US indictment implicates Hong Kong in tax evasion

A federal court has accused Swiss bank Wegelin of using sham operations to hide funds, some incorporated in Hong Kong. The city is expected to come under increased scrutiny.
US indictment implicates Hong Kong in tax evasion

US citizens and green-card holders living in Hong Kong and around Asia are expected to come under closer scrutiny after a US federal court indicted private Swiss bank Wegelin in New York as part of its crackdown on international tax evasion.

It has accused Switzerland’s oldest private bank of conspiring to conceal over $1 billion of US client money in offshore accounts.

This is seen as an especially significant development in that Wegelin becomes the first institution without any US operations to be indicted for such an offence.

“It is a broadening of the long-arm reach of US authorities,” Jay Krause, head of wealth planning for Asia at law firm Withers in Hong Kong, tells AsianInvestor.

He notes that this is the first evidence of a dual-barrelled approach by US authorities, going after institutions with US operations and those without.

As part of the indictment, the US government’s internal revenue service (IRS) alleged that Wegelin had used sham corporations to hide funds, some of which were incorporated in Hong Kong.

This is the first time that Hong Kong has been specifically referenced as one of the jurisdictions where sham corporations were used to further US tax evasion.

Asked what impact this verdict might have, Krause suggests it is likely to bring further scrutiny for the large expat community in Hong Kong as well as Asian, and particularly Chinese, US citizens and green-card holders transacting business through Hong Kong.

“The IRS already has a couple of criminal investigators on the ground at the consulate here in Hong Kong,” he notes. “It’s possible that they may look to increase investigative capacity following an announcement such as this.

“We expect real focus to move to the East. Over the last year the IRS has stated that it is well aware of the flow of funds from Europe to Asia. Now we are seeing tangible evidence of that flow of funds.

“The IRS and US Department of Justice have made it clear that dealing with international tax evasion by US persons is a primary goal, so this is likely to bring additional scrutiny to Hong Kong, among others.”

Withers notes the indictment presumably arises in large part from information gathered by the IRS from its 2009 and 2011 voluntary disclosure programmes, under which 33,000 participants came forward, paying in excess of $4.4 billion in back taxes, interest and penalties to date.

Asked whether he felt tax evasion was commonplace in Hong Kong and Asia, Krause says there would be a number of US people in Asia – some of whom were not born with citizenship but subsequently obtained it – who are not fully aware of their US tax reporting obligations.

“I think it is inevitable that there will be a reasonable number of people from Asia who are not fully up to speed with their US tax reporting obligations,” he adds. “Whether they have gone about that intentionally or not is speculative. But it’s highly likely that there are.”

Withers points out that the IRS has just launched a new 2012 disclosure programme on similar terms to prior programmes, including substantially reduced penalties for US citizens and green-card holders living outside the US who are compliant with their local tax obligations.

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