Sweetheart Deferred Prosecution Deals for Swiss Banks in the Works

Major Swiss banks were positioning themselves last week to survive a U.S. Justice Department criminal probe for sheltering wealthy American tax dodgers.

(Translate: prepare the deferred prosecution agreements.)

But at least one American who understands the ins and outs of the tax dodging business says it’s time for the Justice Department to bring down the hammer.

James Henry is a former chief economist at McKinsey & Co.

He’s currently chair of the Global Alliance for Tax Justice.

And he’s featured in a documentary film on the offshoring industry titled — We’re Not Broke.

“What the Swiss really understand is jail time,” Henry told Corporate Crime Reporter in an interview last week. “Their bankers need to be exposed to serving time for enabling tax dodging, money laundering and fraud. That really gets their juices flowing. They have been going after whistleblowers. We need to go after them.”

“The corporations who are the serial offenders — like UBS — they need to experience the joys — not of a deferred prosecution — but of a corporate indictment,” Henry said. “Our Justice Department has made a decision to get into economics and be concerned about upsetting the banking world. They are worried that an indictment would take banks like UBS and HSBC down. It might take them down. But actually having the will to take one of those banks down would have an enormous salutary effect on everyone else in the industry. It would signal that this behavior is unacceptable.”

The news reports coming out of Switzerland last week indicated that the Department is moving away from a global $10 billion settlement with the banks and toward negotiating individual deals with the banks.

The $10 billion global settlement would be one of the largest corporate fines in history.

“But this may be a prolonged process of negotiating with the individual Swiss banks,” Henry said. “So, it may not be just the one lump sum payment. They may never get that headline that they were talking about a couple of months back. This deal got shifted to something more subtle.”

“But that shouldn’t blind us to the fact that these games are being played and that any settlement — whether a global settlement or a prolonged series of individual settlements — with very little scrutiny from the U.S. Congress — either one of those is an outrage.”

“The idea that you would actually permit big ticket tax dodgers to walk off of the stage with a slap on the wrist — like the proposed Swiss settlement — or that you would let companies like Apple and Microsoft, General Electric and Google — shift their most valuable corporate assets to places where they have almost no activity and evade corporate income taxes at a time when we are slashing aid to kids in schools, money for seniors — this is outrageous.”

“This has become a global movement. We have African countries that have effectively negative corporate tax rates, because they have such great subsidies that they have to pay corporations. You have major companies paying bribes that end up in Swiss accounts. Public officials are being corrupted, undermining the rule of law and democracy.”

Henry is the author of Blood Bankers: Tales from the Global Underground Economy (Four Walls, Eight Windows).

He is currently working on a new book titled Pirate Bankers.

Henry conservatively estimates that the United States loses anywhere from $170 billion to $200 billion a year in tax revenue — $100 billion from wealthy Americans dodging taxes by parking their capital in tax havens like Switzerland — and another $70 billion to $100 billion a year from corporations dodging taxes.

On the corporate tax dodging side, Henry says that companies like Google, Microsoft and General Electric have been able to use the loopholes, many of which were created in the last few years of the Clinton administration.

“Things like — the acquisition of entities with virtually no employees. They have been using these dodges to park lots of their intellectual property, brands and patents offshore, essentially paying themselves royalties in places like Bermuda,” Henry says.

“And as a result, they radically lower their tax rates. And this has been happening since 1997 and 1998.”
“And it’s now getting in the headlines. Last week, there was a headline that Apple was parking something like 64 percent of its corporate profits in Ireland. And they are using other companies in the Netherlands and Bermuda to pay themselves royalties.”

“These are games that are just stripping the tax code of any kind of corporate participation.”

Henry says that US companies are the world leaders in offshoring.

“But there are lots of other kinds of transfer pricing abuse and base shifting that goes on throughout the first world,” Henry says.

“The entire shipping industry is basically off the books worldwide. You have the cruise line industry that parks itself in offshore havens. You have the banana industry that sets up all kinds of intermediate companies to transfer the bananas from third world countries to the first world and along the way they charge for brands and finance and banking.”

“These are all charged for by subsidiaries that have no arms length competitors. But they are very hard to audit, so by the time the bananas get to Europe or to the United States, all of the profit has been siphoned off to these subsidiaries that are supposedly supplying all of these services.”

On the individual tax dodging side, Henry did an analysis of all offshore banking and found as of year end 2010 about $21 trillion to $32 trillion offshore of private individual wealth — “most of which was untaxed and was invested through havens.”

“And of that $21 trillion to $32 trillion, about $12 trillion was in the top 50 banks. And about $6 trillion or $7 trillion was in the top ten banks,” Henry said.

Let’s say I’m a rich person and I park my income in bank in Switzerland. What’s the benefit to me and how is it illegal?

“The U.S. and many other countries have worldwide income tax coverage. Unless you are an extraordinarily generous person, you won’t tell the Treasury about your offshore account. In fact, that’s what UBS got tagged for in 2009. They had been sending private bankers from Switzerland to the United States, targeting the wealthiest Americans to take their money offshore to Switzerland where they wouldn’t pay taxes on it.”

“It’s all about tax evasion.”

“The United States and Canada have something called automatic information exchange,” Henry explains. “If a Canadian has income on a U.S. bank account, we automatically tell the Canadian Treasury about it so they can enforce their code.”

“There is no automatic information exchange, however, with Switzerland or most of the other destination havens in the world that are receiving this capital.”

“And indeed the United States is a big tax haven with respect to Latin America. We don’t report income received by a Mexican on stocks, bonds or bank deposits from U.S. holdings because it’s not taxable here.”

“We have set up our tax laws to attract this kind of capital. If you are non resident alien from Mexico, Brazil, Argentina, Venezuela — these are big suppliers of capital flight to the United States — we don’t tell your tax authorities about it. And we don’t tax it here. That’s an example of where the United States has joined the club.”

[For the complete transcript of the Interview with James Henry, see 27 Corporate Crime Reporter 22(12), June 3, 2013, print edition only.]