the recent series of criminal prosecutions against tax professionals and offshore bankers. These criminal cases, brought against the largest Swiss bank (UBS), the oldest Swiss bank (Wegelin), one of the largest accounting firms in the world (KPMG), as well as numerous lawyers and accountants, represent a dramatic shift for the U.S. Department of Justice. After decades of tolerating abusive tax shelters and tax haven banks, the government changed its policy. However, rather than indicting the individuals and corporations who invested in tax shelters or hid money in offshore accounts, the Justice Department indicted the lawyers, accountants, and bankers who advised them. This Article will analyze those prosecutions from a theoretical, historical, and practical perspective, and will examine the impact the new prosecution policy will have on the legal professional, the tax system, and international relations.Schumacher comments
The past few years have seen a dramatic shift in the prosecution policies of the U.S. Department of Justice in tax cases. Until recently, the U.S. government rarely prosecuted cases that involved the gray areas of the law, and arguable, if not plausible, interpretations of the Tax Code were rarely the subject of prosecutions.
Indictments of attorneys and accountants were even rarer, and these prosecutions usually accompanied the indictment of the taxpayers themselves. As a result, the government generally resorted to bringing civil tax cases when going after investors in abusive tax shelters, and the professionals who marketed these scams were rarely brought into even these civil proceedings. Likewise, the use of offshore accounts by U.S. taxpayers was tolerated by prosecutors for decades. Indeed, the tax treaty with Switzerland acknowledged Swiss bank secrecy in tax prosecutions. This indulgence of tax shelters and tax havens led, at least in part, to their proliferation.
However, beginning with the tax shelter prosecutions in 2005, the government's policy of restraint has undergone a significant change. Rather than challenging abusive transactions civilly or prosecuting the taxpayers, the government began focusing its criminal resources on the professionals who advised and enabled their clients to evade or avoid taxes. Thus, instead of pursuing taxpayers who claimed hundreds of millions of dollars in phony losses, the government decided to go after the accounting firms, law firms, and professionals who advised these taxpayers. And these were not just any firms. The government proceeded criminally against professionals from some of the leading law and accounting firms, including KPMG, Ernst & Young, Brown & Wood, and Jenkens & Gilchrist. These cases garnered mixed results for the government, with the government getting some notable victories, but also some high-profile losses. In the process, however, the government effectively shut down the tax shelter industry and fundamentally changed tax practice.
The government persisted in this policy of pursuing professionals when it decided to go after Swiss banks and bankers, instead of the tens of thousands of U.S. depositors who hid money in undeclared offshore accounts. As with the tax shelter cases, the government targeted some of the biggest players, entering into a Deferred Prosecution Agreement with UBS, Switzerland's largest bank, and indicting some of its bankers. In 2012, the government indicted Switzerland's oldest bank, Wegelin Bank, and three of its partners, even though the bank had no U.S. office. As a result of the indictment, the bank essentially ceased to exist as an independent entity within a month. Wegelin pleaded guilty to tax crimes in January 2013, and formally ceased operation. While the prosecution of banks and bankers was ongoing, the government allowed most U.S. taxpayers to resolve their cases civilly via a series of offshore voluntary disclosure initiatives. These combined actions, along with the actions of other countries, dramatically changed offshore banking and the use and perception of tax havens.
In this Article, I will examine the government's decision to pursue the professionals, instead of the clients the professionals represented, and the impact this revised prosecution policy has had on the tax system. In so doing, I will examine these prosecutions in their historical context, analyze whether they represent sound policy, and recommend whether changes in the policy should be made.
In Part I of the Article, I will examine the history of criminal prosecutions in both the tax shelter and tax haven areas. This history demonstrates that very few people, whether taxpayer or professional, were charged criminally for investing in tax shelters or hiding money in tax havens. This tolerance by prosecutors led to their continued use and expansion. Part II will then discuss the recent criminal prosecutions brought against tax lawyers, accountants, and bankers for their role in assisting their clients and customers in evading taxes. These cases will provide the necessary backdrop for what appears to be a fundamental shift in prosecution policy.
Part III of the Article will analyze the theory underlying criminal prosecutions. In this Part, I will show that federal prosecutors enjoy wide discretion as to whom to charge. Given this discretion, it is essential that front-line prosecutors are guided by clear prosecution policies and that those policies be consistently followed. These policies, while not crystalline, require prosecutors to determine the culpability of the person charged, including the person's relative culpability in relation to other actors not charged; the deterrent effect (particularly general deterrence) that would result from the prosecution; the retributive effect of the prosecution, in particular whether the victim of the crime has been compensated and their injuries have been addressed; and whether the prosecution will serve to protect the integrity of the civil tax system.
Finally, in Part IV, I will examine whether the recent prosecutions are consistent with the criminal theory and the government's prosecution goals discussed in Part III. I will argue that both the tax shelter and tax haven cases were generally consistent with criminal theory and the goals of prosecution policies and have for the most part been very successful. The most successful, indeed ingenious, aspect of the policy, whether intended or not, comes from the leveraging of general deterrence. By prosecuting professionals, rather than the taxpayers, the government has magnified the deterrent effect of the prosecutions. In so doing, the revised prosecution policies have fundamentally changed tax compliance.
