Global Financial Integrity

WASHINGTON, DC – Global Financial Integrity (GFI) today applauded the introduction of a bill, which would close several major tax loopholes and curtail abusive tax haven secrecy.

The Cut Unjustified Tax (CUT) Loopholes Act, which was introduced in the U.S. Senate today by Senators Carl Levin (D-MI) and Kent Conrad (D-ND), contains several provisions to permanently close offshore tax loopholes, raise revenue, and increase transparency and accountability for multinational enterprises.

“Enactment of the CUT Loopholes Act would be a huge step forward,” said Raymond Baker, director of GFI. “It would scrap several egregious offshore tax loopholes—eliminating incentives to send money and jobs overseas, help level the playing field between small businesses and multinational corporations, increase information and transparency for corporate investors, and strengthen law enforcement and tax collection abilities.”

According to the Joint Committee on Taxation and the Office of Management and Budget, the CUT Loopholes Act would reduce the deficit by at least $155 billion over the next decade with $130 billion of that reduction being attributable to the bill’s offshore tax provisions.

Significant provisions of the legislation would:

• Stop companies run from the United States from claiming foreign status and dodging U.S. taxes on their foreign income (§103) by treating foreign corporations that are publicly traded or have gross assets of $50 million or more and whose management and control occur primarily in the United States as U.S. domestic corporations for income tax purposes.
• Require annual country-by-country reporting (§111) by SEC-registered corporations on employees, sales, financing, tax obligations, and tax payments.
• Strengthen John Doe summons (§115) by streamlining the process used by the IRS to issue summons to a class of persons, such as the clients of an offshore bank, accounting firm, or law firm, while strengthening court oversight.
• Strengthen penalties (§§121-122) on tax shelter promoters and those who aid and abet tax evasion by increasing the maximum fine to 150% of any ill-gotten gains.

GFI was particularly pleased to note the section on country-by-country reporting.

“The country-by-country reporting provision adds a layer of pro-investment, best practices accountability to this bill,” said Mr. Baker. “For investors, the more information available about a company’s business practices and balance sheets, the better. This reporting requirement would also help anti-corruption and economic development efforts in developing countries by creating more transparency with respect to whether a multinational is contributing to the tax base of the developing countries in which it operates, or whether it is engaging clever accounting tricks to move that money to tax havens.”

A full summary of the legislation can be found here.

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Notes to Editors:

1. Click here to read Sen. Levin’s and Sen. Conrad’s press release on the legislation
2. Click here to read a full summary of the legislation.
3. Click here for more information on country-by-country reporting.
4. Click here to read the Financial Accountability & Corporate Transparency (FACT) Coalition’s statement on the legislation.

Contact:

Clark Gascoigne
+1 202 293 0740 ext. 222
cgascoigne@gfintegrity.org

__________

Global Financial Integrity (GFI) is a Washington, DC-based research and advocacy organization which promotes transparency in the international financial system.

For additional information please visit www.gfintegrity.org.

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Tom Cardamone

Global Financial Integrity Managing Director Tom Cardamone has written a new blog post for the TrustLaw website highlighting U.S. Senator Rand Paul’s (R-KY) efforts to gut the USA PATRIOT Act of key anti-money laundering/anti-terror financing provisions. The key provisions are set to expire Friday morning unless the U.S. Congress renews them before then.

Referencing two of Senator Paul’s eight proposed amendments to the act, Cardamone writes:

Two of the Paul amendments deal with Suspicious Activity Reports (SARs) that money services businesses are required to submit to the Treasury Department when terrorist financing, money laundering or other illegal financial activity is suspected. Paul sees this requirement as a violation of the fourth amendment to the constitution, which protects Americans against illegal search and seizure.  He explained this position during a speech on the Senate floor on Tuesday.

While Paul believes that the Patriot Act makes it “incumbent upon the bank to spy on their customers,” in reality the SARs requirement is a judicious use of government power directed specifically at activities that could be harmful to U.S. national security and innocent citizens. If Paul’s amendments pass, they will severely undermine the ability of law enforcement to investigate suspicious financial movements that are consistent with activity known to be used with criminal intent. Indeed, money services businesses are required to file a SARs when the firm “knows, suspects or has reason to suspect” illegal activity.

