[Senate Hearing 110-614] [From the U.S. Government Publishing Office] S. Hrg. 110-614 TAX HAVEN BANKS AND U.S. TAX COMPLIANCE ======================================================================= HEARINGS before the PERMANENT SUBCOMMITTEE ON INVESTIGATIONS of the COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS UNITED STATES SENATE of the ONE HUNDRED TENTH CONGRESS SECOND SESSION ---------- JULY 17 AND 25, 2008 ---------- Available via http://www.gpoaccess.gov/congress/index.html Printed for the use of the Committee on Homeland Security and Governmental Affairs S. Hrg. 110-614 TAX HAVEN BANKS AND U.S. TAX COMPLIANCE ======================================================================= HEARING before the PERMANENT SUBCOMMITTEE ON INVESTIGATIONS of the COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS UNITED STATES SENATE of the ONE HUNDRED TENTH CONGRESS SECOND SESSION __________ JULY 17 AND 25, 2008 __________ Available via http://www.gpoaccess.gov/congress/index.html Printed for the use of the Committee on Homeland Security and Governmental Affairs ---------- U.S. GOVERNMENT PRINTING OFFICE 44-127 PDF WASHINGTON : 2008 For sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, Washington, DC 20402-0001 COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS JOSEPH I. LIEBERMAN, Connecticut, Chairman CARL LEVIN, Michigan SUSAN M. COLLINS, Maine DANIEL K. AKAKA, Hawaii TED STEVENS, Alaska THOMAS R. CARPER, Delaware GEORGE V. VOINOVICH, Ohio MARK PRYOR, Arkansas NORM COLEMAN, Minnesota MARY L. LANDRIEU, Louisiana TOM COBURN, Oklahoma BARACK OBAMA, Illinois PETE V. DOMENICI, New Mexico CLAIRE McCASKILL, Missouri JOHN WARNER, Virginia JON TESTER, Montana JOHN E. SUNUNU, New Hampshire Michael L. Alexander, Staff Director Brandon L. Milhorn, Minority Staff Director and Chief Counsel Trina Driessnack Tyrer, Chief Clerk ------ PERMANENT SUBCOMMITTEE ON INVESTIGATIONS CARL LEVIN, Michigan, Chairman THOMAS R. CARPER, Delaware NORM COLEMAN, Minnesota MARK L. PRYOR, Arkansas TOM COBURN, Oklahoma BARACK OBAMA, Illinois PETE V. DOMENICI, New Mexico CLAIRE McCASKILL, Missouri JOHN WARNER, Virginia JON TESTER, Montana JOHN E. SUNUNU, New Hampshire Elise J. Bean, Staff Director and Chief Counsel Robert L. Roach, Counsel and Chief Investigator Zachary I. Schram, Counsel Mark L. Greenblatt, Staff Director and Chief Counsel to the Minority Michael P. Flowers, Counsel to the Minority Adam Pullano, Staff Assistant to the Minority Mary D. Robertson, Chief Clerk C O N T E N T S ------ Opening statements: Page Senator Levin................................................ 1, 45 Senator Coleman.............................................. 7, 50 WITNESSES Thursday, July 17, 2008 Hon. Douglas Shulman, Commissioner, Internal Revenue Service, U.S. Department of the Treasury................................ 11 Hon. Kevin J. O'Connor, Associate Attorney General, U.S. Department of Justice.......................................... 14 Shannon Marsh, Fort Lauderdale, Florida, accompanied by Sharon Kegerrels, Esq................................................. 31 William Wu, Forest Hills, New York, accompanied by Henry Klingeman, Esq................................................. 32 Martin Liechti, Head, UBS Wealth Management Americas, Zurich, Switzerland, accompanied by David M. Zornow, Esq............... 35 Mark Branson, Chief Financial Officer, UBS Global Wealth Management and Business Banking, Member, UBS Group Managing Board, Zurich, Switzerland..................................... 36 Friday, July 25, 2008 Steven Greenfield, New York, New York............................ 51 Peter S. Lowy, Beverly Hills, California; accompanied by Robert Bennett, Esq................................................... 52 Alphabetical List of Witnesses Branson, Mark: Testimony.................................................... 36 Greenfield, Steven: Testimony.................................................... 51 Liechti, Martin: Testimony.................................................... 35 Lowy, Peter S.: Testimony.................................................... 52 Marsh, Shannon: Testimony.................................................... 31 O'Connor, Hon. Kevin J.: Testimony.................................................... 14 Prepared statement........................................... 65 Shulman, Hon. Douglas: Testimony.................................................... 11 Prepared statement........................................... 55 Wu, William: Testimony.................................................... 32 APPENDIX Staff Report titled ``Tax Haven Banks and U.S. Tax Compliance''.. 73 EXHIBITS 1. GMarsh Foundations, chart prepared by the U.S. Senate Permanent Subcommittee on Investigations....................... 209 2. GWu Foundation, chart prepared by the U.S. Senate Permanent Subcommittee on Investigations................................. 210 3. GGreenfield Foundation, chart prepared by the U.S. Senate Permanent Subcommittee on Investigations....................... 211 4. GLowy Foundation, chart prepared by the U.S. Senate Permanent Subcommittee on Investigations....................... 212 5. a. GStatement of former LGT Treuhand employee, formerly known as Henrich Kieber........................................ 213 b. GLiechtenstein warrant for the arrest of Henrich Kieber... 222 DOCUMENTS RELATING TO MARSH ACCOUNTS: 6. GLetter of wishes, Lincol Foundation, October 15, 1985...... 223 7. GLGT receipt for US $3,320,700 cash from Lincol Fondation, dated October 15, 1985......................................... 224 8. GHandwritten letter signed by Shannon N. Marsh to Mr. Alvate, to give Kerry M. Marsh permission to review all documents and receipts pertaining to Lincol Foundation and Chateau Foundation, dated May 23, 1992......................... 226 9. GInstruction signed by Shannon Neal Marsh, empowering Marsh family members to act as principals for Lincol Foundation, dated November 17, 1993........................................ 227 10. GCorrespondence from James A. Marsh, Jr. to Peter Meier, LGT, dated October 4, 1994, re: Lincol and Chateau............. 228 11. GLetter of wishes, Lincol Foundation and Foundation Chateau, October 11, 2000............................................... 229 12. GLGT Memorandum to File about Lincol and Chateau Foundations, dated February 7, 2002............................ 231 13. GDeed of Signature accepting appointment as Protector of the Chateau Foundation, signed by Kerry Michael Marsh, Shannon Neal Marsh, and James Albright Marsh, Jr. and Deed of Appointment of Successors, signed by James Albright Marsh, Jr................. 233 14. GResolution, The Foundation Board of Foundation CHATEAU, indicating the inventory of assets and liabilities at 31 December 2000 showing a total of USD 10'015'623,50, dated September 12, 2003............................................. 237 15. GLetter from James A. Marsh, Jr. to LGT, dated November 10, 2004, granting LGT all administrational and management activities for Foundation Chateau.............................. 238 16. GCorrespondence from Shannon Neal Marsh to Members of the Foundation Council of Chateau Foundation, dated November 4, 2004, re: appointment of members of the Foundation Council of Chateau Foundation............................................. 239 17. GExcerpt from Estate of James A. Marsh, 2006 Income Tax Returns........................................................ 240 18. GThree letters from Baker & McKenzie LLP (Marsh Family attorney) to the Internal Revenue Service, dated May 12, 2008, forwarding amended returns for foreign income and foreign bank and financial accounts for calendar years 2002-2006............ 244 DOCUMENTS RELATING TO WU ACCOUNTS: 19. GLGT report on JCMA Foundation, dated June 27, 2002......... 255 20. GDeclaration of Trust between Cobyrne Limited and JCMA Foundation, dated October 1, 1996.............................. 257 21. GNew York City property records, recording sale of Forest Hills, NY home of William S. Wu to Tai Lung Worldwide, Ltd., dated January 21, 1997......................................... 259 22. GLGT Memorandum by Kim Choy regarding JCMA Foundation, dated June 26, 2002.................................................. 265 23. GDocuments regarding withdrawal of $100,000 by JCMA Foundation/William Wu from LGT through HSBC Hong Kong and Shanghai Banking Corp. Hong Kong, dated June 27,2002........... 266 24. GExcerpt from Resolution, The Foundation Board of JCMA Foundation, indicating statement of assets as per 31 December 2001 in the total amount of USD 4,283,473.49, dated February 7, 2002........................................................... 270 25. GExcerpt from Resolution, The Foundation Board of the JCMA Foundation, indicating inventory of assets and liabilities at 31 December 2003 showing a total of USD 2,172,145.97, dated March 10, 2004................................................. 272 26. GExcerpt from Resolution of the Foundation Board of JCMA Foundation, showing assets as per 31 December 2004 amount to USD 1,202,636.25, dated February 13, 2006...................... 274 27. GExcerpt from Resolution of the Foundation Board of JCMA Foundation, showing assets as per 31 December 2005 amount to USD 1,188,957.64, dated March 30, 2006......................... 279 28. GExcerpt from Resolution of the Foundation Board of Desert Rose Foundation, showing assets as per 31 December 2006 amount to USD 422,249.10, dated April 18, 2007........................ 284 29. GLGT report on Veline Foundation after a March 27, 2000, client visit................................................... 288 30. GStatements of assets as per 31.12.2000, Veline Foundation, dated February 5, 2001......................................... 290 31. GBearer Share Certificate, Manta Company Limited, dated September 3, 1997.............................................. 291 32. GHandwritten organizational chart showing Veline Foundation ownership of corporations and property, undated................ 292 DOCUMENTS RELATED TO LOWY ACCOUNTS: 33. GLGT Memorandum for the Record, dated November 26, 1996, memorializing a November 21, 1996, Meeting in Sydney regarding Westfields, Adelphi, Crofton between LGT and Frank Lowy, David Lowy, David Gronski, and Joshua Gelbard........................ 293 34. GLGT Memorandum for the Record, dated November 27, 1996, regarding New Establishment Westfields/Lowy.................... 297 35. GLGT Note for File, dated December 17, 1996, regarding telephone conversation with Frank Lowy and Joshua Gelbard regarding Westfields, Adelphi, Crofton......................... 299 36. GLGT Memorandum for the Record, dated January 23, 1997, regarding January 20, 1997 meeting in Los Angeles between LGT and Frank Lowy, David Lowy, and Peter Lowy regarding Westfield/ Lowy Family.................................................... 303 37. GLGT Memorandum for the Record, dated March 4, 1997, regarding March 3, 1997, phone call with Peter Widmer regarding March 12, 1997 meeting in London with F.L. and J. Gelbert, the definitive structure as well as the asset transfer is to be discussed...................................................... 307 38. GCorrespondence from J.H. Gelbard to LGT, dated March 12, 1997, regarding formation of a Foundation by the name Luperla Foundation..................................................... 309 39. GLGT Memorandum for the file, dated March 13, 1997, regarding March 12, 1997, meeting in London between LGT and Frank Lowy and Josua Gelbard................................... 311 40. GLGT Memorandum for the Record, dated March 16, 1997, regarding March 12, 1997, meeting in London with F.L. regarding Luperla Foundation............................................. 315 41. GRegulations, Luperla Foundation, Vaduz, dated April 30, 1997........................................................... 319 42. GLGT Memorandum for the Record, dated May 2, 1997, regarding April 30, 1997, meeting in the Hotel Savoy, Zurich between LGT and David Lowy and J.H. Gelbard................................ 322 43. GLGT Memorandum for the File, dated May 14, 1997, regarding Luperla Foundation, Vaduz...................................... 326 44. GLGT Memorandum for the File, dated October 23, 1997, regarding Luperla Foundation/Sewell Service Ltd. B.V.I......... 328 45. GLGT Memorandum for the File, dated January 29, 1998, regarding January 28, 1998, meeting in Bendern with Peter Widmer regarding Luperla Foundation, Vaduz (``Luperla'')....... 330 46. GLGT Memorandum for the File, dated June 26, 2001, regarding Luperla Foundation............................................. 332 47. GLGT Memorandum for the File, dated July 16, 2001, regarding Luperla Foundation, Vaduz...................................... 334 48. GLGT Memorandum for the File, dated December 17, 2001, regarding Luperla Foundation, Vaduz............................ 342 49. GLGT Memorandum for the File, dated December 18, 2001, regarding Luperla Foundation, Vaduz............................ 348 50. GLGT Memorandum for the File, dated December 20, 2001, regarding Luperla Foundation, Vaduz............................ 352 51. GDocuments regarding Beverly Park Corporation............... 358 52. GIRS Information Document Requests (IDR) regarding Beverly Park Corporation............................................... 362 53. GState of Delaware, Division of Corporations, Entity Details for Beverly Park Corp.......................................... 365 DOCUMENTS RELATING TO GREENFIELD ACCOUNTS: 54. GLGT Memorandum for the Record, dated March 27, 2001, memorializing a March 23, 2001 meeting regarding Maverick Foundation between LGT and Harvey and Steven David Greenfield.. 367 55. GLGT Summary of Maverick Foundation as of December 31, 2001, dated January 1, 2002.......................................... 372 56. GLGT report on Maverick Foundation, undated................. 373 57. GLGT report on TSF Company Limited, undated................. 375 58. GLGT report on Chiu Fu (Far East) Limited, undated.......... 377 59. GLGT Background Information/Profile for Maverick Foundation, dated October 12, 2001......................................... 379 60. GLGT Background Information/Profile for TSF Company Ltd., BVI, dated December 20, 2001................................... 380 DOCUMENTS RELATING TO GONZALEZ ACCOUNTS: 61. GFoundation Tragique flow chart, undated.................... 381 62. GLGT report for Tragunda Foundation, dated December 3, 2001. 382 63. GLGT Background Information/Profile for Auto and Motoren [Motors] Corp., dated October 3, 2001.......................... 384 64. GLGT report on Asmeral Investment Anstalt, undated.......... 386 65. GLGT Memorandum for the File, dated September 11, 2001, regarding Foundation Tragique.................................. 388 66. GStiftung flow chart, undated............................... 392 67. GLGT Background Information/Profile for Foundation Tragique, Vaduz, dated December 18, 2001................................. 393 68. GLGT Background Information/Profile for FIWA AG, Vaduz, dated December 10, 2001........................................ 395 DOCUMENTS RELATING TO CHONG ACCOUNTS: 69. GLGT Background Information/Profile on Yue Shing Tong Foundation..................................................... 397 70. GDocuments related to Apex Assets Limited................... 398 71. GCommunication between Chong and Chalet [Silvan Colanti at LGT], February-March 2008, regarding disclosure of LGT accounts 407 DOCUMENTS RELATING TO MISKIN ACCOUNTS: 72. GDeclarations of Michael Miskin, dated 2003................. 413 73. GDeclarations and court pleadings of Stephanie Miskin, dated 2003........................................................... 417 74. GLGT Memorandum for the Record, dated June 30, 1998, regarding New Establishment Michel Misten...................... 426 75. GMichael Miskin Letter of Wishes with respect to the assets of Micronesia Foundation, dated July 28, 2000.................. 430 76. GLGT report on Micronesia Foundation........................ 432 77. GLGT/Michael Miskin receipt for wire transfer of GBP 3,650,314.00, dated October 21, 1998........................... 436 78. GFax from Thomas Lungkofler/LGT to Michael Miskin, dated February 27, 2002, regarding tax situation in the US-area...... 437 ADDITIONAL DOCUMENTS RELATING TO LGT: 79. GDocuments related to Sera Financial Corporation............ 438 80. GDocuments related to Jaffra Development Inc................ 448 81. GDocuments related to Sewell................................ 454 82. GExcerpt from presentation related to LGT and the Qualified Intermediary (QI) Program...................................... 460 83. GDocuments related to LRAB Foundation....................... 475 DOCUMENTS RELATED TO UBS: 84. GWealth Management And Business Banking, Client Advisor's Guidelines For Implementation And Management Of Discretionary Asset Management Relationship With U.S. Clients (2002)......... 477 85. GCross-Border Banking Activities into the United States (version November 2004)........................................ 480 86. GRestrictions on Cross-Border Banking and Financial Services Activities, Country Paper USA (Effective Date June 1st, 2007), prepared by UBS................................................ 483 87. GExcerpt of KeyClients in NAM, Business Case 2003-2005, prepared by UBS................................................ 491 88. GCorrespondence of UBS to Clients, dated November 4, 2002, We are writing to reassure you that your fear is unjustified and wish to outline only some of the reason why the protection of client data can not possibly be compromised . . . UBS's entire compliance with its QI obligations does not create the risk that his/her identity be shared with U.S. authorities..... 502 89. GMartin Liechti (Head of UBS Wealth Management Americas) email, January 2007, regarding net new money goal and Year of the Pig........................................................ 503 90. GReferral Campaign BU Americas, June 2003 (Swiss watch award)......................................................... 504 91. GBS North America Report, Overview Figures NAM, prepared by UBS............................................................ 506 92. GCase Studies Cross-Border Workshop NAM, prepared by UBS.... 518 93. GUBS Memorandum, dated November 15, 2007, re: Changes in business model for U.S. private clients........................ 520 94. GTalking Points For Informing U.S. Private Clients With Securities Holdings About The Realignment Of Our Business Model Plus Q&A....................................................... 522 DOCUMENTS RELATED TO OLENICOFF: 95. GStatement of Facts, United States of America vs. Bradley Birkenfeld, dated 2008......................................... 526 96. GPlea Agreement For Defendant Igor M. Olenicoff, dated 2007. 533 97. GEmails between Birkenfeld/Olenicoff, dated July 2001, re: Meeting in California.......................................... 550 98. GCorrespondence of Igor Olenicoff, dated October 2001, re: Guardian Guarantee Co. Ltd..................................... 551 99. GEmail between Staggl/Olenicoff, re: Structure.............. 553 100. GUBS documents related to opening of account for Guardian Guarantee Company, Limited..................................... 554 101. GEmails related to Liechtenstein trust and a Danish corporation.................................................... 557 102. GFax from Olenicoff to Birkenfeld, dated December 2001, re: Structure...................................................... 561 103. GEmails dated April 2002, re: transferring U.S. securities to a Liechtenstein account..................................... 562 OTHER DOCUMENTS: 104. GTax Haven Bank Secrecy Tricks, chart prepared by the U. S. Senate Permanent Subcommittee on Investigations................ 564 105. GLiechtenstein Secrecy Laws, chart prepared by the U. S. Senate Permanent Subcommittee on Investigations................ 565 106. GLetter from Baker & McKenzie LLP (Marsh Family attorney) to the Permanent Subcommittee on Investigations, dated July 15, 2008, with clarification....................................... 566 107. GStatement for the Record of the Australian Taxation Office. 568 ADDITIONAL DOCUMENTS RELATED TO LOWY ACCOUNTS: 108. GLGT report on Luperla Foundation........................... 587 109. GLGT Background Information/Profile for Luperla Foundation, dated December 7, 2002......................................... 591 110. GLGT Statement of Account for Luperla Foundation, dated December 29, 2001.............................................. 599 111. GLGT Memorandum for the Record, dated April 10, 2002, regarding retroactive dissolution of Luperla Foundation........ 600 112. GLetter to Peter Lowy from Leon C. Janks, dated December 13, 2001, enclosing documents related to Beverly Park Corporation.. 601 113. a. GContract For The Purchase And Sale of Real Estate, sale by West Park Avenue Corporation to Beverly Park Corporation, March 1997..................................................... 607 b. GBeverly Park Corporation Guest Log, Beverly Hills House and New York Condo, July 1999-May 2000......................... 611 ADDITIONAL MATERIALS: 114. GHidden Money Trail, chart prepared by the U.S. Senate Permanent Subcommittee on Investigations....................... 629 115. a. GLetter from O'Melveny & Myers LLP on behalf of their client, UBS AG, to the Permanent Subcommittee on Investigations, dated August 5, 2008, regarding Subcommittee Staff Report on Tax Haven Banks and U.S. Tax Compliance........ 630 115. b. GMemorandum of the Permanent Subcommittee on Investigations staff regarding August 5, 2008, letter from O'Melveny & Myers LLP.......................................... 635 116. GTax Haven Liechtenstein, Transcript of the Frontal 21 Documentary, March 25, 2008 on ZDF Network in Germany.......... 640 117. GStatement for the record submitted on behalf of the Government of the Principality of Liechtenstein................ 653 118. GOrganizational changes NAM, powerpoint presentation by Michel Guignard, of UBS private banking in Switzerland, May 10, 2005........................................................... 655 119. GTranscript of Liechtenstein court proceeding involving Mario Staggl, April 28, 2005................................... 665 120. GAffidavit of William Wu clarifying his testimony at the Permanent Subcommittee on Investigations' July 17th hearing.... 681 121. GCorrespondence between Caplin & Drysdale on behalf of Mr. Steven Greenfield and the Permanent Subcommittee on Investigations regarding the testimony of Mr. Greenfield at the Subcommittee's hearing......................................... 683 122. GCorrespondence between Skadden, Arps, Slate, Meagher & Flom LLP on behalf of Peter S. Lowy and the Permanent Subcommittee on Investigations regarding the testimony of Mr. Lowy at the Subcommittee's hearing......................................... 699 123. GDocuments relating to Footnotes found in the Staff Report, Tax Haven Banks and U.S. Tax Compliance, prepared by the Minority and Majority Staff of the Permanent Subcommittee on Investigations in conjunction with the Subcommittee hearings held July 17 and 25, 2008: [Note: Footnotes not listed are explanative, reference Subcommittee interviews for which records are not available to the public, or reference a widely available public document.] [*] Retained in the files of the Subcommittee. Footnote No. 16, See Hearing Exhibit No. 89 (above).............. 503 Footnote No. 100, See Hearing Exhibit No. 116 (above)............ 640 Footnote No. 109, See Attachment................................. 710 Footnote No. 110, See Hearing Exhibit No. 105 (above) and Attachment.................................................. 565, 722 Footnote No. 112, See Attachments (2)......................... 725, 729 Footnote No. 118, See Attachment................................. 743 Footnote No. 119, See Attachments (3).................... 754, 764, 772 Footnote No. 120 and 121, See Hearing Exhibit No. 18 (above)..... 244 Footnote No. 122, See Hearing Exhibit No. 17 (above) and Attachments (2)........................................ 240, 779, 802 Footnote No. 123 and 1 824, 832, 841, 845, 849, 854, 862, 871, 875, 879 Footnote No. 129, See Hearing Exhibit No. 11 (above)............. 229 Footnote No. 130 and 1 824, 832, 841, 845, 849, 854, 862, 871, 875, 879 Footnote No. 135, See Attachment................................. 884 Footnote No. 136, See Footnote No. 135 (above) and Attachment. 884, 886 Footnote No. 137, See Hearing Exhibit No. 7 (above).............. 224 Footnote No. 138, See Hearing Exhibit No. 6 (above).............. 223 Footnote No. 139, See Attachment................................. 888 Footnote No. 140, See Attachment................................. 890 Footnote No. 141, See Hearing Exhibit No. 12 (above)............. 231 Footnote No. 142, See Hearing Exhibit No. 11 (above)............. 229 Footnote No. 143, See Hearing Exhibit No. 14 (above) and Attachments (3)................................... 237, 892, 893, 894 Footnote No. 144, See Hearing Exhibit No. 13 (above)............. 233 Footnote No. 145, See Hearing Exhibit No. 10 and Footnote No. 136 (above)................................................ 228, 884, 886 Footnote No. 146, See Hearing Exhibit No. 12 (above)............. 231 Footnote No. 148, See Hearing Exhibit No. 18 (above) and Attachments (2)........................................ 244, 895, 898 Footnote No. 149, See Hearing Exhibit No. 17 (above) and Attachments (6).................... 240, 901, 902, 903, 904, 905, 906 Footnote No. 150, See Hearing Exhibit No. 6 (above).............. 223 Footnote No. 151, See Hearing Exhibit No. 8 (above).............. 226 Footnote No. 152, See Hearing Exhibit No. 9 (above).............. 227 Footnote No. 153, See Hearing Exhibit No. 12 (above)............. 231 Footnote No. 154, See 824, 832, 841, 845, 849, 854, 862, 871, 875, 879 Footnote No. 155, See Hearing Exhibit No. 13 (above) and Attachment.................................................. 233, 907 Footnote No. 156, See Hearing Exhibit No. 18 (above)............. 