Senators criticize DOJ for “stalled” pursuit of tax evaders

Deputy Attorney General James Cole. SOURCE: Senate Permanent Subcommittee on Investigations

Members of the Senate Permanent Committee on Investigations criticized the Justice Department for the lack of progress in obtaining names of U.S. tax evaders from Swiss banks in the aftermath of the UBS scandal in 2008. 

“We have great concern that the battle to collect those unpaid taxes on hidden offshore assets seemed stalled,” said Sen. Carl Levin (D-Michigan).

Levin warned that “allowing Americans to evade their tax obligations through hidden offshore accounts deprives our government of needed revenue, and more than that, it deprives honest American taxpayers of something vital to the legitimacy of our tax system – fairness.”

Read more: Senate investigation details Credit Suisse’s role in “aiding and abetting” U.S. tax evasion

At the hearing held on Feb. 26th, Levin and Sen. John McCain (R-Arizona) questioned the Justice Department’s decision to rely mostly on treaty requests to obtain the names of U.S. clients with undisclosed accounts with Credit Suisse.

Under the existing treaty process, Switzerland would allow the disclosure of account holder names only if the United States could prove that the account holders’ actions constituted tax fraud, which is more difficult to prove than tax evasion.

As a result, since 2009, the Justice Department was able obtain only 238 names out of the 22,000 U.S. clients that held accounts with Credit Suisse.

“To me, getting 238 in five years out of a universe of 22,000 – less than 1% – is more than an embarrassment. It abdicates the home court advantage of using U.S. courts,” said Levin.

Levin expressed disappointment that although subpoenas were issued against Credit Suisse, the Justice Department “did not attempt to enforce those subpoenas in a U.S. court.” Levin also pointed out that the IRS didn’t issue a Joe Doe summon, which he noted was used against UBS to extract information on 4,500 accounts belonging to U.S. clients.

“Rather than using those proven U.S. tools that could be enforced in our courts, the Department of Justice reversed course from its UBS approach. For five years, the Department of Justice has voluntarily limited its requests for Swiss documents, including the names of tax evaders to requests made under a U.S.-Swiss tax treaty despite that treaty’s highly restrictive maddeningly slow and unproductive process,” Levin said. “By restricting itself to the treaty process, the Department of Justice essentially handed over control of U.S. information requests to Swiss regulators and Swiss courts that rule on how they would be handled and have regularly elevated bank secrecy over bank disclosures.”

Read more: Swiss secrecy laws hamper investigations of U.S. tax evaders

Deputy Attorney General James Cole defended the Justice Department’s approach, citing limits to subpoena and John Doe summons in obtaining Swiss records.

“Those tools cannot always be effectively employed,” said Cole.

Cole explained that enforcing subpoenas often lead to “protracted” litigation and that even if they are enforced and the Swiss banks are found to be in contempt, the banks would rather pay the fines “for an appreciable period of time” than violate Swiss secrecy law and risk imprisonment.

“What you get, if you try to enforce it [referring to subpoena], is a contempt citation for failure to actually produce from the court with fines that will go each day. Many of these financial institutions are very, very wealthy and can afford those fines and don’t want to run afoul of Swiss law where they are,” said Cole.

Cole also pointed that subpoenas and John Doe summons may be used against only Swiss banks that have presence in the United States.

“The majority of the Swiss financial institutions that we are currently investigating do not [have U.S. presence],” said Cole.

To obtain information from Swiss banks without U.S. presence, Cole said a program was established in 2013 to allow Swiss banks to self-report to the Justice Department, cooperate with U.S. investigators, and pay hefty fines in exchange for non-prosecution agreements for facilitating U.S. tax evasion. Cole said 106 Swiss banks have agreed to participate in the voluntary disclosure program.

(Credit Suisse is one of 14 banks under investigation by the Justice Department and is not part of the voluntary disclosure program.)

“What the program does do is provide an opportunity to banks that we have little or no information about to self-report to the Department that they have committed or facilitated U.S. tax evasion,” said Cole. “The program requires extensive cooperation by each participating bank, including full disclosures of its illegal activities, the names of each of its culpable employees and third-party advisors, and the number and value of each of its U.S. accounts…Each of the banks must also pay steep penalties calibrated to reflect both the magnitude and the severity of the bank’s conduct and agree to get out of the business of facilitating U.S. tax evasion.”

But Levin challenged why the Justice Department agreed to grant the Swiss banks prosecutorial amnesty but did not require the banks to disclose names of U.S. account holders.

“Giving up on getting U.S. client names contradicts U.S. policy of demanding full cooperation from parties excused from prosecution, and it sets a bad precedence for how the Department of Justice will handle other tax haven banks,” said Levin.

Cole cited the Swiss secrecy law that would prohibit the banks from providing the names of U.S. account holders. However, Cole insisted that the information provided by the banks in the voluntary disclosure program would be useful to “formulate more effective treaty requests” to obtain the account holders’ names.

Cole explained that the Department’s strategy is to build “use every that we think is going to be effective” to build “good, solid cases against these banks” and use the threat of criminal prosecution to force the bank and Swiss authorities to disclose the names of tax evaders.

In the meantime, Cole noted that 43,000 tax evaders have entered the voluntary disclosure program and paid over $6 billion in back taxes, penalties, and interests since the UBS scandal. Furthermore, the Justice Department has indicted 73 account holders and 35 professionals on tax evasion charges, and 72 have pleaded guilty or were convicted at trial since 2009. So far, five bankers have been convicted.

“It’s hard. It’s frustrating. It’s time-consuming. There’s walls in our way. And we’re going at it from every angle we can find we think is going to work,” Cole said.

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