Switzerland’s recent decision to allow Swiss bank UBS to provide the Internal Revenue Service with information on 4,500 American account holders is expected to result in a wave of criminal prosecutions for tax evasion. The defendants in these prosecutions likely will not be limited to UBS account holders; London-based HSBC Holdings, Ltd. and its American account holders may be the next targets of IRS scrutiny.
Unlike many criminal investigations that require proof of a defendant’s intent to commit a crime, tax evasion cases can be simpler to prove. Identifying the American owner of a foreign bank account that has not been reported to the IRS is often the most important piece of the investigation. Intent usually is not difficult to prove, because most defendants have a relatively sophisticated understanding of financial matters and cannot reasonably feign ignorance of IRS reporting requirements.
The IRS investigation of UBS could provide a blueprint for future investigations of other foreign banks and their American clients. In the UBS case, IRS investigators received information from a UBS employee revealing that UBS helped clients hide assets from taxing authorities. The IRS then threatened UBS with criminal prosecution unless it provided information regarding American account holders.
Although HSBC has not yet been named as a target of any criminal investigation, IRS inquiries of HSBC account holders have been on the rise. Recent court filings indicate that a Virginia doctor returning from Switzerland was questioned by U.S. Customs officials about sending American currency to his home from Switzerland. Further investigation revealed that HSBC had told the doctor that it was closing his Swiss account, and had referred him to a Swiss attorney who advised him about how to get the funds from the account into the United States without alerting the IRS. Further investigation could result in criminal charges against HSBC and the attorney.
If the investigation follows the path of the UBS case, the U.S. government may use the threat of criminal charges against HSBC to obtain information about American owners of unreported HSBC accounts. The threat of criminal charges against the attorney could also lead to identification of further unreported account owners. Attorney-client privilege in this case may be undermined by the crime-fraud exception, which provides that attorney-client communication made in furtherance of a crime is not protected by privilege.
HSBC’s difficulties have been further compounded by a former employee who copied account holders’ files and then contacted European police authorities, offering to provide the files as evidence that HSBC had assisted its clients with tax evasion. The French government seized the files and is using them to track down French tax evaders. Reportedly, 1,000 of HSBC’s American clients are included in the files.
It appears already that the effects of the UBS case will reach far beyond that bank’s own account holders. HSBC and other offshore banks could soon be facing the same difficult choice between facing criminal prosecution or divulging client information.