The Senate Permanent Subcommittee on Investigations (PSI), chaired by Senator Carl Levin (D-MI), after a 6 month probe, has released a report which says that Swiss banking giant UBS AG and Lichtenstein based LGT Bank have aided and abetted wealthy Americans evade taxes, cover up ownership of accounts and hide assets. Background on the LGT investigation and updates on the UBS tax evasion here, here and here.

The 115 page report says that "UBS has opened thousands of accounts in Switzerland that are beneficially owned by U.S. clients, hold billions of dollars in assets, and have not been reported to U.S. tax authorities.'' (Update - Here's the link to the PSI report.)

LGT used such tactics as asking their employees to use public phone booths so as to make it difficult to trace calls back to the bank, and use intermediary transfer corporations in tax havens like the Bristish Virgin Islands, according to a bank employee who talked with the Subcommittee.

The report outlines how eight individuals - including Frank Lowy, Westfield Group; Richard M. Chong, a venture capitalist; and Harvey Greenfield, Commonwealth Toy and Novelty Company - used offshore accounts to evade taxes. After facing problems with Australian tax authorities, Mr. Lowy, one of LGT bank's largest clients, used the bank to set up Lichtenstein based foundations (one of these has been names as Luperla) to divert $100 million in assets back to his family through Delaware corporations. LGT removed all traces and any connection to Mr. Lowy or his family when setting up Luperla, except in internal bank documents, thus avoiding discloure to the IRS.

The blowback from this report has already started. PSI is set to hold a hearing on 'Tax Haven Banks and U. S. Tax Compliance' on Thursday. The witness list for this hearing is explosive and includes the major figures involved on both sides of the federal investigation into off-shore tax evasion by LGT, UBS and other off-shore banks.

The witness list includes Douglas H. Shulman, Commissioner of the IRS and Kevin J. O'Conner, a DOJ Associate Attorney General, along with persons who have been accused of involvement in the tax evasion such as Martin Liechti, Head, UBS Wealth Management Americas , Zurich, Switzerland; and Peter S. Lowy, group managing director of Australia-based Westfield Group, who allegedly holds one of the overseas accounts mentioend in the PSI report. Reuters report quotes Mr. Lowy's attorney, Robert Bennett, as saying that his client is out of the country, but will be appearing voluntarily on the 25th of July.

Secondly, the IRS is preparing to close a loophole related to disclosure of American clients in its agreement with foreign banks, which allowed clients of UBS to hide about $20 billion in assets from U.S. tax authorities. The new rules, which are about to be released by the IRS, would require the foreign banks to identify the actual American account owners and recipients of any interest payments, forcing the banks to file a 1099 form and withhold taxes on such accounts at 28 percent. The IRS is also tightening oversight of these accounts by IRS authorised external auditors who are permitted to review the banks under the 2001 QI agreement between the IRS and the foreign banks.

(Update 1 - 17th July 2008 - Excerpt from the prepared statement of Douglas H. Shulman, IRS Commissioner - "We are also considering a regulation to have QIs [Qualified Intermediaries] report U.S. taxpayers’ worldwide income to the IRS in certain cases– not just U.S. source income. "

Meaning that if this goes into effect, U.S. nationals would have their incomes worldwide scrutinized to see where it was coming from, and where its going to. This is actually a big step forward for the IRS being able to trace money being routed discreetly back into the U.S.

And Shulman says, regarding UBS, that "The summons directs the bank to produce records identifying U.S. taxpayers who had accounts with the bank in Switzerland between 2002 and 2007 and elected to have their accounts remain hidden from the IRS. On July 1st a federal judge in Miami approved a Justice Department request to enable the IRS to serve the summons. We are working closely with the Justice Department to ensure that we get the information requested in the summons. Accordingly, the IRS is exploring our options on how to bring a potentially large number of U.S. taxpayer cases to resolution."

And he says regarding LGT that "To date, the IRS has initiated enforcement action involving close to 200 taxpayers with accounts in this jurisdiction."

Translation - The 19,000 account holders at UBS better come clean before the IRS decides to really turn the screws. Because this is not going to be over unless and until they clean out UBS.)

(Update 2 - 17th July 2008 - Excerpt from opening statement by Mark Branson of UBS, Chief Financial Officer, Global Wealth Management, who says "We did have detailed written policies that prohibited our employees from engaging in some of the conduct that our internal investigation has uncovered, such as assisting in the creation of sham offshore companies to defraud tax authorities. While our own review is not complete, it is apparent now that our controls and supervision were inadequate. UBS is committed to taking both corrective and disciplinary measures.")

Reference:
http://www.bloomberg.com/apps/news?pid=20601087&sid=af8NUGMoFXVM
http://hsgac.senate.gov/public/index.cfm?Fuseaction=Subcommittees.Home&SubcommitteeID=88ed6460-02ee-40a9-84a9-e278af44313c&Initials=PSI
http://www.reuters.com/article/governmentFilingsNews/idUSN1647439520080717
http://www.bloomberg.com/apps/news?pid=20601087&sid=afaIyKMEym.g
http://www.nytimes.com/2008/07/17/washington/17tax.html
http://www.ubs.com/1/e/media_overview/media_americas.html