Fraud accord

There was a saying within US law enforcement that the only way the US managed to find any information as to what was in the Panamanian companies registry was to send the marines in. The problem thereafter was that the marines were not well-drilled in matters of evidence gathering and continuity, so most of the information was lost or useless. Whatever the truth as to the Panamanian position under General Noriega, times have moved on.

Most offshore centres now cooperate with other jurisdictions over tax matters in the criminal arena. They do so in different ways, with some centres evincing more grace than others.

Don’t mess with the IRS
Perhaps the most extreme recent example of unwilling international cooperation by a person resident in an offshore centre is the Union Bank of Switzerland’s (UBS) dealings with the US Department of Justice (DoJ).

It proved a very bad idea for UBS bankers to travel to the US and declare falsely that they were there on holiday, while in truth they assisted US citizens to defraud the Internal Revenue Service (IRS). Whatever the Swiss law may be on banking secrecy, once a banker entered the US they became bound by the laws of that country, including its criminal laws.

It should come as no surprise that it is a criminal offence to enter the US and incite US citizens to defraud the IRS. UBS has thus agreed to hand over details of 4,500 US persons who hold Swiss bank accounts. In its usual understated fashion, the US found that a good way of securing cooperation was to arrest a senior UBS banker travelling through Miami.

Of note is how the DoJ came to learn details of the UBS bankers’ activities in the US. The authorities learnt that a very rich resident of California had paid very little tax. When said resident realised how much trouble he was in and his likely sentence for years of tax evasion, it became a fairly straightforward decision for him to give up the secrets of his Swiss banker’s actions within the US. Thus UBS found itself reaching some pragmatic decisions as to cooperation.

It will be very interesting to learn whether the UBS experience leads to a more cooperative approach from the Swiss authorities over matters of tax fraud. The Swiss authorities’ position on cooperation over tax matters has been that there must be a clear case of fraud involving a false statement to a revenue authority. Simply not paying taxes has not been a problem for the Swiss to date.

Royal dues
As regards other offshore centres, cooperation has been more forthcoming. With the Crown Dependencies, two decades ago there were problems with obtaining material when the authorities requesting assistance specified statutory revenue offences as the relevant crimes under investigation.

There was a sea change when those authorities investigated the common law offence of cheating Her Majesty. Given that her Majesty was head of state of the dependencies and it was her pockets that were being picked, cooperation was more readily forthcoming.

Channeling money
In the early 1990s Jersey enacted an investigation of fraud law and from at least that time there has been full cooperation on tax matters.

There is a series of English cases where revenue offences have been prosecuted in the English courts where crucial evidence has been provided by Jersey. Moreover, the English authorities have assisted Jersey to prosecute money launderers where the predicate crime has been English revenue offences.

Chartered accountant Peter Michel was convicted in 2007 of laundering the proceeds of English revenue fraud on a very substantial scale, the Crown case being that the very purpose of his business was to launder the proceeds of English tax evasion. He was sentenced to six years imprisonment, ordered to pay a confiscation order of just under £10m and costs of some £1.5m. He has appealed to the Privy Council on the basis of excessive interventions in his cross-examination by the trial judge. The advice of the Privy Council is expected shortly.

In Jersey presently a trust company professional is fighting extradition to Australia on offences of money laundering and tax evasion, the alleged victim being the Australian Office of State Revenue. There was no hesitation on the part of the Jersey authorities to accede to the Australian request, simply because the issue concerned tax evasion.

It follows that, in the better-quality offshore jurisdictions, it matters not that the offence under investigation relates to tax. Where there is a crime, there will be cooperation.

As to cooperation with tax authorities on a civil basis, matters move more slowly. The mood of the international community is developing. The principle still remains that revenue judgments from one jurisdiction are not enforceable in another. This is a serious problem and one that will not be easy to address.

All jurisdictions have been rushing to sign tax information exchange agreements (TIEAs) with each other since the Organisation for Economic Cooperation and Development determined that, so long as 12 TIEAs were signed, a blacklist would be avoided. The general rule of such TIEAs is that there can be no fishing expedition. An overseas revenue must know what it is looking for and identify it. Furthermore, in civil tax cases the TIEAs will only apply to investigations commenced after the TIEA was signed.

There is reason to be sceptical as to how useful these TIEAs will be. Only time will tell. Notwithstanding the pressure on offshore financial institutions, through TIEAs and the like significant pressure is also being put on their parents domestically by domestic revenue authorities. n

Stephen Baker is a partner at BakerPlatt