US Senator Carl Levin's speech on striking out offshore tax abuse

Editorial comment by Prof Daniel N Erasmus
2009/10/08

Stop Tax Haven Abuse Act, S. 506 and S. 569, the Incorporation Transparency and Law Enforcement Assistance Act are being promoted by Senator Carl Levin as a measure to combat tax abuse. Tax avoidance or tax evasion? The term tax abuse seems aptly coined in an attempt to cover both. The first (avoidance) is not fraud, whereas the second is. Anti-tax avoidance measures are promulgated by jurisdictions world-wide. On the other hand blatant tax evasion, tax fraud, is a crime! Structuring one's affairs, not to pay too much tax, and around tax avoidance provisions, is lawful, and secrecy or privacy piercing measures should not deem these lawful activities to be unlawful. Otherwise, the rule of law will be eroded in the opposite direction of what the good Senator is proposing now. Tax evasion is where US and other residents hide money that should be taxable, in Swiss numbered bank accounts, without declaring that money to the IRS or other tax authorities. Obtaining dispositions from discretionary trusts set up in offshore jurisdictions, and declaring those receipts to tax authorities is not unlawful. Legitimate structures encourage savings, investment and healthy returns, which are taxed on withdrawal. That's not unlawful, nor should it be. But then, advising any client on an offshore discretionary trust would include peeking into the proposed legislation. If it is enacted in the US, others will follow suit. The speech of the Senator follows:

Keynote Address by Senator Carl Levin at the Conference on Increasing Transparency in Global Finance: A Development Imperative

Remarks as prepared for delivery

I’m pleased to be with you tonight to discuss an issue of great importance to me, and I know to you as well: the scourge of offshore tax abuse.

It is highly encouraging that you are meeting to discuss how illicit money arising from tax scams, corporate misconduct, foreign corruption, and other wrongdoing has hurt economic development, emerging civil societies, and the rule of law. It is also a pleasure to be introduced by so accomplished a scholar as Professor Fukuyama, who once famously proclaimed “the end of history.” I’d settle for the end of abusive tax havens.

We’re actually making some progress on doing that, but the battle is far from over.

Let me begin with something of a spy story. Now, maybe you wouldn’t expect somebody like me – who Time Magazine once described as “balding and … rumpled” – to be spinning James Bond-like tales of secret codes, smuggled diamonds, and sudden betrayals. But what’s been happening in the offshore tax haven world reads like the stuff of a novel. It involves billions of dollars in hidden assets, secret documents, clandestine meetings, and scheming in cities around the world. It involves conflict among some of the world’s richest nations. And in recent months, political events have caused a near earthquake in the offshore world that has shaken the marbled headquarters of some of the world’s richest private banks serving some of the world’s wealthiest people.

As many of you know, for the last ten years we have been investigating tax havens and offshore tax abuse at the Permanent Subcommittee on Investigations, which I chair. Our Subcommittee has jurisdiction and broad subpoena authority to investigate wrongdoing. Our probe, which has enjoyed bipartisan support, has yielded a series of hearings and reports over the years exposing how some financial institutions and professionals aid and abet tax evasion and help taxpayers dodge their tax obligations.

My interest in the offshore world was first triggered by our 1999 investigation of U.S. banks that were offering private banking services, including offshore shell companies and bank accounts, to some foreign heads of state and their relatives suspected of hiding their illicit funds. That was followed by a 2001 investigation into how small offshore banks were using major U.S. banks to move criminal proceeds deposited by drug traffickers and financial fraudsters, and a 2002 investigation of Enron that was using phony offshore transactions to inflate its revenues and minimize its taxes. Enron alone formed 440 shell companies in the Cayman Islands, and one small building in the Caymans, called the Ugland House, provides the mailing address for 12,000 shell companies. In 2003, we investigated how major U.S. accounting firms like KPMG were designing and marketing abusive tax shelters, including some with offshore transactions. In 2004, we investigated a bank in Washington, D.C., that formed offshore entities for Augusto Pinochet, former president of Chile, and the sitting president of Equatorial Guinea. In 2006, we presented six case studies of how U.S. taxpayers were using tax haven jurisdictions to hide assets and dodge their U.S. taxes.

Over the last year, we held dramatic hearings showing how two tax haven banks in particular, LGT Bank in Liechtenstein and UBS in Switzerland, used their bank secrecy laws to help wealthy U.S. residents conceal billions of dollars in assets in secret financial accounts which are supposed to be disclosed to the IRS, but which weren’t. Of course, these banks didn’t limit themselves to U.S. clients; they provided the same assistance to tax cheats in Germany, France, the United Kingdom, Canada, Australia, and many other jurisdictions.