SARs are a key tool in the fight against terror financing, and the provisions should be renewed without amendment.

The blog post, which you can read in full on the TrustLaw website, is the first in a series of Tom Cardamone’s views that will henceforth appear on the TrustLaw website fortnightly on Thursdays.  Visit Mr. Cardamone’s TrustLaw author page to stay up-to-date with his latest posts.

Watch the video clip from C-SPAN below:

I wrote about the hearing yesterday, so I’d like to make a general comment about the report.

Reading through each of the case studies, a theme emerges. At various points in each study, certain public and private individuals and institutions identified the unlawful or suspect nature of the financial transactions taking place in front of them. Often, they acted to close a bank account, notify authorities, freeze assets, or start an investigation. However, the corrupt foreign officials continued to find ways to move their money to where they wanted it to be.

The problem was systematic. No one individual or agency can be blamed for any of these four cases occurring. Instead, they were able to establish a veneer  of legitimacy using shell corporations, offshore bank accounts, and lax US financial law to turn an account being shut down by Wachovia or Bank of America or any number of large commercial banks into just a setback, instead of having their flow of money completely shut down.

The recommendations listed by the report reflect this. One suggested reform suggests strengthening PEP (Political Exposed Person) laws, which would do a better job of alerting banks to who they are doing business with. Another set of reforms would close specific loopholes in anti-money laundering laws exposed by these case studies. But more importantly, the report attacks the systemic problem of shell corporations, immigration and visa issues, and ethical standards by professional organizations.

The military would call this an “effects-based” attack on the problem. Instead of simply aiming at the target (which, in this case, would mean closing individual loopholes used by these case studies to move money around, or punishing/firing the people directly involved in the case), the report also suggests focusing on the peripheral enablers and causes of the problem. While this is not exactly a novel concept, Congress’s anti-money laundering efforts have lacked a grand strategy for some time now.

• Read legislation
• Read press release
• President Obama’s statement
• Secretary Geithner’s Statement

Summary*: Recent events have highlighted the growing use of foreign financial institutions, foreign trusts, and foreign corporations by U.S. individuals to evade U.S. tax. In order to prevent this tax evasion, the Foreign Account Tax Compliance Act of 2009 would provide the U.S. Treasury Department with significant new tools to find and prosecute U.S. individuals that hide assets overseas from the Internal Revenue Service.

Based on proposals included in President Obama’s 2010 Budget, on legislation proposed by Senator Carl Levin and Representative Lloyd Doggett, and a draft released by Senator Max Baucus, the Foreign Account Tax Compliance Act would force foreign financial institutions, foreign trusts, and foreign corporations to provide information about their U.S. accountholders, grantors, and owners, respectively. The nonpartisan Joint Committee on Taxation has estimated the provisions of the Foreign Account Tax Compliance Act would prevent U.S. individuals from evading $8.5 billion in U.S. tax over the next ten years.

The Foreign Account Tax Compliance Act of 2009 has been developed in close consultation with the U.S. Department of the Treasury, and is the legislative product of numerous hearings conducted in the Senate Permanent Select Committee on Investigations, the Select Revenue Measures Subcommittee of the House Ways and Means Committee, and the Senate Finance Committee.

For Immediate Release

Contact: Dan Virkstis (Baucus), (202) 224?4515

October 27, 2009

Matthew Beck (Rangel), (202) 225?8933

BAUCUS, RANGEL, KERRY, NEAL IMPROVE PLAN TO TACKLE OFFSHORE TAX ABUSE THROUGH INCREASED TRANSPARENCY, ENHANCED REPORTING AND STRONGER PENALTIES

