Hiding Money Overseas? You’re Taking a Big Chance
By Paul Sullivan
Published: February 4, 2011
ANYONE who squirrels away money in an offshore bank account, confident that it will remain a secret, should think again.
In the last three years, there have been a series of prominent cases in which formerly secretive banks, including UBS and Julius Baer in Switzerland and the LGT Group, the Liechtenstein royal bank, have had to notify clients that former employees had taken their account data and were about to make it public. And now the founder of WikiLeaks has indicated that he has another trove of documents from Julius Baer that he could release any day.
Yet some wealthy people continue to turn to offshore accounts, including growing numbers who are now going to Singapore and Hong Kong in the wake of the crackdown on private banking in Switzerland.
Asher Rubinstein, a lawyer in New York who specializes in complicated tax matters, said he had people come into his office who were willing to risk disclosure. He said most people who asked about opening an account offshore or declaring an existing one realized the risks they were taking.
“I say, ‘Make yourself tax-compliant, because if you don’t do it, your penalties are great, including jail time,’ ” Mr. Rubinstein said. “Nine out of 10 say, ‘You’re right.’ They’re not happy about it because they’re going to have to part with a big chunk of money in taxes. But one out of 10 is going to say, ‘Thank you very much, I’m going to take my chances.’ ”
To any logical person, this is irrational behavior, particularly when the United States government can seize up to 50 percent of an account’s value for every year it existed.
And if UBS and Julius Baer have highlighted anything, it is that the source of the secret documents may not be driven by righteous indignation against offshore banking. In both instances, former bankers became whistle-blowers only after their firms paid them less than they felt they deserved.
Additionally, the Internal Revenue Service offers rewards for information on tax evasion, so a disgruntled business partner or jilted former spouse could just as easily reveal hidden money.
Still, in an increasingly globalized world, there are plenty of legitimate reasons to have offshore accounts. The accounts are perfectly legal as long as the I.R.S. knows about them and the owner is paying taxes on any income from the holdings.
Here is a look at the state of play as nervous clients wait to see what, if anything, might be revealed in a new trove of WikiLeaks documents.
ILLEGAL ACCOUNTS For obvious reasons, lawyers and financial advisers were not willing to speak about how someone goes about setting up an illegal offshore account. But as Mr. Rubinstein noted, people are still doing it despite increasing evidence that they may get caught.
Small banks in the Swiss cantons continue to be attractive to people trying to hide money. Unlike UBS, which has a banking license and significant assets in the United States, these banks have nothing that could be seized by the American government.
In addition to local banks in Singapore and Hong Kong, many Swiss banks have opened offices there. “Singapore has become more important,” said Karl G. Wellner, president and chief executive of Papamarkou Wellner Asset Management. “They’re not going to yield to pressure from the U.S.”
Wealth advisers note that Americans are not the only ones looking for offshore accounts. And wealthy people from other countries do not come with the baggage of United States regulators.
Yet the number of American citizens evading taxes may not be as large as popularly imagined. James N. Mastracchio, co-chairman of the tax controversy practice at the Baker Hostetler firm, has been working with people who came forth during the I.R.S.’s last amnesty program in 2009.
He said only about 5 percent of the cases involved blatant tax evasion. But those who did come clean did so because they feared this was going to be their only chance to avoid criminal prosecution.
“There was a fear that the accounts would be released, and they would be brought in,” he said. “People will keep going until they think they’re going to get caught.”
HONEST MISTAKES While it may strain credulity, there are people who have had offshore accounts for years, if not decades, and have never declared them because they did not think they had to. The amnesty program brought out two such groups.
In one are the people who inherited offshore accounts. Mr. Mastracchio said a large portion of his clients were relatives of Holocaust survivors who had set up Swiss bank accounts to protect what money they had. Problems arose when relatives inherited these accounts and then had to decide what to do with them.
While the I.R.S. has always allowed people to amend their tax returns back six years and pay any tax plus penalties, the United States Treasury created a form in 2004 requiring citizens to declare all foreign bank accounts.
But few people knew about this requirement, which carried severe penalties for not complying. People who intentionally did not file the form were subject to fines up to 50 percent of the account balance, though those who could prove they did not know about it were fined only up to $10,000.
The other group is people who moved to the United States and maintained bank accounts in their home countries. “They thought it was two different systems and they didn’t know the U.S. wanted income reported worldwide,” Mr. Mastracchio said. “It wasn’t tax evasion that created the problem; it was life circumstances.”
Both groups still had to pay penalties, but they were not as severe as those for people who set out to evade taxes. One case in which people cannot hope for leniency is when they created structures to hide the true ownership of an account.
“It’s not just someone opened an account at HSBC in Geneva in his name,” Mr. Asher said. “It’s he opened a foundation in Panama and the foundation opened an account at some Swiss cantonal bank. That’s an additional layer that really draws the ire of the I.R.S.”
LEGAL ACCOUNTS People who legally open offshore accounts do so for a variety of reasons that range from the simple to the secretive. There is nothing illegal about the accounts as long as they are declared and taxes paid.
A child may be studying abroad, or someone may have a business interest in another country. In both cases, they need a bank account in that currency.
Or, given the global economic uncertainty, investors may want to open an investment account denominated in a foreign currency to diversify their portfolio.
“It’s a shame that offshore banking is painted with this stigma,” Mr. Wellner said. “People think it’s to hide drug money or for illicit purposes. In the vast majority of cases, it’s legitimate.”
Still, a big reason to set up these accounts is to shield assets from future litigation. Doctors often set up the accounts, allowing them to shield assets if they are sued for malpractice. But this is even more of a reason to make sure the account complies with all tax laws.
“If the patient loses the malpractice suit and says, ‘I’m going to tell the I.R.S.,’ the doctor has to be fully compliant so he can say, ‘Go ahead,’ ” Mr. Asher said. If the doctor can say that, “then he’s fine.”
While that may not sit well with some people, it is perfectly legal.