1. Global Taxation and Banking Catherine Woelfel Emily Yahr

2. Discussion Topics Overview and Background Arguments For and Against U.S. Legislation ◦Bank Secrecy Act (1970) ◦Patriot Act (2001) ◦Foreign Account Tax Compliance Act (2010) U.S. vs. Switzerland in the Case of UBS and Offshore Banking Policy Proposal

3. Overview and Background An offshore bank is a bank located outside the country of residence of the depositor, typically in a low tax jurisdiction that provides financial and legal advantages for the depositor such as privacy, taxation benefits and potential protection against domestic instability. Generally, offshore banks are in jurisdictions which have bank secrecy acts; these allow the banks to keep all depositors information a secret from authorities

4. Overview Cont. There are numerous offshore jurisdictions but the Cayman Islands and Switzerland dominate the global market. Experts contend that as much as half of world capital flows go through some type of offshore bank. Tax haven areas contain just 1.2% of the world’s population but contain a staggering 26% of the world’s wealth.

5. Arguments for Offshore Banks In a country that is politically or economically unstable there is always a fear that citizens’ assets could be confiscated by the state or frozen. Offshore banks can provide these citizens with a legal and safer banking alternative. Offshore banking helps developing island nations stay competitive in the global market and creates jobs and growth within these economies. Offshore banks can operate with lower costs and therefore can provide clients with higher interest rates then domestic markets. These banks may offer services, loan rates and investment opportunities which would not be available through domestic banks.

6. Arguments Against Offshore Banks Offshore banks are tax havens for people who deal in the underground economy and are involved in organized crime. More recently, there are concerns these banks are funding global terrorism. It is generally only convenient for the very wealthy. Because of the remoteness of the bank locations and the cost to maintain these accounts, only the highest income earners can really benefit. Therefore in the domestic country the tax burden falls more heavily on those who make a smaller income. Offshore banking has historically been riskier then onshore banking. Because of a lack of government oversight and regulation, offshore banks tend to be less financially secure.

7. United States Legislation The United States Bank Secrecy Act of 1970 ◦The first law the United States enacted to fight money laundering and tax evasion. ◦This act also requires businesses to report suspicious activity that could identify criminal activities including tax evasion and money laundering.

8. Bank Secrecy Act of 1970 cont. ◦The act also requires businesses to keep records of cash purchases and file reports of cash transactions exceeding $10,000 daily. These reports are used by law enforcement both domestic and international agencies to identify and detect money laundering.  Currency Transaction Report  Report of International Transportation of Currency or Monetary Instruments  Report of Foreign Bank and Financial Accounts  Suspicious Activity Report  Designation of Exempt Person

9. United States Legislation The USA Patriot Act of 2001 Title III of the Patriot Act took the anti-money laundering law one step further by creating new rules for American banks to try and overcome offshore bank secrecy laws. It is intended to prevent and detect money laundering which is directly related to the financing of terrorism.

10. The USA Patriot Act of 2001 Section I: Strengthening banking rules by requiring stricter record keeping for financial institutions especially institutions which deal internationally. Section II: Modified the Bank Secrecy Act to improve communication between law enforcement and financial institutions. Section III: Deals with currency smuggling and counterfeiting and maximizes the penalty for counterfeiting currency by four times.

11. Foreign Account Tax Compliance Act (FATCA) of 2010 Under FATCA, certain U.S. taxpayers holding financial assets outside the United States must report those assets to the IRS. FATCA will require foreign financial institutions to report directly to the IRS certain information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest.

12. U.S. v UBS From 2007-2009, U.S. authorities pressured UBS to provide information on their U.S. clients U.S. accused UBS Swiss of helping U.S. citizens evade taxes on upwards of $20million in assets/income

13. U.S. v UBS: The Result In 2009, in exchange for a deferred prosecution agreement UBS: Provided information on hundreds of U.S. clients Paid a penalty of $780million In 2009, Switzerland agreed to provide information on over 4,000 U.S. clients Court ruled that this agreement could not be enforced. Therefore…

14. U.S. v UBS: The Result In 2010, Swiss Parliament approved a treaty ensuring UBS could provide the U.S. IRS with information on tax evaders “The agreement was part of global efforts by countries such as the U.S. and Germany to crack down on tax evasion as budget deficits are ballooning in the wake of the economic crisis. Switzerland, Liechtenstein, Luxembourg and Austria agreed to facilitate the exchange of bank account data.” –Bloomberg, June 2010

15. Competing Interests Swiss Banking Act of 1934 ◦Prohibits banks from releasing information about their clientele ◦Representative of the culture of confidentiality in the Swiss banking system ◦Swiss Parliament fought U.S. request for information as fundamentally against the premise of banking as a private activity/business

16. Policy Proposal Pressure governments of nations with prominent tax havens to notify the U.S. IRS of all U.S. clients. PROSCONS Gained tax revenueHigh cost/low ROI Establish infrastructure to deter tax evasion Could impair diplomacy efforts Collaboration with foreign banks could foster future working relationships Potential diminished competitiveness of U.S. businesses

17. Questions

18. References Huffington Post Business. “UBS Tax Deal: Switzerland Approves Treaty With U.S. On Second Try.” Last modified June 15, 2010. http://www.huffingtonpost.com/2010/06/16/ubs-tax-deal-switzerland_n_613882.html. Reuters. “Swiss parliament approves UBS-U.S. tax deal.” Last modified June 17, 2010. http://www.reuters.com/article/2010/06/17/us-ubs-tax-idUSTRE65D1LJ20100617. Spears Wealth Management Survey. “Tax Special: Suisse and Sour.” Last modified August 17, 2009. http://www.spearswms.com/tax-and-trust/11637/tax-special-suisse- and-sour.thtml. The New York Times. “Switzerland Rejects Deal to Share Banking Data.” Last modified June 8, 2010. http://www.nytimes.com/2010/06/09/business/global/09ubs.html?hp. U.S. Internal Revenue Service (IRS). “Bank Secrecy Act.” Last modified October 28, 2011. http://www.irs.gov/businesses/small/article/0,,id=152532,00.html. U.S. Internal Revenue Service (IRS). “Summary of Key FATCA Provisions.” Last modified August 18, 2011. http://www.irs.gov/businesses/corporations/article/0,,id=236664,00.html.