Senate-House Proposal Detects, Deters, Discourages Overseas Tax Evasion

Washington, D.C. – Senate Finance Committee Chairman Max Baucus (D?Mont.), House Ways and Means Committee Chairman Charles Rangel (D?NY), senior Senate Finance Committee member John Kerry (D?MA) and Ways and Means Select Revenue Subcommittee Chairman Richard Neal (D?MA) today unveiled a comprehensive proposal to clamp down on tax evasion and improve taxpayer compliance by giving the IRS new administrative tools to detect, deter and discourage offshore tax abuses. Based on proposals included in President Obama’s 2010 Budget, on legislation proposed by Senator Carl Levin and Representative Lloyd Doggett, and a draft released by Senator Max Baucus, the Foreign Account Tax Compliance Act would force foreign financial institutions, foreign trusts, and foreign corporations to provide information about their U.S. accountholders, grantors, and owners, respectively. The nonpartisan Joint Committee on Taxation has estimated the provisions of the Foreign Account Tax Compliance Act would prevent U.S. individuals from evading $8.5 billion in U.S. tax over the next ten years.

Senator Baucus and Congressman Rangel consulted extensively with the Department of the Treasury, the Internal Revenue Service (IRS), the Joint Committee on Taxation (JCT) and industry stakeholders to ensure the proposal accurately represents industry practices and will be able to meet current IRS compliance and enforcement needs.

“Last March, I circulated a preliminary draft of offshore compliance legislation to obtain stakeholder input to make the proposal even stronger, more durable and more likely to become law. The proposal offered today is the culmination of that effort and represents the best ideas from both the House and the Senate on how to strengthen IRS resources to root out tax cheats once and for all,” said Baucus. “These tax evaders cost our country tens of billions of dollars every year in unpaid taxes, and honest, law?abiding taxpayers pay the price. Not only is this practice fundamentally unfair, this is money that could be used in any number of other important areas, such as reducing our fiscal deficits.”

“This bill offers foreign banks a simple choice – if you wish to access our capital markets, you have to report on

U.S. account holders,” said Ways and Means Committee Chairman Rangel. “I am confident that most banks will do the right thing and help to make bank secrecy practices a thing of the past.”

“When I first came to the Senate, I investigated the murky and opaque network that allows people to hide assets abroad and evade U.S. tax laws. Decades later, we still have work to do, but this long overdue legislation is a step forward,” said Sen. Kerry. “It will prevent another UBS and strengthen taxpayer compliance. The Treasury Department’s efforts to improve how we share tax information with other countries and the compliance provisions in this bill will help crackdown on the bad actors who try to hide funds offshore instead of playing by the rules.”

“This bill is a continuation of my efforts to reduce tax evasion by American citizens and bring more transparency to international banking. Last March, I held a hearing in the Subcommittee on Select Revenue Measures addressing the nexus between bank secrecy and tax avoidance. With billions of dollars in U.S. tax revenue being lost each year due to uncooperative foreign financial institutions, it is clear the issue is reaching its tipping point. The demand for standards on bank secrecy has even gone international, with British Prime Minister Gordon Brown calling for the beginning of the end of tax havens. As a longtime critic of U.S. individuals and companies engaging in unlawful foreign tax avoidance, I believe this bill provides the Treasury Department with the tools it needs to crack down on those Americans hiding assets overseas,” said Ways and Means Select Revenue Subcommittee Chairman Neal.

Important measures in the proposal include:

• The bill requires 30% withholding on payments to foreign financial institutions and other entities unless they acknowledge the accounts’ existence to the IRS and disclose relevant information including account ownership, balances and amounts moving in and out of the accounts.
• Individuals and entities would be required to report offshore accounts with values of $50,000 or more on their tax returns. The statute of limitations will be extended to six years when offshore accounts are unreported or misreported.
• Advisors who help set up offshore accounts would be required to disclose their activities or pay a penalty. The proposal would also require electronic filing of information reports about withholding on transfers to foreign accounts to enable the IRS to better match reports to tax returns.
• ? The bill strengthens rules and penalties with regard to foreign trusts, including rules to determine whether distributions from foreign trusts are going to U.S. beneficiaries and reporting requirements on
• U.S. transfers to foreign trusts.
• The legislation clarifies that U.S. dividend payments received by foreign persons are treated as dividends even when couched as another type of distribution in an effort to avoid U.S. taxes.

