Swiss banking giant UBS, under investigation by the U.S. government for allegedly helping Americans hide money from the Internal Revenue Service, is closing thousands of accounts, putting clients at greater risk of being exposed, tax lawyers say.

UBS clients have been receiving calls and letters telling them that their Swiss accounts will soon be liquidated. Those who have concealed funds from the IRS have two basic choices: They can take new and potentially difficult steps to hide the money, heightening their risk of being caught and punished severely, or they can come clean, lawyers say.

The backdrop for UBS’s action is that the U.S. government has been pressing UBS and the Swiss government to disclose the names of thousands of Americans with undeclared accounts, while the Swiss have vowed to uphold Swiss legal protections for bank clients.

However, as a practical matter, whether or not the Swiss formally give up the names, UBS’s decision to close the accounts undermines Switzerland’s legendary code of bank secrecy, lawyers said.

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Raoul Weil, 48, chairman of global wealth management at UBS in Zurich, was indicted Nov. 6 in Fort Lauderdale, Florida, according to court papers unsealed today. His bank continued to help American clients evade taxes with false documents after agreeing in 2001 to identify account holders and tell the IRS about their income, the U.S. alleged.“Weil and other executives would not implement effective restrictions on the United States cross-border business because the business was too profitable for the Swiss bank,” according to the indictment, which identifies other, unnamed UBS executives as unindicted co-conspirators.

The Justice Department has been probing whether the bank helped Americans evade taxes and the U.S. Securities and Exchange Commission is looking into whether it failed to register as a broker-dealer or investment adviser. In June, former UBS private banker Bradley Birkenfeld pleaded guilty to helping a California billionaire dodge taxes and agreed to cooperate with prosecutors.

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Around the world, a quiet but fierce battle is raging. In a bid to lure high net-worth individuals to their shores, the world’s tax havens are trying to outrival each other with tax breaks. And the list of combatants is not a short one – according to the US National Bureau of Economic Research, roughly 15 per cent of countries are tax havens. While the UAE and Switzerland may be the first places that spring to mind, there are some unlikely new contenders such as Macedonia and Liechtenstein, among them.

“The definition of a haven is a place that is offering low to zero tax, I’d say,” says Paul Panayi, the managing director at Optimus Wealth, a wealth management company. “The name implies safety – in a storm you would want to find a haven. With increased competition from so many countries looking for high net-worth individuals, the tax perks on offer are getting better. The old money seems to stick with the places they know: Monte Carlo or Switzerland, for example – places where you pay an enormous amount of money for a property. There is a growing group emerging, however. People who have done well in business in the last five to 10 years but might not be super-wealthy and who are looking at some of the newer tax-friendly places – like Dubai, Mauritius and the Caribbean. Typically, people only reside at the tax haven for three to four years if they’re about to sell a business, or they know they are going to have a period of high earnings.”

“Monaco used to accept anyone, but not any more,” continues Panayi. “These days you have to guarantee you will be there for a year, as well as deposit a sizeable amount into a bank account – at least £500,000 (Dh3.2 million). They also do credit checks. In Switzerland, it varies from canton to canton; generally you turn up to the local tax office, strike a deal on the amount of tax you pay and pay that amount.”

The Caribbean is an enduringly popular location for the rich; somewhere they can live in idyllic, tropical surroundings, and save money while doing so. Bermuda, Barbados, the Bahamas, the Cayman Islands, Anguilla, Grenada, Nevis and the Turks and Caicos are all offering low tax to anyone who resides there. Typically, these islands offer no income tax, value added tax, capital gains or inheritance tax – and in some cases, no property taxes – but regional variations do occur.

Prices in Barbados, for example, are high: the cheapest one-bed property on Cluttons estate agency’s books starts at Dh3.7m and goes up to Dh7m. Barbados’s West Coast is seen as the most desirable – and priciest – area to live in, home to Sandy Lane, the celebrities’ hotel of choice, and to the Four Seasons resort, where Simon Cowell recently spent a rumoured Dh94m buying his holiday home.

