applying them to financial information exchanged with foreign countries for tax purposes. Since then, there are numerous cases of successful exchange of information from Switzerland to other countries based on TIEAs and/or Double Tax Treaties for specifically identified individuals or companies. One of the most striking leading cases extending government access to private information decided by the Supreme Court in Switzerland was when group information was granted to the Netherlands based on a double tax treaty because the request (among others) included a detailed description of the group of affected taxpayers. This decision triggered a series of group requests from the Netherlands and also from other jurisdictions having a Double Tax Treaty with Switzerland.

ii. United Kingdom

A successful court decision in the UK on exchange of information based on a double tax treaty for example is Kotton v. FTT (TC) HMRC, where the High Court approved the exchange of

Information on spending of the claimants credit card to assist the Swedish Tax Authority (STA) to check whether the claimant was resident in Sweden. The process on how exchange of tax information can be requested in the UK is outlined in the homepage of the UK’s Revenue website16.

iii. United States

The US historically also provided a high level of privacy in financial matters. After 9/11 however the patriot act was passed which grants government rights to monitor phone and e-mail communications, collect bank and credit reporting records, and track activity of individuals and corporates on the Internet.

In the US the IRS issuance of summons at the request of foreign authorities has been repeatedly upheld by courts. This based on exchange of information clauses of international treaties and the Internal Revenue Manual of the IRS. Such a summons may be issued to obtain information from individuals and entities within the United States, relating to the foreign tax liability of a foreign citizen. An example for an actual court case ordering exchange of information based on the USMexico Tax Information Exchange Agreement effective January 18^th, 1990 and the US-Mexican Double Tax Treaty effective January 1^st, 1994 is outlined in this Link.

Based on a newer Double Tax Treaty containing collection provisions with Denmark, a US court concluded that the IRS was even required to collect the Danish taxes as if they were taxes owed to the US.

For many years the US were criticized because their compliance rules did not foresee that foreign beneficial owners of US Limited Liability Companies (LLCs) be registered, and therefore the beneficial owner information was not available to be shared with other jurisdictions. This changed in 2016 for foreign-owned, single-member LLC who now have to be reported to the Internal Revenue Service of the US. Likewise all beneficial owners of any legal entity accounts opened on or after May 11, 2018 have to be identified within banks now, which means that now the beneficial owners of these structures are not only subject, but also potentially available to exchange of information requests. For accounts above USD 1 million with one or more non-US

Persons as direct or beneficial owners however all nominal and beneficial owners have to be identified.

In a court case based on the double tax treaty with Finland, the IRS requested and subsequently was ordered to obtain US bank information on Finnish Residents with US Bank Accounts and payment cards. Should some of these accounts or payment cards be held by structures such as a Limited Liability Company (LLC) or Trust, a second request of the contracting jurisdiction of a double tax treaty would normally result in obtaining the information of the beneficial owners (“clients”) behind the structures.

2. Automatic Exchange of Information Mechanisms

a) Common Reporting Standard (CRS)

The Common Reporting Standard (CRS), developed in response to a G20 request and approved by the OECD in 2014, requires jurisdictions to obtain information from their financial institutions and thereafter automatically exchange that information with other jurisdictions on an annual basis. Based on CRS in 2019 information on some 84 million accounts worldwide were exchanged.

In general terms, the information collected and exchanged is: name, address, taxpayer identification number, date and place of birth of each reportable person, account number, name and identifying number of the reporting financial institution, account balance or value at the end of the relevant calendar year (or other appropriate reporting period) or at its closure if the account was closed, capital gains, income depending on the type of the account (dividends, interest, gross proceeds/redemptions, other).

As per August 2020, some 114 jurisdictions have committed to automatic information exchange, including Switzerland and the UK. The UK’s schedule of exchanging tax information is listed on common reporting standard

The UK Revenue’s website, the Swiss schedule is published on the websit of the State Secretariat for International Finance (SIF).

The US have currently not signed up to the Common Reporting Standard model, as they operate anexchange of information scheme under the Foreign Account Tax Compliance Act (FATCA).