244 Footnote No. 158, See Attachments (3).................... 909, 917, 922 Footnote No. 159, See Hearing Exhibit No. 19 and 20 (above)... 255, 257 Footnote No. 160, See Hearing Exhibit No. 19 (above)............. 255 Footnote No. 161, See Attachment................................. 925 Footnote No. 162, See Hearing Exhibit No. 21 (above)............. 259 Footnote No. 163, See Hearing Exhibit No. 19 (above)............. 255 Footnote No. 164, See Hearing Exhibit No. 24 (above)............. 270 Footnote No. 165, See Attachment................................. 926 Footnote No. 166, See Attachments (6)..... 932, 934, 936, 938, 941, 955 Footnote No. 167, See Attachments (2)......................... 971, 978 Footnote No. 168-170, See Hearing Exhibit No. 23 (above)......... 266 Footnote No. 171, See Hearing Exhibit No. 22 (above)............. 265 Footnote No. 172, See Attachment................................. 985 Footnote No. 173, See Footnote No. 167 (above)................ 971, 978 Footnote No. 174-177, See Footnote No. 166 932, 934, 936, 938, 941, 955 Footnote No. 178, See Hearing Exhibit Nos. 27 and 28 (above).. 279, 284 Footnote No. 179, See Hearing Exhibit No. 29 (above) and Attachment.................................................. 288, 996 Footnote No. 180, See Hearing Exhibit No. 30 (above)............. 290 Footnote No. 181, See Hearing Exhibit No. 31 (above)............. 291 Footnote No. 183, See Hearing Exhibit No. 29 (above)............. 288 Footnote No. 184, See Hearing Exhibit No. 32 (above)............. 292 Footnote No. 185, See Attachments (3)................... 997, 998, 1002 Footnote No. 187, See Hearing Exhibit Nos. 33, 34, 39, 42 and 46 (above)...................................... 293, 297, 311, 322, 332 Footnote No. 188, See Hearing Exhibit No. 45 (above)............. 330 Footnote No. 189, See Hearing Exhibit No. 33 (above)............. 293 Footnote No. 191, See Hearing Exhibit No. 36 (above)............. 303 Footnote No. 192, See Hearing Exhibit Nos. 35 and 36 (above).. 299, 303 Footnote No. 193, See Hearing Exhibit No. 39 (above)............. 311 Footnote No. 194, See Hearing Exhibit Nos. 40 and 45 (above).. 315, 330 Footnote No. 195, See Hearing Exhibit Nos. 36, 39 and 42 303, 311, 322 Footnote No. 196, See Hearing Exhibit No. 35 (above)............. 299 Footnote No. 197, See Hearing Exhibit No. 36 (above)............. 303 Footnote No. 198, See Hearing Exhibit No. 33 (above)............. 293 Footnote No. 199, See Hearing Exhibit No. 38 (above)............. 309 Footnote No. 200, See Hearing Exhibit No. 41 (above)............. 319 Footnote No. 201, See Hearing Exhibit No. 40 (above) and Attachment................................................. 315, 1005 Footnote No. 202, See Hearing Exhibit No. 36 (above)............. 303 Footnote No. 204, See Hearing Exhibit Nos. 33, 35, 39, 45 and 46 (above)...................................... 293, 299, 311, 330, 332 Footnote No. 205, See Hearing Exhibit Nos. 38 and 40 (above).. 309, 315 Footnote No. 206, See Hearing Exhibit Nos. 42 and 44 (above).. 322, 328 Footnote No. 207, See Hearing Exhibit No. 38 (above)............. 309 Footnote No. 208, See Hearing Exhibit No. 41 (above)............. 319 Footnote No. 209 and 210, See Hearing Exhibit No. 43 (above)..... 326 Footnote No. 211, See Hearing Exhibit Nos. 36, 46 and 47 303, 332, 334 Footnote No. 212, See Hearing Exhibit No. 41 (above)............. 319 Footnote No. 213, See Hearing Exhibit No. 51 (above)............. 358 Footnote No. 214, See Hearing Exhibit Nos. 51, 113a and 113b (above)................................................ 358, 607, 611 Footnote No. 215 and 216, See Hearing Exhibit No. 46 (above)..... 332 Footnote No. 217 and 218, See Hearing Exhibit No. 47 (above)..... 334 Footnote No. 219 and 220, See Hearing Exhibit No. 48 (above)..... 342 Footnote No. 221, See Hearing Exhibit Nos. 48-50 (above). 342, 348, 352 Footnote No. 222 and 223, See Hearing Exhibit No. 48 (above)..... 342 Footnote No. 224, See Hearing Exhibit No. 50 (above)............. 352 Footnote No. 225, See Attachment................................. 1009 Footnote No. 226, See Hearing Exhibit No. 52 (above) and Attachment................................................. 362, 1015 Footnote No. 227, See Hearing Exhibit No. 52 (above) and Attachment................................................. 362, 1019 Footnote No. 229, See Hearing Exhibit Nos. 54 and 55 (above).. 367, 372 Footnote No. 230, See Hearing Exhibit Nos. 56-58 (above). 373, 375, 377 Footnote No. 231, See Hearing Exhibit No. 56 (above)............. 373 Footnote No. 232, See Hearing Exhibit No. 59 (above)............. 379 Footnote No. 233 and 234, See Hearing Exhibit No. 56 (above)..... 373 Footnote No. 235, See Attachments (2)....................... 1023, 1025 Footnote No. 236-241, See Hearing Exhibit No. 54 (above)......... 367 Footnote No. 243, See Attachment................................. 1028 Footnote No. 248, See Hearing Exhibit No. 61 (above)............. 381 Footnote No. 249, See Hearing Exhibit Nos. 61 and 68 (above).. 381, 395 Footnote No. 261, See Hearing Exhibit No. 67 (above)............. 393 Footnote No. 264 and 265, See Hearing Exhibit No. 65 (above)..... 388 Footnote No. 266, See Hearing Exhibit Nos. 61 and 65 (above).. 381, 388 Footnote No. 267-269, See Hearing Exhibit No. 65 (above)......... 388 Footnote No. 270, See Hearing Exhibit No. 64 (above)............. 386 Footnote No. 271, See Hearing Exhibit No. 63 (above)............. 384 Footnote No. 272, See Attachment................................. 1029 Footnote No. 273, See Footnote No. 243 (above)................... 1028 Footnote No. 275, See Hearing Exhibit No. 69 (above) and Attachments (2)...................................... 397, 1030, 1032 Footnote No. 276, See Hearing Exhibit No. 69 (above) and Attachment................................................. 397, 1034 Footnote No. 277, See Footnote No. 276 (above) and Attachmen 1034, 1042 Footnote No. 278, See Attachments (4)........... 1048, 1049, 1050, 1051 Footnote No. 279, See Attachment................................. 1052 Footnote No. 280, See Attachment................................. 1053 Footnote No. 283, See Hearing Exhibit No. 70 (above)............. 398 Footnote No. 284, See Footnote No. 280 (above)................... 1053 Footnote No. 285, See Attachments (5)...... 1059, 1060, 1061,1062, 1063 Footnote No. 286-293, See Hearing Exhibit No. 70 (above)......... 398 Footnote No. 294-297, See Hearing Exhibit No. 71 (above)......... 407 Footnote No. 299, See Hearing Exhibit No. 74 (above)............. 426 Footnote No. 300, See Hearing Exhibit No. 72 (above)............. 413 Footnote No. 301 and 302, See Hearing Exhibit No. 73 (above)..... 417 Footnote No. 303 and 304, See Hearing Exhibit No. 72 (above)..... 413 Footnote No. 305, SEALED EXHIBIT and Hearing Exhibit No. 73 (above)........................................................ 417 Footnote No. 306, See Hearing Exhibit No. 74 (above)............. 426 Footnote No. 307, See Hearing Exhibit Nos. 75 and 76 (above).. 430, 432 Footnote No. 308, See Hearing Exhibit No. 76 (above)............. 432 Footnote No. 309, See Hearing Exhibit No. 74 (above)............. 426 Footnote No. 310, See Hearing Exhibit No. 76 (above)............. 432 Footnote No. 312, See Attachment................................. 1064 Footnote No. 313, See Hearing Exhibit No. 72 (above)............. 413 Footnote No. 315, See Attachment................................. 1066 Footnote No. 317, See Attachment................................. 1069 Footnote No. 319, See Hearing Exhibit No. 74 (above)............. 426 Footnote No. 321, See Attachment................................. 1072 Footnote No. 323, See Attachments (4)........... 1074, 1075, 1076, 1079 Footnote No. 324, See Hearing Exhibit No. 77 (above)............. 436 Footnote No. 325, See Hearing Exhibit No. 75 (above)............. 430 Footnote No. 326, See Attachment................................. 1085 Footnote No. 327, See Attachment................................. 1086 Footnote No. 329, See Hearing Exhibit No. 78 (above)............. 437 Footnote No. 330, See Hearing Exhibit No. 73 (above)............. 417 Footnote No. 331, See Footnote No. 317 (above)................... 1069 Footnote No. 333, See Footnote No. 321 (above)................... 1072 Footnote No. 334, See Hearing Exhibit No. 73 and Footnote No. 317 (above).................................................... 417, 1069 Footnote No. 335, See Hearing Exhibit No. 82 (above) and See Attachments (2)...................................... 460, 1087, 1091 Footnote No. 336-337, See Attachment............................. 1093 Footnote No. 339-343, See Hearing Exhibit No. 79 (above)......... 438 Footnote No. 344, See Hearing Exhibit No. 80 (above)............. 448 Footnote No. 345, See Hearing Exhibit No. 81 (above)............. 454 Footnote No. 346, See Hearing Exhibit Nos. 44 and 108 (above). 328, 587 Footnote No. 347 and 348, See Hearing Exhibit No. 80 (above)..... 448 Footnote No. 349, See Hearing Exhibit No. 83 (above)............. 475 Footnote No. 365, See Attachment................................. 1145 Footnote No. 367, SEALED EXHIBIT................................. * Footnote No. 370, See Hearing Exhibit No. 87 (above)............. 491 Footnote No. 372, See Hearing Exhibit No. 89 (above)............. 503 Footnote No. 373, See Hearing Exhibit No. 91 (above)............. 506 Footnote No. 375-380, See Hearing Exhibit No. 89 (above)......... 503 Footnote No. 381, See Attachment................................. 1148 Footnote No. 382, See Footnote No. 367 (above) SEALED EXHIBIT.... * Footnote No. 384, See Hearing Exhibit No. 88 (above)............. 502 Footnote No. 390, See Hearing Exhibit No. 85 (above)............. 480 Footnote No. 392, See Hearing Exhibit No. 84 (above) and Attachment................................................. 477, 1170 Footnote No. 393, See Hearing Exhibit No. 85 (above)............. 480 Footnote No. 398, See Footnote No. 367 (above) SEALED EXHIBIT.... * Footnote No. 400, See Hearing Exhibit No. 85 (above)............. 480 Footnote No. 402, See Attachment................................. 1172 Footnote No. 404, See Footnote No. 367 (above) SEALED EXHIBIT.... * Footnote No. 405, See Hearing Exhibit No. 87 (above)............. 491 Footnote No. 409, See Footnote No. 367 (above) SEALED EXHIBIT.... * Footnote No. 410, See Hearing Exhibit No. 93 (above)............. 520 Footnote No. 413, See Footnote No. 367 (above) SEALED EXHIBIT.... * Footnote No. 415, See Hearing Exhibit No. 91 (above) and Attachment................................................. 506, 1173 Footnote No. 416, See Hearing Exhibit No. 90 (above)............. 504 Footnote No. 417, See Hearing Exhibit No. 89 (above)............. 503 Footnote No. 418, See Hearing Exhibit No. 87 (above)............. 491 Footnote No. 420-432, See Footnote No. 367 (above) SEALED EXHIBIT * Footnote No. 433, See Attachment................................. 1174 Footnote No. 434, See Hearing Exhibit No. 85 (above)............. 480 Footnote No. 435, See Footnote No. 367 (above) SEALED EXHIBIT and Footnote No. 433 (above)....................................... 1174 Footnote No. 436, See Footnote No. 367 (above) SEALED EXHIBIT.... * Footnote No. 437, See Hearing Exhibit No. 92 (above)............. 518 Footnote No. 438 and 439, See Footnote No. 367 (above) SEALED EXHIBIT........................................................ * Footnote No. 443, See Hearing Exhibit Nos. 84 and 85 (above).. 477, 480 Footnote No. 444-450, See Footnote No. 367 (above) SEALED EXHIBIT * Footnote No. 451, See Hearing Exhibit No. 86 (above)............. 483 Footnote No. 455, See Hearing Exhibit No. 93 (above)............. 520 Footnote No. 458, See Attachment................................. 1176 Footnote No. 459, See Hearing Exhibit No. 94 (above)............. 522 Footnote No. 464, See Hearing Exhibit No. 96 (above)............. 533 Footnote No. 465, See Hearing Exhibit No. 97 (above)............. 550 Footnote No. 468, See Footnote No. 367 (above) SEALED EXHIBIT.... * Footnote No. 469, See Hearing Exhibit No. 97 (above)............. 550 Footnote No. 471, See Attachments (2)....................... 1178, 1179 Footnote No. 472, See Hearing Exhibit No. 98 (above)............. 551 Footnote No. 473-475, See Hearing Exhibit No. 100 (above)........ 554 Footnote No. 476, See Hearing Exhibit No. 97 (above)............. 550 Footnote No. 477, See Hearing Exhibit No. 99 (above)............. 553 Footnote No. 478, See Hearing Exhibit No. 96 (above) and Attachment................................................. 533, 1180 Footnote No. 480, See Attachment................................. 1181 Footnote No. 481, See Attachment................................. 1182 Footnote No. 483, See Attachments (2)....................... 1183, 1184 Footnote No. 484, See Hearing Exhibit No. 102 (above)............ 561 Footnote No. 485, See Attachment................................. 1185 Footnote No. 486, See Attachment................................. 1186 Footnote No. 487, See Attachment................................. 1187 Footnote No. 488, See Attachment................................. 1188 Footnote No. 489, See Hearing Exhibit No. 103 (above)............ 562 Footnote No. 490, See Hearing Exhibit No. 96 (above)............. 533 Footnote No. 491, See Attachments (2)....................... 1189, 1190 Footnote No. 492, See Attachments (2)....................... 1191, 1192 Footnote No. 493, See Attachments (2)....................... 1196, 1197 Footnote No. 495, See Footnote No. 367 (above) SEALED EXHIBIT.... * 124. GCorrespondence between the Permanent Subcommittee on Investigations and Frank P. Lowy............................... 1198 125. GCorrespondence between the Permanent Subcommittee on Investigations and Joshua H. Gelbard........................... 1201 [*] Retained in the files of the Subcommittee. TAX HAVEN BANKS AND U.S. TAX COMPLIANCE ---------- THURSDAY, JULY 17, 2008 U.S. Senate, Permanent Subcommittee on Investigations, of the Committee on Homeland Security and Governmental Affairs, Washington, DC. The Subcommittee met, pursuant to notice, at 9:34 a.m., in Room SD-106, Dirksen Senate Office Building, Hon. Carl Levin, Chairman of the Subcommittee, presiding. Present: Senators Levin and Coleman. Also Present: Senator Kerry. Staff Present: Elise J. Bean, Staff Director/Chief Counsel; Mary D. Robertson, Chief Clerk; Robert L. Roach, Counsel and Chief Investigator; Ross Kirschner, Counsel; Laura Stuber, Counsel; Zack Schram, Counsel; Gina Reinhardt, Congressional Fellow; Timothy Everett, Intern; Jeffrey Rezmovic, Law Clerk; Lauren Sarkesian, Intern; Spencer Walters, Law Clerk; Mark L. Greenblatt, Staff Director and Chief Counsel to the Minority; Michael P. Flowers, Counsel to the Minority; Clifford C. Stoddard, Jr., Counsel to the Minority; Timothy R. Terry, Counsel to the Minority; Adam Pullano, Staff Assistant to the Minority; Kelly Brannigan; Kathy Kerrigan (Senator Kerry), and Thomas Caballero, Senate Legal Counsel's Office. OPENING STATEMENT OF SENATOR LEVIN Senator Levin. Good morning, everybody. About 50 tax havens operate in the world today. Their twin hallmarks are secrecy and tax avoidance. Some tax havens are little known places like Andorra and Vanuatu that few Americans have heard of. Others, like Switzerland and Liechtenstein, are notorious for operating behind an iron ring of secrecy. Billions and billions of dollars worth of U.S. assets find their way into these secrecy tax havens, aided by banks, trust companies, accountants, lawyers, and others. Each year, the U.S. Treasury loses up to $100 billion in tax revenues from offshore tax abuses. Tax havens are engaged in economic warfare against the United States and against honest, hard-working American taxpayers. Today we will look at two banks that relied on secrecy and deception to hide not just the tax avoidance schemes of their clients, but the actions that they themselves took to facilitate U.S. tax evasion. The first bank is LGT, a private bank owned by the royal family of Liechtenstein. Liechtenstein is a tiny alpine nation whose 35,000 citizens would fill one- third of a good-sized football stadium. It has no airport, but supports 15 banks that together boast of holding more than $200 billion in assets. Liechtenstein also boasts of secrecy laws that are more stringent than even those that have made Switzerland synonymous with hidden bank accounts. The second bank is UBS, a Swiss bank. It is one of the world's largest financial institutions, the world's largest manager of private wealth, and a public company of international renown. Yet, as we will hear today, UBS has an estimated 19,000 so-called undeclared accounts for U.S. citizens with an estimated $18 billion in assets that have been kept secret from the IRS. Both LGT and UBS operate behind a wall of secrecy that this hearing and our report will show needs to come down. The evidence we have been able to obtain breaks through some of that wall of secrecy to show how these two banks have employed banking practices that facilitate, and have resulted in, tax evasion by U.S. clients. We initiated this investigation into tax haven banks in February 2008, as a global tax scandal erupted after a former employee of LGT provided tax authorities around the world with data on about 1,400 people with accounts at LGT Bank in Liechtenstein. On February 14, 2008, German tax authorities, having obtained the names of 600 to 700 German taxpayers with LGT accounts, executed multiple search warrants and arrested a prominent businessman for allegedly using LGT accounts to evade $1.5 million in taxes. Soon after, our IRS announced that it had initiated enforcement action against about 100 U.S. taxpayers in connection with accounts in Liechtenstein. The United Kingdom, Italy, France, Spain, and Australia made similar announcements on the same day. Altogether since February, nearly a dozen countries have announced plans to investigate taxpayers with Liechtenstein accounts, demonstrating not only the worldwide scope of the tax scandal, but also a newfound international determination to fight against tax evasion facilitated by tax haven banks. The former LGT employee who exposed LGT's dirty laundry had to go into hiding to avoid arrest by Liechtenstein which has listed him as its No. 1 target for arrest. A $10 million reward has been placed on his head by unknown parties on the Internet. This Subcommittee obtained about 12,000 pages of LGT documents related to U.S. clients from that former LGT employee. We also interviewed him and took his statement by videoconference, a tape of which, with precautions taken to obscure identifying details, will be presented during this hearing. His revelations are explosive. The documents and information that he provided depict a bank that is a willing partner, and an aider and abettor, to clients trying to evade taxes, dodge creditors, or defy court orders. Internal LGT documents and other information show secrecy was a deeply embedded way of life at the LGT bank. LGT used code names for its clients and directed its bankers to use pay phones when contacting them. A LGT document instructed bankers trying to contact a client as follows: ``CAUTION: Calls may be made only from public phone booths, preferably not from a [Liechtenstein] phone booth !!!'' LGT set up secret, shell transfer corporations which clients could use to route money into and out of their LGT accounts, in order to, in the words of LGT, ``cover the tracks.'' LGT created elaborate, deceptive offshore structures, using foundations, trusts, and corporations, to hide a client's ownership of assets from tax authorities in other countries. Our report presents seven case studies of U.S. clients using LGT services. Due to time constraints, we will discuss only four today. In preparation for this hearing, the Subcommittee served subpoenas on three of the four LGT clients seeking their personal appearance: Shannon Marsh, William Wu, and Steven Greenfield. Two of those individuals--Mr. Marsh and Mr. Wu--are here today. The third--Mr. Greenfield--has refused to appear after a subpoena was served on him, and we will be seeking enforcement of our subpoena. The fourth--Peter Lowy-- left the country despite our request that he appear today. The Subcommittee notified his legal counsel that he would be subpoenaed to appear, if necessary. He has now agreed to appear before the Subcommittee at a continuation of this hearing a week from tomorrow. Later in the hearing, when these individuals are called to give testimony, I will describe in more detail what we have learned about their Liechtenstein accounts, but for now I will mention each case history only briefly. Shannon Marsh. Shannon Marsh is a son of the late James Albright Marsh, a U.S. citizen from Florida in the construction business who formed four Liechtenstein foundations in the 1980s and transferred substantial funds to them. Two of these foundations were formed for him by LGT Bank. By 2007, the assets in the four foundations had a combined value of $49 million. LGT instructed the Marshes to use the code ``Friends of J.N.'' when they wished to ``get in touch.'' The Marsh accounts were never disclosed to the IRS by LGT Bank. William Wu. Mr. Wu is a U.S. citizen who has lived for many years with his family in New York. LGT helped Mr. Wu hide ownership of his house in New York by helping him arrange a fake sale to an offshore company that he secretly controlled. LGT also helped him withdraw substantial funds from his Liechtenstein account, ranging from $100,000 to $1.5 million at a time, in ways that made the funds difficult to trace. Steven Greenfield. Harvey and Steven Greenfield, father and son, are New York businessmen who specialize in importing toys. In March 2001, in Liechtenstein, LGT Bank held a 5-hour meeting with the Greenfields, attended by three LGT private bankers and Prince Philipp, Chairman of the LGT Board of Directors and brother to the sovereign of Liechtenstein. The meeting was primarily a sales pitch to convince the Greenfields to transfer to LGT Bank about $30 million from a Hong Kong bank after ``leaving behind as few traces as possible.'' Again, Mr. Greenfield has refused to appear despite service of a subpoena, so we will be pursuing that matter. Peter Lowy. Peter Lowy lives in California. His father, with his sons' help, set up a LGT foundation in 1998, after telling the bank that he did not want Australian tax authorities to know about the assets. LGT took measures to hide the Lowys' ownership of the assets, including by keeping their name off the formation documents for the new foundation, routing incoming assets through an offshore transfer corporation to prevent a direct link to the new foundation, and using a Delaware corporation headed by Peter Lowy to name the beneficiaries. In 2001, the Lowys dissolved the foundation and moved to Switzerland assets totaling about $68 million. Mr. Lowy will appear next week to answer questions about these matters. The importance of these case studies is that they provide an inside look at what goes on behind the wall of secrecy that surrounds this Liechtenstein bank. And what does go on behind that wall? Banking practices that facilitate tax evasion-- conduct that angers every honest American who pays taxes. We have also managed to pierce some of the layers of Swiss secrecy that for too long have made Switzerland the place to bank for people with something to hide. In late 2007, the Subcommittee took the deposition of Bradley Birkenfeld, who worked for more than 12 years as a private banker in Switzerland, including 4 years at the Geneva office of UBS. In 2008, Mr. Birkenfeld was charged and pled guilty 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 secret accounts in Switzerland and Liechtenstein. In connection with this prosecution, the United States also detained, as a material witness, a senior UBS private banking official from Switzerland, Martin Liechti, then traveling on business in Florida. These enforcement actions appear to represent the first time that the United States has criminally prosecuted a Swiss banker for helping a U.S. taxpayer evade U.S. taxes. And Mr. Liechti is here today. I want to express my appreciation to the Justice Department and to the U.S. Attorney for the Southern District of Florida for making him available. Our report describes how Mr. Birkenfeld signed up Mr. Olenicoff as a client, in part by traveling to California from Switzerland to meet him, and opened UBS accounts for him in Switzerland in the name of offshore corporations that Mr. Olenicoff controlled to hide his ownership of the assets. For a time, Mr. Olenicoff was Mr. Birkenfeld's largest client. The details of their tax evasion scheme are sordid enough. But what Mr. Birkenfeld told the Subcommittee was that what he did as a private banker at UBS was ordinary practice. He told us about thousands of Swiss accounts at UBS for U.S. clients holding billions of dollars in assets, all undeclared. He also described the pressure placed on the Swiss private bankers to bring new money into the bank from the United States, called ``net new money.'' His deposition with us and other documents show that each year, UBS assigns each private banker an annual net new money target. A January 2007 e-mail sent out by Mr. Liechti to the Swiss bankers in the Americas division wished them a happy new year, recounted how, in 2002, they had brought in 4 million Swiss francs per banker, how that number had quadrupled in 2 years to 17 million Swiss francs per banker in 2006, and then urged them to quadruple their efforts again in 2007 to bring in 60 million Swiss francs per banker in net new money from the Americas. Mr. Birkenfeld told us that Swiss bankers regularly traveled to the United States to target U.S. citizens for net new money. He told us how these Swiss bankers maintained a low profile, using business cards that did not mention ``wealth management,'' sometimes declaring they were in the United States for non-business purposes, and carrying encrypted computers that, allegedly, even U.S. Customs agents could not read. A Subcommittee analysis of travel records supplied