Wednesday, May 29, 2013

Rand Paul Protects American Tax Dodgers

The Swiss want their banks to reveal U.S. tax evaders, but one U.S. Senator doesn't --- says it violates the U.S. Constitution.

Switzerland’s strong laws protecting the secrecy of bank clients helped make it a famous name in world finance. But that secrecy is crumbling under the pressure of the U.S. government. Swiss finance minister Eveline Widmer-Schlumpf announced plans today to give limited immunity to banks who negotiate with prosecutors who say they are hiding American income in the Alps.

There are $2.1 trillion in foreign assets in Switzerland, with the American share estimated at hundreds of billions of dollars (though not all of it is tax-evading). Settling U.S. charges could cost the Swiss banks currently under investigation, including Credit Suisse, Pictet, Julius Baer and HSBC’s Swiss subsidiary, fines in the billions of dollars for abetting tax evasion.

Since 2008, the Swiss financial system has faced escalating pressure on tax evaders from U.S. authorities. In January, Wegelin & Co., the country’s oldest bank, pled guilty to hiding $1.2 billion from American tax collectors on behalf of 100 Americans. The bank paid $57.8 million in fines and announced it would close, selling its assets. The prosecution came about after Wegelin tried to pick up more offshore money business from UBS in 2008 and 2009, just before the top Swiss bank entered a deferred prosecution agreement (pdf) that included $780 million in penalties for helping U.S. citizens shift their incomes abroad.

After the biggest and the oldest banks in the country got rapped by U.S. authorities, the Swiss got pragmatic and decided it would be better for the financial sector to settle up, rather than engage in an expensive and embarrassing battle with the U.S., but negotiations for an umbrella settlement with the whole financial sector stalled. So the Swiss themselves decided to create a year-long window of opportunity to let banks share client information—though not names—that would allow the U.S. to identify citizens illegally sheltering income abroad.

Sharing that information will be up to the banks themselves if the Swiss parliament passes some form of the law when it comes up in June. But if it fails—or when it expires—the United States will face the same problem of secrecy.

In February, however, Switzerland and the U.S. had agreed on a plan to share tax information that will resolve many of these problems. The deal, part of a landmark U.S. law that requires foreign financial institutions to share tax information, depends on the U.S. senate ratifying a treaty amendment that would essentially make the relaxation of Swiss secrecy laws permanent.

But that amendment is in jeopardy in the U.S. because a single senator, Rand Paul of Kentucky, has exercised his individual right to block it (along with tax transparency agreements with Luxembourg and Hungary) from being ratified by U.S. lawmakers. Paul argues that the treaty, and the new tax transparency law, threaten constitutional protections against unreasonable searches, although U.S. courts have approved similar measures. Tax attorneys and foreign trade groups worry that holding up the amendment is creating uncertainty for financial institutions and hurting U.S. credibility, and anti-tax evasion advocates say the move simply makes it easier for people to break the law.

However, it’s not clear what the Obama administration or Democrats in the Senate can do to force Paul to relinquish his hold on the amendment. And thanks to recent scandals, it’s a tough political environment to argue for more IRS scrutiny, even if it’s for offshore banks. If the stalemate continues, and the Swiss government’s year-long window closes, it could signal a return to opacity as usual for Americans banking in Geneva, Zurich and Bern.

* Originally post ed by Tim Fernholz @timfernholz (Original Source)

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