Senate Report Finds Banks Used Offshore Securities Accounts as Tax Havens to Evade US Tax Law

A bipartisan Senate investigation has revealed that tax haven banks are assisting U.S. taxpayers in evading federal taxes by urging U.S. clients to open securities accounts in their offshore jurisdictions, assisting them in structuring those accounts to avoid disclosure to U.S. authorities, and providing financial services in ways that do not alert U.S. authorities to the existence of the foreign accounts. One large global Swiss bank is currently under investigation by the SEC, IRS, and Department of Justice. The report, by the Subcommittee on Investigations, is entitled Tax Haven Banks and US Tax Compliance.

The Senate staff found that, although the Swiss bank had extensive banking and securities operations in the United States that could accommodate its U.S. clients, it directed its bankers to target U.S. clients to open more bank accounts in Switzerland. Swiss bankers were encouraged to travel to the US and recruit new US clients The Swiss bankers also marketed securities and banking products and services while in the United States, and accepted orders for securities transactions from clients in the United States, without an appropriate license and in apparent violation of U.S. law and banking policy.

U.S. securities laws prohibit persons from advertising securities products or services or
executing securities transactions within the United States unless registered with the SEC. In addition, securities products offered to U.S. persons must comply with U.S. securities laws, which generally means that they must be registered with the SEC, a condition that may not be met by non-U.S. securities, mutual funds, and other investment products. State securities laws may have similar prohibitions.

Moreover, U.S. tax laws may require foreign financial institutions to report sales of non-U.S. securities on 1099 Forms if the sales are effected in the United States, such as through a broker physically in the United States or telephone calls or emails originating in the United States. In addition, although the Swiss bank is itself licensed to operate as a bank and broker-dealer in the United States, its banking and securities licenses do not extend to its non-U.S. offices or affiliates providing services to U.S. residents.

In provisions known as “deemed sales” rules, federal tax laws and the standard QI agreement require sales of non-U.S. securities to be reported by foreign financial institutions on 1099 Forms sent to the IRS, if those sales were effected in the United States, such as arranged by a broker physically in the United States or through telephone calls or emails originating in the United States. To avoid violating U.S. law, exceeding its SEC and banking licenses, or triggering 1099 reporting requirements for deemed sales, the bank maintained written policies restricting the marketing and client-related activities that may be undertaken in the United States by bank employees from outside of the country.

But the facts suggested that the bank was not enforcing its own policies. This lack of enforcement, in turn, raised concerns that Swiss bankers with U.S. clients may have been routinely violating bank policy and U.S. law.

More broadly, the Senate staff found that bank secrecy laws and practices are serving as a cloak, not only for client misconduct, but also for misconduct by banks colluding with clients to evade taxes, dodge creditors, and defy court orders. In addition, the bank employed practices that could facilitate, and have resulted in, tax evasion by their U.S. clients, including assisting clients to open accounts in the names of offshore entities; advising clients on complex offshore structures to hide ownership of assets; using client code names; and disguising asset transfers into and from accounts.

Also, the report found that the bank assisted its U.S. clients in structuring their foreign accounts to avoid QI reporting to the IRS, including by allowing U.S. clients who sold their U.S. securities to continue to hold undisclosed accounts and by opening accounts in the name of non-U.S. entities beneficially owned by U.S. clients. While these banking practices did not technically violate the QI agreements, the result is that the bank helped keep accounts secret from the IRS and thereby facilitated tax evasion by its U.S. clients.