by Customs corroborates the testimony. The travel records show that about 20 UBS Swiss bankers made about 300 trips to the United States since 2003, often traveling together to UBS- sponsored functions designed to attract wealthy potential clients. The travel records also show that some UBS private banking officials made regular U.S. visits, including Mr. Liechti who traveled to the United States up to eight times in a year. Mr. Birkenfeld described one Swiss banker who saw 30 to 40 clients on each U.S. visit. All this to sell Swiss secrecy on U.S. soil. Mr. Birkenfeld also described UBS Swiss bankers who presented their clients with securities products and helped execute securities transactions here in the United States, without a broker-dealer license from the Securities and Exchange Commission. In response to Subcommittee inquiries, UBS also acknowledged that, like LGT, its bankers had set up foreign corporations to disguise the ownership of accounts by U.S. clients. The Subcommittee even obtained a document showing that UBS provided its Swiss private bankers with training on how to detect surveillance by U.S. customs agents and law enforcement officers while traveling here. Think about that: A major international bank is training its bankers to detect surveillance by U.S. authorities. UBS efforts targeting U.S. clients to open Swiss accounts were, in the words of Mr. Birkenfeld, a ``massive machine.'' And the push to open Swiss accounts took place even though UBS had branch banking and securities operations in the United States that were large enough to accommodate all of its U.S. clients. Which brings up a fundamental question. Why would a U.S. taxpayer open a UBS account in Switzerland when it could bank with UBS right here in the United States? Why would 19,000 U.S. clients with nearly $18 billion in assets choose to open up accounts in Switzerland? It seems plain that part of the answer is that they wanted to open undeclared accounts that the IRS would not know about. They wanted secrecy. And UBS gave them secrecy. In November 2002, UBS sent a letter to all of its U.S. clients to reassure them that their secret Swiss accounts were still safely hidden, despite a new Qualified Intermediary program, or QI, going into effect. Here is what that UBS letter said in part: ``Dear client: From our recent conversations we understand that you are concerned that UBS' stance on keeping its U.S. customers' information strictly confidential may have changed. . . . We are writing to reassure you that your fear is unjustified and wish to outline only some of the reasons why the protection of client data can not possibly be compromised. . . . '' We all know what is going on here. U.S. clients who don't bank with UBS in the United States and instead bank with UBS in Switzerland are buying secrecy. And folks who buy secrecy have secrets they don't want to reveal, such as evading taxes, ducking creditors, or defying court orders. But those clients aren't the only ones relying on secrecy to cloak their actions. Banks in tax havens, including the two banks under examination today, are also covering up their own actions--actions that they presumably didn't want to see exposed by media around the world. We are putting up a chart that summarizes the Tax Haven Bank Secrecy Tricks that we have uncovered during this investigation:\1\ Banks using code names for clients to disguise their identities; banks telling their bankers to use pay phones instead of business phones so authorities can't trace a call back to the bank; banks giving their bankers encrypted computers when they travel so tax authorities can't read any client information; banks funneling money through so- called transfer companies to cover the tracks of the funds and make audits difficult; banks opening accounts in the names of foreign shell companies to hide the real owners; banks setting up fake charitable trusts for the same reason; banks providing their bankers with countersurveillance training. The list goes on and on. These tricks are all about deception, all about making it impossible for the IRS to follow the money, to bring tax cheats to justice, and to bring back into the U.S. Treasury the tens of billions of dollars owed to Uncle Sam. --------------------------------------------------------------------------- \1\ See Exhibit No. 104, which appears in the Appendix on page 564. --------------------------------------------------------------------------- UBS has told the Subcommittee that it is changing its ways. It has banned travel by its Swiss bankers to the United States. It is encouraging U.S. clients to bank with UBS in the United States or at a subsidiary in Switzerland called Swiss Financial Advisors that requires all U.S. clients to disclose their accounts to the IRS. Liechtenstein tells us they are in negotiations with the United States to enter into a tax information exchange agreement and with its European neighbors to expand tax cooperation in connection with an anti-fraud agreement. Well, I hope that is all true, but count me skeptical for a number of reasons. First, we haven't heard anything from LGT about reforms; it is not even here today, in contrast to UBS that is here today. Second, evading U.S. taxes is a billion dollar industry; it's gone on for decades; and the profits are huge, both for the tax cheats and for the banks that hold their assets. The documents and testimony that we are releasing today disclose a culture of secrecy and deception that we are determined to end, despite it being so strongly entrenched. Tax evasion eats at the fabric of society, not only by starving health care, education, and other needed governmnent services of resources, but also by undermining trust--making honest folks feel that they are being taken advantage of when they pay their fair share. Our report outlines a number of ways we can fight back to end tax haven abuses, and here are a few. First, we should support the recent innovative enforcement actions taken by the Justice Department and IRS to prosecute foreign bankers who help U.S. taxpayers cheat Uncle Sam and to compel foreign banks to disclose the names of their U.S. clients. Second, we ought to enact new tools to penalize tax haven banks that impede U.S. tax enforcement. Congress should give the Treasury Department authority to bar U.S. financial institutions from doing business with those banks, and the IRS should remove those banks from the Qualified Intermediary program, the QI program, that allows them to avoid disclosing the names of their non-U.S. clients to U.S. authorities. Third, Congress should create a rebuttable presumption in enforcement proceedings that U.S. taxpayers who form or who send assets to or who receive assets from a legal entity in an offshore secrecy jurisdiction controls that entity and is, therefore, liable for taxation on its assets and income. Fourth, Congress ought to change the law to require banks who know U.S. clients are behind the accounts opened in the name of offshore entities to treat those accounts as U.S. accounts that have to be disclosed to the IRS. And we can do all that and more by enacting the Stop Tax Haven Abuse Act, a bill that I and Senator Coleman introduced last year. Right now, tax haven banks and tax haven governments dress up their secrecy laws and banking practices with phrases like ``financial privacy'' and ``wealth management.'' But secrecy breeds tax evasion. And secrecy hides not only the wrongdoers, but also those who aid and abet the wrongdoing. We are determined to tear down those secrecy walls in favor of transparency, cooperation, and tax compliance. I want to thank my Ranking Member, Senator Coleman, and his staff for their support of this investigation and the legislation to stop tax haven abuses that we have introduced. Senator Coleman. OPENING STATEMENT OF SENATOR COLEMAN Senator Coleman. Thank you, Mr. Chairman. This morning, we return to a matter that is important to all American taxpayers: The role of foreign banks--particularly those in offshore tax havens--in helping a disturbing number of wealthy Americans cheat on their taxes. At the outset, I want to express my appreciation to Senator Levin for his unwavering commitment throughout this effort. This has been a truly bipartisan investigation in every sense of the word. It would not have been possible to bring these important problems to light without your leadership, Mr. Chairman, and for that I thank you. The problem we are confronting today is simple: Tens of thousands of America's wealthiest citizens are using offshore secrecy jurisdictions to hide trillions of dollars and avoid paying their fair share of taxes. The offshore problem remains one of staggering proportions. These tax havens hold an estimated $1.5 trillion in American assets, resulting in lost taxes of roughly $100 billion. That is three times the size of the Minnesota State budget general fund--lost because of dishonest individuals and entities exploiting the secrecy of foreign countries. In doing so, these privileged few are forcing honest American taxpayers to bear a disproportionate burden of investing in crucial areas like health care, homeland security, and education. That tax loss sits like a millstone around the necks of honest American taxpayers, who are struggling with high taxes, ever-increasing gas prices, and rising health care costs. But these tax cheats are not acting alone. Foreign banks in these offshore havens are enthusiastic partners in this deception. Hiding behind an impregnable fortress of secrecy laws, these banks have partnered with American tax cheats to use offshore tax and secrecy havens to conceal ownership of assets and make sham transactions seem legitimate, while staying one step ahead of U.S. law enforcement and the IRS. Over the course of the last year, the Subcommittee has engaged in a broad investigation into two of these banks: LGT Bank in Liechtenstein, and UBS AG in Switzerland. Both banks operate under strict secrecy laws, yet both banks enabled and promoted felony tax evasion, and sometimes even worse misconduct, like the bribery of American officials and others. The audacity and cleverness of the bankers we have examined are matched only by the zeal with which their American clients used their services. Before we turn to the evidence, it is worthwhile to take a moment and review the relevant laws and rules to understand how the banks eagerly manipulated the regulatory and legal landscape to assist their tax-cheating clients. The key rules governing these foreign banks are found in the Qualified Intermediary program (QI). The QI program is intended to encourage foreign banks to assist the IRS collect taxes from overseas accounts by calling for contracts with the individual foreign banks. In short, contracts executed under the QI program require the banks to report to the IRS when the accounts held by Americans have income derived from U.S. securities and withhold the proper amount of taxes, sending that amount back to the United States. In one sense, the QI program has been quite effective: The IRS has been able to collect substantial taxes that it previously could not. But there was a loophole in these QI agreements, and these foreign banks drove a Mack truck right through it. Basically, while the QI agreements require the banks to reveal American account holders with U.S. securities investments, the agreements do not require the reporting of accounts that are held by non-US citizens or entities. So what did the banks do? They encouraged their American clients to form shell companies and trusts in jurisdictions with strict secrecy laws, helped them open accounts in the names of those trusts and companies, and then assisted them in shifting millions of dollars from accounts in their names to accounts in the names of the foreign entities. In doing so, these banks turned a blind eye to the fact that there was no legitimate reason for these maneuvers. In his opening statement, Senator Levin highlighted the findings of our Subcommittee, as set forth in the bipartisan staff report we have issued to accompany this hearing. The case studies related to LGT are as appalling in their brazenness as they are disturbing in their commonality: A family falsely hiding nearly $50 million in trusts for decades; Another family moving funds from one shell corporation to another to yet another in a chain of transfers that was clearly designed for one reason: To avoid paying taxes; A family meeting with the royal family of Liechtenstein with the express purpose, in their words, of ``hiding the traces''; The brazen facilitation of bribery here in the United States by Marc Rich and his affiliates. Sadly, the list goes on and on. What is worse, LGT was not alone. UBS engaged in parallel misconduct. In short, soon after joining the QI program, UBS undertook a systematic, wide- ranging effort to harvest tax cheats from the United States, help them restructure their Swiss accounts to avoid paying taxes on billions of dollars, and surreptitiously evade the attention of Federal law enforcement agencies. To be clear, our focus is on UBS' operations out of Switzerland. UBS has a large number of personnel based here in the United States, including in Minnesota, and they, like us, must be surely appalled at what the Subcommittee has uncovered. These people are not part of the misconduct we examine today, nor do we suggest in any way that they are involved in these activities. Moreover, we should note that UBS has been cooperative with the Subcommittee's investigation and has been responsive to its requests. UBS is also appearing today voluntarily, and not under compulsion of subpoena. I find it significant that while UBS did not necessarily have to send a knowledgeable witness from Switzerland, it chose to do so, which stands in stark contrast to LGT's refusal to appear before us today. But there is a fundamental question that must be asked of UBS, and that is, when you are sending Swiss bankers, 20 UBS bankers taking over 300 trips since 2003, somebody in America has to know what is going on. Clearly, though this is generated out of Switzerland, this kind of activity in this country cannot simply have occurred without folks here intentionally turning a blind eye. I am not sure what my folks in Minnesota know, but I would sure like to find out what the folks in America knew about these transactions. The results of the Subcommittee's investigation are striking. The evidence reveals that the banks engaged in highly suspicious activities designed to hide the identities of their clients, including, as the Chairman noted, using code words, encrypted computers designed to thwart U.S. customs officials, shell companies and trusts strewn around the world, and techniques to avoid surveillance by law enforcement. Some of these activities sound like the cloak-and-dagger deception in a James Bond movie. It is bad enough if the banks were simply enabling tax crimes. But the problem is far worse and more pervasive than a mere see-no-evil acceptance of tax fraud. Our investigation has found that the banks have left their secrecy fortresses and furtively entered the United States to recruit and service thousands upon thousands of tax cheats. Driven by a desire to service their clients' desires, regardless of legality, these banks actively promote and cultivate this conduct day after day. They didn't just facilitate this misconduct; they orchestrated it. That must stop and it must stop now. How do we fix this problem? The Subcommittee has offered a number of recommendations. First, as the Chairman has noted, Congress should pass the Stop Tax Haven Abuse Act, which is comprehensive legislation that Senator Levin and I introduced, along with Senator Obama. It would go far to stop offshore tax haven and tax shelter abuses by shining a light in the dark world of secrecy jurisdictions. We must also change the laws and regulations which permit banks in tax havens to fulfill their contractual obligations to the IRS even though they are facilitating criminal conduct. We must also improve the QI program, by strengthening reporting requirements for QI banks and expanding the audit process. We must also bolster our law enforcement activities and increase the statute of limitations for activities involving tax havens. To be clear, foreign investment is vitally important to the United States. Such investments are critical to job growth and opportunity expansion and are undeniably necessary for the economic well-being of our citizens. Nor is our focus here today on U.S. companies investing abroad, which bolsters our competitiveness in the increasingly global economy. To the contrary, our inquiry is focused on individual U.S. taxpayers who have cheated the system with the active assistance of offshore banks. There may indeed be valid reasons for holding accounts offshore, such as Americans living and working abroad, or those with families in other countries with political or economic instability. These persons, when they file the appropriate documents with the IRS and pay their fair share of taxes, have nothing to fear from this inquiry. I want to close, however, by speaking directly to those who should be worried: Those Americans, and their attorneys and financial enablers, who have gone offshore to dodge their taxes, escape our courts, or worse. Our message is simple: You are hurting this country. Millions of Americans struggle with bills and mortgages, pay for gas and health care, educate their children, and care for their loved ones. Hundreds of thousands of your fellow Americans protect us--both here and at war abroad--making unimaginable sacrifices on behalf of this country. By cheating on your taxes, you are forcing those people to carry even more weight on their sagging shoulders. You, the tax cheats, are not being asked to suffer as they are. You, the tax cheats, are not being asked to struggle with your daily bills and mortgages and gas prices and medical bills. You are simply being asked to pay your fair share to the country whose freedoms you so richly enjoy. Listen closely to what we have uncovered in this investigation. Come forward and stop hiding. In one document, a foreign banker advised his American client to stop engaging in certain transactions so that the American authorities would not catch him. He said boldly, ``Let sleeping dogs lie.'' Well, the dogs are no longer sleeping. Thank you, Mr. Chairman. Senator Levin. Thank you very much, Senator Coleman. And now I would like to welcome our first panel of witnesses to today's hearing: Doug Shulman, the Commissioner of the IRS, and Kevin O'Connor, the Associate Attorney General at the Department of Justice. Commissioner Shulman, first I want to thank you for being here today, and this is your first appearance before this Subcommittee. Your predecessor, Mark Everson, contributed frequent insights and important context to our hearings. We welcome you. We look forward to your testimony. Mr. O'Connor, I believe this is also your first appearance before this Subcommittee, and it is important for us to hear from the Department of Justice, and we welcome you. We thank you both. We thank your agencies for your efforts to go after people who would dodge our tax laws and evade paying their taxes. Pursuant to Rule VI, all witnesses who testify before the Subcommittee are required to be sworn. So at this time, let me ask you both to please stand and raise your right hand. Do you swear that the testimony you are about to give will be the truth, the whole truth, and nothing but the truth, so help you, God? Mr. Shulman. I do. Mr. O'Connor. I do. Senator Levin. We will be using a timing system today, and one minute before the red light comes on, you will see the light change from green to yellow, giving you an opportunity to conclude your remark. Your entire testimony will be printed in the record. We ask that you limit--attempt to limit it, in any event--your oral testimony to no more than 10 minutes. Commissioner Shulman, we will have you go first, followed by Mr. O'Connor, and then we will turn to questions. Thank you so much. Commissioner Shulman. TESTIMONY OF HON. DOUGLAS SHULMAN,\1\ COMMISSIONER, INTERNAL REVENUE SERVICE, U.S. DEPARTMENT OF THE TREASURY Mr. Shulman. Thank you, Chairman Levin and Ranking Member Coleman. I want to thank you for inviting me to this Subcommittee hearing. As you said, this is my first opportunity to testify before the Subcommittee. Let me reiterate to you in public what I have told you privately. --------------------------------------------------------------------------- \1\ The prepared statement of Mr. Shulman appears in the Appendix on page 55. --------------------------------------------------------------------------- This Subcommittee has a long and impressive history of investigating tax secrecy jurisdictions and offshore abuses that undermine the integrity of the Federal tax system and potentially divert billions of dollars from the U.S. Treasury. I am looking forward to working with you during my 5-year term as IRS Commissioner. I have made international issues a strategic priority for the IRS. High-net-worth individuals should not be able to shortchange their fellow citizens by moving assets or income offshore as a means of avoiding U.S. taxation. Frankly, I have been outraged by some of the behavior that we have found in our investigations and that you have highlighted in your report. I also find the actions of the financial institutions involved in this evasion to be surprising and disappointing. We have been particularly active in the international arena in the past few months, and more is in the works. Some of these activities I can discuss publicly because they are already part of the public record. There are other situations that I cannot discuss because the investigation may be ongoing. Taxpayer privacy laws generally prohibit public disclosure of IRS investigations. The most notable recent case in the public record involves a major Swiss bank. The bank signed a disclosure agreement with the United States in 2001 to become a qualified intermediary, or QI. Becoming a QI requires a financial institution to, among other things, report on the income of U.S. taxpayers that were clients of the bank. However, a former employee of the bank, as part of his recent guilty plea, stated that a number of the bank's U.S. clients objected to having their information subjected to such reporting. The IRS has since requested, via a John Doe summons, that the bank turn over account information on any other U.S. client who used this Swiss bank to avoid U.S. income taxes. The summons directs the bank to produce records identifying U.S. taxpayers who had accounts with the bank in Switzerland between 2002 and 2007 and elected to have their accounts remain hidden from the IRS. On July 1, a Federal judge in Miami approved a Justice Department request to enable the IRS to serve this summons. We are working closely with the Justice Department to ensure that we get all of the information requested in the summons. Speaking more broadly, the IRS has a multifaceted approach to combating offshore tax evasion. We are deploying a wide array of techniques and resources to uncover unlawful activities. Let me go through a few of them. One important tool is information reporting. Most U.S. tax returns require that the filer provide information about foreign financial accounts, ownership in foreign entities, and financial statement data. In addition, a U.S. citizen with offshore accounts in excess of $10,000 must file a foreign bank and financial account (FBAR) report. Information reporting requirements typically come with either civil or criminal penalties for noncompliance, and in some cases, both. Another tool is the QI program, which you, Mr. Chairman, and Ranking Member Coleman have both discussed. In laymen's terms, the QI program gives the IRS an important line of sight to the activities of foreign banks and other financial institutions. It also provides detailed information reporting that the IRS, before we instituted the QI program, did not receive. The QI program is critical to sound tax administration in a global economy. By bringing foreign financial institutions more directly into the U.S. tax system, we can better ensure that U.S. persons are properly paying tax on foreign account activity and that foreign persons are subject to the proper withholding rates. However, the whole program rests on the fact that banks and financial institutions that are part of the program have to abide by their agreement with the U.S. Government. The QI program is relatively new, and as with any new and complex program, there will be flaws that must be addressed. In my view, we need to shore up the QI program and continuously enhance it. In my written statement, I discuss some of the steps we are taking to improve this important program. The third tool in our arsenal is international agreements such as tax treaties and tax information exchange agreements, under which other countries agree to obtain information on behalf of the United States for use in U.S. tax matters. We also have a number of efforts to share information and strategies with our international counterparts, including a Joint International Tax Shelter Information Center, where we have people from the IRS and other tax administrations collocated to exchange information about specific abusive transactions and their promoters and investors. In addition, we meet regularly with revenue commissioners or their counterparts, from nine other countries, to consider and discuss issues of global and national tax administration. International dialogue and cooperation will only become more important in the years to come, and we will work to continually enhance these relationships. As you noted, Chairman Levin, in some of the current activities that are underway and have been made public, we have been coordinating with our foreign counterparts, and this has been really made possible because of the groundwork we have done in the last several years to develop relationships, collocate people, etc. When investigating offshore tax evasion and specific identities of