(Reuters) - U.S. authorities hunting in Swiss banks for suspected tax cheats have a new weapon in their arsenal: an arcane but aggressive legal maneuver more commonly used against drug smugglers, money launderers and Imelda Marcos, widow of the Philippine dictator.
Backed by court judges, federal prosecutors are issuing subpoenas — official papers which compel the recipients to provide potentially damning evidence — to United States taxpayers suspected of holding hidden accounts at Swiss and other offshore banks, according to criminal defense lawyers whose clients have received the papers.
The grand jury subpoenas are unusual in that they ask bank clients — not the banks themselves — to turn over to the authorities their bank account details since 2003, including statements with the highest annual balances. Taxpayers who refuse to comply potentially face a stark choice: be found in contempt of court and thus subject to civil or criminal fines and jail time, or disclose potentially incriminating evidence against themselves.
“This is a very hot issue right now,” said Nathan Hochman, former assistant attorney general for the Tax Division of the Justice Department who is now in private practice at the law firm Bingham McCutchen. Hochman said that defense lawyers representing taxpayers were furious over the tactic, which already has been challenged in some courts.
The subpoenas, at least a dozen of which have been issued over the past year or so, are the latest twist in a showdown between Switzerland and the United States over the battered tradition of Swiss bank secrecy. Swiss law, dating to 1934 and stemming from a medieval tradition, protects client bank information from disclosure; bankers who reveal client details can face jail time.
The subpoenas are evidence of tensions between Switzerland, the global capital of offshore wealth with an estimated $2 trillion in hidden assets, and the U.S. Justice Department, which is conducting criminal investigations of 11 Swiss banks suspected of enabling tens of thousands of wealthy Americans to evade U.S. taxes through secret bank accounts holding billions of dollars in hidden assets. The banks include Credit Suisse AG CSGN.VX, which received a target letter last July notifying it that it was formally under criminal scrutiny; HSBC Holdings plc (HSBA.L), and Basler Kantonalbank, a large Swiss cantonal, or regional, bank.
The Justice Department is seeking to force the banks to disclose American client names and account information and pay hefty fines or face serious consequences, including possible indictment or deferred-prosecution agreements. “The number one thing is the customer data — it is at the heart of the issue,” said a U.S. government official briefed on the matter and on the subpoenas.
Earlier this month, the upper house of the Swiss parliament backed an amendment that would allow Switzerland to compel its banks to hand over American client data, even if authorities don’t already know the client names; the lower house still has to approve it. The amendment covers an existing tax treaty between the United States and Switzerland in which the Alpine country has agreed to hand over client data but generally only if the U.S. side already knows the client’s identity.
Tax lawyers representing clients receiving the subpoenas, known as Title 31 subpoenas, say that U.S. prosecutors are effectively staging an end-run around the treaty process. “The government is looking for a shortcut to traditional investigative steps in an international case,” said a tax lawyer in Washington, D.C., who declined to be identified because he represented a taxpayer indicted by a grand jury in a sealed case.
Title 31 is a part of the U.S. Code of Laws that deals with money and finance. Federal prosecutors used the Title 31 subpoena strategy against Imelda Marcos around 1990 as part of a federal inquiry into bribes allegedly paid by Westinghouse Electric Corp to the Philippine government, according to prosecutors.
American taxpayers receiving the subpoenas include those who applied too late to one of two IRS voluntary disclosure programs, as well as clients who appear to have been “outed” by a clutch of recently indicted or charged Swiss bankers.
Federal prosecutors suspect that the nearly 20,000 U.S. taxpayers who came forward under the programs represent a fraction of the total tax evaders.
At issue is a U.S. legal principle known as the required records exception to the U.S. Constitution’s Fifth Amendment. Courts have ruled that the amendment, granting persons the right not to be forced to incriminate themselves, has an important exception for “required records” that must be kept for activities that are regulated and of a “public” nature. Federal prosecutors issuing the court-backed subpoenas argue that offshore private banking falls into this category of activity.
But courts have issued conflicting opinions on whether that reasoning is correct.
Last August, in a closely watched case brought by a wealthy California taxpayer known only by the initials M.H., the U.S. Court of Appeals for the 9th Circuit upheld a district court’s prior ruling that M.H. was in contempt of court for refusing to produce the bank documents.
Meanwhile, last September, a federal judge in Texas ruled that a different taxpayer did not have to comply with a subpoena for bank records because the records did not fall under the required records doctrine. The Justice Department is appealing against that ruling, according to court papers.
According to a criminal defense lawyer in Washington, D.C., with a client who has received a subpoena, the subpoenas are “tantamount to a required confession — the production and authentication of records that are not in a regulated industry and have none of the ‘public’ aspects of other required records cases.” The lawyer added that “while it may be a clever attempt, it pushes the ‘required records’ aspects of 5th Amendment case law to — and most of us think well beyond — its limits.”
The lawyer declined to be identified, citing confidentiality rules governing grand jury subpoenas. But he added that some banks were “dragging their feet” in turning over documents to clients, while others, in particular “smaller banks,” were refusing to do so. He did not identify the banks.
Jeremy Temkin, a criminal tax lawyer at Morvillo Abramovitz in New York, called the subpoenas on bank clients “an extension of the pressure on the Swiss to pressure on the American taxpayer. It’s a very aggressive position.”
Editing By Howard Goller, Phil Berlowitz