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You can run, but you cannot hide

It's late evening and there is a faint mist in the air.  A man in a dark suit and carrying a briefcase slips through the shadows and then knocks softly on the door of a hotel room in Newark, New Jersey.  The door opens, and the man slips silently inside.  He's here to meet with his contact – who's known only by the code name 'Raincity'

Is this a story of Mafia hit-men, or KGB double agents?  No, this was a Swiss banker,  an employee of a 'reputable' international bank, calling on a client who has undeclared assets.  That banker has since been charged by the US Government with helping the client evade tax.

The fact that the US Government is pursuing these bankers, and the fact that they chose to meet their clients in such a 'covert' way, are indicators of the extent to which the 'offshore' world has changed in recent years.

One of the most obvious impacts of the global financial crisis is that it has forced governments to introduce austerity measures in order to try to balance the books.

A second – less visible – focus of many governments has been to build tax revenues by cracking down on aggressive tax avoidance and tax evasion.  This is very worthwhile for them since every dollar they invest fighting evasion typically recovers more than $10 in unpaid tax. The amount of money involved is also huge.  The UK government estimated that there was £ 125 billion of undeclared UK money in Swiss accounts.  Other estimates say there is between US$21-31 trillion of untaxed money world-wide.

In the past it was easy enough, and pretty common. - especially  You had some cash-flow or perhaps an inheritance or other lump sum from abroad?  Bringing it home would mean that you'd have to pay tax on the income you then generated from it.  Faced with this choice a lot of people felt 'justified' in redirecting the money to some other jurisdiction where not too many questions were asked and where nobody was too worried about tax.

It's a bit like smoking  . .everyone always knew that it was bad, but in the old days an awful lot of people did it.  But now things are very different.  In these times of financial austerity there is now enormous moral opprobrium attached to untaxed accounts, and the tax authorities are taking a very firm stance, including criminal prosecution, of those they can catch.

So far, the two countries most active in this area have been the USA and the United Kingdom.  Their efforts so far have been very successful with many of the traditional hiding places (Switzerland, Lichtenstein, Jersey, the Isle of Man etc) now 'closed' to untaxed assets. Those options that are still open are progressively being targeted.  For example, a lot of untaxed money is thought to have 'fled' from Switzerland to Singapore – and so not surprisingly, Singapore is now identifying, 'evicting', and in some cases reporting untaxed deposits

These moves are putting a great deal of pressure on those who might have undeclared assets invested in 'tax haven' destinations.  The situation has also now been complicated by the recent problems in Cyprus, by the sale by various whistle-blowers of bank client lists to tax authorities in the US and Germany and the recent 'Offshore leaks' disclosures.

It's very important to stress here that a lot of 'offshore' business is both entirely legal, and also completely legitimate.  Offshore structures are widely used for legitimate succession planing, asset protection and international trade.  Many of those who do so comply with all relevant tax and other laws and are doing nothing wrong.  However, it's also impossible to ignore the fact that a lot of people have chosen to use banking secrecy as a way to evade tax.

These people, who thought that they could safely evade their own countries' tax laws, are finding out the hard way that their money might not have been as safe as they thought, they are seeing that many places that once offered banking secrecy are becoming 'less secret' and they are finding out that 'secrecy' in any case does not always mean secret.

Some of them are taking the pain and 'owning up' – but then facing very dramatic financial penalties – up to 50% of their money. Others are fleeing to new jurisdictions, but as the net closes there are fewer and few places to run and it's getting harder and harder to hide.  

Similar EU-driven anti-evasion rules are coming soon to the CR.  What choices do Czech residents with hidden assets have? And what action should they be taking now? – before the axe falls.

Most importantly they should seek the help of a trusted adviser.  There are two issues that need to be considered.  First is the past.  Those who have broken laws in the past cannot so easily 'magically' make what they have done legal.

In the case of the UK, we have seen a range of different amnesties made available over the last few years.  Most were 'jurisdiction dependent', but in some cases – such as the 'Lichtenstein disclosure facility' is was possible to voluntarily disclose assets on a world-wide basis.  Of course there were penalties, but using amnesty facilities like this typically ensure that you are safe from criminal prosecution.  The penalties are also typically much lower when you voluntarily disclose than when the authorities catch you.

It's also important to stress that the amnesties were only ever designed to cover undeclared income from offshore.  They cannot – and should not - help those who are dealing with money that was illegally obtained in the first place (the proceeds of crime or corruption).  Anti-money laundering rules are now very strict, and no reputable advisers or banks will deal with dirty money.  For people in this position, the choices are much starker and very rapidly running out.  One of the most helpful side-effects of these new rules is that they are going to make life very very difficult for corrupt politicians and criminals.  The 'Offshore leaks' are already bringing some of these people to justice.  There will be more similar prosecutions in the future.

The second aspect people need to consider is the future.  Whatever decision they make – however they deal with the sins of the past - they also need to take steps to regularise their affairs in the future.  This means arranging their finances so that they stop breaking the law and evading taxes.

There are a number of strategies that can help people do this – but as everyone's situation is different.  Again, people need to speak to their advisers before deciding what to do.

About the Author: James Turnbull is enrolled as a barrister and solicitor of the High Court of New Zealand, and has had more than 20 years of legal and financial services experience. 


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