U.S. taxpayers are not known, the IRS generally uses its John Doe summons authority. The summons is used to identify individuals, groups, or classes of U.S. taxpayers who may be involved in specific areas of tax noncompliance and who cannot be identified through other means. And the final and very important tool that I will mention this morning is informants. Informants have been valuable sources of information for IRS civil and criminal investigations into offshore tax evasion. With the new whistleblower standards that reward informants, we are hopeful that we will get additional input on potential violations. Deterrence is one of our most powerful weapons. In this regard, I am very proud of the hard work that the IRS and Justice Department investigators have put into these recent cases. As a result of their continuing work, I am confident that those who engage in deliberate offshore tax evasion are very concerned right now, as they should be. I believe that we owe it to the vast majority of honest taxpayers to pursue these cases aggressively, and I am committed to do so now and during my 5 years at the IRS. I am also equally committed to respecting the rights of U.S. citizens and corporations who engage in legitimate global commerce. In closing, I believe that we are efficiently utilizing the tools that we have, but there are other ways that Congress can help. First and foremost is to approve our 2009 budget and enact the legislative proposals that are included therein. The budget provides key enforcement resources that we can use in the area of international tax evasion. In addition, Congress can provide more time for us to work on these cases by extending the current 3-year statute of limitations. Because of the complexity of these cases, 3 years is often insufficient to close the case properly. Finally, it is important that Congress continue to support and strengthen our network of tax treaties. They provide a basis for information sharing, and each time an agreement is renewed, we seek more information from our treaty partners. Mr. Chairman, thank you again for the opportunity to be here. I look forward to working with you and the Members of the Subcommittee during my tenure at the IRS, and I am happy to respond to questions. Senator Levin. Commissioner Shulman, thank you so much. Mr. O'Connor. TESTIMONY OF HON. KEVIN J. O'CONNOR,\1\ ASSOCIATE ATTORNEY GENERAL, U.S. DEPARTMENT OF JUSTICE Mr. O'Connor. Thank you, Chairman Levin and Ranking Member Coleman, for the opportunity to appear here this morning to discuss the Department of Justice's efforts, alongside our colleagues at the IRS, to combat the use of tax havens and offshore entities by U.S. taxpayers to evade income taxes. Let me begin by echoing my colleague, Commissioner Shulman, commending this Subcommittee for its longstanding commitment to investigating and publicizing abuses of our Federal tax system. Your work--in particular, the report that you issued just today--has brought much needed attention to serious misconduct that threatens to undermine the fundamental integrity of our tax system. Really, Commissioner Shulman and I were remarking before that we would be so lucky to have many of your Subcommittee staffers in our offices based on the thoroughness and diligence of that report, and I commend you and your staffs as well. --------------------------------------------------------------------------- \1\ The prepared statement of Mr. O'Connor appears in the Appendix on page 65. --------------------------------------------------------------------------- Senator Levin. Thank you. We appreciate that, and I know they appreciate that, and you're right, they deserve that kind of a compliment. Mr. O'Connor. As a result of their work, taxpayers have a greater understanding of their obligations and the consequences of noncompliance, and tax professionals and promoters are on notice that their efforts to design, market, or facilitate tax evasion schemes will not be tolerated. Today I would like to briefly focus my remarks on the Department of Justice's role in combating the continuing problem of offshore tax evasion. Over the years, as you are well aware, Congress has made numerous changes to our tax laws to reflect advances in communications and technology. One fundamental concept has, however, remained constant: U.S. taxpayers are subject to taxation on their worldwide income from whatever source that income is derived. The use of tax haven banks and offshore nominee accounts to evade taxes is a direct assault on this basic principle and cannot be tolerated. Offshore tax schemes, often used by high-wealth individuals, but not exclusively, potentially result in the loss of billions of dollars a year in U.S. tax revenues. For this reason, the Department, alongside with our counterparts at the IRS, have used and will continue to use all of the tools at our disposal to ensure that noncompliance is both detected, and, where appropriate, aggressively prosecuted. While taxpayers who engage in tax evasion are subject to civil and criminal liability for their conduct, we are equally concerned about the role played by tax professionals and promoters in designing and implementing these schemes. It is discouraging, as Commissioner Shulman said, to see that some professionals--tax attorneys, accountants, bankers, brokers, corporate service providers, and trust administrators, in particular--continue to violate their legal and ethical responsibilities by facilitating these illegal tax schemes at a substantial profit. Holding these professionals accountable for their misconduct is necessary, and as the examples in my written testimony reflect, we are pursuing criminal sanctions against such individuals and entities where and when appropriate. Our success in prosecuting these cases is as a result of our close working relationship with the IRS and with U.S. Attorneys' Offices across the country. For example, lawyers in the Tax Division have worked with the IRS to investigate offshore tax evasion by obtaining approval from a court to serve what are known as John Doe summonses. As my colleague from the IRS has mentioned, a John Doe Summons enables the IRS, with the assistance of the Department of Justice and Federal court approval, to obtain information about possible fraud by taxpayers whose identities at that time are unknown. On the criminal side, the Tax Division serves as the nerve center for all of our Federal criminal tax prosecutions. Tax Division attorneys work closely with the IRS Criminal Investigation Special Agents to develop and prosecute a wide variety and array of tax crimes, including offshore evasion. It bears noting in this regard, however, that offshore tax evasion cases are, by their nature, international in scope. Investigations requiring international cooperation are both time-consuming, expensive, and often raise complex legal issues such as national sovereignty and bank secrecy laws of the foreign countries in which evidence we may seek is located. Despite the challenges, U.S. law enforcement agencies and our foreign counterparts are engaged in a variety of information-sharing arrangements designed to aid in shutting down illegal and abusive activity and exchanging the information we, both the IRS and the Department of Justice, need to do our jobs. Critical to every investigation of offshore activity is the ability to obtain evidence from a foreign country. In addition to traditional letters rogatory, information can be requested through tax treaties or tax information exchange agreements in both civil and criminal cases, and through Mutual Legal Assistance Treaties--otherwise known as MLATs--in criminal cases. Unfortunately, we do not have cooperative agreements with every country. Moreover, not all cooperative agreements cover both civil and criminal matters. On occasion, MLATs exclude outright tax crimes altogether, while other MLATs and tax treaties are limited to particular instances in which we can allege specific kinds of fraud. In such circumstances, however, we will not be deterred. We will pursue other formal and informal methods of obtaining the foreign evidence we seek. This includes the use of John Doe summonses as well as grand jury subpoenas. Tax evasion is a chronic drain on the public fisc and is a pernicious obstacle to effective tax administration. If not vigorously investigated and addressed, it threatens to undermine confidence in our system of voluntary compliance and self-assessment. We are dedicated to ensuring that law-abiding taxpayers have confidence that the tax laws are fairly and equally applied, and that those who would attempt to engage in tax evasion know that we will deter their schemes, detect their schemes, and hold them accountable for their misconduct. Thank you, Mr. Chairman and Ranking Member Coleman, for inviting me and the Department today to discuss our efforts to combat tax evasion. I would be happy to answer questions you may have. Senator Levin. Thank you so much, Mr. O'Connor. We will try an 8-minute round here for the first round of questions. We put up a chart before that lists some of the secrecy tricks that were uncovered during our investigation that these banks have used.\1\ These are actual, established banking practices at LGT and UBS, if you can believe it. The purpose of these banking practices is to stop you folks, the prosecutors and the IRS, from being able to follow the money and make it more difficult to bring tax cheats to justice. --------------------------------------------------------------------------- \1\ See Exhibit No. 104, which appears in the Appendix on page 564. --------------------------------------------------------------------------- Just to read a few of them, some of those tricks are funneling money through so-called transfer companies to cover the tracks of the funds; opening accounts in the name of foreign shell corporations and companies to hide the real owners; using foreign credit cards on undeclared accounts; using captive trustees for trusts instead of independent trustees. Have you seen these types of practices in your work? And are these practices limited to these two banks? Mr. O'Connor. Mr. O'Connor. Chairman Levin, your staff was kind enough to provide me a copy of that chart this morning in advance of the hearing. It is fair to say we have seen all of these tactics. I think with respect to Mr. Birkenfeld, the one case that has been discussed publicly because of his guilty plea, the vast majority of those secrecy tricks were actually employed in that matter. At least Mr. Birkenfeld admitted in Federal court in connection with his plea agreement that he engaged in those types of tactics. So the short answer to your question is yes. Senator Levin. Do you want to add anything, Commissioner? Mr. Shulman. All I would add is that anytime someone wants to evade paying taxes, they look for complexity. It is the reason people go overseas, because things become much more complex once you leave our borders and our jurisdiction. You add on top of this complex financial arrangements which include all the techniques in your chart, and you've got exactly the method by which people are looking to evade the U.S. tax laws. Senator Levin. We have talked about these QI agreements as to how they are basically subverted by tactics, some of which are on that chart.\1\ Should we insist that when U.S. clients are the beneficial owners of so-called foreign trusts or companies that they be treated as owners of the securities in a foreign bank account instead of owners of the nominal trust or the company that was created for them? Mr. Shulman. I think the issue you bring up is the absolute issue here, which is how we can have a line of sight into the people who really benefit from the money coming from these accounts. The QI program has brought in a lot of money into the U.S. Government and has created a line of sight into foreign banks and those accounts. With that said, we are in the process now of reviewing the QI program and have started discussions about tightening it up, so let me share with you those discussions. Last week, I participated in a conference call with major accounting firms who were responsible for performing audits on the QI program. I asked them to come to us with issues, and we shared with them the issues we have seen. In addition, we raised the possibility of requiring, as part of their agreement, that they report any fraud they see in a foreign bank in the QI program to the IRS, which, frankly, is what occurs when a bank hides assets. There is also this issue of beneficial ownership. What we are going to try to do in this regard is to rework our regulations and our QI agreements so that QI banks have to put in additional steps of due diligence to make sure they understand who the owner is; and where they cannot ascertain who the owner is, default to withholding. And so we could go through it later, and these are still being worked on. We want to make sure we carve out legitimate businesses, like public companies or active businesses in a foreign country, so QI banks don't need to look through there. But if the owner is basically a trust that looks like an individual holder, we want to make sure we either obtain their taxpayer identification number or implement automatic withholding. And then, finally, there is this whole issue of worldwide income that we are taking a hard look at, because one of the techniques alleged gets people out of U.S. securities and into foreign securities, which are not currently covered under the QI program. Senator Levin. These banks have accomplished their deception here in avoidance of the QI program in a number of ways. The one we are going to look at today told their U.S.-- here is what they told their U.S. clients: We are not going to identify you, and the way we are going to avoid identifying you to the IRS is that you are going to have to sell your U.S. securities from this account; or you have got to reopen your account under the name of a non-U.S. entity. So they helped them to create that shell company or that trust that is then the nominal owner of those securities, rather than what they know to be the U.S. taxpayer. Would you agree that banks that do that are gaming the QI program? Mr. Shulman. Absolutely. Senator Levin. And is there any reason why we should not modify this program to tell banks we will not accept that, and that if you want to participate in this program, you must disclose the beneficial owner to us when you know it? Mr. Shulman. That is the intent of the QI program, and I share your anger over people who circumvent the system. I want to emphasize, though, at least in my view, that banks that don't meet their obligation should be ashamed of themselves, and we should deal with them appropriately. But kicking a bank out of the QI program, which is always an option, would mean that account holders in that bank will not be subject to U.S. taxation. Thus, our goal is to get banks into compliance and to keep them in the U.S. tax net, where appropriate. Senator Levin. And if we can't get them into compliance, to kick them out of the program? Mr. Shulman. We terminated QI agreements before, and currently have a number of QI agreements that we are looking at right now. Senator Levin. How large a problem would you estimate this offshore tax haven, tax avoidance is? Can you give us any kind of an estimate as to what the loss is to the Treasury? Mr. Shulman. As you know, I started this job 3 months ago. We actually have some good research in certain areas of tax evasion. Research in general in tax evasion is hard because, as you know, when there is tax evasion, people are actually hiding their activities, so it is not the kind of research you get through a census or questionnaire. The current data we have from around 2001 does not quantify this, but I am confident to say that these activities involve thousands of taxpayers and billions of dollars. Mr. O'Connor. Mr. Chairman, if I might add? Senator Levin. Please. Mr. O'Connor. If you just look at the Olenicoff plea, $200 million, and some of the figures thrown around there and realize that is just one taxpayer, and then you multiply that by thousands, it is an incredibly, significantly large number that I would not even want to put a ceiling on. Senator Levin. You would say it is a significant loss to the Treasury? Mr. O'Connor. Absolutely. Senator Levin. Would it be safe to say it is in the tens of billions? Could you even go that far? We have come up with an estimate of up to $100 billion, and I know you are not going to want to pick any specific figure. But would you be able to say that your estimate is it would be in the tens of billions? Is that a safe estimate? Mr. O'Connor. I am probably utterly unqualified to make such an assessment, but it is certainly in the billions. I think I am comfortable saying that. I would defer to Commissioner Shulman, who probably is much closer to these figures as the person who---- Senator Levin. You would rather defer this to a future moment, I think. [Laughter.] But we will look forward to your estimate. At least, Commissioner Shulman, you would say it is a significant loss to the Treasury. Is that safe? Mr. Shulman. It is a significant loss. And also let me tell you, even in my confirmation hearing, I talked to the Senate Finance Committee about why I made international a strategic priority of mine coming in. Where there is complexity, there are global capital flows, mobile capital, and people and businesses who want to evade taxes are going to do it in the complex international arena. And so regardless what the number is--and I agree the number is significant--this is an area that we are going to focus on at the IRS. Senator Levin. Finally, the burden is now on the government to prove that an individual controls an offshore corporation, and that is very difficult where there are secrecy jurisdictions. Would a presumption that a U.S. taxpayer who forms or who sends assets to or who gets assets from a corporation in an offshore secrecy jurisdiction controls that corporation--it would be a rebuttable presumption, but would that be helpful in tax enforcement cases? I do not know, maybe, Mr. O'Connor, I should start with you on that. I am not sure. Either one of you can give me an answer, Commissioner or Mr. O'Connor. Mr. O'Connor. Well, I think certainly the more information we have as prosecutors, it is always better and the easier we can do our jobs and the more efficiently we can do our jobs. I would say that about any mechanism. In terms of what is actually in a QI, obviously those are agreements negotiated by the IRS, not the Department of Justice. Senator Levin. I mean a law that created that presumption so that would have to be disclosed, it would be a rebuttable presumption, but it puts the burden on people who use these offshore tax havens to come forward and to disclose the fact that they have either assets in that tax haven or have assets, income from companies that are in those tax havens. Mr. O'Connor. Yes, I think I could just say that the Department has a formal response for handling inquiries about legislation. I, as I sit here today, cannot see a reason to oppose that. Senator Levin. All right. Do you have a comment on that at this time? Mr. Shulman. My comment is that the idea of getting a line of sight to the people who own and control these accounts is the whole game. I actually think some of the activities that are in your report and that have been made public show that we are actually doing a pretty good job right now of getting some of these lines of sight. Our preference would be to modify the regs in the QI program so we can see through first, and then come back later to things like presumptions because they are tools that can obviously ensnare a whole wide range of people who may or may not be involved in evasion. Senator Levin. Which is why we make it rebuttable. Senator Coleman. Senator Coleman. Thank you, Mr. Chairman. The Chairman talked about U.S. clients and this issue of beneficial owners. In other words, you create a trust, the beneficial owner is the client, but you use that as a way to shield the identity of the client. Even with secrecy jurisdictions, either to Mr. O'Connor or Mr. Shulman, is it fair to say that they still have to comply with the know-your-client obligations that we impose on banks? Mr. Shulman. Yes, in order to enter the QI program, a piece of the diligence is to have acceptable know-your-customer rules. And so people who are evading this are generally doing it on purpose. Senator Coleman. And that is what we call the ``gap,'' one of my frustrations. On the one hand, banks have to know their customer, so they know who they are dealing with. Then you have the QI program. If they have had their customers unload U.S. securities, they got the assets, they have their customers set up beneficial trusts which should be identified, but they still know the customer because the banks retain that information. And yet when QI comes, they are allowed simply to put a blinder on and to respond just to QI, even though they know that there is another path in there. And what I am frustrated about is up until this hearing, we have folks auditing QI. They may, in fact, see fraud. They may see this other stuff. But they do not report on it. What has been the justification up until now for folks who are auditing, seeing fraud, seeing other trails, and not pursuing them? What has the rationale been all along? Mr. Shulman. Like I said, I am 3 months into this job. We are now in the process of closing down a loophole in the program. I think that the intent you articulated is just that, and I think banks who circumvent that intent should be ashamed of themselves. They know that the purpose of signing up for the QI program is to provide us with a line of sight into U.S. taxpayers who have a tax obligation, and they either withhold or report that income to us. And so, dancing around a set of technicalities is not an excuse. We are going to make sure we tighten up those technicalities so they are harder to dance around, and we will keep working with this Subcommittee if we find we cannot do that through administrative remedies and regulations. And so I cannot tell you what the purpose was before. I think the purpose was always to make sure we could see through and get the information. People have found some ways around that, and we are going to try to remedy that. Senator Coleman. And I hope we do. My point with the know your customer (KYC) rules is that the information is there. Banks know who these folks are, and they have been able to segregate out their KYC obligations and to kind of disassociate KYC from QI and just respond in a narrow sense to the QI, process that information that even our own auditors did not break through. So, I ask for a little bit of common sense here. And I know that we want folks to participate in QI. We are getting access to information that we did not have. On the other hand, there is a charade being played here. There is a game being played with terrible consequences. I am not seeing any bars to simply coming in and telling auditors to go down that trail. If there is fraud, you check it out. And to the banks, we know you have KYC obligations; if you do this, you have a problem. And we talk about what the reaction to that problem is. But, to me it seems pretty clear. You have this huge gap that there does not seem to be a reason for. Mr. O'Connor, one of the things that you talked about were these Mutual Legal Assistance Treaties (MLATs) that we have with other countries. So if you are doing an international case, we have this MLAT, but you have noted that they sometimes exclude tax crimes. I have not looked through this, but do they exclude tax crimes when we have MLATs with tax havens? Mr. O'Connor. Well, not surprisingly, obviously MLATs are the product not of legislation or dictation, but of negotiation. And at the end of the day, we try to negotiate the most favorable terms possible with foreign sovereigns. But we cannot dictate necessarily what they will give and not give us. To no one's surprise, the countries that tend to carve out, if you will, tax crimes tend to be those with bank secrecy laws. So it is an obstacle to us, and it is something we are very well aware of, and we are almost in daily communication trying to, if you will, loosen those terms to get the information we need. Senator Coleman. This would come back to perhaps another area of oversight, Mr. Chairman. We are giving these countries access to the world's largest economy. We are giving them access to American securities. There is a huge benefit for being able to tap into the American economy. Even in the UBS notes, they talk about there are 200-and-something billionaires in America. This is a big market. This is still where, in spite of our challenges, it is where the money is. And I would think that we would utilize that leverage. So I would hope we would do a review of that and say for the luxury of participating in this market, this economy, and to be able to do business, we have to close this down. As I said, you can drive a Mack truck through the holes in this system. And there is a lot of money, Mr. Chairman, that is just not going down the drain, but it is staying in people's pockets. So I see the MLATs, and it seems to me that the exclusion is something that we really have to take a look at, and I hope we would do that. Mr. O'Connor. If I may, Senator, we are, and I think in fairness, while the MLAT with a country, say, carves out tax cases except where there is an organized crime element, that is not our sole avenue to pursue evidence. So while the MLAT may not be as favorable to us as we would like, we do have a double taxation treaty. There is also what is called the IMAT, which is their own law enforcement assistance regulations in Switzerland. So there are other avenues we can pursue even if the MLAT has a carve-out for tax offenses, complete carve-out or sometimes defines tax offenses very narrowly. For example, in some countries, simple tax evasion is not a crime. It is only a civil liability. Whereas, in the United States it is a