Thursday, August 13, 2009

Is the US/Swiss Agreement the Fall of Tax Havens?

The press is reporting that the US has reached an agreement with the Swiss on the release of information that could implicate individuals in the United States. See Wayne Tomkins, Daily Business Review,,  Swiss, U.S. Reach Agreement in UBS Tax Evasion Dispute; CNN,UBS settles secret accounts case with U.S.;Lynnley Browning,U.S. Reports Agreement With UBS in Tax Case.

Previously UBS entered into a deferred prosecution agreement. (see here)  But an issue remained as to whether there was a conflict in Swiss law that could preclude the release of some information to the U.S. After all, what do you do when releasing information to the U.S. in one country might result in a criminal violation of the laws of that country.

Court decisions have previously looked at such conflicts in laws.  For example, in 1998 the U.S. Supreme Court considered a Fifth Amendment issue in the case of U.S. v. Balsys, a case where the witness argued that answering questions pursuant to an OSI (Office of Special Investigations of the Criminal Division of the US Dept. of Justice) subpoena might subject him to criminal prosecution by other countries.  The Court stated that "[s]ince the likely gain to the witness fearing foreign prosecution is thus, uncertain, the countervailing uncertainty about the loss of testimony to the United States cannot be dismissed as comparatively unimportant."  The Court in Balsys held "that although resident aliens are entitled to the same Fifth Amendment protections as citizen 'persons' the risk of their deportation is not sufficient to sustain a self-incrimination privilege intended to apply only to the United States government." Oyez here  

Some pre-Balsys courts used a balancing test to determine whether an Internal Revenue summons, that would subject individuals to criminal liability in another country, should be enforced. See U.S. v. First National Bank of Chicago, 699 F.2d 341 (7th Cir. 1983); U.S. v. Chase Manhattan Bank, 584 F. Supp. 1080 (S.D. N.Y. 1984).

Obviously reaching an agreement will resolve the immediate issue. But it remains to be seen whether this issue will be revived in some form in individual cases against U.S. citizens who may be accused of  using Swiss accounts to avoid U.S. taxation, although I cannot see a way that it could be.  It will also be interesting to see if other countries that may have served as tax havens for U.S. citizens will start to crumble.  In the meantime, there are probably many unhappy individuals in the U.S. who placed money in Swiss accounts years back thinking that the Swiss secrecy that they were noted for, would never be breached.


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