A Joint Committee on Taxation (JCT) technical explanation of the Foreign Account Tax Compliance Act of 2009 from is available on their website here: http://jct.gov/.

A full summary of the legislation follows:

FOREIGN ACCOUNT TAX COMPLIANCE ACT OF 2009

OCTOBER 27, 2009

Summary: Recent events have highlighted the growing use of foreign financial institutions, foreign trusts, and foreign corporations by U.S. individuals to evade U.S. tax. In order to prevent this tax evasion, the Foreign Account Tax Compliance Act of 2009 would provide the U.S. Treasury Department with significant new tools to find and prosecute U.S. individuals that hide assets overseas from the Internal Revenue Service.

Based on proposals included in President Obama’s 2010 Budget, on legislation proposed by Senator Carl Levin and Representative Lloyd Doggett, and a draft released by Senator Max Baucus, the Foreign Account Tax Compliance Act would force foreign financial institutions, foreign trusts, and foreign corporations to provide information about their U.S. accountholders, grantors, and owners, respectively. The nonpartisan Joint Committee on Taxation has estimated the provisions of the Foreign Account Tax Compliance Act would prevent U.S. individuals from evading $8.5 billion in U.S. tax over the next ten years.

The Foreign Account Tax Compliance Act of 2009 has been developed in close consultation with the U.S. Department of the Treasury, and is the legislative product of numerous hearings conducted in the Senate Permanent Select Committee on Investigations, the Select Revenue Measures Subcommittee of the House Ways and Means Committee, and the Senate Finance Committee.

I. INCREASED DISCLOSURE OF BENEFICIAL OWNERS

The proposals in this section of the bill have been estimated to raise $3.1 billion over ten years.

Reporting on certain foreign bank accounts. As a tax enforcement tool, the United States requires U.S. financial institutions to file annual information returns disclosing and reporting on the activities of bank accounts held by

U.S. individuals. Many U.S. individuals looking to evade their tax obligations in the United States have sought to hide income and assets from the Internal Revenue Service (“IRS”) by opening secret foreign bank accounts with foreign financial institutions. Some foreign financial institutions have voluntarily agreed to provide information on the U.S. assets of U.S. accountholders as part of the “Qualified Intermediary” program since 2000. However, many of the foreign financial institutions that hold U.S. accounts are outside the reach of U.S. law. As a result, the ability of the United States to require foreign financial institutions to disclose and report on U.S. accountholders is significantly limited. Although these foreign financial institutions are outside the direct reach of U.S. law, many of them have substantial investments in U.S. financial assets or hold substantial U.S. financial assets for the account of others.

The bill would impose a thirty percent (30%) withholding tax on income from U.S. financial assets held by a foreign financial institution unless the foreign financial institution agrees to disclose the identity of any U.S. individual with an account at the institution (or the institution’s affiliates) and to annually report on the account balance, gross receipts and gross withdrawals/payments from such account. Foreign financial institutions would also be required to agree to disclose and report on foreign entities that have substantial U.S. owners. These disclosure and reporting requirements would be in addition to any requirements imposed under the Qualified Intermediary program. It is expected that foreign financial institutions would comply with these disclosure and reporting requirements in order to avoid paying this withholding tax.

Reporting on owners of foreign corporations and foreign trusts. Under present law, withholding agents are not required to look?through a foreign corporation to determine whether such corporation is owned by a U.S. individual. This aspect of present law has allowed U.S. individuals to evade their tax obligations in the United States by setting up foreign shell corporations and investing overseas through these shell corporations. The bill would require foreign corporations to provide withholding agents with the name, address and tax identification number of any U.S. individual that is a substantial owner of the foreign corporation (i.e., owns more than ten percent (10%) of the foreign corporation’s stock (by vote or value)). Withholding agents would report this information to the U.S. Treasury Department. The bill would exempt publicly?held and certain other foreign corporations from these reporting requirements and would provide the Treasury Department with the regulatory authority to exclude other recipients that pose a low risk of tax evasion. Any withholding agent making a withholdable payment to a foreign corporation that does not comply with these disclosure and reporting requirements would be required to withhold tax at a rate of thirty percent (30%). Similar rules would also apply to foreign trusts.

