The War on Tax Evasion: How a Good Pursuit Gets Ugly



At first glance, the showdown between the US government and the Swiss banks seems to have produced a satisfactory outcome: Tax dodgers can no longer park their undeclared monies in Switzerland without fear of discovery.

Under a new bilateral deal, Swiss banks are forced to hand over comprehensive details of their US customers – in fact, just about all they know but for actual names – that enable the American Justice Department to file robust “mutual legal assistance” requests. These petitions subsequently force Swiss courts to order the full disclosure of banking records regarding suspected US tax evaders.

The deal severely punishes banks that refuse to participate or do so less than wholeheartedly. Switzerland’s oldest bank, Wegelin & Co founded in 1741, has to close its doors earlier this year after it pleaded guilty in a New York court to hiding about $1.2bn from US tax authorities. Though the bank had not violated a single Swiss law and does not operate from US soil, it paid close to $58m in fines after which it shut down.

“The banks then may expect fines of 20 to 50% on the undeclared account balances.”

Swiss bankers, having watched the execution of Wegelin & Co, are now cordially invited to “voluntarily” disclose information on their US customers to the Internal Revenue Service (IRS). The banks then may expect fines of 20 to 50% on the undeclared account balances. Even Swiss banks with no foreign customers are wise to participate and furnish independently obtained proof that they do not hold any deposits of US citizens or green card holders.

Failure to comply will be met with aggressive persecution. Many of Switzerland’s 300 or so banks are quite small and do not have the wherewithal to fight the IRS. They simply must accede to any and all requests emanating from US authorities or risk ending up like Wegelin & Co.

There is a lot wrong with the Foreign Account Tax Compliance Act (FATCA) which seeks to extend the reach of US legislation far beyond the country’s national confines. For starters, the legislation inverts the burden of proof. Bankers now have to prove their innocence.

While it may be true that some of the larger Swiss banks in the past actively and knowingly courted US tax dodgers, this is no reason to proffer blanket accusations against all banks. In fact, the IRS has now abdicated its own obligations to properly investigate tax evasion: Alleged offenders will be handed to them on a plate.

Also, tax experts argue that FATCA mainly targets small-time tax dodgers. The truly rich and tax averse keep their millions out of sight through highly complex offshore vehicles of the type US politician Mitt Romney was found to use during his failed bid for the presidency. These dubious monies are decidedly not targeted by the IRS and the US Justice Department.

While fighting tax evasion and avoidance are entirely legitimate pursuits, the heavy-handed weapons chosen by the US and some other countries force an unwelcome breach of long-established privacy laws and practices. As such, FATCA is akin to the War on Terror which justifies extra-judicial killings by remote control, the wholesale invasion of privacy and a vast range of other questionable restrictions on freedom.

Most bothersome, however, is the fact that governments worldwide increasingly aim to cover-up the inefficiencies of their own bureaucracies with broader and sweeping powers; be that in the quest against terrorism or the fight against tax evaders.

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