crime. So we find that each country is different, but we are very creative in exploring different avenues. If we run into a dead end with a MLAT, we will pursue those documents through the tax treaty. And again, as Commissioner Shulman said, if we have to go all the way down to using a grand jury subpoena or a John Doe summons, we will do that as well. Senator Coleman. Commissioner, just one other area of a gap in the QI program. It is my understanding--does the QI program involve folks who have assets in U.S. securities, their securities? Mr. Shulman. Correct. Senator Coleman. So that one of the things that we see is you get clients of both UBS and LGT who sold--if they sell of their U.S. securities, then they escape any QI obligations. Is that a fair statement? Mr. Shulman. If you sell off your U.S. securities, yes. Senator Coleman. And so what about expanding banks' QI reporting obligations on U.S. persons--I am talking about U.S. citizens--beyond those for simply U.S. citizens who hold securities? Have you looked at that expansion of QI? Mr. Shulman. Yes, when I talk about worldwide income and mention that--and I did not go into it deeper--that is one thing we are looking at. Senator Coleman. I would hope we would pursue that. Thank you, Commissioner. Thank you, Mr. Chairman. Senator Levin. Thank you very much, Senator Coleman. We welcome Senator Kerry here, and we are going to excuse this panel unless you have questions of them. Senator Kerry. Mr. Chairman, I don't want---- Senator Levin. We were going to move to the second panel. Senator Kerry. I might have just two questions, if that is possible. Senator Levin. Please. Senator Kerry. Could I just begin by saying, first of all, thank you for the courtesy of allowing a non-Permanent Subcommittee Member to be part of this. I really appreciate that. I know that happens occasionally around here in various committees, and I am very grateful to you for your courtesy. And, second, I would like to say thank you to you and Senator Coleman for doing this. I see that some of the chairs are empty here, but I must say to you this is a topic that people really need to understand, and its larger implications. And I am very respectful of the work that this Subcommittee has done. It has done a terrific job, though I know there are some folks who dispute some aspects of the report, and that will have an opportunity to be able to be aired here. But when I served on the Banking Committee back in 1986, I became aware of some of this and became interested in it through a bank called BCCI, which became infamous because not only did it have money from Noriega and drug trafficking, but it has money from Osama bin Laden, which is one of the first times we observed his name. And that secrecy process really opened up a window for many of us, arms trafficking that was illicit and otherwise. And I remember visiting with the governor of the Bank of England in the course of trying to get at this and ran into resistance in certain quarters that were willing to protect the secrecy and the flow of funds in that way. And so that is when we developed some of the MLAT apparatus, which I have heard referred to. I did hear both of the testimonies, though I was not here. And we also passed some amendments in the Banking Committee that came to be known as the Kerry amendments, which required transparency and reporting. And, ultimately, the $10,000 transfer requirement and other things became pro forma. Listening to the Administration--and we created our financial group down at the Treasury, and we have gone through a process of this. But it strikes me that we are woefully behind the curve and that the focus on this has been sort of significantly sporadic, to be honest with you. And I want you to address that a little bit. There is an infamous building in the Cayman Islands that I believe houses some 15,000 or so brass plates that are telephone numbers and fax machines, which are used, everybody knows, to move huge sums of money in and out of the financial system. And with the commingling of these funds that takes place with multiple transfers, ultimately accountability is really just absent. Why are known financial tax evasion/wealth-hiding entities still able to access the largest financial systems in the world and, until recently, the most secure in our own, willy-nilly? Just why has there not been a greater push for cross-country international transparency and accountability? Because I heard you in your testimony mention we are trying to get some of these others countries to cooperate. It depends on the level of their cooperation. We are still struggling with something that is just fundamental to the integrity of every government's ability to be able to run itself and provide a fairness to their populations. And it seems to me the effort necessary to do this other than when Senator Levin and Senator Coleman have a moment of accountability is just not forthcoming. Can you address that? Mr. O'Connor. Well, I would be happy to speak on behalf of the Department of Justice. I think you are 100 percent correct about the scope of the problem, but I have had the pleasure of working with our Tax Division and to see even a case like the Birkenfeld case, the complexities involved in chasing through foreign accounts and foreign entities, it is incredible. And they are working incredibly hard with U.S. Attorneys' Offices across the country to try to ferret out these cases, both the taxpayers--and there are obviously thousands of them--as well as the promoters. Of course, there is always going to be an issue. For example, we have one individual under indictment now who is in a country for which we do not have an extradition treaty. So you do run into road blocks in these investigations that are not made by Department of Justice or others, but it is just a simple sovereignty issue. And the folks in the Tax Division have assured me--and I am comfortable with that--that they are doing all that they possibly can to hold people accountable both here in the United States but abroad as well. And whether it is using material witness statutes to detain people, whether it is being creative in how we go about getting documentation that is not here in the United States, we are availing ourselves of all the avenues available to us. Senator Kerry. All the evidence available, but not all the evidence that could be available. I mean, don't the G-8 fundamentally have the financial clout in the use of their system to demand greater transparency and accountability? Mr. O'Connor. Senator, I think they do, and in fairness to the folks who negotiate these treaties, I would imagine every time we ask for something, the countries ask for something in return. And I would imagine if you are in the State Department or in our Office of International Affairs negotiating MLATs, and every time we ask for more information, there is a counter request to us that we have to weigh equally. And we may have reasons in that circumstance to not agree to everything they want, which the end result might be we don't get everything we want. Again, I am not privy to, I do not participate in those negotiations, but I know that they can oftentimes reach dead ends. Senator Kerry. Well, doesn't the IRS have a very clear sense of the level of lost revenue to the country as a consequence of these practices? Mr. Shulman. We talked a little bit about this before, Senator, and let me, if I could, just respond to your earlier question, and at least give you my perspective on it. I just started my term. I am going to be here for 5 years. We are going to make this a major focus. What I said before is really the notion that once you leave the United States, our tools become harder to use, and it takes longer to use them from a tax administration standpoint, evasion tactics are easier to execute when you get outside of the United States. You layer on that the notion that capital markets have become global, and the obvious place to hide assets. We have never had a study directly on the leakage from the U.S. Treasury from global tax evasion, but I am comfortable saying it is in the billions of dollars, and it is something that we are going to focus on. I think one of the keys and one thing that I know is happening now--and it has been happening in my 3 months here because I have been involved in conversations--is that the OECD has a Tax Administrator Forum that sets standards of transparency that the United States has been active in. Just in the last couple of weeks, I think the G-8 actually asked that there be a broader OECD directive around transparency. We now house people together with folks from the governments of the U.K., Australia, Canada, and Japan to look at tax evasion. And we have now coordinated efforts with those countries and others, around some of these tax haven and tax evasion cases that you have been reading about recently. And we have hundreds of cases open. In response to your question of whether we are behind the curve, I would say every regulatory entity in the United States is going to need to pay attention to global capital flows, and that we are always going to be struggling to get ahead of the curve where there is complexity. We need to focus on both U.S. citizens, who frankly are evading their tax obligations and shortchanging their citizens, as well as on the supply side, which this Subcommittee is talking about today, the banks, the promoters, the lawyers, the accountants--anyone else involved in making it possible to evade tax obligations. I just think we need to have continued focus. Senator Kerry. Well, my time is up. I really want to thank the Chairman. I would just say those efforts I referred to were 1986 and 1991. It is now 2008. And I will tell you, the American taxpayer has enough to be angry about in terms of what is happening to their wallet today and the sense of unfairness that is institutionalized in the system. But if we cannot get at this with greater energy and create a system that is fair, and they are picking up the burden for a whole bunch of folks who are avoiding it and taking it overseas, we have a serious long-term problem because it undermines--and all you have to do is look at other countries in Europe that have difficulties in terms of the legitimacy of their tax structures to see what begins to happen. Our underground economy is already growing enormously, and everybody knows it. And this is one of the contributing factors to that. So, Mr. Chairman, I congratulate you again. I think this is really important stuff in terms of the integrity of our governance, and I think it is terrific you are pursuing it. Senator Levin. Thank you, Senator Kerry. Let me mention that I think we both would fully agree with you that there is a role for much stronger regulation and enforcement. But there is also a role here for legislation, and as I mentioned in my opening statement, I have introduced with Senator Coleman and Senator Obama a bill which will really take on these tax havens head on. The way we do that, one of the ways we do it in that bill, is to create a rebuttable presumption that in enforcement proceedings, a U.S. taxpayer who forms a legal entity in an offshore secrecy jurisdiction, which were enumerated by the Treasury Department, or who sends assets to an entity in a tax haven jurisdiction, or who receives assets from an entity in a tax haven jurisdiction is presumptively liable for that income and for tax on those assets. It is the way to get at this thing. It puts the onus on taxpayers. They are not going to be able to go to that little building there that has tens of thousands of nameplates of phony corporations which allow people to avoid paying taxes because they cannot do it without violating our tax law. When they send in their tax return, under our bill they would have to disclose that they are sending assets to an entity in a tax haven. And if they do not do it, they would be violating our laws. Right now they do not violate our laws per se by just simply sending money to a tax haven. It is only if they do not report it under certain circumstances. We want to create a rebuttable presumption that they are taxable on that income. They can rebut it. But we have to do that if we are going to take on that building in the Caymans and places like that all around the world, and these banks which facilitate and aid and abet our taxpayers. That is the way we think we can directly do it legislatively. But we need all the regulatory enforcement. Senator Kerry. The only thing I would say to that, Mr. Chairman--and I applaud it, and I think you have to move in that direction. But I know, because I have been through this with some of these folks, what you are going to hear from some of them, and that is that in a global marketplace, where capital is competing for the return on investment and where there is a voracious appetite for deals and for who is moving their wealth where and how, some people are going to say if you make it so onerous only in one jurisdiction, those folks just are not going to bother, and they will go take their capital-- -- Senator Levin. We are not talking about foreign taxpayers. We are talking about U.S. taxpayers. Senator Kerry. I understand that, but it is critical for the U.S. taxpayer to be able to feel they are competing on a playing field where they can have the ability to compete. And if that comparable cost of capital gets skewered, which is why the international piece is so critical here, that you have got to have the transparency and openness and have the larger financial structure, now global, not just controlled by New York as it used to be, but London, Singapore, Hong Kong, a vast array of centers of finance, you are going to have to think carefully about the implications. That is all I am saying. Senator Levin. I could not agree with you more. Senator Coleman. Senator Coleman. Thank you. Mr. O'Connor, if you could look at the exhibit book to your left, Exhibit No. 92,\1\ which purports to be information that comes from UBS, it was used at UBS workshops, training for some of their client advisors. It was given to us by Mr. Birkenfeld. I think he delivered that, and I will be asking the UBS folks about this. But if you look at Case 4--which the Chairman mentioned in his opening statement--and it gives a case study, and it says, ``After passing the immigration desk during your trip to the USA/Canada, you are intercepted by the authorities. By checking your Palm, they find all your client meetings. Fortunately, you stored only very short remarks of the different meetings and no names.'' --------------------------------------------------------------------------- \1\ See Exhibit No. 92, which appears in the Appendix on page 518. --------------------------------------------------------------------------- Then it goes on to say, ``You are staying at a hotel. You are being observed.'' And what they are reflecting is being observed by authorities, and that you are then intercepted by an FBI agent, and he is looking for information about one of your clients, explains to you your client is involved in illegal activities. Then they ask, ``What are the signs indicating something is going on?'' In other words, this purports to be directions to folks coming in to do business here--and we are going to find out that they are not registered securities folks, that many of them that came, that on their entry documents saying they were here for personal reasons, not for business reasons were in fact here solely for the business of inducing and abetting tax evasion. Can you tell me in your experience whether--is this standard training that American businesses give to their staff or that even other international--I am trying to understand where this fits in. Mr. O'Connor. Well, if it is standard training, God help us because, again, in fairness, I would want to see what UBS would have to say about it. But it seems to me it is clearly a way to evade the QI requirements, the deemed sales provision of the QI programs, as well as our securities laws that would require them to register as investment advisors. And, as I have seen the Subcommittee's report about filing false declarations with customs, the lengths that apparently we are going to--and, again, I referred to Mr. Birkenfeld's plea where he confirms a lot of this. It is, frankly, very troubling, and that is why we charged that case as a 371 conspiracy. It was not charged as an evasion case. It is one thing for a U.S. taxpayer to be creative and create shell corporations. It is a whole different ball of wax when a bank is enabling it and encouraging it. And that is what Mr. Birkenfeld has admitted to here. It was not just a taxpayer trying to save money by not paying their lawful taxes. It was a conspiracy. Senator Coleman. If you were looking at pursuing some action against the entity, would it be fair to say that this kind of information at least appears on the surface to be enabling the kind of illegal conduct that we are talking about? Mr. O'Connor. Again, I have to be very careful with an ongoing investigation, but in a hypothetical manner, obviously this is documentation that raises a lot more questions than it answers. Senator Coleman. Thank you, Mr. O'Connor. Thank you, Mr. Chairman. Senator Levin. Thank you, Senator Coleman. And we will again thank you both and excuse you. Mr. Shulman. Thank you. Senator Levin. Before we seat the next panel, we are going to have a tape recording, so the second panel is going to be deferred until we have a presentation of a statement by and questions of a man named Heinrich Kieber. In 2007 and 2008, Mr. Kieber, a former employee of LGT provided tax authorities around the world with records on people who had accounts at LGT. He freely gave to this Subcommittee about 12,000 pages of documents related to U.S. persons who had LGT accounts. Mr. Kieber spent 2 years reviewing the LGT documents. He also spoke with LGT officers and employees. As a result, he gained a familiarity with the operations and practices of LGT. During a recorded interview with Subcommittee staff, he provided information on LGT practices that helped U.S. citizens hide their assets from U.S. tax authorities. Many of the practices that he outlined apply to the case histories that are featured in the next panel. This taped interview along with the documents provided to the Subcommittee by Mr. Kieber provide insight into the practices of LGT. This man is now in a witness protection program. His current location and name are unknown to the Subcommittee. In order to avoid any breach in the security surrounding his condition or whereabouts, we will not discuss any aspects of the interview other than the content. There is a transcript of this interview at Exhibit No. 5.a.\1\ --------------------------------------------------------------------------- \1\ See Exhibit No. 5.a., which appears in the Appendix on page 213. --------------------------------------------------------------------------- So now if we could play that interview, we would appreciate it. [Interview played.] [The transcript of the interview follows:] MR. ROACH: Good morning, sir. My name is Bob Roach. I am counsel for the Democratic staff of the Permanent Subcommittee on Investigations. With me is my colleague, Mike Flowers, who is counsel for the Republican staff of the Subcommittee. MR. FLOWERS: Good morning, sir. CONFIDENTIAL WITNESS: Good morning. MR. ROACH: Thank you for joining us. I understand you have a statement to make after which we will ask you a few questions about the banking and trust operations of the LGT Group. Please proceed. CONFIDENTIAL WITNESS: Good morning. I swear that the testimony I am about to give will be the truth, the whole truth, and nothing but the truth so help me God. In 2000, the LGT Trust was evaluating the so-called ``paperless office.'' A project to scan every document of each client's legal entity and index them electronically, encoding an internal ``bak track'' code, a b-a-k. The project requires to hire over 20 new staff members. Based on my education and skills, I, then named Heinrich Kieber, worked--started to work at the LGT Trust in Vaduz in October 2000, and I worked there for more than 2 years until the date 2002. The LGT Group in Liechtenstein is a provider of a vast range of financial services. The key business of the LGT Group consists of the LGT Bank and the LGT Trust services. Both are independent, commercial companies, and both use autonomous computer data storage systems. The core trade of the LGT Trust, with head office in Vaduz and several branches in Switzerland, is selling and managing Liechtenstein legal entities such as foundations or establishments. They cater for clients from many different countries including the USA. Generally, the client transfers his/her bank assets, such as securities and cash accounts and often also the nonbank assets, such as real estate, expensive paintings, patents, rights, etc., into the ownership of a selected one or more legal entity. The client becomes then the beneficial owner of the legal entity. Every single legal entity from Liechtenstein has to pay on average a worldwide matchless flat tax rate of only $1000 Swiss francs per year, regardless of the millions of different type of assets they own and income they gain. The LGT Trust, back in the year 2002, had over 3,500 active legal entities under management, with the combined total bank assets of around 7.2 billion Swiss francs of which about 6 were invested at the LGT Bank and the rest in other Liechtenstein banks or Swiss banks. Back then, the LGT Bank had around 50 to 60 billion Swiss francs in their books. Today they hold over 100 billion Swiss francs. The real value of the nonbank assets are never recorded in the books. The first couple of months I was in charge of the correct handling of all clients' legal entities' files to make sure that they are scanned properly and that not one of the very sensitive documents where all the data concerning the beneficial owners are recorded is lost in the process. Because of the nature of my job, I had access to all documents of all legal entities, active ones and the inactive ones. The biggest task of the second stage was the proper indexing of all scanned documents. To be able to index the documents, we had to read every single one on our screens. It was then when I began to realize the very questionable business the LGT was often involved in and the dubious clients they were serving, the kind of business that goes beyond just facilitating massive tax evasion. Going through thousands of documents, I got very--I got the very clear picture of the highly sophisticated and sometimes surprisingly simple tricks and methods used to (a) help any clients to bring his or her bank assets to Liechtenstein and nonbank assets under the control of the one or more selective legal entity; (b) help any clients to keep his or her assets out of the reach of the taxman and people who may have a legal right to it or interest in it; (c) get around the laws of Liechtenstein and other countries; (d)--and (d)--avoid the attention of international law enforcement agencies and the international media. Liechtenstein has implemented real tough new compliance laws in January 2001. In addition, in July 2002, they signed a mutual assistance treaty with the United States of America. This treaty was designed to protect the international financial markets against terror, organized and economic crimes. However, the business practices of LGT undermines those reforms that Liechtenstein enacted. The LGT deliberately ignores the basic principles of the know-your-customer rules. For sure, I can frankly declare that in the vast majority of all legal entities, LGT does not have a clue about the real sources of their clients' huge wealth they manage, as it has been verified in the files I delivered to the U.S. Government. The final part of my job was to conduct training programs for all of the 85 staff members of the LGT Trust, including CEO, members of the company's board--and members of the company's board. When I was teaching the CEO or a member of the board or a trust client advisor, I confronted them about the LGT's questionable practices that I have seen in many files. Sometimes I always raised this topic with foundations' bank account managers from the LGT Bank. All these discussions were about files with strong indication to corruption, links to dictators, or business deals to avoid a U.S. embargo, for example. The answer was always the same: None of your business. Just stick to your designated job. I obtained copies of the data of every legal entity and, furthermore, copies of vast internal documents before I left the company. All documents provided are authentic, original copies and have not been in any way changed or manipulated. MR. ROACH: Thank you, sir. CONFIDENTIAL WITNESS: That's my statement. MR. ROACH: Thank you, sir. I'd now like to ask you a few questions. First of all, in your statement you referred to tricks that LGT used to help clients bring their assets into the bank, including--would you mind commenting on that, including the use of shell companies to move funds internationally. CONFIDENTIAL WITNESS: Yes. There are several methods in use, depending on the type of assets the client wants to transfer into his or her legal entity in Liechtenstein. For bank assets, the LGT Group establishes, indirectly manages, and ultimately owns a number of legal entities, so called ``special purpose vehicles,'' SPV. For the purpose of high-grade camouflage, there are two types of SPVs. Type A: big bank accounts around the world; and Type B: Which do not have any bank accounts but own and control Type A. To protect the LGT Group, those types used are never from Liechtenstein. The LGT uses only SPV registered in Panama, in the British Virgin Islands, or sometimes even in Nigeria. In practical terms, for a U.S. client, the LGT will transfer the bank's assets out of the United States through a chain of several Type A SPVs. Firstly, always into a country, for example, Canada, which from the IRS point of view is not suspicious. Next, through a series of other countries and therefore