There are cheaper alternatives, however. In Grand Bahama, which is tax-free and where you can qualify to apply for residency if you purchase a property, you can buy a one-bed in the Suffolk Court development – a 10-minute drive from Freeport International Airport – for Dh1.7m.

Another increasingly popular destination is Mauritius. It is only since 2002 that foreigners were allowed to buy on the tropical island in the Indian Ocean off the coast Africa, with astonishing beaches and rainforest – and only after the government had introduced a system called the Integrated Resort Scheme (IRS). IRS was designed to keep property relatively high-end: by law, non-Mauritians have to pay a minimum of Dh1.8million when buying on the island, as well as fork out a land registration tax of Dh257,000. The good news is that with your Mauritian property you automatically get residency – as do any dependents – and corporation tax is capped at 15 per cent.

The upside is that Mauritius has no capital gains or inheritance tax and its economy is strong – rising at around six per cent annually. On the downside, as a foreigner, you can only buy a newbuild property in a designated IRS resort, so if your dream is lovingly to renovate an old plantation house, this isn’t the island for you.

Average prices paid by foreigners on the island are around Dh2,571 to Dh3,122 per square metre. Cluttons is selling Villas Valriche, a development offering luxury villas with infinity pools and easy access to an 18-hole golf course. Prices in the hilltop development, with panoramic sea views in front and the Black River Gorge National Park to the rear, start at Dh3.11m for a detached villa with pool and gardens.

Switzerland is where the old money goes, and it is famously picky about who lives within its borders – Swiss property laws are designed to make sure the foreigners don’t nab all the best properties. The federal government has set an annual quota of permits for non-resident foreigners seeking to acquire property in Switzerland. In addition, cantonal authorisation is needed before gaining a title, and each canton has different rules on the issue. Average property prices in the country are Dh27,279 per square metre, according to the Global Property Guide.

“We have a huge variety of clients from all sorts of walks of life buying in Switzerland,” says Annabelle Waite of the Swiss branch of property investment agency Pure International. “Investors taking advantage of low interest rates, grandparents buying family chalets as heirlooms – and avoiding inheritance tax – young professionals starting a family wanting social and economical security. EU nationals can relocate here easily – they simply have to apply for a permit. They also have to prove they have sufficient financial means and adequate health insurance. Non-EU citizens can obtain residency permits if it is justified on a financial basis.”

For somewhere a bit less conventional you may want to consider Belize, the English-speaking Central American nation – at least according to James Hickman of Caxton FX, a specialist currency exchange company. “It is one of the best tax havens in the world, having no capital gains tax or estate tax, and under certain provisions, non-residents and offshore companies are able to repatriate their earnings tax-free.”

Most people are buying land and flats within resorts. One of the more high-end areas in Belize is Placencia, a 16-mile-long peninsula in the south of Belize, home of Francis Ford Coppola’s resort, Turtle Inn. Prices at another development, Bella Maya, a luxury beachfront four-star resort with swimming pool, restaurant, bar, shops and private beach, start at Dh1.38m, and most properties come with balcony or terrace.

New rules, issued Monday, apply to a little-noticed, multibillion-dollar I.R.S. program that allows participating foreign banks to funnel hundreds of billions of dollars overseas on behalf of American clients without disclosing their names to the I.R.S. In return, the banks promise to know who their clients are, withhold any taxes due on United States securities in their accounts — typically 30 percent — and send that money to the I.R.S.

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Real estate developer Igor Olenicoff filed the lawsuit Tuesday in U.S. District Court in Santa Ana, accusing the bank of telling him his fortune would be invested in accordance with U.S. tax laws then hiding it in offshore entities.

The lawsuit carries similar accusations against financial entities in Liechtenstein, where UBS allegedly moved Olenicoff’s $200 million in investments.

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The Internal Revenue Service is planning to increase its enforcement efforts by sending out warning letters to a larger group of taxpayers who may be underreporting their income.

