A U.S. District Court judge in Miami, Florida has authorized the U.S. Internal Revenue Service to seek information from Switzerland's largest bank, UBS, concerning American taxpayers the IRS claims may have evaded income taxes.
The court order allows the IRS to serve a summons on UBS, which has extensive operations and thousands of employees in the United States, to obtain information on possible tax fraud by thousands of Americans whose identities the IRS claims are unknown to the tax collecting agency.
U.S. District judge Joan Lenard, (who badly needs an education in the Fourth Amendment), granted the so-called "John Doe" summons a day after the U.S. Justice Department made what it called an unprecedented request for the records, part of an IRS investigation into services provided to UBS American clients from 2000 to 2007.
The IRS demand is based on nothing more than the questionable testimony of a single ex-UBS banker and his U.S. client, both singing when faced with jail time for their tax evasion. On this slender basis, the privacy of a reported 20,000 UBS American clients is being destroyed.
More of the Same
This IRS scatter gun approach seeking thousands of names without showing any probable cause of tax evasion in individual cases is a repeat of the highly questionable use of the same IRS ploy in 2001. Then it was aimed at alleged tax fraud by Americans with credit or debit cards issued by offshore banks. As I have said before http://baumanblog.sovereignsociety.com/2008/07/irs-plays-hardb.html in that case the IRS managed to obtain tens of thousands of names of VISA and MasterCard and some from American Express, the only one of the card companies to oppose and limit the broad IRS demands.
End result: a paltry 1300 taxpayers paid $170 million in back taxes after the IRS claimed that tens of thousands of taxpayers owed billions.
Will UBS Fight
The big question now is whether UBS, the supposed giant of Swiss banking, will have the guts to take a strong stand based on the Swiss bank secrecy laws and fight for the principle of its clients' financial privacy.
That means the bank, already on shaky grounds financially because of billions in losses from its stupid sub-prime housing loan investments, must appeal the court order to block the production of the American names. Indeed, I think they should fight it right up to the U.S. Supreme Court, if necessary.
If UBS fails to defend its clients' privacy, as Swiss law certainly allows them to do, every UBS client who values their privacy immediately should transfer their accounts elsewhere. (We can recommend far more reliable Swiss or other banks).
Prior UBS Sellout
But don't bet on UBS standing up for privacy, if their past history is an example.
Disturbing to privacy seekers was (and is) a previous UBS surrender under pressure to demands of the U.S. Federal Reserve System. Official U.S. acceptance of the 1998 merger of Swiss Bank Corp. and Union Bank of Switzerland creating UBS AG was approved by the Federal Reserve only after UBS agreed to provide U.S. regulators all information "necessary to determine and enforce compliance with [U.S.] federal law." No doubt, that means U.S. tax laws too. Perhaps the IRS will call in that chit now.
U.S. regulators had threatened to shut down the bank's extensive U.S. operations (an unstated threat that still hangs over UBS now). Rather than defend their client’s privacy rights, the bank compromised. That is why we have always advised U.S. depositors considering Swiss banks to avoid UBS AG and any other Swiss bank with U.S. based branches, affiliates or banking operations, other than a mere "representative office."
Swiss Law Imposes Secrecy
Unless there is a strong suspicion of criminal wrongdoing, under Swiss law it is a crime for bankers to violate the secrecy of their clients. Swiss banks refuse to expose records to foreign tax authorities, unless a Swiss court order requires it. Until now in Switzerland the IRS has been up against the brick wall of statutory bank secrecy that can be pierced only by judicial decree in almost all cases.
In Switzerland bank secrecy is not just a right but also an obligation imposed on the banks and their employees to keep secret information relating to their customers.
Swiss banks are prohibited from responding to inquiries about an individual account, whether from attorneys, credit rating services or foreign governments. Under Swiss law banks must furnish information and testify before public authorities. But in instances involving criminal offenses under the laws of other countries (including tax and foreign currency crimes) that are not crimes under Swiss law, Swiss banks have no obligation to provide information or to testify.
In most cases, the Swiss government cannot obtain information about an account without a court order. To obtain an order, investigators must demonstrate the probable violation of Swiss law and that there is reason to believe the particular account at issue is involved in that violation. Non-payment of foreign taxes is not a crime in Switzerland, but "tax fraud" is, and no doubt the IRS hopes that is a rather elastic phrase.
A guarantee of bank secrecy was added to the Swiss Constitution in 2005 and a violation is punishable under Article 47 of the Banking Law, even after termination of an official or employment relationship and even after retirement from banking. The law imposes a fine of up to CHF50’000 (US$38,800) and six months in prison.
1934 Swiss Bank Secrecy Law as amended in 1971 - Whoever divulges information entrusted to him in his capacity as officer, commissioner of a bank, as a representative of the Banking Commission, officer or employee or as a recognized auditing company, or who has become aware of such information in this capacity, and whoever tries to induce others to violate professional secrecy, shall be punished by prison up to 6 months or by fine up to CHF 50’000. The violation of professional secrecy remains punishable even after termination of the official or employment relationship or the exercise of the profession. (Art. 47, Federal Law on Banks and Savings Banks).
Make the IRS Prove It
I'll repeat what I have said before -- if the DOJ and IRS have probable cause to believe any individual American has illegally avoided taxes, that person should be investigated and prosecuted if the evidence warrants it -- which is what they did in the instant case.
But the IRS has no right to assume that every American with a UBS bank account is ipso facto guilty of tax evasion, nor should they have the right to access the banking information of tens of thousands of innocent persons in a massive fishing expedition.
If a Bank of America banker and a BOA bank account holder both pleaded guilty to conspiring to engage in tax evasion, on that grounds should the IRS be given the names and information about millions of BOA bank account clients?
There is still a Fourth Amendment in the Bill of Rights prohibiting unreasonable searches, as tattered as it may be under the Bush regime, but that Amendment and Swiss banking secrecy law should be more than enough grounds for UBS and its lawyers to appeal this horrendous court ruling.
But don’t hold your breath.
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