Where IRS Agents Can Butt in Offshore – and Where They Can’t
I've long been skeptical about using the Channel Islands – both Guernsey and Jersey, the islands off the British coast – as secure offshore financial centers. My skepticism originated in the so-called "Cantrade Affair."
In the late 1980s, a group of investors – including a dear, now departed friend – placed several million dollars with Jersey-based Cantrade. It was a subsidiary of the AAA-rated UBS Bank of Switzerland.
Over the next few years, the investors lost virtually all their money. A currency trader the bank recommended turned out to be corrupt. So did a partner in the accounting firm (Touche Ross UK, now Deloitte & Touche), who falsely confirmed the trader's supposedly stellar long-term track record.
Lawsuits and a criminal investigation followed. The investors settled their case against Cantrade in 1997. Cantrade settled the criminal charges in 1998 in an out-of-court settlement that avoided having the fraud exposed at a public trial. The currency trader and the Touche Ross partner were sentenced to prison.
Because of the Cantrade affair, I've pretty much written off Jersey as a serious offshore jurisdiction. I simply don't trust it, although there have been significant reforms in the last decade.
I don't know as much about the other major Channel Island – Guernsey. Rightly or wrongly, I’ve thought of this island as "guilty by association" with Jersey.
Until now, that is.
Last week, I received several messages from a reader in Guernsey who claims that IRS agents accompany tax inspectors in certain investigations. He also believes that local police are monitoring telecommunications with offshore services providers, in concert with the FBI and the IRS.
I have no way of confirming these allegations. However, I can confirm that the "Tax Information Exchange Agreement" (TIEA) between the United States and Guernsey authorizes the IRS to accompany Guernsey tax officials in tax examinations (Article 6(2)). (The U.S.-Jersey TIEA has similar provisions.) And while wholesale electronic surveillance of offshore services providers may not be occurring, a local court may authorize surveillance against any target.
I'm not picking on Jersey, by the way. Under Jersey law (and the law of many other offshore jurisdictions), this type of surveillance is perfectly legal. Naturally, U.S. and U.K. tax officials encourage it.
This is an important reason why The Sovereign Society recommends offshore jurisdictions that impose strict controls on the disclosure of financial (or other) information to foreign authorities.
In Austria, for instance, there's no Tax Information Exchange Agreement in effect. If the IRS wants to learn about your Austrian bank account, IRS agents can't simply accompany an Austrian tax inspector to the bank, and surreptitiously examine the records.
Instead, IRS agents must present evidence a crime has been committed, with that evidence confirmed by Austrian officials. Similar laws are in effect in Switzerland, Liechtenstein and Panama.
I've long been skeptical about using the Channel Islands – both Guernsey and Jersey, the islands off the British coast – as secure offshore financial centers. My skepticism originated in the so-called "Cantrade Affair."
In the late 1980s, a group of investors – including a dear, now departed friend – placed several million dollars with Jersey-based Cantrade. It was a subsidiary of the AAA-rated UBS Bank of Switzerland.
Over the next few years, the investors lost virtually all their money. A currency trader the bank recommended turned out to be corrupt. So did a partner in the accounting firm (Touche Ross UK, now Deloitte & Touche), who falsely confirmed the trader's supposedly stellar long-term track record.
Lawsuits and a criminal investigation followed. The investors settled their case against Cantrade in 1997. Cantrade settled the criminal charges in 1998 in an out-of-court settlement that avoided having the fraud exposed at a public trial. The currency trader and the Touche Ross partner were sentenced to prison.
Because of the Cantrade affair, I've pretty much written off Jersey as a serious offshore jurisdiction. I simply don't trust it, although there have been significant reforms in the last decade.
I don't know as much about the other major Channel Island – Guernsey. Rightly or wrongly, I’ve thought of this island as "guilty by association" with Jersey.
Until now, that is.
Last week, I received several messages from a reader in Guernsey who claims that IRS agents accompany tax inspectors in certain investigations. He also believes that local police are monitoring telecommunications with offshore services providers, in concert with the FBI and the IRS.
I have no way of confirming these allegations. However, I can confirm that the "Tax Information Exchange Agreement" (TIEA) between the United States and Guernsey authorizes the IRS to accompany Guernsey tax officials in tax examinations (Article 6(2)). (The U.S.-Jersey TIEA has similar provisions.) And while wholesale electronic surveillance of offshore services providers may not be occurring, a local court may authorize surveillance against any target.
I'm not picking on Jersey, by the way. Under Jersey law (and the law of many other offshore jurisdictions), this type of surveillance is perfectly legal. Naturally, U.S. and U.K. tax officials encourage it.
This is an important reason why The Sovereign Society recommends offshore jurisdictions that impose strict controls on the disclosure of financial (or other) information to foreign authorities.
In Austria, for instance, there's no Tax Information Exchange Agreement in effect. If the IRS wants to learn about your Austrian bank account, IRS agents can't simply accompany an Austrian tax inspector to the bank, and surreptitiously examine the records.
Instead, IRS agents must present evidence a crime has been committed, with that evidence confirmed by Austrian officials. Similar laws are in effect in Switzerland, Liechtenstein and Panama.
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