2009 amended treaty with Switzerland offers limited help in tracking down U.S. tax cheats

Sen. Carl Levin (D-Michigan). SOURCE: Senate Permanent Subcommittee on Investigations

The 2009 protocol to amend the U.S.-Swiss tax treaty would offer limited help in tracking down U.S. tax evaders, but some Senators worry that the treaty’s loopholes and the Swiss parliament’s actions will allow most of the tax cheats to escape prosecution. 

The 2009 treaty, which was reached after the Senate uncovered widespread facilitation of tax evasion by UBS, would somewhat ease restrictions on treaty requests for name disclosures by Swiss banks.

If ratified by the Senate, then treaty requests by U.S. authorities for the names of account holders will just need to meet the “relevance standard” instead of tax fraud.

However, the less restrictive standard will be applied only for Swiss accounts in existence after September 2009 – a loophole that some Senators stressed would allow many U.S. tax evaders to get away.

The new treaty standard may “be useful prospectively but can’t be used for potentially tens of thousands of Swiss accounts employed for U.S. tax evasion before 2009,” said Sen. Carl Levin (D-Michigan). “The end result is that the tax evaders and the Swiss bankers who help them may get away with wrongdoing.”

Levin pointed out that “tax abuse was rampant between 2005 and mid-2009 and the amount of taxes being evaded with accounts opened during that period from our investigation was very, very high.”

For example, in 2006 Credit Suisse held about 22,000 accounts belonging to U.S. clients totaling about 12 billion Swiss francs in assets. In light of the UBS scandal, Credit Suisse conducted an internal investigation that revealed only 6,678 of the 22,000 accounts were reported to the Internal Revenue Service. About 18,000 U.S. client accounts – the majority of which were not tax compliant – were closed by Credit Suisse, many before the September 2009 deadline.

Levin lamented that U.S. authorities would still have to meet the old treaty’s tax fraud standard in order to obtain information on accounts that were opened before September 2009. Levin called the old treaty process “hopeless” and noted that Swiss authorities released only the names of 238 U.S. account holders through treaty requests since 2009.

However, Credit Suisse’s General Counsel Romeo Cerutti assured Senators that the 2009 treaty could still be useful to track down U.S. clients who transferred their undisclosed assets to other Swiss banks after their Credit Suisse accounts were closed.

“Any account that was still opened at that time [September 2009] , you’re going to get information,” Cerutti testified. “A lot of the accounts that were closed at that time went on to other Swiss banks. So you will get it if the IRS makes the same request under the treaty as to other Swiss banks.”

Cerutti said Credit Suisse is ready to provide some account information to U.S. authorities pending ratification of the 2009 protocol.

“I would say that under the new Double Taxation Treaty – the one that still needs to be ratified here in the Senate and I urge you to ratify it as quickly as possible – you will get many more accounts, and you can get them quickly,” said Cerutti, who noted that the Swiss parliament already ratified the protocol.

Levin remained skeptical of Cerutti’s claims.

“The treaty is going to do some good in the future,” said Levin. “But please don’t represent to this committee and to the public that when the treaty is ratified that we can expect those names from you. We’re not going to get any pre-2009 names because of Swiss law.”

Levin also pointed out that the 2009 treaty’s effectiveness was undermined by a law passed by the Swiss government in 2012 requiring that U.S. treaty requests for U.S. client names must prove that the Swiss banks “‘significantly contributed’ to the pattern of misconduct by those unnamed account holders”.

“In other words, the Department of Justice will have to prove that a bank is guilty of facilitating misconduct by a group of unnamed account holder before it can even get the account information needed to prove the misconduct,” Levin said.

He added, “It’s still a rigged game.”

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