International Crack Down The New Global Hunt for Tax Cheats

By forming multinational investigative teams, the IRS and other tax collectors are cracking down on evaders and giving new meaning to globalization.

By Keith Epstein and Mark Scott

Liechtenstein: Not quite the tax haven it used to be. The formation of global tax authorities has made life far harder for tax evaders and tax havens.

Liechtenstein: Not quite the tax haven it used to be. The formation of global tax authorities has made life far harder for tax evaders and tax havens.

Government authorities from Australia to the US are hunting big game together. Their prey? Wealthy tax evaders -- as well as the asset managers, banks, and accountants who help prosperous people conceal cash in offshore bank accounts. For decades, globalization has afforded an edge to tax cheats. Now it's working for the tax cops, too.

Buoyed by new multinational investigative teams, agreements with banks to open once-secret records, tougher penalties for cheats and third parties, and a thirst for billions of dollars in recoverable revenue, the new globe-spanning tax man has got the world's mega-rich worried they could run afoul of the mounting crackdown.

With so much money at stake, it's no wonder the US Internal Revenue Service, Germany's Bundesministerium der Finanzen, Britain's Her Majesty's Revenue & Customs, and other international colleagues are eager to nab wealthy tax evaders. Almost $6 trillion is estimated to be hidden from tax authorities across the globe -- Germany's central bank suggests $775 billion in German assets alone have been secreted out of the country. In the US, the IRS reckons $295 billion of potential tax revenue goes uncollected -- much of it because of underreported income. With governmental budgets strained everywhere, leaders are eager to mop up those missing payments.

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A Collaborative Effort

To close this "tax gap," US investigators and their comrades overseas are cooperating as never before. Since the September 11 terrorist attacks, tracking money movements has become a priority. In response, law enforcement and banks have started to share more information about possible tax evaders. Governments also realize they have a lot to gain from stiffer penalties that return more money to underfilled coffers.

"There's a lot of offshore tax evasion, so governments are trying to find tools to combat that," says Grace Perez-Navarro, deputy director of tax policy and administration at the Paris-based Organisation for Economic Co-operation & Development (OECD). "Governments realized there was greater value in working multilaterally."

Cross-border collaboration has become a buzzword in global law enforcement circles. Under an OECD-negotiated treaty, 19 countries, including states as diverse as the US, Italy, and Azerbaijan now can prosecute tax evaders within their jurisdictions on behalf of other signatory countries. The European Union passed a similar law in 2000, while Brazil, India, and South Africa began cooperating with each other to identify suspect transactions in 2006. Their targets typically conceal assets in the roughly 40 nations generally seen as tax havens, which are analyzed routinely by international organizations such as the OECD and the International Monetary Fund.

The IRS Joins Forces

These days, an investigator following a lead need not even cross a border for help from his international colleagues: He or she merely has to walk down the hallway. Since 2004 tax shelter sleuths from five countries -- the US, Britain, Australia, Japan, and Canada -- have shared work space, tactics, and information in a joint office at IRS headquarters in Washington. The success of the operation led to its expansion last year, including the opening of a London-based outpost at Her Majesty's Revenue & Customs.

The physical setup of this so-called Joint International Tax Shelter Information Centre reflects the sensitivity of the work. Each member of the unit -- which is physically separated from the rest of the IRS -- has a separate, closed office, allowing for confidential communication with counterparts back home, as well as discreet one-on-one conversations with local colleagues and the IRS. "The office space is configured in a manner that reflects the critical need to protect the privacy of taxpayer information," according to an IRS spokesman.

The IRS argues that such cooperation is essential in a world of globalized money flows. "Cross-border migration of capital and people has made this a more integrated world, and the IRS is working closely with other national tax administrators to ensure that we have a global view of our work," says the top tax official in the US, IRS Commissioner Douglas Shulman. This close work with other tax authorities, he adds, has allowed the IRS and its equivalents in other nations to achieve "a new level of cooperation in identifying, developing, and sharing leads on abusive tax transactions and schemes."

Such cooperation will only increase as governments clamp down on tax evasion, says Daniel Feingold, senior partner at Britain-based global tax consultancy Strategic Tax Planning. "There's a definite push for this sort of thing," he says.

Squeezing Tax Havens

All of this has put the squeeze on tax havens such as Liechtenstein and Andorra that have long-held traditions and laws supporting no-questions-asked banking for wealthy clients. "The number of countries safe for this activity is dwindling," says Beverly Hills-based tax lawyer Edward Robbins Jr., a former assistant US attorney who oversaw tax prosecutions in California. "There aren't that many left, frankly."