Extending bearer bond tax sanction to bearer bonds designed for foreign markets. Bearer bonds (i.e., bonds that do not have an official record of ownership) allow individuals seeking to evade taxes with the ability to invest anonymously. Recognizing the potential for U.S. individuals to take advantage of bearer bonds to avoid U.S. taxes, President Reagan and Congress took a number of steps in 1982 to eliminate bearer bonds in the United States. First, they prevented the United States government from issuing bearer bonds that would be marketed to U.S. investors. Second, they imposed sanctions on issuers of bearer bonds that could be purchased by U.S. investors. Under these sanctions, the issuer of such a bearer bond is not allowed to claim any interest deductions on the bond, the earnings and profits of a corporation are generally not reduced by the amount of any interest on the bond, and interest on the bond will not qualify for any applicable tax exemption (e.g., tax?exempt municipal bonds). Furthermore, certain issuers of such bearer bonds are also subject to an excise tax equal to one percent (1%) of the principal amount of the bearer bond multiplied by the term of the bond. If the issuer of the bearer bond is not subject to the excise tax, then the holder of the bearer bond would be subject to additional sanctions that apply when the bearer bond is sold, exchanged, lost or becomes worthless: (1) the loss of capital gains treatment and (2) the denial of loss deductions. Because the United States is asking other countries to eliminate opportunities for U.S. investors to purchase bearer bonds issued outside the United States, the bill would extend these sanctions to bearer bonds that are marketed to foreign investors and would prevent the United States government from issuing any bearer bonds.

II. FOREIGN FINANCIAL ASSET REPORTING

The proposals in this section of the bill have been estimated to raise $0.9 billion over ten years.

Disclosure of information with respect to foreign financial assets. The bill would require any individual that holds more than $50,000 (in the aggregate) in (1) a depository or custodial account maintained by a foreign financial institution or (2) any foreign stock, interest in a foreign entity, or financial instrument with a foreign counterparty not held in a custodial account of a financial institution (collectively, “reportable foreign assets”) to report information about these accounts and/or assets to the U.S. Treasury Department with the individual’s annual tax return. Failures to comply with this requirement would be subject to a penalty of $10,000, and higher penalties (up to $50,000) could apply if the failure is not remedied within 90 days following notification from the Treasury Department.

Penalties for underpayments attributable to undisclosed foreign financial assets. The bill would impose a penalty equal to forty percent (40%) of the amount of any understatement that is attributable to an undisclosed foreign financial asset (i.e., any foreign financial asset that a taxpayer is required to disclose and fails to disclose on an information return).

Modification of statute of limitations for significant underreporting of income in connection with foreign assets.

Under present law, additional Federal tax liabilities in the form of tax, interest, and penalties must be assessed by the Internal Revenue Service within three years after the date a return is filed. If an assessment is not made within the required time period, the additional liabilities generally cannot be assessed or collected at any future time. This three?year statute of limitations is extended to six years where there is a substantial omission of items from a tax return. This additional time gives the Internal Revenue Service an opportunity to identify the omission and determine the taxpayer’s correct tax liability. In particular, it is often difficult for the Internal Revenue Service to identify omissions that arise in connection with foreign assets. However, the extended six?year statute of limitations only applies where the omission is in excess of twenty?five percent (25%) of the gross income stated on the tax return. The bill would extend the six?year statute of limitations for omissions that exceed $5,000 and are attributable to one or more reportable foreign assets. The bill would also clarify that the statute of limitations does not begin to run until the taxpayer files the information return disclosing the taxpayer’s reportable foreign assets.

III. OTHER DISCLOSURE PROVISIONS

The proposals in this section of the bill have been estimated to raise $1 billion over ten years.

