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Technology Ends Offshore Tax Evasion

by John Rubino on March 15, 2010

Not so long ago, one of first things a newly-rich person would do was move some money into a numbered Swiss account or Cayman trust, where it would be safe from spouse, creditors, and tax collectors. Maybe not the most ethical way to behave, but what the hell, you’re rich and you can get away with it, and in your new social circle it’s not just condoned, it’s expected.

But that was then. Today, high-tax governments understand that tax havens like the Bahamas are easy to bully into information-sharing agreements. Even banking fortress Switzerland has been cracked by the IRS’s recent assault on UBS. The number of places guaranteed to protect your financial privacy is dwindling, and you can bet the remaining few will become targets once Switzerland is fully integrated into the global tax system.

But that’s not the main reason to come clean on offshore accounts. Technology is the real threat. Now that tens of thousands of bank account records can be loaded onto a CD or an email attachment, all the bank secrecy laws in the world won’t protect you from a computer technician with a gambling problem. This week, for instance, Swiss Bank HSBC announced that

… a former employee stole the personal details of about 24,000 clients of its private bank in Switzerland in a major security breach three years ago.

HSBC said a data theft it uncovered last year was far more serious than it first thought. Initially the bank believed that fewer than 10 customers had been affected. But it admitted on Thursday that approximately 15,000 existing clients and 9,000 previous clients with HSBC accounts in Switzerland before 2006 had been caught.

The breach, which affected 15 per cent of HSBC’s total private client base, will come as a serious blow to the reputation of the bank. HSBC said the stolen information was limited to accounts in Switzerland and confirmed that no data had been compromised for clients with accounts elsewhere. It did not believe the stolen data have allowed or would allow any third party to access any client account.

The French tax authorities had used the stolen data to launch a crackdown on tax evaders but have since returned the files to the Swiss Federal prosecutor, which is now leading a criminal investigation.

The data were stolen in 2006 by a former IT specialist who was based at the Geneva branch of HSBC. Hervé Falciani has admitted stealing the information and handing it to French tax authorities, though he denies receiving payment.

Other countries, Germany in particular, have dithered about what to do with this prize, alternately salivating over it and pushing it away. But in the end it doesn’t matter, because governments are less of a target market for this kind of information than organized (or entrepreneurial) crime. If you’re hiding a bunch of money overseas, every time the phone rings you’ll now have to wonder if a Russian-accented voice on the other end is going to inform you that he knows about your account but will keep quiet in return for $100,000 wired to his secret account. You’ll become prey to people even worse than tax collectors.

Does this mean that offshore investing is pointless? Of course not. It’s still a good idea to diversify geographically, both for access to assets not available at home and to put assets beyond the reach of your government — which, no matter where you live, is inching ever-closer to dictatorship. A Last Plane Account, to use the term coined by GoldMoney’s James Turk, is crucial for everyone with enough capital to worry about confiscation. But evading taxes on the returns this account generates is no longer a high percentage bet. So fill out the forms, pay the taxes, and get on with your diversification.

Tagged as: GoldMoney, Offshore Investing, Swiss bank

{ 9 comments… read them below or add one }

Bruce C. March 15, 2010 at 11:28 am: One of the many convoluted ramifications of an unjust tax code is that it induces dishonesty at all levels of society and then actually reinforces all of the beliefs about taxation and justice that tend to support evermore distorted tax policies. Although there will always be individuals who would try to unlawfully avoid paying their share of taxes, I submit that if each and every US citizen paid the same amount in taxes regardless of income or assets then there would be much less evasion and no need for declaration of assets and other invasions of privacy. (That would have to be phased in because current revenues are about $900B which divided by about 108M taxpayers is about $8,300 dollars, and right now about 54M pay only about $500 on average.) Each citizen would have one vote and one tax bill amount for the privilege. Besides being fair and just in my opinion, it would also inspire a whole lot more civic attentiveness and participation. Under those circumstances, imagine what most people would say about another politician’s idea to create another spending program.
paper is poverty March 15, 2010 at 2:12 pm: @ Bruce C,

Setting aside the immorality of a flat tax system within a corrupted plutocracy, about 1 in 8 Americans lives below the federal poverty line, which for an individual is less than $11,000/year, and for a family of 4 is $22,000/year. It’s not a matter of “phasing in” a flat tax; it would never fly. You can’t get blood out of a stone, and if you attempt to imprison the large minority who cannot make that payment, you’d have a revolution on your hands. If you think it might be feasible given enough cuts in spending, I can only point out that government spending is now over 40% of our GDP, such that drastic cuts would damage the economy and further reduce people’s ability to make a flat tax payment. This idea just doesn’t work mathematically.
Bruce C. March 15, 2010 at 4:21 pm: Paper is Poverty,

