Buffet of tax-evading secrecy revealed by US settlement with Swiss bank Rahn+Bodmer

The US signed a deferred prosecution agreement last month with Zurich’s oldest private bank, Rahn+Bodmer, after the Swiss bank admitted to helping US account holders evade US tax obligations by hiding hundreds of millions of dollars in offshore bank accounts at Rahn+Bodmer (R+B). The settlement exposes a buffet of secrecy tools used by the Swiss bank to help US clients evade tax, all of which have been tracked and scrutinised for years by our Financial Secrecy Index. This is a global ranking of the countries most complicit in helping wealthy individuals hide their wealth from the rule of law, and on which the US and Switzerland currently rank 2nd and 3rd respectively.

The revelations to come out of the settlement are bittersweet. On the one hand, it provides yet more proof of the index’s accuracy in identifying loopholes and other regulatory shortcomings that foster harmful financial secrecy – and so the settlement can only strengthen confidence in the scope to stamp out financial secrecy by implementing our policy recommendations. But at the same time, the settlement is further proof of the widespread use of financial secrecy and the astronomical costs that countries around the world incur with every day that governments delay taking real action.

Zurich’s oldest private bank is not a major global player, but it still had a fair haul. Per the US Department of Justice:

From at least in or about 2004 and continuing until at least in or about 2012, R+B conspired with certain of its U.S. accountholders and others to defraud the United States with respect to taxes, file false federal tax returns, and commit tax evasion… R+B admitted to holding undeclared accounts on behalf of approximately 340 U.S. taxpayers, who collectively evaded approximately $16.4 million in U.S. taxes between in or about 2004 and in or about 2012.  The assets under management that R+B held for undeclared U.S. accountholders increased from approximately $391 million in 2004 to approximately $550 million in 2007, its peak year for undeclared assets under management.

This is a drop in the bucket compared to our estimate of lost tax revenues of $182 billion a year globally, due to undeclared offshore assets. But big enough that the bank seem to have used a great many of the secrecy tricks in the book.

Calling the variety of tactics used by Rahn+Bodmer to help US clients evade tax a “buffet” is no exaggeration. From the most typical uses of banking secrecy, to the involvement of opaque foundations, it’s all there. We provide a short summary here of the various tactics exposed by the settlement, but start first with the usual suspects dishing these tactics out.

Switzerland

No one can be surprised to see a Swiss bank at the heart of yet another tax evasion hustle, given that Switzerland has ranked among the top three worst offenders on the Financial Secrecy Index since the very first edition in 2009. Just two months ago one in eight Swiss banks were revealed to be involved in embezzling Venezuelan public funds.

The US authorities, in particular, could not have been surprised by the behaviours of Rahn+Bodmer in this settlement case, and not just because a lot has been written on the role of enablers¹Intermediaries like accountants and bankers are not just passive facilitators of global tax abuse. They’re often active, and sometimes aggressive purveyors. Learn more here., ie  bankers, lawyers and other intermediaries, in facilitating illicit financial flows, but because the US has already caught other Swiss banks such as UBS and Credit Suisse helping US clients evade tax before.

As we reported here in 2014,  the infamous US “qualified intermediary” system relied on banks to properly collect taxes on non-US persons based on treaty provisions, so that US authorities didn’t need to find out the identity of those non-US persons. However, Swiss and other banks that were designated as “qualified intermediaries” were found to exploit the system to enable Americans to evade taxes. These abuses of trust by banks (which we now know also included Rahn+Bodmer), is what led to the establishing of automatic exchange of bank account information under the US the Foreign Account Tax Compliance Act (FATCA). This way, instead of blindly trusting banks, the US required all financial institutions in the world to identify any American taxpayer holding foreign accounts.

The “qualified intermediary” experience goes to show that without meaningful accountability and repercussions, such as jail time, enablers will continue to operate business as usual. But in light of the $22 million speeding ticket the Department of Justice has levied on Rahn+Bodmer under the new settlement, it seems this lesson continues to go unlearnt.

In 2001, R+B entered into a Qualified Intermediary Agreement (“QI”) with the IRS… Under the QI, R+B was generally obligated to identify and document any accounts that held U.S. source income by collecting either an IRS Form W-91 for U.S. persons… [However,] R+B also opened and maintained accounts on behalf of 174 U.S. taxpayer-clients in the names of non-U.S. structures, including sham structures. R+B treated these non-U.S. structures as the account holders, and accordingly did not require the submission of Forms W-9 for these accounts. R+B client advisors understood that these structures could be used for tax evasion. R+B bankers’ knowledge that the accounts at issue were actually owned by U.S. taxpayers was demonstrated by a particular form in the account opening documents (“Form A”) that was required to be maintained by Swiss banks under Swiss banking regulations and that set forth the true beneficial owners of the accounts in question.

Speaking of beneficial owners, this case illustrates one of the reasons why the Financial Secrecy Index, unlike the OECD’s Global Forum or the Financial Action Task Force (FATF), does not consider relying on banks alone to collect beneficial ownership information to be robust implementation. While financial institutions have a role to play in helping detect and report discrepancies in information submitted by their clients, we consider that beneficial ownership information for all legal vehicles must always be held by government authorities directly, in order for the registration process to be effective.

Banking secrecy

Banking secrecy comes in many, increasingly sophisticated flavours these days as enablers look to bypass the growing implementation of exchange of information between countries. However, the Rahn+Bodmer case also encompasses plain vanilla banking secrecy:

R+B opened and maintained “numbered” or “pseudonym” accounts for numerous U.S. taxpayer-clients to ensure that the U.S. taxpayer-clients’ names would not appear on bank documents relating to their accounts and thereby reduce the risk that U.S. tax authorities would learn the identities of the U.S. taxpayer-clients.