Whereas the legal basis of this information exchange will often be a bilateral agreement between two jurisdictions, there is also a multilateral Convention on Mutual Administrative Assistance in Tax Matters has been signed by 137 countries including Switzerland, the UK and the US, whereby the entry into force in the US is still outstanding. The convention covers all forms of tax co-operation to tackle tax evasion and avoidance.

b) US Foreign Account Tax Compliance Act (FATCA)

FATCA was designed to prevent tax evasion by US taxable persons using foreign banks and ways of financial structuring.

Since 2015 the US have entered into intergovernmental agreements (IGAs) with other jurisdictions based on which they have undertaken automatic information exchanges pursuant to FATCA. The model 1 IGA with other jurisdictions are reciprocal and foresee exchange of tax information both ways, unlike the model 2 agreements which only foresee exchange towards the US.

However, foreign financial institutions subject to a reciprocal Model 1 IGA are required to look through entities wherever they are domiciled and report information on US beneficial owners, but no such look-through requirement is imposed on US financial institutions subject to that IGA. Likewise US financial institutions are not required to report accounts held by entities that are not resident in the FATCA partner jurisdiction, and there is only reporting on non-cash US accounts with US source income subject to withholding in the US.

The list of the currently 113 jurisdictions having signed up to FATCA can be found on the US Treasury webpage.

3. Other relevant Co-operation Agreements

a) Mutual Legal Assistance Treaties (MLATs)

These normally bilateral treaties will ensure mutual legal assistance such as obtaining evidencelocated in the US on foreign tax evasion, including summons of information held by third parties, or, as mentioned above, sharing information related to US stock trading offenses.

b) Simultaneous Criminal Investigation Programs (SCIPs)

The US has entered into Simultaneous Criminal Investigation Programs (SCIPs) with Australia, Canada, France, Italy, Japan, Mexico and South Korea. Simultaneous Criminal Investigation Programs conduct investigations on individuals and/or companies involved in substantial tax violations in the US or in the respective contracting jurisdictions. The programs come with broad tax
information exchange clauses.

III. Other important Topics to take into Consideration when dealing with Confidentiality

1. Holding the Bank Account via a Private Investment Company and/or Trust

In the US, non-resident clients will often hold their account via a Private Investment Company (sometimes also called Offshore or Domiciliary Company) or a Trust, thereby avoiding US estate taxes upon their decease of currently up to 40% applicable to US situts assets54 booked in their US accounts. The use of a foreign Private Investment Company and (often or if not properly planned) the trust however will in many cases trigger negative tax effects in the domicile country of the client. Alternatively, it could deprive the taxpayer of certain tax planning opportunities concerning investments issued in his domicile country which he could hold in his US account and would generate tax advantages only if held in his own name.

2. Possible criminal Consequences of abusing Confidentiality Features for Tax Evasion and/or Tax Fraud in the international financial Center

Some taxpayers may be tempted to use confidentiality mechanisms to hold undeclared funds in the respective international financial centers. Besides the point made above that all larger financial centers nowadays frequently exchange information with most other jurisdictions and that the international mechanisms for information exchange are increasing at considerable speed both in quality and in quantity, there will often also be criminal impact in the international financial center in addition to the possible criminal impact in the domicile country.

3. Qualification of foreign Tax Evasion as criminal Offense in the international financial Center a) Is foreign tax evasion a domestic crime in the international financial center?

Besides the information exchange schemes described above, governments of international financial centers also have further tools available to deal with foreign tax evasion: Foreign tax crimes can be charged according to local criminal laws, for example in Switzerland, the UK, and the US.

i. Switzerland

As of January 1, 2016, the Swiss Criminal Code has been amended so that felony or qualified tax fraud (as per the Swiss definition usually involving falsification of documents) of indirect taxes (such as customs duties, withholding tax, stamp duties, VAT, etc.) exceeding the sum of CHF 300’000 per tax period qualifies as predicate offense to money laundering if and when it is committed
commercially or in co-operation with third parties and causes a significant unlawful advantage or significant damage. Evasion of direct taxes does not qualify as a felony in Switzerland. Given that the assets involved have to originate from a predicate offense which could be forfeited, many law experts in Switzerland consider this new offense of money laundering in tax matters to be dysfunctional, given that this kind of behavior in Switzerland does not trigger foreclosure of assets , which is one of the preconditions.

ii. United Kingdom

According to the UK Proceeds of Crime Act 2002 tax evasion is a criminal offense and money laundering of the proceeds of foreign crimes is punishable. This includes removing property from
the jurisdiction (England and Wales or Scotland or Northern Ireland).

iii. United States

A leading Supreme Court case in the US is Pasquantino v. United States, where a conviction of the defendants to the criminal offense of wire fraud based on carrying out a scheme to evade Canadian taxes64,65 was confirmed. The same is applicable for other violations of foreign law, like reportingviolations or foreign exchange violations.