I don’t disagree with you that things are so lopsided right now that what I’m proposing could not be implemented very rapidly. However, using the current state of affairs as a reason to reject a different system is counterproductive. Virtually nothing can change if that standard is used. A new philosophical basis must be accepted for there to be any lasting change. Once people are on the same page with that the ways and means of the transition will be more apparent and possible. Right now, most people seem to think that it is just or “fair” that those who make more or have more should pay more. I’ve never understood that concept. If the prices charged for ones’ groceries depended upon their income then most people would get it, and yet that is how taxes work.
Alex March 15, 2010 at 7:11 pm: It’s funny, how numerous former Soviet Bloc countries have managed to implement the flat tax, and saw a corresponding and immediate bump in their revenues due to lack of loopholes. *Russia*, the poster child for corrupt plutocracies has managed to successfully implement a flat tax system with a tax code only 1/17th that of the USA’s, and everywhere it’s been implemented it’s dramatically decreased government and tax accountant overhead. Flat tax regimes haven’t been theoretical for a couple of decades now, they’re a success worldwide.
Brad Thrasher March 15, 2010 at 8:30 pm: Is Bruce C. suggesting that only tax payers would have the right to vote?

“Each citizen would have one vote and one tax bill amount for the privilege.”

Voting is a right. Paying taxes is a responsibility. Neither is a privilege.
Bruce C. March 16, 2010 at 11:09 am: Brad,

Yes, the current version of the Constitution does grant all US citizens the legal right to vote. The key word here is “legal” in the sense that it is granted by Men not Nature. I consider it a privilege that I live within a society that has bestowed upon itself an enforceable means of each and every member to have a voice in its political policies. Originally only those who had property/wealth and paid taxes were granted that right but subsequent Constitutional amendments expanded that right to everyone regardless of whether or not they have any property/wealth of their own or legal claims to the property of others or who pay taxes at all. (I understand the sentiments for doing so but I think we are all learning the consequences of that.) I agree that the right to vote is not a privilege like, say, the license to drive an motor vehicle on the public roadways, but it is a privilege in the grander sense that only by virtue of living within a society governed by laws and not men does such a right even exist and is enforced.

If every citizen paid the same amount of tax it would put every citizen on equal footing politically, which is what all of the amendments pertaining to the expansion and equality of political rights were intended, and would counter the tendency of politicians to buy votes. Not only would it re-establish the original Constitutional intent and purpose of representation for taxation and the encouragement of civil participation, it would do so very simply and directly.
Lee M. March 16, 2010 at 10:57 pm: In 1914 to be subject to pay federal income tax you had to make about $10,000 and your tax was about 1% of that amount. Adjusted for inflation in todays dollars thats over $225,000 for an individual. Why not make ONLY those people who make that much NOW be subject to personal Income Tax, and pass a National Sales Tax of some sort for the REST of us. A National sales tax would also have the advantage of taxing the “Underground” economy from which no tax is gathered? It would be collected at the point of sale for every item by the store or service purveyor and wouldnt need a single additional IRS agent. The government would be ROLLING in money before it knew it and the IRS could get its nose out of most peoples business and be freed up to go after where the REAL money and most of the tax crooks are. The Europeans would also stop carping about the US Income tax program being used as a hidden “Subsidy” for some enterprises. This could be a Future tax policy worth exploring in the US.
Bruce C. March 17, 2010 at 10:02 am: Lee,

You mentioned a lot of different things that, taken as a whole, would not in my opinion really change the underlying problems with the current system, in fact they could be even worse.

First of all, maximizing the revenue for the Fed. gov. is not necessarily a good thing. The financial state of governments at all levels show that they tend to spend whatever amount they receive, and then some. The single most effective way to limit the size, scope, intrusiveness, and power of any government is to restrict the money it has to work with, and a national sales tax would do just the opposite. More importantly, it would also not provide any means for the citizenry to control gov. revenue, short of denying themselves the fruits of their own labor. Furthermore, the philosophical basis is perverse: the more you spend the more tax you pay. (At least with an income tax one could conceivably argue that taxes are a proxy for legal and security costs to protect one’s proportionally valuable business from contract violations and destruction.) I also think there would be just as much if not more IRS intrusions. One would still have to prove that one’s income is or is not above $225,000 (or whatever, but using your example) requiring all the same record keeping, finagling, time, and accounting costs. Any such income threshold would become a political football, again providing a way for politicians to “buy votes” by raising or lowering it (the “rich” would be outnumbered in votes) allowing deductions, exemptions, suspensions, etc., etc. And, of course, the same would apply to offshore accounts and all that that implies. All of that would be fundamentally no different than what we have now, and I should think worse (i.e., more complex and unjust).

Consider these questions: Do the people who make at least $225,000 also have to pay a sales tax? If so, would it be a different rate? Is that fair/just? Why? Who would determine that? And why $225,000 anyway? Who decides that? Would a sales tax be only for goods, or services too? How about financial products, or money? What about imports? Do only US citizens pay, or everybody? Does it matter where something is bought?

I could think of a hundred more questions like this. Such a system would not be simple at all and difficult to enforce (more IRS, etc.) and most likely riddled with injustices and controversies.
dan March 22, 2010 at 3:39 am: how about two simple and constitutional taxes

Tarriffs and Excise taxes

all else is UNCONSTITUTIONAL