Worldwide: Protecting Yourself From International Tax Investigations

Who Will Be Next?

How To Respond To A Tax Investigation

The international political community continues to make the most threatening noises about those who they believe do not pay enough tax. Long gone it seems are the days where it was accepted that a person could properly organise his affairs in such a way that the minimum tax lawfully due was paid to the Revenue Services. The voice of the press and politicians means that tax continues to be at the forefront of the public consciousness. There is discernable shift in the attitude of societies to the morality of avoiding the payment of tax. The distinction between tax avoidance, which is lawful, and tax evasion, which is unlawful and criminal, is apparently being quickly forgotten. Politicians no longer speak of the criminality of evasion but the immorality of avoiding tax. It would be foolish to ignore that shift in language.

Such is the remarkable state of affairs that large corporations are volunteering to pay extra sums to escape opprobrium. Those who do not pay enough tax are named and shamed by the press. There are public campaigns for the removal of honours initially bestowed for public service. Public entertainers feel obliged to apologise for the state of their tax affairs. Those tax affairs were doubtless organised by the best accountants, tax planners and lawyers charging appropriate fees.

Those involved in the financial services industry and the professionals who advise them can, however, have comfort. Whatever the words of the politicians and the public hysteria, law enforcement agencies and the Courts are interested only in the letter of the law. They are not interested in how persons organise their tax affairs provided they are lawful. They are interested in tax evasion and not the lawful mitigation of tax. However, where the words of the politicians are highly relevant to the financial services industry is on the consequent pressure being placed on law enforcement agencies around the world to catch tax cheats and to catch those who assist them.

The enthusiasm of law enforcement and tax agencies to catch cheats is evidenced by their willingness to pay persons for information which has been stolen from financial institutions. This leads to very interesting theoretical questions. Might agencies such as HMRC who have paid for stolen material be guilty of handling stolen property or laundering the proceeds of crime should any tax consequently be paid to them? On the present state of the law it might be optimistic to suppose a criminal court would refuse to hear a case based on property stolen from a bank and paid for by the prosecuting authority.

The leader in the drive against those involved in tax evasion is of course the United States. In recent times the Department of Justice has driven huge inroads into the concept of Swiss bank secrecy. It has caused a Swiss constitutional crisis by its demands for information, and the Swiss have caved in. The Swiss government has reached an agreement with the United States that there be a voluntary disclosure programme available to its banks. This is extraordinary but the attack on the Swiss banks by the Department of Justice has been so furious that the Swiss have surrendered and they want it to stop. Credit Suisse has pleaded guilty to a criminal indictment of conspiracy to aid and assist U.S. taxpayers in filing false income tax returns. Credit Suisse has a criminal record. What the Department of Justice has achieved as regards the Swiss is remarkable. Yet the United States politicians are not satisfied. They press for more and the Department of Justice will doubtless give them more.

The Swiss banks were the first substantial target. The United States' law enforcement authorities will almost certainly continue to target financial institutions in a multitude of jurisdictions. It is not just large financial institutions such as banks who will be targeted. As well as continuing to target the banks, the United States has picked on some much smaller fish. They have carried out sting operations against trust and corporate service providers from the Cayman Islands and Belize. Financial professionals from Cayman foolishly flew to Miami to conclude deals with persons who turned out to be federal agents and were arrested there.

It is not just the United States who are targeting foreigners who help in the evasion of tax. Australia has successfully extradited, prosecuted and sentenced Philip de Figueiredo, a Jersey resident, for involvement in the evasion of Australian tax. That individual is now reported as co-operating with Australian prosecutors, doubtless with a view to securing early release.

Substantial financial institutions are under investigation in Germany, Argentina, France and a range of other countries. There is no doubt that tax is going to be a continual and growing issue for financial institutions and professionals who advise them. The United States will not stop with financial institutions. It has dealt with large firms of accountants within its jurisdiction and it will move to deal with them outside the jurisdiction. It will take on law firms outside the jurisdiction. It will challenge claims to legal professional privilege where lawyers have been involved in tax structuring.

Individuals and institutions need to take proper steps to protect themselves and to make sure they are not vulnerable to investigations. They need to have dealt with historic relationships and also to have proper processes in place for new clients and ongoing relationships.

Tax information exchange agreements, the sharing of SARs and legislation such as FATCA mean that there is a mass of information in the hands of law enforcement authorities. Computer programs are becoming more sophisticated and the analysis of information is becoming easier. How does FATCA information provided to the United States fit in with information provided by Swiss banks? How does information being provided by one financial institution in a particular jurisdiction fit into the picture being provided by institutions in other jurisdictions? What is the picture which will emerge when the pieces are put together? Who will the United States target next?

It may be that the likelihood is the light won't shine on your particular financial institution, accountant, tax adviser or lawyer, but it might. The options are to hope for the best or to be prepared. It might never happen to you but it almost inevitably will happen to someone in the financial community.

It may be best advised to be prepared. Not everything is as straightforward as law enforcement agencies would believe or claim. They are not always right. Raoul Weil of UBS was tried in Miami for being involved in tax evasion. A jury quickly acquitted him despite all that had been said publicly about UBS's misconduct. Mr. Weil was excellently represented by expert counsel.

If you are the subject of a tax investigation, or may be, then there are key steps to be taken in order to prepare and protect yourself.

First, if there have been historic procedural problems it is essential they are remedied and old problem cases properly reviewed. Any law enforcement agency will be favourably impressed by a financial institution with the full range of modern procedures in place. If proper disclosures have been made under FATCA and/or SAR regimes this will reflect well. Likewise appropriate liaison with the local regulator will stand an institution in good stead. It hardly needs saying, but it is much better to be a witness in a tax investigation than the subject of it.

If you have notice of a tax investigation do not take it lightly. It is easy to know in your heart that you would never have done anything dishonest but what would an objective observer make of the circumstances?

Put the papers you have in chronological order. What if anything is missing? Why is it missing?

Prepare to answer fully any questions you may be asked.

Instruct an independent lawyer with appropriate expertise. This gives you the best chance of claiming legal privilege as you discuss the case, as well as ensuring you are best placed to respond.

The world is getting smaller. Every communication with a person abroad means there is a risk of falling within the criminal jurisdiction of a court abroad. An email will likely suffice. Philip de Figueiredo had never been to Australia but he was convicted in Queensland and was imprisoned there. There is no European arrest warrant in Jersey, but there is in France or England should a person travel there. There should be no need for honest persons to be alarmed, but institutions and individuals should ensure that they are best placed to respond to the questions which they may be asked in tax investigations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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