"At one point, the Swiss lawyer recommended to Mr. McCarthy that he set up
a Liechtenstein foundation that would serve as an umbrella over a Panamanian
or Hong Kong corporation. That 'would allow for an extra layer of privacy and
help to conceal' Mr. McCarthy's identity, said the statement of facts."
1) The deal between the IRS and UBS apparently requires the latter to hand
over thousands of names of U.S. citizens. It's a safe bet that hundreds of
those are major donors to the campaigns of the politicians currently running
the country -- and a few dozen are the politicians themselves -- which creates
some amusing moral dilemmas for the enforcement folks and the media.
2) In the wake of the UBS fiasco, it's going to be even harder for U.S. citizens
to get foreign bank accounts, which is exactly what Washington wants.
3) China might be a little harder to push around than Switzerland.
UBS Tax Crackdown Widens to Hong Kong
By CARRICK
MOLLENKAMP
The U.S. crackdown on clients of UBS AG is widening into a global
hunt, with the government detailing in court documents how the Swiss
bank and outside advisers helped Americans hide money using enterprises
set up in Hong Kong.
For the first time in the government's long-running bid to ferret
out the names of U.S. tax-evaders from the Swiss bank's client list,
plea agreements entered in the case are providing a clearer picture
of UBS's sophisticated efforts to help Americans hide income or the
existence of foreign bank accounts.
On Friday, John McCarthy, a UBS client in California, agreed to plead
guilty to one count of failing to file an annual report to the Treasury
Department. A document filed with the plea shows the tax scheme relied
in part on channeling funds to a Swiss UBS account held in the name
of a Hong Kong entity, the second time accounts in the Asian financial
hub have figured in these cases.
The Hong Kong link is important because the Justice Department and
Internal Revenue Service are apparently using that as a clue of wrongdoing
as they plow through some 250 names that UBS turned over to the U.S.
government, say people familiar with the Justice Department probe.
The bank handed over the names as part of a criminal settlement it
agreed to in February.
Separately, the U.S. has been pursuing a civil case against UBS. Last
week, the two sides reached a settlement that is expected to lead to
the Swiss bank handing over the names of thousands of U.S. account
holders. Lawyers representing UBS clients believe the bank will turn
over names associated with 5,000 to 10,000 accounts. Details on the
settlement are expected this week.
UBS declined to comment on Mr. McCarthy's case, as it has with other
individual cases.
Documents filed on Friday in the U.S. District Court for the Central
District of California in Los Angeles underscore Swiss advisers' role
in helping clients sidestep U.S. financial regulators. As part of his
agreement to plead guilty, Mr. McCarthy and the Justice Department
agreed to a statement of facts that details the UBS tax structure.
The documents state that Mr. McCarthy, of Malibu, Calif., controlled
a UBS account opened in Switzerland in 2003 in the name of a Hong Kong
entity, COGS Enterprises Ltd. Mr. McCarthy, with the help of UBS and
an unnamed Swiss lawyer, moved funds from a Los Angeles business into
an unidentified U.S. bank account and then into the COGS account at
UBS. He directed the transfer of more than $1 million to the COGS account,
the statement of facts said.
Between 2003 and 2008, Mr. McCarthy talked with UBS representatives
and the Swiss lawyer in Beverly Hills and Switzerland to hash out details
of his business, according to the statement. UBS representatives told
Mr. McCarthy that "a lot of United States clients don't report
their income and just take it off the top."
At one point, the Swiss lawyer recommended to Mr. McCarthy that he
set up a Liechtenstein foundation that would serve as an umbrella over
a Panamanian or Hong Kong corporation. That "would allow for an
extra layer of privacy and help to conceal" Mr. McCarthy's identity,
said the statement of facts.
Mr. McCarthy also transferred funds into other UBS accounts from a
bank in the Cayman Islands, the statement says. He is due to appear
in federal court on Sept. 14. He faces a maximum penalty of five years
in prison and fines totaling $250,000.
"Mr. McCarthy has accepted responsibility for his conduct," said
his lawyer, Steven Toscher. "He, like many other U.S. taxpayers,
has made serious mistakes regarding the use of foreign bank accounts.
Mr. McCarthy has decided to get right with his tax obligations and
his case should serve as a strong signal to other taxpayers."
Jeffrey Chernick of New York, who pleaded guilty in July to filing
a false tax return, also used a Hong Kong corporation and offshore
bank accounts to conceal from the IRS commissions paid for sales, according
to a statement of facts agreed to by the Justice Department and Mr.
Chernick. A lawyer for Mr. Chernick declined to comment.
Hong Kong, of course, can be used as a legitimate tax-planning jurisdiction
and gateway to mainland China. But tax lawyers say the former British
colony's corporate legal system allows structures to be assembled with
ease, mirroring in many ways how corporations are formed in the U.S.
or Europe. These lawyers say the IRS might also face challenges investigating
corporations set up in Hong Kong, which has come under fire in the
past for not sharing tax information with other jurisdictions.
In a statement, a spokesman for the Hong Kong government said Hong
Kong has "stringent and effective anti-tax avoidance legislation" and
doesn't have laws protecting bank secrecy. A law that would align Hong
Kong with international standards on exchange of tax information was
submitted to lawmakers last month.
According to a person familiar with the UBS structures, a number of
outside fiduciary advisers offered templates for setting up offshore
structures on behalf of UBS clients.
In a statement Friday, U.S. Attorney Thomas P. O'Brien said the Justice
Department and IRS were "aggressively pursuing those who shirk
their federal tax obligations by hiding funds in secret bank accounts
in Europe and Asia."
Before the settlement was reached last week in the civil proceedings,
UBS and the Swiss government had claimed that UBS couldn't provide
account identities to the U.S. because it violated Swiss privacy law.