The new warning letter, the CP2057, will differ from the CP2000 letter that the IRS has been sending out for years, according to The Wall Street Journal. The earlier type of letter included suggestions for proposed changes to areas such as income, credits and deductions, while the CP2057 will mainly ask taxpayers to double-check parts of the return and file an amended return if they have made a mistake. Unlike the CP2000, it will not include the exact amount owed.

The IRS will begin testing the new automated notices later this year and expand their use if they succeed in collecting extra revenue.

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The 57 page pdf can be found here.

7/17/08 Press Release from Michigan Senator Carl Levin’s office-

WASHINGTON – At a Thursday hearing entitled, Tax Haven Banks and U.S. Tax Compliance, the latest in a series of hearings with insider information about the workings of the offshore industry, the Senate Permanent Subcommittee on Investigations will examine how tax haven banks facilitate tax evasion by U.S. clients, hide client and bank misconduct behind the cloak of bank secrecy laws, and add to the offshore abuses that cost U.S. taxpayers an estimated $100 billion dollars each year. A six month-long bipartisan Subcommittee investigation examined LGT Bank in Liechtenstein and UBS in Switzerland to expose how tax haven banks are assisting U.S. taxpayers to evade taxes, in particular by urging U.S. clients to open accounts in their offshore jurisdictions, assisting them in structuring those accounts to avoid disclosure to U.S. authorities, and providing financial services in ways that do not alert U.S. authorities to the existence of the foreign accounts. Subcommittee Chairman Sen. Carl Levin (D-Mich.) and Ranking Minority Member Norm Coleman (R-Minn.) will release a 115-page joint staff report [PDF] detailing the findings of the investigation in conjunction with the hearing. “Tax havens are engaged in economic warfare against the United States, and the honest, hardworking American taxpayer is losing,” said Levin. “The iron ring of secrecy around tax haven banks and their deceptive banking practices enable and encourage tax cheats to hide assets from the United States. Congress needs to enact strong penalties on tax haven banks that help U.S. taxpayers avoid paying taxes to Uncle Sam.” Senator Coleman said, “It is simply unacceptable that some individuals are using offshore tax havens and secrecy jurisdictions to shelter trillions of dollars from taxation, forcing working families to shoulder the tax burden. By exploiting gaping loopholes, these foreign banks are enabling felony tax evasion. Simply put, foreign banks should not be Al Capone safe-houses for evading taxes. Closing these loopholes means we must strengthen reporting requirements, broaden the scope of the audit program, and extend the amount of time the IRS has to investigate cases involving an offshore tax haven.” Exposing a trove of internal bank documents and interviews with bank insiders, the Subcommittee report shines a spotlight into the murky operations of two high-profile tax haven banks. Eight case studies expose bank practices that could facilitate, and have resulted in, tax evasion by U.S. clients:

1. Marsh. The Marshes of Ft. Lauderdale, Florida, hid $49 million in four Liechtenstein foundations over 20 years.
2. Wu. LGT helped William Wu hide ownership of assets, including his house in Forest Hills, New York, using an elaborate offshore structure.
3. Lowy. LGT used transfer companies and a foundation with a Delaware corporation to help the Lowys hide their beneficial interest in a foundation with $68 million in assets.
4. Greenfield. LGT private bankers, including Prince Philipp of Liechtenstein, met with Mr. Greenfield and his father to pitch the transfer of $30 million from Bank of Bermuda to LGT.
5. Gonzalez. LGT helped a Gonzalez car dealership inflate invoices, move funds offshore and, after getting sued for their pricing practices, hide assets in case of a court judgment.
6. Chong. LGT helped Richard Chong use hidden accounts to move millions of dollars related to his business ventures, routing them through an offshore corporation to avoid scrutiny.
7. Miskin. LGT helped Michael Miskin hide assets from courts, tax authorities, and his wife.
8. Olenicoff. Bradley Birkenfeld, a private banker employed by UBS AG, pleaded guilty last month to conspiring with a U.S. citizen, Igor Olenicoff, to defraud the IRS of $7.2 million in taxes owed on $200 million of assets hidden in Switzerland and Liechtenstein.