different jurisdictions. Preferably countries with very weak or, better, non-existing compliance laws. Before reaching Liechtenstein, it will run through a Swiss bank, for example the Banca del Gottardo in Lugano. This bank, in turn, has reciprocal rights to use the LGT Bank for its own customers. For an additional layer of concealment, either the Swiss bank or the LGT Bank often perform a fake cash-out transaction to make it look like the monies have been paid out in cash over the counter where in fact they have been transferred into the concentration account of the LGT Bank and, at the same time, an equal amount has been credited into the client's legal entity's bank account. After one or two years in use, the SPVs are put into liquidation, then deleted, and new ones established. The only purpose of all this is to make it extremely complicated for law enforcement agencies to follow the trail, as each step serves as a filter to hide the track of the client's money. For any bank or trust company in Liechtenstein, the matter of SPVs is commercially very sensitive material. The better sys--sorry. The better the system put in place, actually the less it will be detected. There's a lot of effort put into general research and checks of any possible legal implications, so that the LGT Group can always be many steps ahead of the tax authorities. All of the clients' trust advisors and bank account managers of the LGT Group get regular in-house training in relation to the latest tricks and methods used so they can keep their knowledge up to date and can offer it to any existing or future customers. MR. FLOWERS: Thank you, sir. Sir, you mentioned during your statement that LGT helped clients to keep their assets out of reach of tax agencies or persons with legal claims on those assets. Could you please explain how that was accomplished? CONFIDENTIAL WITNESS: Yes. What happens, the LGT strongly recommends to all clients to follow instructions such as, firstly, not to tell anybody concerning the legal entity to their lawyers, to other family members or relatives who are not part of the pool of beneficial owners, to friends or business partners. The reason is, any human relationship can go wrong and the client may end up in a situation where blackmailing is possible. Secondly, not to call the LGT Group from home--not from home, not from work. Use public phones instead. As Liechtenstein has an own country code number, the IRS may use the same plan as the Italian tax police did some years ago. They ordered the state-run phone company to record over a certain period the caller's i.d.; the time, date, and number dialed from a big city in Italy to Liechtenstein, to a Liechtenstein number. When the number called did not match a phone number--sorry--did match a phone number registered to a bank, trust company, or a lawyer, the tax police of Italy conducted a special assessment of the Italian callers. Thirdly, a third recommendation, only make calls in emergency to the nominated cell phone numbers of the clients' trust advisors. The LGT Trust only uses cell phone numbers from Switzerland or Austria. Again, because of the existence of a Liechtenstein-own country code number. When calling, the clients should always use the code words agreed and never state their own names or name of the legal entities. In addition, the LGT Group itself does not send any mail to their customers out of--from Liechtenstein. If at all, mail gets sent out via Swiss or Austrian post office to avoid the attention of any tax enforcement agency around the world looking for mail coming from Liechtenstein. In addition, any documents sent out are specially prepared in the way that the name of the bank, the client's name, or the legal entities' name is not revealed. The LGT Group does not call the clients at home or at work or on her or his phone--cell phones and does not communicate with their clients via email. The fact that all the LGT Trust's clients do not need their assets hidden in legal entities for their daily living helps very much to avoid detection and to keep the personal contact between the parties to a minimum, on average once per year. MR. ROACH: Thank you. You said that LGT used methods to allow it to get around compliance with the laws of Liechtenstein and other countries. How did LGT do that? CONFIDENTIAL WITNESS: Yes, they're very sophisticated in that way. The know-your-customer rules necessitate a lot of up- to-date documentation concerning the client's identity and the true source of assets. In addition, a profile of every client has to be created, and any movement outside the set profile has to be reported to a preferably independent government entity, for example, to the financial intelligence unit. The LGT not only fails to keep the basic documentation up to date, often there is no clear indication of the beneficial owner or the source of the monies at all. Furthermore, they, the LGT Trust, predetermine the threshold of a client's profile in such an unrealistic way that it would--that it will not trigger the compulsive report even so when according to compliance law, the transaction is regarded as more than suspicious. MR. FLOWERS: Thank you, sir. Sir, based on your experiences while working at LGT, did LGT ever assist U.S. persons in repatriating their assets back to the United States in a manner that would have reduced the attentions of the United States Government? CONFIDENTIAL WITNESS: Yes, there are several tricks in use, and I recall one. Then, at times, actually the LGT Trust would adjust the legal entities' documents to designate a new beneficial owner who will cause or result in the lowest tax obligation or, if possible, a zero tax obligation. Often this means creating a--new trust documents and changing the name of the real beneficial owner into the name of a person or relative who has recently died or, in some cases, is unfortunately in the process of dying. When the assets are transferred back to the United States, the real beneficial owners explain to the IRS that they have just inherited a large amount which was only discovered in recent times. MR. ROACH: Now, in your statement, you also said that LGT sought to avoid the attention of international law enforcement and the media. How did LGT do that? CONFIDENTIAL WITNESS: After some major scandals in the past 15 years, in an effort to avoid bad and further damage to their reputation, many powerful financial key players in Liechtenstein established smaller banks or trust companies whose names nobody recognizes. They have transferred their risky group of clients into those new banks or trust companies. In that way, if the risky clients are exposed in a scandal overseas, the larger well-known banks or trust companies are out of trouble and the media spotlight. The LGT Trust, but not so much the LGT Bank, did not accept new clients from Russia, for example, but would refer them to such smaller trust companies. MR. FLOWERS: Sir, you made references in your statement to LGT's role in assisting in corruptive--or corruption, acts of corruption including breaking embargoes, for example. Could you please elaborate on that? CONFIDENTIAL WITNESS: Yeah. The words I say here is that one set of documents indicate its pride in government officials in another country--in other countries including the United States. The LGT Bank introduced the client to the LGT Trust. The LGT Trust did accept the client but refused to nominate staff onto a new Panama company where such payments should be done in the future. At the end, in this file, the payments continued to be facilitated through the LGT Bank. And there's another file which has a very strong indication to--of corruption in a third world country. A head of a social government department owns over $5 million U.S. dollars with no explanation in the files whatever in regard to the source of the vast amount. MR. ROACH: In an answer to a previous question, you identified some problems with LGT's know-your-customer program. What about LGT's compliance with the qualified intermediary program? CONFIDENTIAL WITNESS: Yeah, I strongly believe that they are violating this one too. The IRS implemented the qualified intermediary stages QI to be able to collect the withholding tax on interest and dividends on U.S. securities through foreign intermediaries. The LGT Group realized quickly that without the QI stages, the banking secrecy for their U.S. clients cannot be sustained, because only as a QI the LGT Group can avoid having to report the underlying beneficial owners to the IRS. The IRS approved the QI stages to Liechtenstein as a country and to the LGT Group as a foreign intermediary in early 2001, as both were able to persuade the IRS that Liechtenstein's know-your-customer rules were top standard. All U.S. clients from the LGT Group with U.S. securities in the bank portfolios have been informed about the QI regulations. These clients had two options: Get out of the U.S. security-- sell them or keep them. The clients wanting to keep the U.S. securities had great fears that the IRS may eventually find out who the ultimate beneficial owners are, for instance, through the external auditors' working paper the IRS can request to examine. To reduce the panic, the LGT came up with the solutions: (a) to transfer all U.S. securities held by a legal entity of a U.S. tax person into a newly established Panama corporation. To add a further layer of secrecy between the foundation and that Panama corporation, another offshore company will own the Panama corporation. The LGT's argument for the Panama corporation solution was that the IRS regards it as a per se corporation; (b) having added enough offshore companies in between the U.S. client as a beneficial owner and the entity holding the U.S. securities, the LGT Trust declares the whole structure as being a non-U.S. status. This should keep the client out of trouble and taxes. MR. ROACH: Thank you very much, sir. We appreciate your comments. This concludes our questions. MR. FLOWERS: Thank you, sir. CONFIDENTIAL WITNESS: Thank you very much. Senator Levin. After Germany and other nations began to act on the information provided by Mr. Kieber, Liechtenstein put out an international arrest warrant for Mr. Kieber and posted his picture on the government's website, and this is a chart of that website.\1\ Even today it is on the website, and Mr. Kieber has been listed by Liechtenstein as their number one target for arrest. --------------------------------------------------------------------------- \1\ Exhibit No. 5.b., which appears in the Appendix on page 222. --------------------------------------------------------------------------- This is what the message on that arrest warrant reads. This is a translation: ``Information on the whereabouts of Heinrich Kieber should be passed on to the national police force of the Principality of Liechtenstein or the closest police station. Kieber is being sought under an international arrest warrant. Liechtenstein law enforcement authorities seek Kieber's prompt delivery/extradition. The legal basis: Warrant issued by the principality's county court on 2/9/08 for the alleged transfer (passing on) of company business secrets for use abroad and for data theft.'' Liechtenstein is obviously aggressive in pursuing persons who release information about their banking practices in violation of their secrecy laws. They have not been particularly aggressive at all in combating banks that facilitate tax evasion. And while the government of Liechtenstein told the Subcommittee that it has now initiated an investigation into LGT, when the Subcommittee asked the chief compliance officer of LGT Group about the investigation, he was unaware of it. We will now call panel two. Mr. Marsh and Mr. Wu, if you would please be seated. [Pause.] Senator Levin. Let me now welcome our second panel of witnesses for today's hearing: Shannon Marsh of Fort Lauderdale, Florida, and William Wu, of Forest Hills, New York. We appreciate your traveling here today. Pursuant to Rule VI, all witnesses who appear before the Subcommittee are required to be sworn. And at this time, I would ask both of you to please stand and raise your right hand. Do you swear that any testimony that you will give before this Subcommittee will be the truth, the whole truth, and nothing but the truth, so help you, God? Mr. Marsh. I do. Mr. Wu. I do. TESTIMONY OF SHANNON MARSH, FORT LAUDERDALE, FLORIDA, ACCOMPANIED BY SHARON KEGERREIS, ESQ. Senator Levin. Our investigation disclosed that Shannon Marsh is the son of the late James Albright Marsh who formed four Liechtenstein foundations in the mid-1980s, as shown in a chart which we will put up, and transferred substantial sums to those foundations.\1\ In 1985, for example, LGT documents show that he deposited $3.3 million in cash into just one LGT foundation. That is Exhibit No. 7.\2\ By 2007, the assets in the four foundations had a combined value of more than $49 million. --------------------------------------------------------------------------- \1\ See Exhibit No. 1, which appears in the Appendix on page 209. \2\ See Exhibit No. 7, which appears in the Appendix on page 224. --------------------------------------------------------------------------- Shannon Marsh, who is here today, has been involved with the LGT foundations since the beginning. LGT's documents indicate that he traveled to Liechtenstein, served as a foundation protector with control over the foundations' activities, and signed a so-called letter of wishes to provide instructions for distributing foundation assets that he would receive. The Marshes are in settlement discussions with the IRS. Mr. Marsh, do you have any opening remarks? Ms. Kegerreis. No, Your Honor, we don't. Senator Levin. Mr. Marsh, have you ever spoken to anyone at LGT Bank in Liechtenstein? Mr. Marsh. On the advice of counsel, I hereby invoke my right to remain silent under the Fifth Amendment of the U.S. Constitution. Senator Levin. And, Mr. Marsh, do you have any corrections to what I have just said about the Marsh foundations and your activities at LGT to ensure that we have the facts right? Mr. Marsh. On the advice of counsel, I hereby invoke my right to remain silent under the Fifth Amendment of the U.S. Constitution. Senator Levin. Mr. Marsh, you have been asked specific questions about matters of interest to this Subcommittee, and in response to each question, you have asserted your Fifth Amendment privilege. Is it your intention to assert your Fifth Amendment privilege to any question that might be directed to you by the Subcommittee today? Mr. Marsh. Yes, it is, sir. Senator Levin. Given the fact that you intend to assert a Fifth Amendment right against self-incrimination to all questions asked of you by this Subcommittee, you are excused. You are free to leave. Ms. Kegerreis. Thank you, Chairman Levin. Senator Levin. Thank you. Mr. Marsh. Thank you. TESTIMONY OF WILLIAM WU, FOREST HILLS, NEW YORK, ACCOMPANIED BY HENRY KLINGEMAN, ESQ. Senator Levin. Our investigation disclosed that William S. Wu has lived for many years with his family in New York. LGT helped Mr. Wu establish a Liechtenstein foundation in 1996 and a second one in 2006. LGT documents indicate that these foundations were used to conceal certain Wu ownership interests. For example, in 1997, 3 months after forming his first foundation, Mr. Wu pretended to sell his home in New York to what appeared to be an unrelated party from Hong Kong. In fact, as you can see from the chart which we have put up,\3\ the buyer was a British Virgin Islands company with a Hong Kong address, and it was wholly owned by a Bahamian corporation, which was in turn wholly owned by Mr. Wu's Liechtenstein foundation. These layers of ownership were designed to hide Mr. Wu's ownership of the home that he lived in and likely shield him from taxes at the same time. --------------------------------------------------------------------------- \3\ See Exhibit No. 2, which appears in the Appendix on page 210. --------------------------------------------------------------------------- LGT documents also show that Mr. Wu transferred substantial sums to his foundation and over the years withdrew substantial amounts ranging from $100,000 to $1.5 million at a time. In one instance, LGT arranged for Mr. Wu to withdraw $100,000 using an HSBC bank check drawn on a LGT correspondent account, which made the funds difficult to trace. By 2006, Mr. Wu's first foundation had been dissolved while his second foundation had assets in excess of $4.6 million. Mr. Wu, do you have an opening statement? Mr. Wu. No, sir. Senator Levin. Have you ever spoken to anyone at LGT Bank in Liechtenstein? Mr. Wu. Senator, I decline to answer the question based on my right to remain silent under the Fifth Amendment to the U.S. Constitution. Senator Levin. And, Mr. Wu, do you have any corrections to what I have just said about your foundations and your role in them in order to ensure that we have the facts correct? Mr. Wu. No, sir.\1\ And, Senator, I intend to give the same answer to any questions posed to me. --------------------------------------------------------------------------- \1\ See Exhibit No. 120, which appears in the Appendix on page 681. --------------------------------------------------------------------------- Senator Levin. You have been asked specific questions about matters of interest to this Subcommittee, and in response to the questions, you have asserted your Fifth Amendment privilege. Is it your intention to assert your Fifth Amendment privilege to any question that might be directed to you by the Subcommittee today? Mr. Wu. Yes, sir. Senator Levin. Given the fact that you are asserting a Fifth Amendment right against self-incrimination to all questions asked of you by this Subcommittee, Mr. Wu, you are excused. Mr. Wu. Thank you. Senator Levin. Thank you. Now, the third witness who was subpoenaed for this panel was Steven Greenfield. Harvey Greenfield, Steven Greenfield's father, and Steven Greenfield are New York businessmen. In 1992, LGT helped Harvey Greenfield establish a Liechtenstein foundation for which he is the sole primary beneficiary. Steven Greenfield holds power of attorney. As shown in the Greenfield foundation chart,\2\ the Greenfields' foundation used two British Virgin Islands corporations as conduits to transfer funds, which at the end of 2001 had a combined value of $2.2 million. --------------------------------------------------------------------------- \2\ See Exhibit No. 3, which appears in the Appendix on page 211. --------------------------------------------------------------------------- A LGT memorandum, which is Exhibit No. 54,\3\ describing the 2001 meeting in Liechtenstein with Prince Philipp states the following: ``The Bank of Bermuda has indicated to the client that it would like to end the business relationship with him as a U.S. citizen. Due to these circumstances, the client is now on the search for a safe haven for his offshore assets. The bank indicates strong interest in receiving the US$30 million. The clients are very careful and eager to dissolve the trust with the Bank of Bermuda, leaving behind as few traces as possible.'' --------------------------------------------------------------------------- \3\ See Exhibit No. 54, which appears in the Appendix on page 367. --------------------------------------------------------------------------- The Subcommittee subpoenaed Mr. Greenfield to testify at today's hearing. LGT documents indicate that he has information related to the Subcommittee's investigation into tax haven financial institutions, their use of offshore entities and accounts for U.S. clients, and the impact of these activities on U.S. tax compliance. Mr. Greenfield's counsel informed the Subcommittee by letter that Mr. Greenfield would assert his Fifth Amendment rights in response to any questions and requested that he be excused from appearing at this hearing. The Subcommittee informed Mr. Greenfield's counsel by letter that his absence was not excused and that he was required to attend the hearing and answer Subcommittee questions or assert appropriate privileges in response to particular questions. Our letter assured the lawyer that any assertion or constitutional rights would be respected, but that his client needed to make any assertions personally at the hearing. That exchange of correspondence will be included in today's hearing record, as well as a longer statement of mine.\1\ --------------------------------------------------------------------------- \1\ Subsequent to the adjournment of the hearing, Mr. Steven Greenfield agreed to appear before the Permanent Subcommittee on Investigations at the July 25 hearing. Senator Levin's longer statement was presented at that hearing. However, the correspondence referred to by Senator Levin is included as Exhibit No. 121, which appears in the appendix on page 683. --------------------------------------------------------------------------- Senator Levin. Mr. Greenfield has ignored the Subcommittee's subpoena and directive and has chosen not to appear today. There are both civil and criminal sanctions that can be sought by the Subcommittee for his failure to appear, and we will at the appropriate time make a decision as to how to proceed with respect to Mr. Greenfield. The fourth witness who was to be on this panel was Peter Lowy. On July 10, 2008, Mr. Lowy was asked to appear at today's hearing. His attorney was informed that Mr. Lowy would be formally subpoenaed if he did not agree to appear voluntarily. A subpoena was signed. On July 11, 2008, Mr. Lowy's attorney was asked if he was authorized to accept service of the subpoena. He replied that he would check with his client and respond by Monday, July 14. On Monday, Mr. Lowy's attorney notified the Subcommittee that Mr. Lowy was out of the country. Yesterday, Mr. Lowy's attorney provided a letter stating that Mr. Lowy would appear before the Subcommittee for a hearing on July 25, one week from tomorrow. The letter will be entered into the record, as well as the other documents referred to, and we will look forward to his appearance at that hearing.\2\ --------------------------------------------------------------------------- \2\ See Exhibit No. 122, which appears in the Appendix on page 699. --------------------------------------------------------------------------- Senator Levin. Senator Coleman, before we proceed now to our next panel, I am wondering if I might turn to you for any comments that you might have. Senator Coleman. Mr. Chairman, I simply want to say for the record that I associate myself with the comments from the Chairman and will work with the Chairman on following up and pursuing these matters. Senator Levin. I want to thank you, Senator Coleman, again for your work on this matter, for the great work also of your staff. They have been essential. Senator Coleman. It has been a very good bipartisan investigation, Mr. Chairman. Senator Levin. Now, the next panel is Martin Liechti--and I hope I am pronouncing your name correctly, Mr. Liechti--the head of the Wealth Management Americas, which is part of the Wealth Management Business Bank Division of UBS. In this capacity, Mr. Liechti oversees, among other things, the activities of UBS private bankers in Switzerland who serve U.S. clients, and his offices are located in Zurich, Switzerland. Pursuant to Rule VI, all witnesses who testify before the Subcommittee are required to be sworn. And at this time, I would ask you, Mr. Liechti, to please stand and raise your right hand. Do you solemnly swear that any testimony that you will give before this Subcommittee will be the truth, the whole truth, and nothing but the truth, so help you, God? Mr. Liechti. Yes, I do. TESTIMONY OF MARTIN LIECHTI, HEAD, UBS WEALTH MANAGEMENT AMERICAS, ZURICH, SWITZERLAND, ACCOMPANIED BY DAVID M. ZORNOW, ESQUIRE Senator Levin. Do you have any opening remarks, Mr. Liechti? Mr. Zornow. Mr. Chairman, we do not have an opening statement. Senator Levin. Are you, Mr. Liechti, involved in setting and implementing policies that govern the practices of UBS private bankers in Switzerland who recruit and serve clients from the United States? Mr. Liechti. Mr. Chairman, on advice of my counsel, I assert my rights under the Fifth Amendment to the U.S. Constitution and respectfully decline to answer your question. Senator Levin. Mr. Liechti, as part of your responsibilities, do you travel to the United States? Mr. Liechti. Mr. Chairman, on the advice of my counsel, I assert my rights under the Fifth Amendment to the U.S. Constitution, and I respectfully decline to answer your question. Senator Levin. Mr. Liechti, you have been asked specific questions about matters of interest to this Subcommittee. In response to each question, you have asserted your Fifth Amendment privilege. Is it your intention to assert your Fifth Amendment privilege to any question that might be directed to you by the Subcommittee today? Mr. Liechti. Yes, I do. Senator Levin. Given the fact that you are asserting your Fifth Amendment right against self-incrimination to all questions asked of you by this Subcommittee, you are excused. Mr. Zornow. Thank you, Mr. Chairman. Mr. Liechti. Thank you. Senator Levin. Thank you. We will now move to our final panel and call as our final witness today Mark Branson, the Chief Financial Officer of UBS Global Wealth Management and Business Banking of Zurich, Switzerland. Mr. Branson, I want to thank you for traveling here today. We look forward to your testimony. The Subcommittee also extended an invitation to the LGT Group in Liechtenstein. We do not have the authority to compel its attendance. We, nonetheless, had hoped that LGT would send a representative to answer questions and to provide us with the bank's perspective. LGT chose not to appear. LGT did send its Senior Compliance Officer to be interviewed by the Subcommittee in private last week and provided limited information in response to our requests. We obviously had hoped that LGT would be more open and forthcoming to enable the Subcommittee to gain a better understanding of its interaction with U.S. clients. However, we do not have