Hiding assets offshore is blatantly unfair to the vast majority of taxpayers who comply with their civic obligations and have to shoulder the additional tax burden when others don’t pay what they owe. It deprives government treasuries of money needed to protect our citizens and provide the services that make our nations more secure and prosperous. In the United States alone, we’ve estimated that offshore tax abuse deprives the U.S. Treasury of approximately $100 billion in revenues each year.

Offshore tax cheating also undermines the justice of our tax systems, leading taxpayers to conclude that the systems favor those with the means to shield income from tax officials and building resentment, distrust, and anger. In other nations, and in particular developing nations where legal and societal frameworks are less robust and more vulnerable to abuse, I believe these problems can be even more damaging than in the United States, sending needed resources out of the country, draining government treasuries, and poisoning civil society.

But back to the spy story. It starts with Heinrich Kieber, a computer technician at LGT, with is owned by the Liechtenstein royal family. Mr. Kieber saw how LGT was helping taxpayers around the world hide income and assets, and decided to expose the wrongdoing. He provided names, account numbers, and account information to tax authorities in the United States and other nations and to my Subcommittee. He disclosed how LGT bankers developed code names for prized customers, used pay phones to conceal calls to clients, set up corporations and foundations to hide account ownership, and used elaborate means to move money in and out of accounts to conceal the audit trail. In 2008, when his information went public following high profile arrests in Germany, it snowballed into a worldwide scandal focused on how LGT was helping hundreds if not thousands of taxpayers evade payment of taxes.

For his trouble, Mr. Kieber is now in hiding. There is a warrant out for his arrest, and a $10 million bounty placed on his head by unknown individuals. In July of 2008, when he testified before my Subcommittee about LGT’s misconduct, we had to use complex security procedures to protect his new identity, including taking his testimony on videotape without showing his face to the world.

Mr. Kieber’s revelations shook the offshore world. He was followed by Bradley Birkenfeld, a former UBS banker who went to law enforcement officials with evidence that peeled back the curtain of secrecy hiding UBS’s years-long, flagrant violations of U.S. tax law. He told of UBS bankers who secretly visited U.S. clients to manage accounts hidden from the IRS, used encrypted computers to conceal client data, received counter-surveillance training to deflect U.S. inquiries, and opened accounts in the names of offshore corporations to conceal their true owners. He admitted helping one U.S. client hide $200 million in Swiss and Liechtenstein accounts, and another smuggle diamonds into the United States in a tube of toothpaste. Mr. Birkenfeld has since pleaded guilty to aiding and abetting U.S. tax evasion. UBS has admitted that Swiss accounts opened by U.S. taxpayers held more than $18 billion in assets and income hidden from the IRS.

The banking activities described in the Kieber and Birkenfeld revelations were so detailed, so brazen, and so startling that they fueled worldwide outrage at tax haven banks, the use of bank secrecy to facilitate tax evasion, and the complicity of offshore governments in the misconduct, producing what may be our best chance in decades to put a stop to offshore tax abuse.

That’s why, in our spy story, for the moment at least, the good guys are on the march. In the fight against tax havens, we have made more progress in the last year than the previous ten years combined. Let me outline some of the developments.

* Liechtenstein and Switzerland have reversed decades of resistance and agreed to enter into Tax Information Exchange Agreements in line with the model agreement developed by the Organization for Economic Cooperation and Development (OECD). Both countries have already initialed such agreements with the United States and other countries.
* UBS has entered into a deferred prosecution agreement with the United States in which it admitted conspiring with some clients to defraud the United States out of tax revenues, paid a $750 million fine, and agreed not to open any more U.S. client accounts without alerting the IRS. Think of it: UBS, the largest private bank in the world, has said that it will no longer offer hidden Swiss accounts to U.S. residents. When UBS first announced that radical change in policy at one of my Subcommittee hearings, it almost knocked me off my chair.

* In addition, as part of the deferred prosecution agreement, UBS and the Swiss Government broke decades of practice and turned over between 250 and 300 names of U.S. clients to the U.S. Justice Department. To settle a civil lawsuit brought by the U.S. Justice Department, UBS and the Swiss have also recently promised to turn over about 4,500 additional client names over the next year.

* As G-20 leaders signaled a new willingness to take action against uncooperative tax havens, the changes made by Liechtenstein and Switzerland set off a chain reaction in other bank-secrecy nations. Places like Luxembourg, Austria, Andorra, Monaco, and others also pledged for the first time to share tax information and cooperate with international tax enforcement.