In reviewing these case histories, the investigation found: (1) bank secrecy laws and practices are serving as a cloak, not only for client misconduct, but also for misconduct by banks colluding with clients to evade taxes, dodge creditors, and defy court orders; (2) from at least 2000 to 2007, LGT and UBS employed banking practices that could facilitate, and have resulted in, tax evasion by their U.S. clients, including assisting clients to open accounts in the names of offshore entities; advising clients on complex offshore structures to hide ownership of assets; using client code names; and disguising asset transfers into and from accounts; (3) since 2001, LGT and UBS have collectively maintained thousands of U.S. client accounts with billions of dollars in assets that have not been disclosed to the IRS; UBS alone has an estimated 19,000 accounts in Switzerland for U.S. clients with assets valued at $18 billion, and the IRS has identified at least 100 U.S. taxpayers with accounts at LGT; and (4) LGT and UBS have assisted their U.S. clients in structuring their foreign accounts to avoid QI reporting to the IRS, including by allowing U.S. clients who sold their U.S. securities to continue to hold undisclosed accounts, and by opening accounts in the name of non-U.S. entities beneficially owned by U.S. clients; while these banking practices did not technically violate the banks’ Qualified Intermediaryagreements with the IRS, the result is that the banks helped keep accounts secret from the IRS and thereby facilitated tax evasion by their U.S. clients. Reforms recommended by the Levin-Coleman report to reign in tax haven abuses include the following:

1. Strengthen QI Reporting of Foreign Accounts Held by U.S. Persons. In addition to prosecuting misconduct under existing law, the Administration should strengthen the Qualified Intermediary Agreements by requiring QI participants to file 1099 forms for: (1) all U.S. persons who are clients (whether or not the client has U.S. securities or receives U.S. source income); and (2) accounts beneficially owned by U.S. persons, even if the accounts are held in the name of a foreign corporation, trust, foundation, or other entity. The IRS should also close the “QI-KYC Gap” by expressly requiring QI participants to apply to their QI reporting obligations all information obtained through their Know-Your-Customer procedures to identify the beneficial owners of accounts.
2. Strengthen 1099 Reporting. Congress should strengthen the statutory 1099 reporting requirements by requiring any domestic or foreign financial institution that obtains information that the beneficial owner of a foreign-owned financial account is a U.S. taxpayer to file a 1099 form reporting that account to the IRS.
3. Strengthen QI Audits. The IRS should broaden QI audits to require bank auditors to report evidence of fraudulent or illegal activity.
4. Penalize Tax Haven Banks that Impede U.S. Tax Enforcement. Treasury should penalize tax haven banks that impede U.S. tax enforcement or fail to disclose accounts held directly or indirectly by U.S. clients by terminating their QI status, and Congress should amend Section 311 of the Patriot Act to allow Treasury to bar such banks from doing business with U.S. financial institutions.

This hearing and report follow other investigations into offshore abuses by the Subcommittee. Hearings held by the Subcommittee in 2001 examined the historic and ongoing lack of cooperation by some offshore tax havens with international tax enforcement efforts and their resistance to divulging information needed to detect, stop and prosecute U.S. tax evasion. A hearing held in December 2002 and report issued in January 2003 provided an in-depth examination of an abusive tax shelter used by Enron. Two days of hearings in November 2003, and a bipartisan report issued in 2005, provided an inside look at how some respected accounting firms, banks, investment advisors, and lawyers had become engines pushing the design, sale, and implementation of abusive tax shelters to corporations and individuals across the country. In August 2006, a hearing and report examined six case studies illustrating the operation of the offshore tax industry, its service providers and clients, and how tax haven abuses are undermining, circumventing, or violating U.S. tax, securities, and anti-money laundering laws.