Friday, July 25, 2008

Increased Risk Of Regulatory Scrutiny Of Private Bankers

Senators Baucus (D-Montana) and Grassley (R-Iowa) of the Senate Finance Committee (SFC) are seeking to place their names next to Senator Sarbanes (D-Maryland) and Representative Oxley (R-Ohio). These SFC leaders are planning new laws against offshore tax evasion.

Now offshore tax evasion is not “News” as IRS had complained about this back in 2002. According to Global Policy Forum, IRS estimated in 2002 that anywhere from 1 to 2 million Americans were evading taxes. This is a problem as old as the beginning of time as it is in human nature to abhor having to pay a levy/tax to a central body. (For you theologians, check out Able and Cain story, referencing the grain offering by Cain.)

The reason why the latest government action on tax evasion is a Private Bank risk issue is that most people identified with tax evasion are the wealthy. It is not surprising then any new regulations and law would focus on the bankers working with wealthy clients.

Even without the new regulation / law the regulators have plenty to go after bankers. With the introduction of the PATRIOT Act in 2001, Bank Secrecy Act of 1970 (BSA) and the Money Laundering Control Act of 1986 (MLCA) were strengthened. The Title III of the PATRIOT Act provides the Government with additional reach into the international arena to find and persecute money laundering. While the original intent of the PATRIOT Act was to prevent terrorism, the act can be used for any acts of money laundering, be it to fund terrorism, narcotics, or to simply avoid paying taxes.

While money laundering has been a major concern for broker-dealers, hedge funds, and investment banks, the same cannot be said for Private Banks. For centuries, the Swiss Bankers – the ones who pioneered the modern day Private Banking concept – have had the reputation of complete secrecy. This allowed the wealthy to use the Swiss Banks to hide their assets from prying eyes. Naturally, this included any enquiry from the taxman.

While most people using the Private Banking services are honest folks, there are some who try to “push the envelope” with the aid of the Private Bankers. One such Private Bank that has been flagged twice in the recent past for aiding clients in this field is UBS. In 2007, a UBS Private Banker was one of 19 arrested in Brazil for money laundering.
Then, again in 2008, two top UBS Private Bankers were indicted for aiding in tax evasion.

Given that many Private Banks have been structuring deals for their wealthy clients that could be deemed to be money laundering or tax evading, the scrutiny and pressure are mounting against the Private Bankers. Even the Private Bankers themselves know this. According to the Times article, one Private Banker in London is quoted saying "My God, we're doomed."

Perhaps. It will be interesting in the next few months as the international effort into curtailing tax evasion and money laundering intensifies. This will be especially true for Chinese nationals as China is very tough on any crime that it focuses on to prosecute. . I agree with Professor Reuven Avi-Yonah’s comment that "The whole world of private banking is full of this stuff.” Maybe Senators Baucus (D-Montana) and Grassley (R-Iowa) may be relevant in the current dragnet, or maybe not. At least, if the Senators are successful, they can put a colorful moniker for their law.

SOX is just a bad moniker. I recommend that Senators Baucus and Grassley label their effort BAG-A-CHEATE, which stands for BAucus-Grassley Amendment to Congress Headed Efforts At Tax Evaders. This would be just as colorful a moniker as CAN-SPAM and just as difficult to remember what it actually stands for. Senators, you are free to use my suggested moniker, if you wish.

Oh, for those who are curious, here is the link to CAN-SPAM. Yes, it is an actual law.

Ed Kim
Practical Risk Manager

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