Trusts, foundations and closing exemptions

As we reported in April 2020, more than 80 jurisdictions had approved laws requiring beneficial ownership to be registered with a government authority. However, the scope of these laws is many times flawed with loopholes. For instance, some countries’ beneficial ownership laws only cover companies or at best legal persons, ignoring the more sophisticated legal vehicles such as trusts and foundations. Although many argue that these structures are just used for charities or in private family matters (and in some cases that may be true), the Financial Secrecy Index and a range of publications (e.g. here, here and here) have shown how trusts and foundations can equally be abused for illicit financial flows.

Beneficial ownership law should cover these types of sophisticated legal vehicles not just because of their secretive features, but because tax transparency laws must cover all relevant legal entities (without loopholes) in order to be effective. Otherwise, room is left for enablers to find alternative ways to help clients evade tax – and so the legislation ends up pointing enablers in the direction of structures that may not previously have been much abused for illicit flows.

It’s the same with exchange of information. If some countries are excluded from the necessary treaties, not only will they be unable to obtain relevant information to prevent their residents from engaging in illicit financial flows, they may also become tax havens themselves, intentionally or not. And of course it is lower-income countries that are most likely to be excluded when the rules are set by the richest countries in the OECD. Excluded countries can become hotspots for individuals looking to move their bank accounts outside of any possible information exchange, and this is precisely what happened in the Rahn+Bodmer case:

After Liechtenstein and the United States signed a Tax Information Exchange Treaty (“TIEA”), under which Liechtenstein agreed to provide the United States with access to certain bank and other information needed to enforce U.S. tax laws, R+B transferred undeclared assets of several U.S. taxpayer-clients from accounts held in the names of sham foundations organized under the laws of Liechtenstein to new accounts held in the names of new sham foundations organized under the laws of Panama in an effort to further conceal the U.S. taxpayer-accounts.

Non-financial assets: gold, jewellery, etc.

As we’ve discussed before, one of the loopholes of the automatic exchange of information system is that it only covers financial accounts, but fails to cover other hard assets such as precious metals, jewellery and artwork. Freeports²The term “freeport” can conjure up images of bustling seaports brimming with commercial ships and towering stacks of cargo containers. In reality, freeports are large, fortress-like warehouses where unnamed wealthy individuals can hide and launder their valuable assets. The Geneva Freeport, for example, houses the world’s largest art collection. Learn more here., open warehouses and similar venues have been promoted in tax havens precisely to hide these valuable assets from authorities. For this reason, the Financial Secrecy Index has an indicator on other wealth covering freeports and real estate ownership. Efforts to establish a Global Asset Registry have also raised the importance of ownership information for these other types of wealth. The Rahn+Bodmer case confirms that these assets are exploited for secrecy purposes:

[they] took steps to further conceal the undeclared assets of several U.S. taxpayer-clients at R+B by using these assets to purchase gold and other precious metals.

And:

R+B helped U.S. accountholders to repatriate funds to the United States in a manner designed to ensure that U.S. tax authorities did not discover the undeclared accounts, including by transferring the funds of one U.S. accountholder in increments of approximately $100,000 to another Swiss bank before the U.S. accountholder routed the funds to a diamond dealer in Manhattan, where the U.S. accountholder ultimately received them.

Abuse of attorney-client privilege

We have written here about the risks of exploiting attorney-client privilege to engage in illicit financial flows, here on the risks of excluding escrow accounts from automatic exchange system, and here on the risks of exempting lawyer-held accounts from automatic exchanges. All these risks are actualised in the Rahn+Bodmer case:

Following the public announcement of the UBS AG (“UBS”) deferred prosecution agreement with the United States Department of Justice in February 2009, R+B opened on behalf of a Swiss attorney “escrow” accounts to facilitate the transfer of undeclared assets of U.S. taxpayer-clients that had been converted to gold and other precious metals held in a vault at UBS.

Conclusion…

The Financial Secrecy Index and policy recommendations are again proven right. Our roadmap to stamping out financial secrecy can and will deliver. But we can also see that all these secrecy provisions we’ve identified and scrutinised are still being utilised on a regular basis.

With the call from a number of heads of state in February this year for a UN tax convention and aggressive action against the professional enablers; and with President Biden’s stated commitment to cleaning up global illicit finance, this might be the year finally to put to rest the myth that we can rely on banks alone to report tax-evasion activity by clients.

…but not before some hypocrisy pie

And now for your blog dessert: a syrupy serving of tax evasion hypocrisy from an unrelated case last month in the state of Georgia.  

We have written here, here and here about the risks posed by golden visas, which allow individuals to acquire residency or citizenship in a country (usually a tax haven) in exchange for a large sum of money. The main problem of these schemes, aside from the injustice of rejecting refugees but accepting the rich, is that individuals who acquire these certificates don’t need to emigrate or spend much time in the countries which grant them golden visas. They may keep living and enjoying the stability, private property, health, education and other perks of many developed democracies while pretending to be resident somewhere else when it comes to paying taxes.

As documented by the Financial Secrecy Index 2020, the US is among those offering golden visas. But the US District Court for the Southern District of Georgia has now determined in the case of Craig Thomas Jones v. United States that the US may refuse to issue a US passport to a US person who evaded taxes. According to the court, unlike the right to interstate travel, the right to international travel is not a fundamental right. Not surprisingly, this shows, as we have argued many times, that countries may be very strict when it comes to locals evading taxes, but much more lenient to foreigners willing to invest ill-gotten or undeclared money.

The US remains in the business of selling American passports to tax evaders – just so long as they’re not American citizens.