The End Of Bank Secrecy

For many years, there has been a widespread belief in European bank secrecy.  A client of a bank was assured that his bank would not routinely pass his banking records on request to an outsider, and in particular, not to the United States taxing authority.

With its world wide tax regime, the United States has opposed such bank secrecy.  It has pressed for international treaties and law enforcement agreements to compel foreign banks to turn client records over to U.S.   Under the banner of anti-drug and money-laundering enforcement efforts, and not anti-terrorism, these agreements have increased in number and scope.  Even the time-honored exception to compelled disclosure for "fiscal" crimes has been eroded through a definitional narrowing of the term.

Nonetheless, it was still a matter of dogma that a reputable "client-oriented" European bank would not turn over client banking records simply on request by the United States Internal Revenue Service.  That government agency could only obtain such records through the formal international treaty/agreement structure, and only in very specific, limited situations.

In an effort to bypass this time-consuming, cumbersome, and limited method of obtaining records, the IRS moved to the consent directive procedure.  This involved issuing to a U.S. taxpayer suspected of having a foreign bank account an administrative summons demanding the production of foreign bank records.  When such records were not produced, the IRS than initiated in federal district court a summons enforcement proceeding, and the court would then direct the taxpayer, under penalty of incarceration for contempt, to sign a consent directive.  This consent directive would direct a foreign bank to turn over the taxpayer's foreign bank records to the IRS.

In 2003, the IRS announced a foreign credit card compliance initiative.  The IRS had been successful in compelling the major credit card issuers to turn over the names of holders of non-U.S. credit cards.  The IRS assumed that a number of these credit cards might be linked to unreported foreign bank accounts.  U.S. holders of such cards were encouraged to voluntarily come forward, or else face enforcement proceedings.  Such proceedings typically involved the compelled signing of consent directives.

The IRS had varying degrees of success with such consent directives.  Many European banks refused to honor them as they were clearly signed under duress.  So the IRS turned to another approach: compel the taxpayer to get the records himself and then turn them over to the IRS.

In an IRS summons enforcement proceeding, a taxpayer can be compelled by court order to produce specified records that are in his possession, custody or control.   The IRS position is that even if a taxpayer doesn't have any foreign bank records, he can go to the bank, request a copy of the records, and then turn them over to the IRS.  The procedure is as follows.

A summons is issued to a U.S. taxpayer for foreign bank records, or alternatively, for foreign credit card records and all records showing payment of charges made by the taxpayer to a foreign credit card.  If the taxpayer doesn't voluntarily produce such records, the IRS files a petition in a U.S. federal district court and asks the court to order the taxpayer to get the records.  The court then orders such production with the threat of contempt if there is no production.  The leverage is that the court can order the incarceration of the taxpayer until there is production of the records.  Faced with the threat of incarceration, the taxpayer will request the foreign bank to give him the records.

Until now, it was generally understood that most reputable foreign banks would refuse to honor such a coerced request.  No more.  While a bank will readily admit that it would not turn such records over to the U.S. directly--absent full compliance with applicable international agreements,  the response is that the client is entitled to request his records and what the client does (or has to do) with the records is the client's concern, not the bank's.  In short, what a bank will quickly refuse to do directly, it will now as quickly do indirectly.

The lesson to be learned is that the customary rules of bank secrecy may well be a thing of the past and persons subject to U.S. tax had better be aware of this development.