subpoena capability over LGT, and they decided not to appear. We are very pleased that you appeared today, Mr. Branson, and we know that in doing so you are undertaking to answer some questions which you have heard a great deal about already. Pursuant to Rule VI, all witnesses who testify before the Subcommittee are required to be sworn. And at this time, I would ask you to please stand and raise your right hand. Do you solemnly swear that the testimony you will give before this Subcommittee today will be the truth, the whole truth, and nothing but the truth, so help you, God? Mr. Branson. Yes, I do. Senator Levin. Thank you. You may proceed. Do you have an opening statement, Mr. Branson? Mr. Branson. I do. Senator Levin. That is fine. Thank you. TESTIMONY OF MARK BRANSON, CHIEF FINANCIAL OFFICER, UBS GLOBAL WEALTH MANAGEMENT AND BUSINESS BANKING, MEMBER, UBS GROUP MANAGING BOARD, ZURICH, SWITZERLAND Mr. Branson. Thank you, Chairman Levin and Senator Coleman. My name is Mark Branson of UBS. I am the Chief Financial Officer of our Global Wealth Management and Swiss Businesses located in Zurich. I have been with UBS since 1997, and in my current position for 5 months. Prior to this, I was the Chief Executive Officer of UBS in Japan. I am now responsible for finance and for risk control, including the financial reporting of our performance and the maintenance of a strong compliance framework for our wealth management business worldwide. Mr. Chairman, I have now had the chance to review your Subcommittee's staff report. I am here to make absolutely clear that UBS genuinely regrets any compliance failures that may have occurred. We will take responsibility for them. We will not seek to minimize them. On behalf of UBS, I am apologizing. I am committing to you that we will take the actions necessary to see that this does not happen again. First, we have decided to exit entirely the business in question. That means that UBS will no longer provide offshore banking or securities services to U.S. residents through our bank branches. Such services will only be provided to residents of this country through companies licensed in the United States. While we are winding down this business, there will be no new accounts opened, and Swiss-based client advisors will not be permitted to travel to the United States for the purpose of meeting with U.S. clients. Second, we are working with the U.S. Government to identify those names of U.S. clients who may have engaged in tax fraud. Client identity is generally protected from disclosure under Swiss law, but such privacy protections do not apply when disclosure of client names is requested in connection with an investigation of tax fraud and where the requests are presented to the Swiss Government through established legal channels. We will fully support and assist that process. Mr. Chairman, I have worked in this organization in many different divisions and many different locations over the past 11 years. What I have experienced is a firm which not only puts an enormous emphasis on compliance--compliance with law, compliance with regulation, compliance with internal policy-- not only that but also acts as a partner to governments seeking the assistance of the financial system. We have been a recognized partner to the U.S. Government in its efforts to stop the flow of money that supports terrorism, illegal drug trade, or organized crime. And we have constructed a best-in- class system for reconciling the multiple sanction rules imposed by the United States, the United Nations, the European Union, and other countries. This system has won direct praise from senior officials in the U.S. Treasury Department. And these are just two examples. Like many international financial institutions with clients around the globe invested in U.S. securities, UBS has entered into a Qualified Intermediary (QI) agreement with the Internal Revenue Service. We entered this agreement with the IRS effective January 1, 2001. The QI agreement established a reporting and withholding regime by which UBS would help the U.S. Treasury collect more taxes. Chairman Levin, I know that you and Senator Coleman object to banks providing cross-border services to U.S. clients with accounts that do not require the filing of a Form W-9 with the IRS. But, respectfully, this cross-border business was and is entirely legal in both Switzerland and the United States. And, indeed, the QI expressly contemplates that U.S. citizens could access bank accounts in Switzerland and other countries without providing a Form W-9 as long as they held no U.S. securities. Unless or until those rules are changed, that is the framework with which we and other banks must comply. In 2000, UBS adopted detailed procedures and policies to implement the QI agreement, and we worked hard to comply. For example, we undertook a comprehensive process to identify the accounts of U.S. persons which contained assets that could generate U.S. source income. Then, consistent with the QI agreement, UBS systematically communicated with all of these U.S. persons, advising them that they must either provide UBS with Form W-9, and thereby disclose to the IRS their relationship to the account, or must agree to sell all of the U.S. securities in their accounts. If those clients did not respond by taking one of those two options, we administered forced sales of the U.S. securities in those accounts. Notwithstanding this effort, we now know that our compliance system had failures, and misconduct appears to have occurred. As the Subcommittee is aware, the U.S. Department of Justice has been conducting an investigation of UBS' business of servicing U.S. clients from Switzerland. Last year, in order to respond to U.S. investigations, UBS launched a comprehensive internal investigation into our cross-border business with U.S. customers. These still ongoing investigations suggest that misconduct occurred, which we find unacceptable. We did have detailed written policies that prohibited our employees from engaging in some of the conduct that our internal investigation has uncovered, such as assisting in the creation of sham offshore companies to defraud tax authorities. While our own review is not complete, it is apparent now that our controls and our supervision were inadequate. We are committed to taking both corrective and disciplinary measures. Mr. Chairman, as you know, we have nearly 32,000 U.S. employees out of some 80,000 employees around the world. They are all understandably alarmed by the reports of misconduct that they have been seeing. They want to know that kind of misconduct does not belong in UBS and that the firm's ethics match their own. I am here today to tell you and to tell them that, no, that kind of misconduct does not belong in UBS; and, further, that by exiting this business, we have taken a major step designed to ensure that this misconduct will not be repeated and that this matter can be properly resolved. Thank you for the opportunity, and I will be pleased to answer your questions. Senator Levin. Thank you very much, Mr. Branson, for not only coming today but for the steps which your bank is now taking. If anybody ever suggests that congressional oversight does not have an impact, I hope they will read today's hearing. We have put a lot of time into this investigation, and it has obviously already paid off and was worthwhile. We just want to clarify a few things, however, one being--you say you have read the report, you have read the stories of UBS' undeclared accounts and encrypted computers and the shell companies that you mentioned that were created, the anonymous wire transfers, the disguised business trips, the countersurveillance training, the requirement that foreign credit cards be used. Do you have any corrections that you want to make in those factual statements? Mr. Branson. I think obviously it is a very detailed, very thorough report, which raises obviously very legitimate concerns. I think there may well be some areas of factual record within the report that we may challenge, but points of detail, especially in terms of the record of growth in the business which you reference in the document, is something which doesn't actually correspond to our understanding of the growth in the business over that period, maybe some other details. Senator Levin. Would you give to the Subcommittee for the record--not today, obviously, but for the record, would you provide us with any factual statements that are in the report that you disagree with? Mr. Branson. I am sure we can provide that. Senator Levin. Could you provide that within the next couple weeks? Mr. Branson. Yes. Senator Levin. Thank you. Would you agree that the purpose of the QI agreement is not just a technical compliance but is a compliance with the point and the intent of that agreement so that if a bank that agrees to provide information to the IRS of the presence of a client in that bank from the United States, and then takes steps to help that client cover up the U.S. identity of that client so that it appears that the deposit comes from some foreign entity rather than from the beneficial owner, that violates the purpose and intent and spirit of the QI agreement? Mr. Branson. I would agree that the creation of any kind of sham offshore entities to conceal the identity of the client from the IRS would be a violation of the QI agreement. Senator Levin. If you would take a look at Exhibit No. 92,\1\ this is a cross-border workshop that UBS held for its bankers, and just take a look at Case 4, if you would. I am not going to go through all these, obviously, because of the position that you are now taking, which is a very welcome one, at UBS. But take a look at Case 4. These are all troubling because, obviously, this is training to help your bankers avoid surveillance. But there is that one sentence in the first paragraph there about, ``After passing the immigration desk during your trip to the USA/Canada, you are intercepted by the authorities. By checking your Palm, they find all your client meetings.'' And then it says the following: ``Fortunately, you stored only very short remarks of the different meetings and no names.'' --------------------------------------------------------------------------- \1\ See Exhibit No. 92, which appears in the Appendix on page 518. --------------------------------------------------------------------------- Would you agree that is very troubling? Mr. Branson. I think this and the other case studies in this kind of training document have to be seen in the context of the legal framework under which these client advisors are operating, and clearly that is all of the applicable legal frameworks relevant to their business activities, obviously in this case specifically the legal frameworks of Switzerland, the legal frameworks of the United States. The legal framework of Switzerland, as it relates to bank- client confidentiality, clearly prohibits the disclosure of clients' names or identities or their relationship to the bank except in circumstances of criminal activity, tax fraud, etc., as we have heard today. So any client advisor, whether they be in Switzerland or abroad, has an enormously strong duty under the law not to disclose the names of their clients. Senator Levin. Now, this is not disclosure. Mr. Branson. Well, under Swiss law---- Senator Levin. Can you not keep a record of it? Mr. Branson. The names of a client--the link of a name of a client and the relationship to UBS would count as the disclosure of that client's name--it is not the disclosure of the assets in the account. Simply the disclosure of that client relationship is against Swiss law and has severe sanctions, and that is what this training is designed to talk about: Are there difficult situations in which you may find yourself because of that legal framework? Senator Levin. Disclosure is one thing, but putting it in your own Palm, is that disclosure under your law? Mr. Branson. Yes. Senator Levin. That would be disclosure, putting it into your own record? Mr. Branson. If that became available to other parties. Senator Levin. Of course. Mr. Branson. Yes. Senator Levin. That is not what it says here. Mr. Branson. Putting it into your Palm would not be, but that---- Senator Levin. It says here, ``Fortunately, you only stored very short remarks.'' It doesn't say ``disclosed.'' It says ``stored.'' Mr. Branson. Yes. Senator Levin. And no names. Mr. Branson. I think this kind of--as I understand-- obviously, I am not privy to the details of this training, but as I understand this kind of case study, this is talking about data protection, and I think in many different circumstances, data protection through lost Palms, lost BlackBerrys, lost mobile phones is one of the acute concerns of anybody in the services industry, especially the financial services industry. And I do believe that is exactly what this is referring to. Senator Levin. You have testified that you were going to address the current 19,000 accounts, approximately. Mr. Branson. Yes. Senator Levin. Can you just give us a little more detail as to what your intent is, as to how you are going to handle that and see to it that any wrongdoing in those accounts will be disclosed and taken care of and shared with the IRS? Can you give us that again? Mr. Branson. So in terms of---- Senator Levin. The existing accounts. Mr. Branson. Existing accounts and any possible misconduct that may have occurred within UBS, we have an enormously comprehensive internal investigation into that, and obviously at the same time cooperating with the investigations of the U.S. Government into that potential misconduct. There are no final conclusions from what is an ongoing investigation. The preliminary conclusions, I think we have shared some of them with you here today. That investigation and that process which I referenced of working between the different governments and their authorities on the disclosure of client names where tax fraud is suspected, that is an ongoing process. We are supporting and we are assisting that process, and we expect it to bring results. Senator Levin. Are you going to be cooperating with the IRS now? Mr. Branson. Yes, we are. Senator Levin. In looking at these 19,000 names? Mr. Branson. We will be cooperating with the IRS on their summons. Senator Levin. Will you take a look at Exhibit 88?\1\ --------------------------------------------------------------------------- \1\ See Exhibit No. 88, which appears in the Appendix on page 502. --------------------------------------------------------------------------- You have made reference to this notice to U.S. customers in your statement, and you said to the customers that you are going to need to do something here if you have U.S. securities in your account. ``Should a customer choose not to execute such a form, the client is barred from investments in U.S. securities. But under no circumstances will his or her identity be revealed.'' Now, as I understand what you are saying to your U.S. customers, it is that you must either have these securities shifted to a different entity or you must get rid of these securities, you must sell them. And that is what you call ``forced''---- Mr. Branson. ``Forced sales'' of U.S. securities, yes. Senator Levin. U.S. securities. And you said under no circumstances will the identity be revealed. In other words, you would not maintain an account that continued to have U.S. securities in it without a W-9 form. Mr. Branson. That's correct. Senator Levin. But we know from the work that this investigation has carried out that the other option which was utilized was the creation of these sham companies, these other entities in whose name the securities would then be held and deposited. But the secrecy drive here is perhaps reflected as dramatically in that one line, I think, as anything else that we have seen. We have had a lot of folks who have asserted their rights under the Constitution today, and others did not appear at all. UBS, to its credit, not only appeared but you have taken responsibility for your actions, and you have changed your business and your business practices. And I just hope that LGT will take notice. I hope that other Swiss banks and other tax haven banks will take notice as well. UBS is the largest private bank in the world today, I believe, and by changing its stance, I hope that it will start a trend which will clean up the offshore community and stop tax haven banks from facilitating U.S. tax evasion. So before I call on Senator Coleman, I want to thank you, Mr. Branson, and I want to thank UBS for your cooperation with this Subcommittee's investigation. Senator Coleman. Senator Coleman. Thank you, Mr. Chairman. I also hope that others take notice and respond accordingly. I do have some questions. If I can get back to that Case 4, the study there, we are talking about data protection from law enforcement. That is what this is focused on. And what troubles me--and it is more a comment than a question. If you read this, Mr. Chairman and Mr. Branson, it talks about you begin to observe, you notice that some doubt if all the hotel employees are working for the hotel; in other words, you are being observed by law enforcement. And rather than saying at that point, let UBS--let them call the Justice Department, what is the problem here, you are directing your people to figure out a way to limit any and all cooperation with law enforcement. I mean, this to me ties in with--when you look at the other stuff, you look at folks coming into the country and putting on their entry forms here ``For personal business,'' when it appears they were here for soliciting clients. You put it all together, and it is not a very comforting scenario. I just wanted to make that comment. UBS has great presence in Minnesota, good community citizens. What I am trying to understand is you have 20 client advisors coming in, over 300 trips, they are taking clients from American--from folks here. They are taking assets. I presume it is competitive. Everyone wants to build up their portfolio. Who in the United States was aware that these client advisors from Switzerland were coming in for the purpose of soliciting business in violation of U.S. securities law? Mr. Branson. I have no knowledge that anyone in the United States was aware. Senator Coleman. Wouldn't anybody have asked the question, ``What are you doing here?'' Mr. Branson. It may well be that they are not in the same geographic location, so I have no knowledge that anybody in the U.S. knew of specific visits. Senator Coleman. I find that troubling and really difficult to comprehend. If somebody has a UBS guy coming--if I am a UBS guy probably looking to build our portfolios, and somebody is coming in talking to a high-net-worth individual, I think I have to figure out what they are doing. I think I got to know what they are doing. And that piece has never been resolved, and I appreciate the steps you are taking now. I hope as you look internally that if you are really going to clean house that you raise those questions because they certainly are troubling. Let me just ask other questions about things that I am still a little unsure of or troubled by as I sit here. You have indicated that UBS attorneys advised the Subcommittee while some travel was permitted to the United States after November 2007, mainly if it had been previously planned, they told us in no event did any travel occur after January 2008. Our staff has reviewed data from the Department of Homeland Security that shows from January 2008 to April 2008, many of the same UBS bankers in the Wealth Management Unit that we have talked about before came to America 12 times. Six of those trips were listed as being for non-business purposes. Are you aware of folks in 2008 involved in the Wealth Management Unit coming to the United States and continuing to do business here? Mr. Branson. Obviously, what you refer to is data that we don't have access to, and obviously, to the extent that we could get access to that, then we can clear up these questions. There may be a number of reasons why that travel either was because it genuinely was for leisure purpose, because it was for business travel unconnected with clients, maybe because some of those client advisors are no longer within that unit. So there may be a number of reasons why that does not indicate a pattern which is inconsistent with that travel ban. If there was a pattern inconsistent with that travel ban that is shown by that data, I am sure we would take the appropriate action. It is completely inconsistent with our---- Senator Coleman. But you are confident that your travel ban has been communicated and understood by UBS employees in Switzerland and the United States? Mr. Branson. Absolutely confident, yes. Senator Coleman. All right. And based on your knowledge of the program and the practices we described here today, is there anything that we described here today that you believe is different than other banks in Switzerland that fall into UBS' classes in terms of size. I am trying to figure out is it your sense that this has been the standard practice, the stuff we have seen here, or was UBS the exception? Mr. Branson. It is really impossible for me to generalize across other industry or competitors. Sorry, I just really would not have that experience or knowledge. Senator Coleman. It is certainly a competitive industry. You have an identified class of individuals that you are going after. I think I saw in one of the UBS documents, 222 billionaires being part of the universe. Mr. Branson. I mean, certainly the business that we were in, as we pointed out, was a legal, legitimate business, so we certainly were not the only people in that business. That is for sure. Senator Coleman. One of the things that was talked about today was the gap between the know-your-client obligations and the QI obligations. We have been proposing changes to the QI agreement, which include strengthening audit provisions, requiring UBS to report all American client accounts, not just those containing U.S. securities. That is not the law today. And requiring UBS to apply what it learns through know your client (KYC), to its QI obligations, what would UBS do in response to those changes? Mr. Branson. Well, I guess, as I said, we are exiting the business. It, to some extent, would become a moot point under that. But I think your point is well made that there is a-- under the QI agreement, the QI definition of ``beneficial ownership'' and the KYC definition of ``beneficial ownership'' are not the same. I think that is something that you pointed out to Commissioner Shulman this morning as being an ambiguity, if you like, of the QI agreement set-up. It sounds as though he is going to be addressing that ambiguity, which obviously the more clarity there is in the rules, the easier it is to not slip into gray areas. Senator Coleman. Mr. Branson, based on your coming forward with a pretty full apology, with a commitment to exit the business, to restructure how UBS operates, I had a lot of questions about why you were doing the things that you are doing. I think it is pretty clear. You are doing it to develop customer relations with American clients in violation of U.S. securities law and other statutes. Let's look to the future. Again, I appreciate your coming forward. I still remain somewhat troubled by the fact that the scope of this activity and the limited number of folks that you were dealing with to me would have to have raised questions beyond folks just coming from Switzerland. So I do hope that you look very closely and aggressively at that if you are in the process of cleaning house. Thank you, Mr. Chairman. Senator Levin. Thank you. We have your commitment here this morning and your promise to cooperate with the U.S. tax authorities, and we assume that also would include a commitment to cooperate with the SEC, the American Securities and Exchange Commission. Mr. Branson. It does. Senator Levin. Relative to any possible security violation. Mr. Branson. It does. Senator Levin. We cannot reach all the banks. We obviously have reached yours, and that represents progress. The way we have to reach other banks, I am afraid, is going to have to be through our laws, our regulations. We cannot get them all in front of us to do what you have done today here. So we are going to continue that effort. We hope that what you have now decided to do will reverberate throughout that tax haven community. We are determined that we are going to end these abuses which cost so much money to the American Treasury, which are so unfair to the American taxpayer, and we are going to continue that process a week from tomorrow, on July 25. And we will adjourn until then. Thank you again, Mr. Branson. Mr. Branson. Thank you. [Whereupon, at 12:10 p.m., the Subcommittee was adjourned.] TAX HAVEN BANKS AND U.S. TAX COMPLIANCE ---------- FRIDAY, JULY 25, 2008 U.S. Senate, Permanent Subcommittee on Investigations, of the Committee on Homeland Security and Governmental Affairs, Washington, DC. The Subcommittee met, pursuant to notice, at 10:05 a.m., in Room SD-106, Dirksen Senate Office Building, Hon. Carl Levin, Chairman of the Subcommittee, presiding. Present: Senators Levin and Coleman. Staff Present: Elise J. Bean, Staff Director/Chief Counsel; Mary D. Robertson, Chief Clerk; Robert L. Roach, Counsel and Chief Investigator; Ross Kirschner, Counsel; Zack Schram, Counsel; Gina Reinhardt, Congressional Fellow; Timothy Everett, Intern; Jeffrey Rezmovic, Law Clerk; Lauren Sarkesian, Intern; Spencer Walters, Law Clerk; Mark L. Greenblatt, Staff Director and Chief Counsel to the Minority; Michael P. Flowers, Counsel to the Minority; Adam Pullano, Staff Assistant to the Minority; Erica Flint, Staff Assistant to the Minority; Kelly Brannigan; and Thomas Caballero, Senate Legal Counsel's Office. OPENING STATEMENT OF SENATOR LEVIN Senator Levin. The Subcommittee will come to order. Sorry that we had to delay the opening because of two roll call votes on the Senate floor. Last Thursday, the Subcommittee broke through the wall of secrecy that surrounds tax haven banks to expose how UBS AG of Switzerland and LGT Bank of Liechtenstein, from 2000 to 2007, used an array of secrecy tricks to help U.S. clients hide assets from Uncle Sam. The hearing showed, for example, how UBS opened Swiss accounts for 19,000 U.S. clients with nearly $18 billion in assets and did not report any of those accounts to the Internal Revenue Service. The hearing also presented multiple case histories of U.S. clients who used LGT accounts to stash millions of dollars in Liechtenstein. A former LGT employee, now in hiding for disclosing LGT client information, provided videotaped testimony describing a long list of secrecy tricks and deceptive practices used by LGT to hide client funds. UBS, to its credit, announced at the hearing last week that it would take responsibility for its actions. It apologized for past compliance failures, promised to close all 19,000 Swiss accounts unless the U.S. account holder agreed to disclose the account to the IRS, and announced it would no longer offer undeclared offshore accounts for U.S. clients. UBS also indicated that it was prepared to cooperate with the John Doe summons served on the bank by the IRS seeking the names of U.S. clients with undeclared accounts, pending negotiations between the U.S. and Swiss Governments on how it should comply. I hope our governmnent will accept nothing less than all 19,000 client names. UBS' surprise stance at the hearing provides a dramatic example of how congressional oversight can help stop offshore abuses. UBS is now apparently the subject of criticism in Switzerland for agreeing to cooperate with U.S. tax enforcement efforts and disclose client names. This criticism shows how cynical Swiss secrecy has become. It is used today not only to protect account holders' privacy, but to hide wrongdoing by both account holders and the banks that help them. The United States is losing perhaps $100 billion in tax revenues each year due to offshore tax abuses. Swiss bankers should be stopped not only from aiding and abetting such lawlessness, but from profiting from it. If UBS lives up to its promises, it is prepared to trade in bank secrecy for transparency, the rule of law, and tax cooperation. The rest of the banking industry in Switzerland and elsewhere should follow its lead. In contrast to UBS, three other witnesses invited to appear at last week's hearing were notably absent. LGT, which is not subject to the Subcommittee's subpoena power, did not show. Though LGT met privately with Subcommittee investigators, the bank chose not to discuss and defend its practices at an open hearing, perhaps because those practices are not defensible. LGT issued a statement before the hearing that its practices have changed from those described in the Subcommittee report. Count me skeptical that LGT has stopped selling secrecy to its clients. Another scheduled witness, Peter Lowy, was not in the country last week despite being notified of the hearing. Following our notice to him of the Subcommittee's intention to subpoena him, he determined to appear today.