* Last week, at a meeting in Mexico City, the OECD announced that all 87 countries in its Global Forum on Transparency and Information Exchange had agreed to adopt the OECD model agreement on tax information sharing. Essentially, those 87 nations – including some of the most notorious tax havens in the world – pledged to no longer allow bank secrecy laws to be used to carry out tax evasion.

* In the United States, indictments have begun to be filed against tax cheats and the lawyers, accountants, and others who helped them set up their secret Swiss accounts at UBS. We’ve been told that cases involving other tax haven banks may follow.

* In addition, U.S. tax officials have initiated a voluntary program allowing U.S. taxpayers with tax haven bank accounts to come clean, pay their back taxes, and avoid criminal prosecution. Hundreds of tax evaders are coming forward in a development that could restore a billion dollars or more in unpaid taxes to the U.S. Treasury.

Together, these events reflect an upheaval in the offshore tax haven world – a growing worldwide consensus that bank secrecy laws can no longer be relied upon to carry out tax evasion. This progress resulted from bank insiders willing to disclose offshore misconduct, law enforcement officers willing to pursue wrongdoing in the courts, and international leaders willing to demand change. It shows the power of Congressional oversight. And it shows that the scourge of offshore tax abuse is not an inevitable evil we have to live with, but misconduct that we can expose and hopefully eliminate.

Of course, the battle to end offshore tax abuse is far from over. And I am concerned that in our spy story, the good guys may declare victory and relax before the villains are vanquished. We need to take action now to ensure we get a happy ending.

Our first opportunity comes next week when the G20 summit meets in Pittsburgh to discuss financial reform, and tax havens are on the agenda. I recently urged the Obama Administration to work with our G20 partners to support the longstanding effort of the OECD to establish a system of international sanctions that can be taken against tax havens that don’t cooperate with international tax enforcement.

While 87 nations have now pledged to adopt the OECD’s model tax information exchange agreement, it is critical that the international community ensure that these pledges are followed by concrete actions – that tax havens not only sign tax sharing agreements but implement them. If words are not followed by deeds, the international community must have a way to respond.

In my letter, I highlight one possible tax haven sanction that our G-20 partners could consider, which would replicate the successful approach the United States has already pioneered to combat international money laundering. That approach allows the U.S. Treasury to take a series of increasingly tough steps against financial institutions or jurisdictions that pose money laundering concerns, including authority to bar U.S. financial institutions from doing business with the offending bank or jurisdiction and essentially locking them out of the U.S. financial system.

That same lock-out approach could be applied to tax haven banks or jurisdictions that fail to cooperate with international tax enforcement. The G-20 or a smaller subset like the G-7 nations could act as a group to bar their financial institutions from doing business with uncooperative tax haven banks or jurisdictions. Tax haven banks facing that type of united action would have a much harder time turning law enforcement away empty handed. And putting the necessary legal mechanism in place now to stop tax haven abuses in the future would give the international community a powerful new tool to use when the next offshore tax scandal hits.

Here in the United States, there are additional steps we can and should take to stop offshore tax abuse. As a legislator, my priority is to enact two pieces of legislation now before the Congress.

The first is the Stop Tax Haven Abuse Act, S. 506, which I and four colleagues have introduced in the Senate. Congressman Lloyd Doggett and some of his colleagues have introduced the bill in the House. President Obama cosponsored this legislation when he was a member of the Senate, and he endorsed its passage again earlier this year. This bill would enact a long list of measures to combat offshore tax abuse, including measures to enable the United States to take steps against offshore financial institutions or jurisdictions that impede U.S. tax enforcement as I just discussed. It would also simplify U.S. tax enforcement actions by allowing courts to presume that U.S. persons who form, send money to, or receive money from offshore entities control those entities; tighten reporting requirements for financial institutions that establish offshore accounts or entities for U.S. taxpayers; give law enforcement more time to pursue offshore tax cheats; and toughen penalties against those who aid or abet tax evasion. Passage of this legislation holds significant promise of reducing the current $100 billion drain on the U.S. treasury from offshore tax abuse each year.

The Senate Finance Committee and the House Ways and Means Committee have both said they would enact bills addressing offshore tax haven abuses this year. Everyone with an interest in this issue, at home and abroad, should urge the Committees to do just that and to include the key provisions of the Stop Tax Havens Abuse Act in the final product. We could sure use that revenue to help fund health care reform.