Disclosure of assistance in acquiring or forming a foreign entity. The bill would require any person who derives gross income in excess of $100,000 for providing any material aid, assistance, or advice to U.S. individuals acquiring certain direct or indirect interests in a foreign entity to file an information return setting forth the identity of the foreign entity and the identity of the U.S. individual. Failures to comply with this requirement would be subject to a penalty equal to the greater of $10,000 or fifty percent (50%) of the gross income derived by such person with respect to aiding, assisting or advising on such transaction.

Passive foreign investment company reporting. Under present law, a shareholder of a passive foreign investment company (a “PFIC”) is not required to file an information return with the Internal Revenue Service unless the shareholder recognizes gain on the sale of PFIC stock, receives a distribution from a PFIC, or the PFIC has filed a qualified electing fund (“QEF”) election. The bill would require each person who is a shareholder of a passive foreign investment company to file an annual report containing such information as the Secretary may require.

E?Filing of Certain Financial Institution Returns. Under present law, the Treasury Department cannot require any person to file an electronic return unless such person is required to file at least 250 returns during the calendar year. The bill would provide an exception to this rule for financial institutions with respect to returns relating to withholding taxes. Under the bill, the Treasury Department may require financial institutions to file an electronic return even if such person would file fewer than 250 returns during the calendar year.

IV. PROVISIONS RELATED TO FOREIGN TRUSTS

The proposals in this section of the bill have been estimated to raise $1.1 billion over ten years.

Clarifications with respect to foreign trusts. Under present law, a U.S. person is treated as the owner of the property transferred to a foreign trust if the trust has a U.S. beneficiary. Under current Treasury regulations, a foreign trust is treated as having a U.S. beneficiary if any current, future or contingent beneficiary of the trust is a

U.S. person. Notwithstanding this requirement, some taxpayers have taken positions that are contrary to this regulation. In order to enhance compliance with this regulation, the bill would codify this regulation into the statute. The bill would also clarify that a foreign trust will be treated as having a U.S. beneficiary if (1) any person has discretion to determine the beneficiaries of the trust unless the terms of the trust specifically identify the class of beneficiaries and none of those beneficiaries are U.S. persons or (2) any written, oral or other agreement could result in a beneficiary of the trust being a U.S. person. As a final clarification, the bill would clarify that the use of any trust property will be treated as a payment from the trust in the amount of the fair market value of such use.

Presumption with respect to transfers to foreign trusts. The bill would provide that any U.S. person who directly or indirectly transfers property to a foreign trust (other than a trust established for deferred compensation or a charitable trust) shall be presumed as having a U.S. beneficiary unless such person can demonstrate to the satisfaction of the IRS that such trust has complied with all reporting requirements and has submitted any additional information as the Secretary of the Treasury may require with respect to such transfer.

Minimum penalty with respect to failure to report on certain foreign trusts. Under present law, a taxpayer that fails to file an information return with respect to certain transactions involving foreign trusts (e.g., the creation of a foreign trust, the transfer of money or property to a foreign trust, or the death of a U.S. owner of a foreign trust) is subject to a penalty of thirty?five percent (35%) of the amount required to be disclosed on such return. If the IRS uncovers the existence of an undisclosed foreign trust but is unable to determine the amount required to be disclosed on such return, it is unable to impose a penalty under present law. The bill would strengthen this penalty by imposing a minimum penalty of $10,000 on any such failure to file. Notwithstanding this minimum penalty, in no event would the penalties imposed on taxpayers for failing to file an information return with respect to a foreign trust exceed the amount required to be disclosed on such return.

V. DIVIDEND EQUIVALENT PAYMENTS

The proposal in this section of the bill has been estimated to raise $1.6 billion over ten years.

Treatment of dividend equivalent payments received by foreign corporations in the same manner as dividends.

Under present law, dividend payments made to foreign investors are subject to withholding tax at a rate of thirty percent (30%) unless otherwise reduced by an applicable tax treaty. In order to avoid this withholding tax, foreign investors have entered into derivative transactions that provide them with dividend equivalent payments that are not subject to withholding. The bill would require withholding on any dividend equivalent payments that are included in notional principal contracts (e.g., total return swap agreements) and would authorize the Treasury Department to develop rules that would require withholding on dividend equivalent payments that are included in other financial arrangements.