A wire transfer from a non-US citizen into the US from abroad may satisfy Section 1956 (f) of the US money laundering regulations and an international transfer of funds itself can represent money laundering when there is either intent, knowledge that the transaction intends to conceal the proceeds, or it is designed to avoid a transaction reporting requirement.

In United States v. Yusuf the court held that “unpaid taxes, which are unlawfully disguised and retained by means of the filing of false tax returns, constitute ‘proceeds’ of mail fraud for purposes of supporting a charge of federal money laundering”. Prosecutors in the US may therefore charge money laundering based on underlying mail or wire fraud violations, which again rest on alleged violations of foreign tax laws. A foreign person who structures a transaction in which funds that have evaded foreign taxes are used therefore risks prosecution under the money laundering statute.

Furthermore, a court in the Eastern District of New York held that, under Yusuf, sales on which no excise taxes had been paid constitute the “proceeds” of a specified unlawful activity, because unpaid taxes disguised and retained through mail fraud can represent specified unlawful activity proceeds. An actual case in the US consists of a Mexican Businessman who was sentenced to 75.

Months in prison for orchestrating a fraud scheme against the Mexican Government thereby obtaining over USD 20 Million. In addition to the prison term he was ordered to three years of supervised release and ordered to forfeit and pay restitution in the amount of USD 21 million.

iv. International Co-operation

International co-operation focusing on tax evasion is increasing considerably, for example the tax enforcement initiative of the Joint Chiefs of Global Tax Enforcement (known as the J5), an initiative of Australia, Canada, the Netherlands, the UK, and the US. The level of co-operation can also be deduced from the fact that for example the US IRS’ Criminal Investigation Division has staff located in ten countries.

b) Is there a legal obligation to report the domestic crimes?

Financial Intermediaries in Switzerland are obliged to notify the Money Laundering Reporting Office Switzerland (MROS) once they know or have reasonable grounds to suspect that assets involved in a business relationship are among others related to a criminal offense of money laundering and/or are proceeds of a felony or a qualified tax offense.

Based on the Proceeds of Crime Act 2002 in the UK there is an obligation for a person who knows, suspects or has reasonable grounds to know or suspect that another person is or has engaged in a money laundering offense to file a Suspicious Activity Report (SAR). In 2017 the corporate offense of “failure to prevent the facilitation of foreign tax evasion” was introduced in the UK. This enables the prosecution of UK based operations in UK courts concerning tax evasion on taxes due abroad when facilitation has taken place by a UK organization.

The US financial institution who knows, suspects or has reason to suspect that a transaction involves money laundering, tax evasion, evasion of any Bank Secrecy Act (BSA) regulation, has no apparent lawful purpose or is suspected of violation of federal criminal law must file a Suspicious Activity Report (SAR) to the Financial Crimes Enforcement Network (FinCEN) of the US within 30 days.

In 2019 alone 5,596,620 SARs have been filed with FinCEN.

c) What are the possible criminal and legal consequences of the qualification as a domestic crime?

i. Switzerland

Supposing that tax fraud as predicate of money laundering (see reservation of law experts above) has been established, the question arises wether the offender can be convicted of laundering the proceeds of his own tax frauds. In Switzerland based on a decision on the Supreme Court, law experts came to the conclusion this should be the case. The maximal sentence for the underlying fraud is up to 5 years imprisonment or a monetary penalty, and if acting for commercial gain up to 10 years or a monetary penalty of not less than 90 daily penalty units. The maximum criminal sentence for money laundering is three years imprisonment and if actions were taken as a member of a criminal organization or an organization formed to conduct continued money laundering, or a large turnover or substantial profit was achieved, the maximum sentence can be up to five years imprisonment with maximum monetary penalties of 500 daily penalty units of up to CHF 3’000 each. The court can order forfeiture of assets that have been obtained through criminal offenses. Forfeiture of illegal tax savings can also be applicable towards a person who is not accused.

