Offshore banking on endangered list

Legitimate offshore banking by wealthy Americans may be the next casualty of the UBS AG tax evasion case. Having money in an offshore account is perfectly legal as long as it is reported to the Internal Revenue Service and taxes are paid, and many high-net-worth U.S. citizens have offshore accounts to protect their assets from creditors. But having an offshore account is becoming less attractive, and the aggressive stance of the IRS in the UBS case may be another nail in the coffin, tax attorneys and wealth managers say. Meanwhile, the widening net of the offshore crackdown is also bound to ensnare financial advisers, said tax specialists, who predict that advisers who helped clients set up offshore accounts will be under heightened scrutiny from the IRS.

'HUGE HOLE'

UBS of Zurich, Switzerland, agreed last week to settle a contentious lawsuit with the U.S. government by releasing information sought by the IRS on 4,450 client accounts. The out-of-court settlement was made public last week. Assets in the accounts, which are presumed to be held by extremely wealthy Americans, were valued at about $18 billion at their peak, according to the IRS.
“The UBS case has clearly alarmed more people,” said Shannon Eusey, president of Beacon Pointe LLC, a wealth management firm in Newport Beach, Calif., with about $4 billion in assets under management. “I think some of them are asking themselves: "Say, wait a minute, am I that concerned with asset protection?' This case opened up a huge hole in privacy rights and bank secrecy, and people may wonder what gets opened up next,” Ms. Eusey said. Offshore tax specialist Charles Fox, a Charlottesville, Va.-based partner for McGuire Woods LLP of Richmond, Va., noted that an increasing number of states now “offer forms of asset protection techniques.” “People had legitimate offshore accounts for privacy and asset protection reasons,” he said. “But if you don't have the privacy anymore and you can get asset protection benefits elsewhere, more and more people will say it's not worth it to have an offshore account.” What's more, the IRS has made clear that it is going to look even harder at offshore accounts as a result of the settlement. The agreement, which was hammered out after months of intense negotiations between the Swiss government and U.S. authorities, “sends an unmistakable message to people hiding income and assets offshore,” IRS commissioner Doug Shulman said during a press conference. “Wealthy Americans who have hidden their money offshore will find themselves in a jam.” Indeed, the Swiss government agreed also to review IRS requests for information about American accounts in other Swiss banks. “That's a key point,” said Caroline Ciraolo, a tax attorney for Rosenberg Martin Greenberg LLP in Baltimore.

'OPENS THE FLOODGATES'

“It opens the floodgates,” she said. “The disclosure process is going to go on for quite some time.” In fact, on Friday, the widening scope of the crackdown was underscored by two new indictments obtained by the Justice Department accusing a Swiss banker and lawyer of selling tax evasion services to wealthy clients. This process is going beyond individual account holders and will ensnare financial professionals who assisted them, tax specialists said.
“Absolutely, advisers will be included,” said Kevin Packman, a partner in the Tampa, Fla.-based law firm Holland & Knight. “They're shaking the trees and UBS, and other big institutions are first,” he said. “Financial advisers are next.” Mr. Fox agrees and thinks that advisers who helped clients set up offshore accounts will be a high priority for the IRS. “I think, in a way, the IRS is more interested in going after financial advisers than actual clients,” he said. “If clients with offshore accounts pay what they owe to the government, the IRS tends to give them a pass. But the IRS tends to go after financial advisers who helped create and promote tax evasion techniques, and they may face civil suits and criminal indictments,” Mr. Fox said. The settlement and the continuing investigation into offshore accounts will affect banks as well as clients, said John Collis, chairman of Conyers Dill & Pearman, an international law firm in Hamilton, Bermuda. “Banks have been getting out of the business of bank accounts for high-net-worth non-residents for a number of years, and this settlement is bound to perpetuate that trend,” he said. Another result of the offshore crackdown will be increased diversification of wealthy clients' assets among banks and wealth managers, said Charles Lowenhaupt, chief executive for Lowenhaupt Global Advisors LLC. The St. Louis-based firm has more than $550 million in assets under management. “Who is going to put all their money in UBS after something like this?” Mr. Lowenhaupt said. “Now there is an incentive to use five or six different banks in different jurisdictions.”

SEPTEMBER DEADLINE

The settlement also brought renewed attention to the Sept. 23 deadline for the IRS' voluntary disclosure program, which allows Americans who haven't reported income in offshore bank accounts to come forward and likely avoid criminal prosecution. The deadline won't be extended, Mr. Shulman said. As part of the agreement with UBS, he said, the bank will send notices to account holders that their information is going to be provided to the IRS. The notification won't disqualify them from participating in the voluntary disclosure program, Mr. Shulman said. But if offshore account holders don't come forward and their name is given to the IRS later by the Swiss government, “all bets are off,” he said. And bank customers who don't receive notices before Sept. 23 won't be exempt from an IRS review, Mr. Shulman said. “Any bank customer with unreported offshore income or accounts should come forward now, or face stiffer civil penalties and possible criminal prosecution later,” he said. Even before the IRS crackdown, investors' interest in offshore accounts was declining, according to wealth managers. “I haven't been seeing the demand,” Ms. Eusey said. “I don't think it makes much sense to have offshore accounts if you intend to report all of your income correctly, because foreign companies are not set up to report in a manner consistent with the U.S. tax system,” said David Dunn, managing director of Kingsbridge Private Wealth Management Inc. The Las Vegas-based firm has about $100 million in assets. And while having an offshore account can be a legitimate strategy for asset protection, it can also be “very expensive,” Mr. Dunn said. “You have to pay a foreign custodian, a foreign trustee, an investment manager, and your U.S. tax counsel to recast everything into a manner that is reportable to the IRS,” he noted. E-mail Charles Paikert at cpaikert@investmentnews.com.