INTERACTION AMONG PROVISIONS IN THE BILL

Interaction among the various proposals in the bill has been estimated to raise an additional $0.8 billion over 10 years.

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Under the proposed bill, foreign banks would be forced to disclose information about American customers, or face a 30 percent tax on their income from U.S. financial assets.

The legislation would crack down on shell companies by requiring a foreign corporation to give the U.S. Treasury the names of Americans who own more than 10 percent of its shares.

Any American owning more than $50,000 in foreign assets would be required to declare accounts to the Treasury, and a 40 percent penalty would be imposed on understatements of foreign assets by American taxpayers.

To give tax authorities more time to go after tax cheats, it would extend the statute of limitations to six years, from current three years, for major tax evasion cases.

To find out more about the legislation, to read the official press release, and to read President Obama and Secretary Geithner’s statements on the legislation, click here…

WASHINGTON (Reuters) – A proposal to stop rich Americans from stashing assets offshore to evade taxes, by slapping penalties on individuals and foreign financial institutions, was introduced on Tuesday in the U.S. Congress.

The bill, introduced by Senate and House Democratic leaders, would raise $8.5 billion over a decade by collecting taxes in previously secret accounts, lawmakers said.

Continue reading at Reuters.com…

Senator Carl Levin (D-MI) gives the keynote address at the 2009 annual Task Force conference on Wednesday.

Senator Carl Levin was in bullish mood when he spoke last night at the annual conference of the Task Force on Financial Integrity and Economic Development here in Washington. “More progress has been made in the past year than in the previous decade”, he said, “causing total upheaval in the offshore tax haven world.” The recent deferred settlement agreed with Swiss private banking giant UBS was enormously significant, especially since the bank will now be required to advise the US authorities automatically each time when it opens an account for a US citizen. The scale of the backdown by the previously intransigent Swiss “almost knocked me off my chair” quipped the Senator.

Senator Levin has taken a leading role in the combat against tax havens. During his stint as Chairman of the Senate Permanent Sub-Committe on Investigations (which has extraordinary powers to sub-poena witnesses but has no legislative authority) he has led an almost continuous series of investigations into tax havens, their users and abusers. The outcome of his investigations has been the Stop Tax Haven Abuse Act, co-sponsored by then Senator Barrack Obama, and the Incorporation Transparency and Law Enforcement Assistance Act, introduced to the Senate in March 2009. The latter is designed to tackle the lack of disclosure of corporate ownership information in US states like Delaware, which creates massive barriers to law enforcement and encourages widespread tax abuse.

Accusing tax havens of costing the US people up to $100 billion each year in lost revenue, Senator Levin called on the President to support both bills and to steer them through the legislature. “Offshore tax havens are not an inevitable evil” he said, but their activities have a caustic effect on society, stirring up “resentment, distrust and anger.” He called on President Obama and G-20 leaders to seize the moment by supporting systems of international sanctions against non-cooperative jurisdictions. “This is about more than raising revenue” he said, “this is about defending the principles upon which our societies are based.”

These sentiments resonated well with a conference audience which had spent the day discussing practical steps to strengthen transparency in the financial markets, including country-by-country reporting standards for multinational companies, automatic and multilateral systems for tax information exchange between national authorities, and ownership disclosure for all types of legal entities.

The text of Senator Levin’s speech is available here.

The Senator’s remarks included commentary on his extensive work as Chairman of the Senate Permanent Subcommittee on Investigations to increase transparency in offshore finance and combat illicit financial practices. He also warned against “popping the cork on the Champagne” too quickly in the wake of the UBS legal settlement and the recent adoption of OECD tax information exchange standards by many countries of late.

The Senator’s address rounded-out Day One of the Task Force’s two-day conference, which continues tomorrow at the Washington Hilton Embassy Row.

Scroll down to read Senator Levin’s full remarks:

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.

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