The second piece of legislation would take important steps to put our own house in order by ending a form of corporate secrecy in the United States. Today, our 50 states form nearly two million corporations and limited liability companies each year and, in almost every case, do so without requesting the names of the beneficial owners – the people behind the newly formed company’s activities. The failure to request beneficial ownership information creates U.S. corporations with hidden owners who can more easily engage in tax fraud, money laundering, or other misconduct. This corporate secrecy frustrates law enforcement. It also violates our international anti-money laundering commitments and undermines U.S. efforts to persuade offshore jurisdictions to identify the beneficial owners of the companies they form.

S. 569, the Incorporation Transparency and Law Enforcement Assistance Act, which I have introduced with Senators Grassley and McCaskill in this Congress and which was cosponsored by President Obama in the last Congress, would eliminate this weakness in U.S. law. Many groups – some represented in this room – have endorsed the bill, including the Federal Law Enforcement Officers Association, Fraternal Order of Police, Citizens for Tax Justice, and Global Financial Integrity which is helping sponsor this conference. Again, I hope all of you will help us get this bill enacted into law.

Another step we need to take is to support the efforts of the U.S. Justice Department and IRS to take abusive tax haven banks to court, stop their misconduct, and identify their clients. Some would like to shut down that enforcement effort; I want to strengthen it and expand it beyond the groundbreaking UBS case.

In addition, while recognizing the UBS case has been the most aggressive, innovative pursuit of a tax haven bank in U.S. history, we need to recognize that victory is far from complete. A 2004 document indicated that UBS had 52,000 U.S. clients with hidden Swiss accounts. UBS and the Swiss have agreed to disclose only about 5,000 client names. Clearly, some tax cheats will evade investigators, and we will have to rely on UBS and the Swiss government to give us the names of the worst offenders. Before we pop the champagne corks, we need to see how the UBS agreement plays out and how effective it is in identifying the tax offenders.

Next, while widespread adoption of the OECD model tax information sharing agreement is a breakthrough, we shouldn’t kid ourselves that it will solve the offshore tax abuse problem. For one thing, we have to see how many nations that are now promising to sign and implement these agreements actually do so. For another, and this is key, the model agreement has traditionally been interpreted as requiring a country to supply information only when a requesting jurisdiction has the name of a specific, suspect taxpayer. Most governments take the position that if the requesting jurisdiction doesn’t have the taxpayer’s name, no information can be shared, even if bank secrecy laws make obtaining that taxpayer’s name difficult or impossible.

That has to change. That restrictive interpretation has been a key barrier to effective use of international tax information exchange agreements, and it must be broadened. The first step has already been taken in the UBS case. Switzerland has agreed that, in response to a U.S. treaty request, UBS can supply the names of some of their U.S. clients as well as their account information. This concession by the Swiss is a major development that needs to be recognized and pressed worldwide, so that tax information exchange agreements can be used to obtain information not only in cases where the requesting jurisdiction has a specific taxpayer name, but also where the requesting jurisdiction identifies a specific entity that is facilitating tax evasion — such as a bank, attorney, or corporate administrator — and requests the names of that entity’s clients.

Finally, offshore tax abuse needs to be taken into account when developing international trade policy. Specifically, there ought to be a policy against rewarding trading partners that refuse to adopt the growing global consensus against tax evasion. The nation of Panama, for example, hopes to conclude a free trade agreement with the United States in the near future. But at the same time, after pledging in 2002 to negotiate a tax information exchange agreement with the United States, Panama is stonewalling. The United States should insist that Panama and other nations agree to tax information sharing before extending to them the advantages of a free-trade agreement.

We have the means to end offshore tax abuse if we have the political will to act. Offshore tax evasion currently deprives countries of billions of dollars in needed revenues, benefiting the wealthy few who have the resources to hide assets offshore while offloading their tax burden onto the backs of honest taxpayers. When that happens, tax haven abuse undercuts the tenets of fairness and shared sacrifice on which free societies rely.

Tax evaders reap enormous benefits from civil society — they enjoy the security our military and law enforcement agencies provide; they invest and prosper thanks to the rule of law and sanctity of contract which our regulators and court system enforce; and they build their economic future on the financial, communications, and transportation infrastructure that taxpayers finance. What we ask in return is that all members of society pay that share of their income that they owe, so that governments can continue to protect fundamental rights and provide basic services. If that social contract breaks down and some refuse to pay their share, the effects on civil society are caustic. Ending offshore tax abuse is about more than money; it is about protecting the principles upon which our economic and political systems are built.

As Justice Oliver Wendell Holmes famously said, “Taxes are the price we pay for civilization.” Those who seek to avoid their tax obligations are not just free loaders, they are weakening that civilization. But if we take the right steps, together across the globe, we can finally end the scourge of offshore tax abuse.

Thank you for listening, and thanks for the work you do to combat offshore abuse in all its forms.