That being said, the new prosecution policy is not beyond criticism. The tax professionals who marketed the tax shelters created and sold these shelters to their clients as a prepackaged transaction at a handsome profit. Thus, without the professionals, no.taxpayer would have invested in these shelters, and they have at least a colorable claim of relying on their professional advisor. By contrast, the tax haven banks are no more culpable (and arguably less culpable) than many of the U.S. taxpayers who hid money in those accounts, and who escaped prosecution. More significantly, while the tax haven prosecutions address the losses suffered by U.S. taxpayers, little has been done for the true victims of tax haven abuse-the developing world. I will provide a brief review of the devastating impact of tax havens on the developing world. Thus, while prosecuting bankers may make sense from a pragmatic standpoint, more must be done to protect the integrity of the tax system and to ensure that the injuries of the true victims of this conduct are redressed.The national Government is meanwhile conducting an "independent review of medicines and medical devices regulation", examining the Therapeutic Goods Administration’s "regulatory framework and processes" - in line with the national competition policy - to identify -
- areas of unnecessary, duplicative, or ineffective regulation that could be removed or streamlined without undermining the safety or quality of therapeutic goods available in Australia; and
- opportunities to enhance the regulatory framework so that Australia continues to be well positioned to respond effectively to global trends in the development, manufacture, marketing and regulation of therapeutic goods.
It's yet another review of the TGA. (Some past reviews are noted here and here.)
The terms of reference are -
1. Australia has, by a number of different measures (life expectancy, survival with cardiovascular disease, survival with a range of cancers), amongst the best health outcomes of the OECD countries.
2. The regulatory framework of the Therapeutic Goods Administration (TGA) provides an important protection to the Australian community ensuring only safe and effective medicines and medical devices are granted authority to be marketed and/or exported.
3. The TGA also performs crucial post-market roles including the regulation of advertising for therapeutic products and the monitoring of adverse events to ensure the ongoing safety of therapeutic products.
4. A safe and effective regulatory framework for medicines and medical devices should balance safety and market access priorities to the benefit of patients and industry and align with the government’s commitment to increase productivity and competitiveness.
5. It is timely to review the regulatory framework and processes under which the TGA operates, to identify opportunities to improve its operations. This will ensure the TGA is able to operate effectively and efficiently in comparison with high quality international regulators, in respect of regulatory imposts such as timeframes and costs to industry, while also maintaining appropriate public health and safety protections.
Scope of the Review
6. The Review will benchmark TGA regulatory arrangements against trusted international authorities.
7. The Review will make recommendations and related implementation information to:
a. Ensure there is an appropriate balance between risk and benefit in the regulation of prescription, over-the-counter, complementary medicines and medical devices, as well as access for individuals to unapproved medicines and medical devices;
b. Simplify and streamline the approval processes undertaken by TGA. This will include recommendations on: i. fast tracking approvals processes for medicines and medical devices; ii. opportunities for working together with trusted regulators in other jurisdictions, including the potential for work-sharing assessments for products marketed in multiple countries; and iii. exploring how risk assessments, standards and determinations of trusted regulators can be used more extensively by Australian regulators when approving the supply of medicines and medical devices.
c. Ensure regulatory arrangements are sufficiently flexible to accommodate developments in medicines and medical devices, including exploring opportunities to streamline approvals that cross regulatory categories;
d. Improve the processes that assist industry, researchers and consumers to navigate the regulatory system for medicines and medical devices;
e. Support work underway on medical device reforms and clinical trial approval arrangements in Australia; and
f. Any other matters that the review committee regards as important and relevant to the safe and efficient supply of effective medicines and medical devices to the Australian people.
8. The Review will not make recommendations in relation to:
a. Any aspect of the Pharmaceutical Benefits Scheme;
b. Work by the Department of Health on the reimbursement systems, including reimbursement and or subsidy of medicine and medical devices;
c. National Health and Medical Research Council arrangements relating to research and development; or
The associated discussion paper indicates thatd. Work currently underway by the Department of Health and the Department of Industry on ethics processes for clinical trials.
The Panel has identified a number of core principles which we believe should underpin the Review and provide a lens through which issues and options can be viewed.
Principle 1 The role of regulation is to manage risk in order to protect public health and safety.
Principle 2 The level of regulation should be commensurate with the risk posed by the regulated products.
Principle 3 A risk benefits approach to the regulation of therapeutic goods is appropriate.
Principle 4 The regulation of therapeutic goods should take a whole of lifecycle approach. As a result, the regulatory system must: • Have capacity to source and analyse data as it becomes available. • Recognise and respond in a timely way to changes in the risk profile of products across their lifecycle. • Provide for whole of life solutions, from product development to withdrawal/disinvestment. • Be transparent and understood by all stakeholders, including manufacturers and sponsors of therapeutic goods, health professionals, and consumers.
Principle 5 The ultimate responsibility for medicines and medical devices regulation should remain with the Commonwealth. • Australia should maintain its capacity to undertake assessments of medicines and medical devices for safety, quality, and efficacy. • The role of the regulator undertaking this assessment should be considered in light of approaches taken internationally.