For decades, banks in places such as Switzerland have flourished by offering seemingly ideal havens from the tax man. Switzerland's code of silence, for instance, goes back at least 200 years. And during World War II, Nazis and Jews alike made use of Swiss bankers' discretion. Since then so have corporations and non-governmental organizations -- as well as drug traffickers and corrupt dictators.

Yet even this Alpine paradise has conceded to mounting international pressure. Most major Swiss banks have signed up with the US to be "qualified intermediaries." The system gives the IRS access to any account containing US securities and requires the filing of tax and other forms with the US. that identify clients and balances -- not exactly the image of tight-lipped discretion portrayed in movies such as The Spanish Prisoner and The Bourne Identity. Even the Swiss government admits to a disconnect between tradition and current reality. "Swiss banking secrecy is in no way absolute," cautions the Swiss embassy's Web site.

Often under pressure, other tax havens have followed suit. Agreements with traditional ports-of-call for evaders like Malta and Bermuda have aided the IRS and its international counterparts. Now tax collectors don't even have to pick their way through complicated avoidance schemes: They can make a case against alleged tax cheats simply by catching missing or falsified paperwork.

Elaborate Web

Here's how it works. For years, a bank client with any kind of interest in an overseas account valued at more than $10,000 has had to file a special form with the IRS disclosing that fact. But to avoid taxation, he might not file the form, or might underreport the value of the account on his tax return. More deviously, he might conceal transactions in an elaborate web of trusts and holding companies. Now, thanks to more international sharing of data, the IRS may find out about the account anyway -- from the bank itself.

The recent high-profile indictment of former UBS banker Brad Birkenfeld shows just how tough the authorities are getting. Birkenfeld's wealthy client, Igor Olenicoff, has pleaded guilty to filing false tax returns and agreed to pay $52 million in back taxes. Both Olenicoff and Birkenfeld, who was born in Boston and lives in Switzerland, are believed to be cooperating in a continuing investigation that began with the discovery of $200 million allegedly concealed in European tax havens on behalf of Olenicoff, a Russian émigré-turned-California real estate developer.

As a result of that probe, the extended arm of US law may reach not just other clients of Birkenfeld (and those of an alleged collaborator in Liechtenstein named Mario Staggl, who specializes in the intricacies of tax havens and trusts) but also other employees of UBS. "This is not an isolated incident," says David Schwedel, a Florida entrepreneur who is now an investment partner of Birkenfeld's. "He won't be the last banker called in for questioning. There will be a lot of bankers called into this. They're going after others at UBS and any US individuals involved with the bank."

Alerted About the Risks

Kevin Packman, a Miami lawyer who represents taxpayers running afoul of the IRS, says he's amazed that even sophisticated CPAs with major corporate and individual clients seem unaware of the international push against money held offshore. Tax lawyers around the world tell of clients -- often expatriates -- who are becoming increasingly worried about being ensnared in the tightening net, thanks to publicity surrounding tax avoidance test cases in Europe and the US.

One lawyer tells of trying to alert a client in Argentina about the risks of failing to disclose information to authorities in the client's home country. Even so, the client persisted in wanting to keep income under wraps. But tax lawyers and wealth managers from Basel to Boston say the risks of doing so are rising. "It's obvious that there's a growing intolerance of tax avoidance in the Western world," says Ted Wilson, a senior consultant at Scorpio Partnership, a London-based strategic consultancy to those who advise wealthy clients.

Of course, when the cat is in Zurich or Malta, the mice will find other havens. Asset managers, tax lawyers, and investigators tell BusinessWeek that wealthy evaders are taking a closer look at new frontiers for concealment. One such nation is the Republic of Vanuatu, a tiny, tax-free South Pacific archipelago 1,000 miles from Australia. Local officials even promote their tax haven status to potential clients. "Attractions for the foreign investor" include "extensive secrecy protections," according to a Vanuatu business and taxation guide.

Wealthy individuals looking to evade taxes likely will always find ways to circumvent the law. Yet as enforcement finds new ways to share information, the number of prosecutions is expected to rise. That has put pressure on well-known tax havens, such as Liechtenstein, either to shape up or face the full brunt of global tax authorities. In fact, there are signs things are already changing. Says Strategic Tax Planning's Feingold: These days, "among experienced practitioners, no one would ever use Liechtenstein."


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