\1\ The final witness, Steven Greenfield, failed to comply with a Subcommittee subpoena that was served on him requiring his attendance at the hearing last week. The Subcommittee announced at the hearing that it was considering initiating contempt-of- Congress proceedings with respect to Mr. Greenfield. Prior to doing so, the Subcommittee offered him a final opportunity to appear today.\2\ --------------------------------------------------------------------------- \1\ See Exhibit No. 122, which appears in the Appendix on page 699. Exhibit includes July 18, 2008, letter identifying matters the Subcommittee requested Mr. Lowry to address at the July 25, 2008, hearing. \2\ Communications between the Subcommittee and counsel for Mr. Greenfield that took place during the period between July 18 and July 24 are included as part of Exhibit No. 121, which appears in the Appendix on page 683. --------------------------------------------------------------------------- Our objective today is to take testimony from Mr. Greenfield and Mr. Lowy to complete the Subcommittee's hearing record. Both men were involved with the formation of Liechtenstein foundations with the help of LGT. Their foundations then opened LGT accounts with millions of dollars in assets. In both cases, LGT took measures to hide their ownership interests in those accounts. Both cases are now under scrutiny by the IRS. The Greenfield and Lowy case histories unfold like spy novels, with secret meetings, hidden funds, shell corporations, captive foundations, and complex offshore transactions spanning the globe from the United States to Liechtenstein, Switzerland, the British Virgin Islands, Australia, and Hong Kong. What they have in common is that LGT bank officials acted as willing partners to move a lot of money into their bank while obscuring the ownership and origin of the funds. The first case history being examined today involves Harvey and Steven Greenfield, father and son, two New York businessmen who specialize in importing toys. Internal LGT documents show that, in 1992, LGT helped Harvey Greenfield establish a Liechtenstein foundation, for which he is the sole primary beneficiary and for which Steven Greenfield held power of attorney. As shown in this chart which we are putting up, which is Exhibit 3,\1\ the Greenfield foundation used two British Virgin Island corporations that they controlled as conduits to transfer funds which, at the end of 2001, had a combined value of about $2.2 million. --------------------------------------------------------------------------- \1\ See Exhibit No. 3, which appears in the Appendix on page 211. --------------------------------------------------------------------------- In March 2001, LGT records show that LGT held a 5-hour meeting at its Liechtenstein offices attended by the Greenfields, three LGT private bankers, and Prince Philipp, Chairman of the Board of the LGT Group and brother to the reigning sovereign in Liechtenstein. The meeting was primarily a sales pitch to convince the Greenfields to transfer another $30 million to their LGT foundation from a Bank of Bermuda account in Hong Kong. A LGT memorandum describing the meeting, Hearing Exhibit 54,\2\ states in part the following: --------------------------------------------------------------------------- \2\ See Exhibit No. 54, which appears in the Appendix on page 367. --------------------------------------------------------------------------- ``Bank of Bermuda has indicated to the client that it would like to end the business relationship with him as a U.S. citizen. Due to these circumstances, the client is now on the search for a safe haven for his offshore assets. . . . The Bank . . . indicate[d] strong interest in receiving the U.S. $30 million. . . . The clients are very careful and eager to dissolve the Trust with the Bank of Bermuda leaving behind as few traces as possible.'' So LGT pitched itself as a ``safe haven'' for the Greenfields' offshore assets and offered specific suggestions for how the Greenfields could move their $30 million from Hong Kong ``leaving behind as few traces as possible.'' One LGT suggestion was to transfer the $30 million through the two BVI corporations that the Greenfields controlled to channel assets into their Liechtenstein foundation. The documents we obtained stop in 2001; we do not know whether the $30 million transfer actually took place. The Lowy case history illustrates additional LGT secrecy practices. LGT documents disclose that Frank Lowy was an existing client of LGT when he asked, in 1996, about setting up a new foundation to conceal assets from Australian tax authorities. LGT documents describe three meetings held between LGT and the Lowys, in Sydney, Los Angeles, and London, to discuss the structure, funding, and investment portfolio of a new foundation. According to a LGT memorandum, the Los Angeles meeting took place in January 1997 and was attended by LGT representatives, Frank Lowy, and his sons David and Peter Lowy. LGT actually formed Luperla Foundation in April 1997. To hide the Lowys' ownership interest, LGT employed a number of secrecy tricks. First, LGT did not include the Lowy name in any of the official Luperla documents. Although internal LGT documents state that Frank Lowy and his sons were the intended beneficiaries of Luperla, the only name on the foundation documents was that of their attorney, Joshua H. Gelbard. Second, funds from other Lowy-related entities were not directly transferred into the Luperla account. Instead, LGT routed the funds through a British Virgin Islands transfer corporation, called Sewell Services Inc., to hide the trail of funds. Third, LGT and the Lowys designed a unique mechanism to hide the fact that the Lowys were the beneficiaries of the Luperla Foundation. The key to the plan was a Delaware corporation named Beverly Park Corporation, which the Lowys controlled. Beverly Park was formed in January 1997, the same month the Lowys met with LGT in Los Angeles. Beverly Park has a complex ownership chain that ultimately ends with the Frank Lowy Family Trust. Beverly Park's President and Director since its inception is Peter Lowy. The key Luperla provision states that the foundation's beneficiaries would be named by the last company in which Beverly Park held stock. That meant that Luperla had no official beneficiaries at the time it was formed or in the following years, except, of course, for the financial beneficiaries that were named in the documents of LGT. This ingenious set-up allowed the Lowys to deny with a straight face that they were foundation beneficiaries, while controlling the Delaware corporation that would eventually be used to name those beneficiaries. This chart which we are putting up, which is Exhibit 114,\1\ shows how the Luperla Foundation was initially funded and what happened to those funds 4 years later. First, the hidden money trail into Luperla, that is the top half of the chart. The trail starts with $54 million in Lowy funds whose origin is unclear. One LGT document states that the $54 million ``originate[d] from a relatively complex transaction, with the goal of bringing shares listed in the stock market back into the [Lowy] family's possession, which was successfully completed.'' Another LGT document reports that the funds ``stem[med] from a credit financing of the LGT Bank in Liechtenstein that at the time was carried out through a company called Crofton.'' In any event, at some point, the $54 million made its way into a LGT account that had been opened in the name of Crofton, a company which LGT documents indicate was under the control of the Lowys. --------------------------------------------------------------------------- \1\ See Exhibit No. 114, which appears in the Appendix on page 629. --------------------------------------------------------------------------- In May 1997, the $54 million was moved from the Crofton account at LGT to the LGT account opened in the name of Sewell Services, the BVI transfer corporation that LGT had established. From there, the $54 million was immediately transferred to the LGT account for Luperla. Additional transfers through Sewell Services added to the Luperla account over time and by 2001, 4 years later, the Luperla account had grown to $68 million. At that point, the Lowys apparently decided to dissolve Luperla and move its funds to Switzerland. That gets us into the bottom half of the chart which shows the hidden instructions that led to the transfer of Luperla's funds to Switzerland. To transfer the $68 million and dissolve their foundation, Luperla's beneficiaries had to be named. As explained earlier, the process for naming those beneficiaries had to start with Beverly Park, the Delaware corporation whose President was Peter Lowy. In the summer of 2001, Beverly Park secretly acquired the stock of a British Virgin Islands shell company called Lonas Ltd. Lonas Ltd. had been formed in July 2001; the Lowy attorney, Joshua Gelbard, was appointed Lonas' sole director. This information about Lonas is described in several LGT documents, including Exhibits 48 through 50,\1\ even though Beverly Park's own corporate minutes never mention its acquisition of this British Virgin Islands company. --------------------------------------------------------------------------- \1\ See Exhibit Nos. 48 thru 50, which appear in the Appendix on pages 342-352. --------------------------------------------------------------------------- On December 13, 2001, Beverly Park gave Mr. Gelbard a letter authorizing him to act on its behalf, even though he was not an officer, director, or employee of the company. A copy of this letter as well as other original documents related to Beverly Park were provided to Peter Lowy on the same day and then passed on to LGT, as shown in Exhibits 50 and 112.\2\ Over the next week, Mr. Gelbard worked with LGT to provide the information needed for Lonas Ltd. to name the recipients of Luperla's assets and to obtain the transfer of the funds of the foundation. On December 13, 2001, Mr. Gelbard provided a handwritten certification to LGT that Beverly Park did ``not hold shares of any corporation'' after Lonas Ltd. That was the signal that Lonas was then empowered to name the foundation's beneficiaries the recipients of its assets. Mr. Gelbard also, on the same day, provided written instructions to LGT for ``the disbursement of all assets of the foundation.'' Those documents are described in Exhibit 48.\3\ --------------------------------------------------------------------------- \2\ See Exhibit Nos. 50 and 112, which appear in the Appendix on pages 352 and 601 respectively. \3\ See Exhibit No. 48 which appears in the Appendix on page 342. --------------------------------------------------------------------------- LGT documents show that even after receiving these instructions from Mr. Gelbard to transfer Luperla funds, LGT continued to view the Lowys as the true parties behind the foundation. For example, Exhibit 50 shows that after receiving instructions from Mr. Gelbard to transfer the $68 million to two accounts at a Swiss bank, LGT twice telephoned David Lowy to confirm the instructions. LGT even took the precaution of recording one of those telephone calls. After David Lowy authorized the transfer of the funds, on December 20, 2001, as shown in Exhibit 110, \4\ LGT emptied the Luperla account, transferring all $68 million in two transfers to Bank Jacob Safra in Geneva. --------------------------------------------------------------------------- \4\ See Exhibit No. 110, which appears in the Appendix on page 599. --------------------------------------------------------------------------- Frank Lowy has said publicly that the funds were ``distributed for charitable purposes . . . some years ago,'' but he has refused the Subcommittee's request to name the charities involved or identify the dates and amounts of the donations. He has also declined the Subcommittee's invitation to supply additional information about Luperla Foundation or LGT Bank. In 2007, the Lowys were contacted by the IRS with inquiries about Beverly Park. In submissions to the IRS, Beverly Park claimed that it ``did not and does not own any entities,'' despite the LGT documents showing that it had owned Lonas Ltd. Today's hearing provides another opportunity to examine LGT's actions to help its clients hide assets. We hope our two witnesses, Steven Greenfield and Peter Lowy, will shed additional light on LGT's actions. The United States was not, of course, the only country victimized by LGT. LGT has apparently assisted people from dozens of countries in every corner of the globe to evade taxes. While the IRS is investigating 147 U.S. taxpayers with LGT accounts, British tax authorities recently announced they are on the trail of 300 million pounds in unpaid taxes on 1 billion pounds hidden in Liechtenstein. In Germany, over 500 people have admitted so far to failing to pay taxes on funds in a LGT account, and hundreds more are under investigation. LGT still promotes itself as ``the Wealth and Asset Management Group of the Princely House of Liechtenstein.'' It is ironic that a princely bank is the source of this international tax scandal. But we can do more than simply shake our heads at that bank's conduct. We can take action to stop offshore tax abuses, starting with enactment of S. 681--the Stop Tax Haven Abuse Act. Yesterday, our colleagues on the Senate Finance Committee held a hearing on how over 18,500 companies--as many as half from the United States--claim to have offices at a single building, the Ugland House in the Cayman Islands. It sounds like the Finance Committee is as fed up as we are with tax haven tricks, and it is time to join together this year to stop tax haven abuses. Before I call on our witnesses, I would like to turn to Senator Coleman. I want to thank him again for his ongoing support of this investigation and invite his opening remarks. OPENING STATEMENT OF SENATOR COLEMAN Senator Coleman. Thank you, Senator Levin, and I will have more abbreviated remarks today than we had last week. A week ago, this Subcommittee held a hearing on abuses in offshore tax havens. We found a series of masquerades and maneuvers that were shocking in their audacity. Today, as the Chairman noted, we continue that inquiry. At the outset, it is important to note the reasons for today's session. While last week's hearing was standing room only for those in the audience, just as notable were the empty chairs at the witness table. Mr. Greenfield was subpoenaed to appear before this Subcommittee last week, but he chose to defy the Subcommittee's subpoena and not attend the hearing. Mr. Lowy left the United States on a red-eye flight to Australia just before the U.S. Marshals Service could track him down and serve him with the Subcommittee subpoena. The third witness, LGT Global, also refused to appear even though it enjoys wide- ranging access to U.S. financial markets. These actions stand in stark contrast to those who had the guts, the good sense, and the respect for this Subcommittee, to appear and answer for the conduct we have uncovered. We rightly gave credit to UBS for appearing as it did, for the candor with which it dealt with our Members and our investigators, and for its willingness to take both responsibility for past actions as well as a commitment to a principled path for how it would deal with these matters in the future. As the Chairman noted, UBS is prepared to trade in bank secrecy for transparency, the rule of law, and tax cooperation. We also recognize the actions of Mr. Marsh and Mr. Wu for appearing before us, for at a minimum they did not compound their apparent disregard for their tax obligations with disrespect for this process. And we now appreciate that Mr. Greenfield has, at long last, recognized the need to comply with the requests of this Subcommittee. And we also appreciate that Mr. Lowy returned from Australia to appear before us today. What we seek here today is what we ask of any person or entity that we engage with: A measure of candor and respect for the law. I want to note that, at the end of the day, the tax- cheating schemes we have uncovered by the Subcommittee's investigation demonstrate one simple, undeniable fact: The actions of a few to scam their way out of tax obligations hurt all Americans. A privileged few believe they are entitled to shirk their obligations and heap their tax liability on the sagging shoulders of other Americans to make up for what they avoid. As Senator Levin noted last week, we cannot get to all the banks or all the tax cheats. But we can move the ball forward by uncovering this misconduct bit by bit, one by one. Make no mistake: Today's hearing demonstrates forcefully that we will not relent in our pursuit of those who continue to mock our justice, our courts, and our tax system. We will continue our efforts to ferret out those who avoid paying their fair share to the country whose freedoms they so richly enjoy. In holding this hearing today, we impart that message, upholding the traditions and integrity of the Subcommittee and, most importantly, ensuring that those who try to take advantage of the American people do not rest easy. Thank you, Mr. Chairman. Senator Levin. Thank you, Senator Coleman. Today's hearing is a continuation of the Subcommittee's hearing held last week on July 17. The purpose of today's hearing is to take testimony from two witnesses who were invited to testify last week but did not appear at that hearing. Our witnesses today are Steven Greenfield of New York City, and Peter Lowy of Beverly Hills, California. Pursuant to Rule VI, all witnesses who testify before the Subcommittee are required to be sworn. TESTIMONY OF STEVEN GREENFIELD, NEW YORK, NEW YORK Senator Levin. We first will call on Mr. Greenfield, if you would come forward, please, and raise your right hand. Do you swear that the testimony that you will give before this Subcommittee will be the truth, the whole truth, and nothing but the truth, so help you, God? Mr. Greenfield. Yes. Senator Levin. Thank you, Mr. Greenfield, do you have opening remarks? Mr. Greenfield. No. Senator Levin. And have you ever spoken to anyone at LGT Bank in Liechtenstein? Mr. Greenfield. Mr. Chairman, I respectfully assert my rights under the Fifth American of the U.S. Constitution and decline to answer. Senator Levin. Mr. Greenfield, do you have any corrections to the statement of facts in my opening statement or the case history in the report released by the Subcommittee last week? Mr. Greenfield. Mr. Chairman, I respectfully assert my rights under the Fifth American of the U.S. Constitution and decline to answer. Senator Levin. Mr. Greenfield, you have been asked specific questions about matters of interest to this Subcommittee. In response to these questions, you have asserted your Fifth Amendment privilege. Is it your intention to assert your Fifth Amendment privilege to any question that might be directed to you by the Subcommittee today? Mr. Greenfield. Yes. Senator Levin. Given the fact that you intend to assert a Fifth Amendment right against self-incrimination to all questions asked of you by this Subcommittee, you are excused. Thank you for coming today. Mr. Greenfield. Thank you. TESTIMONY OF PETER S. LOWY, BEVERLY HILLS, CALIFORNIA, ACCOMPANIED BY ROBERT BENNETT, ESQ. Senator Levin. Our second witness is Peter S. Lowy, who is the Chief Executive Officer of the Westfield Group in the United States and a Group Managing Director of the Parent Company, Westfield Group in Australia. Mr. Lowy, would you come forward, please, and raise your right hand. Mr. Lowy, do you swear that any testimony you will give before this Subcommittee will be the truth, the whole truth, and nothing but the truth, so help you, God? Mr. Lowy. I do. Mr. Bennett. Mr. Chairman, my name is Robert Bennett, and I am counsel to Mr. Lowy. And I know Mr. Lowy is here. Could I just make one observation? Senator Levin. Not now. Perhaps you can make it afterwards. Mr. Bennett. All right. I will do it after he finishes? Senator Levin. That would be fine. Mr. Bennett. Thank you, Mr. Chairman. Senator Levin. Mr. Lowy, do you have any opening remarks? Mr. Lowy. No, sir. Senator Levin. Mr. Lowy, have you ever spoken to anyone at LGT Bank in Liechtenstein? Mr. Lowy. Senator, I am sorry and mean no disrespect, but on the advice of my counsel, I assert my rights under the Fifth Amendment to the U.S. Constitution and decline to answer your question. Senator Levin. Mr. Lowy, do you have any corrections to the statement of facts in my opening statement or the case history in the report released by the Subcommittee last week? Mr. Lowy. Senator, on the advice of my counsel, I assert my Fifth Amendment rights and decline to answer the question. Senator Levin. Mr. Lowy, you have been asked specific questions about matters of interest to this Subcommittee. In response to each question, you have asserted your Fifth Amendment privilege. Is it your intention to assert your Fifth Amendment privilege to any question that might be directed to you by the Subcommittee today? Mr. Lowy. Yes, sir. Senator Levin. Given the fact that you intend to assert a Fifth Amendment right against self-incrimination to all questions asked of you by this Subcommittee, you are excused. Mr. Lowy. Thank you. Senator Levin. Thank you for coming. Now, as to what your intentions are, Mr. Bennett, do you have a statement for the record that you can give to us? Mr. Bennett. Yes. I just want to make one correction that I feel is very important. Senator Levin. We are not going to have you testify in lieu of your client. Mr. Bennett. Well, I am not going to correct the facts. The Subcommittee has made a mistake in---- Senator Levin. Then you will have to submit that then, and we---- Mr. Bennett. Then I will, and I---- Senator Levin. We will receive that, but we are not going to have you substitute yourself---- Mr. Bennett. That is fine. I will deal with it outside this room, then. Senator Levin. I am sure you will anyway. Mr. Bennett. I will, Senator. Senator Levin. We expected that. We have already had you folks talk to the press instead of talking to us, so we are not the least bit surprised that you will do it outside this room. But we are not going to have you take the place of your client. Mr. Bennett. That is fine. But I do think the Subcommittee should be accurate---- Senator Levin. Thank you. Mr. Bennett [continuing]. In its statements. Senator Levin. We all agree we should be accurate, and if there are any inaccuracies, that should be under oath by your client and not by his lawyer trying to testify in lieu---- Mr. Bennett. The error is made by a Subcommittee member.\1\ --------------------------------------------------------------------------- \1\ See Exhibit No. 122, for correspondence between Mr. Lowy's attorney and the Subcommittee on this matter, which appears in the Appendix on page 699. --------------------------------------------------------------------------- Senator Levin. We stand adjourned. [Whereupon, at 10:31 a.m., the Subcommittee was adjourned.] A P P E N D I X ---------- [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]