Governments go fishing abroad

As the US leads efforts to require disclosure details of foreign-held funds, offshore accounts are no longer the safe havens they once were.

An uncomfortable fact of life in the Information Age is that one subject on which more information is available is you. Google keeps a record of the dodgy, embarrassing websites you visit, and cameras at intersections in city centres compile the evidence that all those lights that you insist were yellow when you zoomed through them were actually red. More important to your financial health (assuming you don't receive too many traffic tickets), there is a good chance that tax agencies, especially in the US, know where your money is, even if it's in an offshore bank.

The ability of governments to keep track of their citizens' financial affairs intersects with other trends that provide authorities with the desire and opportunity to obtain information and then, in some cases, send you a bill. Most initiatives are aimed at residents who use offshore centres solely to hide wealth and evade tax, but in certain circumstances they affect expatriates while they're out of their home countries or after they have returned.

There is a lot at stake: assets kept offshore, meaning in a place other than where their owners maintain residency, totalled US$6.7 trillion in 2008, the Boston Consulting Group estimates. Several European countries have stepped up efforts to ferret out details of cross-border financial dealings, but it has become a particular priority for US legislators and the tax collectors at the Internal Revenue Service (IRS).

"Right now in the US there is a big focus by the IRS and Congress to have greater transparency when US persons have foreign bank accounts," said Joseph Calianno, leader of the International Technical Tax Practice at Grant Thornton, an American accounting and financial advice firm. "This is pretty serious stuff," Mr Calianno said. "They're devoting a lot of time and resources to it. It's one of the hottest topics right now."

Serious like a heart attack if you're one of 4,000 or so American clients of UBS. The Swiss institution, the world's largest private bank, agreed to turn over records on these clients to US authorities, but the plan hit a snag recently when a court said that UBS would be violating Swiss law if it did. The UBS arrangement is one of several approaches that US authorities are taking to obtain offshore financial details, including new legislation and more vigorous enforcement of existing laws and IRS regulations.

A bill working its way through Congress is expected to have a significant impact on Americans doing business with foreign banks or firms providing such services as fund management. The Foreign Account Tax Compliance Act (Facta) would require financial institutions to collect one of two things - information or money - from American customers and turn it over to the IRS. Fatca explicitly targets money sent overseas from US banks. The receiving bank would have a choice of furnishing information about the account holder or withholding 30 per cent of the deposit.

As Mr Calianno understands it, the point of the tax provision isn't to raise revenue but to concentrate the minds of account holders and bankers and keep money inside the tax net long after it has been sent overseas. "Congress and the IRS want to avoid a situation where US citizens are setting up accounts abroad and not reporting the income," he said. "The hope is that they'll never have to do any withholding because citizens will report it."

But just what transactions would need to be reported? Ian Shane, a tax specialist at the New York law firm Golenbock Eiseman Assor Bell & Peskoe, mentioned a client of his who bought a holiday home in Mexico. At the suggestion of his Mexican lawyer, the client opened an account south of the border to hold a down payment for the home. There was no intent to hide anything or skip out on a tax obligation, but if Fatca was in effect and the Mexican bank failed to file the correct paperwork, the homebuyer would seem to face a big tax liability under the letter of the law.

Mr Shane highlighted various innocent reasons for sending money abroad that might make it subject to tax without the sender or receiver even knowing about it. What if an American employer makes contributions to a foreign pension plan on behalf of one of its expat employees, for instance? The point of Fatca is to keep tabs on money that originates in the US. That may limit the impact on expats, but as the pension example shows, foreign employees of US companies may be affected, too.

What if someone works for a local subsidiary of an American company? Could salary payments be deemed to be transfers from the US? The law doesn't seem to be clear on that score. Or how about if expats want to invest in a fund in their adopted country or buy real estate, such as Mr Shane's client did? Fatca might come into play and foreign financial organisations might not even realise it. It's no surprise that a global effort to gather cross-border financial information is intensifying now and that the US is in the vanguard. The September 11 attacks made the tracing of money used to finance terrorism an important security issue. "The reduction in banking secrecy has accelerated over the past few years as a result of September 11 and the excuse that increased money laundering tests were required to catch terrorists," said Bill Blevins, managing director of Blevins Franks International, a large London firm of financial advisers.

He noted, though, that "the law changes have captured more tax from tax evaders who have nothing to do with terrorism". But the law changes do have something to do with the fact that governments around the world are strapped for cash, in part because they spent many billions of dollars during the past two years bailing out banks. The need to raise revenue, combined with a feeling that banks ought to be more pliant in return for the assistance they received, is helping to keep pressure on offshore institutions, many of which, like UBS, are part of global, onshore financial conglomerates.

"In this current witch hunt, going against Swiss banks and tax evaders was a good way of deflecting anger away from banks," Mr Shane said. Expatriates are not being hunted, but the IRS has long kept an eye on them and a hand on their wallets. The US, virtually alone among nations, taxes its citizens wherever they are, and Americans are required to report details of foreign bank accounts on their tax returns.

Governments elsewhere don't tax non-residents, but they try to tax residents' offshore money. In the old days, maybe 20 years ago, when information gathering was less sophisticated, German tax inspectors were reputed to camp out in the car park of Deutsche Bank's Luxembourg office and copy down German license plate numbers. Today German authorities are considering a move that puts an old adage, "it takes a thief to catch a thief," to the test. They are expected to pay roughly $3.5 million for what is said to be a stolen compact disc containing details of about 1,500 German owners of Swiss bank accounts.

Since the existence of such a disc came to light, dozens of German citizens have come forward in hopes of cutting a deal with authorities to avoid harsh tax-evasion penalties. Using a less cloak-and-dagger approach in a quest to secure details of offshore accounts, the European Union in 2005 enacted the Savings Tax Directive. It requires EU residents who deposit money in another member country to allow their banks to notify the home country of the transaction or have tax withheld. The onus is on account holders to have banks report information, not the banks themselves. It's unclear whether efforts such as Fatca, which seek to deputise financial institutions, will succeed, especially after the Swiss ruling threw doubt upon the US-UBS deal.

Governments are "going after tax havens, but just how co-operative are these countries going to be?" Mr Shane wondered. "Congress is very fast to pass rules, but are they enforceable? Are they really going to stop people from putting money in offshore accounts?" Maybe not, but Peter Damisch, a wealth management specialist at Boston Consulting Group, says that the legal pressure may stop certain banks from taking money from citizens of some countries.

"Banks will focus more on individual markets, building up particular capabilities to cover clients from particular countries," he predicted, "and there will be markets they can't serve." Mr Calianno agreed, and said that Americans especially may be left with fewer options for where to keep their money. "One of the drawbacks with some of this push is that it can create a situation where you have certain banks that don't want to do business with US citizens," he said. One authority on offshore financial centres, who insisted on anonymity, warned that those who continue making use of them are likely to discover that they are not the havens they once were. Now more than ever, someone's watching.

"It seems these days that the confidentiality of clients isn't regarded as something precious and something to be protected," he said.