ii. United Kingdom

In the UK, tax evasion is a criminal offense and money laundering of the proceeds of foreign crimes is punishable with up to 14 years imprisonment and/or an unlimited fine. Confiscation can take place except when disproportionate, which courts will generally only find in cases clearly amounting to double-counting. Law enforcement can also use other civil and summary processes to recover assets alleged to be proceeds of crime without criminal convictions, such as unexplained wealth orders, which among others may also be used by the HMRC (the UK tax authorities) in

investigations. The Unexplained Wealth Order was introduced to the Proceeds of Crimes Act in 2017 and is designed to confiscate the proceeds of serious crimes (such as fraud, money laundering and others) through the use of civil powers instead of criminal powers. An important feature is that it reverses the burden of proof, that the standard of proof for suspicion is “reasonable grounds” (unlike criminal standard of “beyond all reasonable doubt”), and that it is a criminal offense to knowingly make a false statement responding to an Unexplained Wealth Order.

iii. United States

In the US, the criminal offense of mail or wire fraud carries a maximum sentence of 20 years and 30 years when mail or wire fraud affect a financial institution. Money laundering maximal penalties are fines up to USD 500’000 or double the amount of assets involved, whichever is greater for each violation and imprisonment up to 20 years for each violation. Government does not have to prove knowledge of the offender that the proceeds were from a specified form of illegal activity. There is both criminal and civil forfeiture against the assets involved in, or when traceable to, money laundering or criminal conduct. Civil forfeiture actions can be brought even if nobody has been convicted for money laundering. In civil forfeiture cases the government has the lower standard of proof “preponderance of evidence” and not “beyond reasonable doubt”. Even the proceeds of any predicate offense to money laundering, including wire and mail fraud, are subject to confiscation, irrespective of whether the government prevails on the money laundering charge. 18 U.S.C. Section 1957, with a maximum sentence of 10 years finally only requires government to show that a defendant engaged or attempted to engage in a monetary transaction with property derived from specified unlawful activity with knowledge of the property being derived from specified unlawful activity worth a minimum of USD 10’000. Finally, many US states have parallel criminal money laundering provisions.

4. Unlawful Leaks

An increasing risk consists of financial information of High Net-Worth Individuals and Ultra High-NetWorth Individuals being shared unlawfully with the public, such as the FinCEN files, whereSARs filed to a US regulator, the Financial Crimes Enforcement Network, were leaked. In most cases however individuals working for service providers of the financial sector are responsible for the leaks, as in the last few years for example the accounting firm Price Waterhouse Coopers (2014), the bank HSBC (2015), the law firm Mossack Fonseca (2016), the service providers Appleby and Estera (2017). Tax authorities worldwide have and still are using the information provided by these and other leaks to investigate and prosecute their taxpayers who appear in those leaks. For example in operation Atlantis it would appear that the tax enforcement agencies of Australia, Canada, the Netherlands, the UK and the US (the so called J5) jointly are systematically targeting parts of the client base of a bank in Puerto Rico for tax fraud based on information obtained from the Panama papers.

An other leak was created by Morgan Stanley in the US when they failed to take proper precautions in wiping sensitive customer data when closing two wealth management data centers in 2016. Morgan Stanley was subsequently fined with USD 60 million and some of the bank’s current and former clients have filed class actions suits claiming that their encrypted private financial data remained on the decommissioned computers.

IV. Conclusion

As outlined above the different tools on information exchange applicable to Switzerland, the UK and the US are very broad and are improving quickly. So is international co-operation in matters of crossborder tax fraud. Non-tax-compliant individuals can run, but they cannot hide in these internationalfinancial centers.

The potential criminal and seizure implications of holding non-tax-compliant assets offshore are often strongly underestimated. In the worst case, offenders may find themselves in the situation that they have been sentenced to various years of imprisonment in the offshore jurisdiction of the international financial center, their assets in the international financial center have been seized, and their domestic tax authorities are knocking on their door for unpaid taxes (plus back-taxes and penalties) on the seized assets, and they are subject to a criminal investigation in their domicile country for tax evasion and/or fraud (and maybe money laundering) at the same time.

Non-compliant taxpayers holding their assets offshore in international financial centers may therefore reconsider their situation and are well advised to get professional advice from a tax lawyer in their domicile country and (where available) take part in tax amnesties or voluntary disclosure schemes.

Disclaimers:

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