Monday, January 21, 2013

Note on Enforcing the Long Arm of the Tax Law

I came across this paper when I was doing some treaty research. It may be of interest: “But the Americans Made Me Do It!”: How United States v. UBS Makes The Case For Executive Exhaustion. No abstract, but here are some excerpts:
In 2008, the U.S. government launched an investigation into UBS AG (“UBS”) following the indictment and conviction of one of UBS’s senior bankers on charges of assisting a wealthy American with tax evasion. ...The United States filed a summons in federal court seeking information from UBS concerning the identities of ... unknown taxpayers. Swiss bank secrecy laws, however, explicitly forbade such disclosure. 
UBS was caught in a classic conflict-of-laws dilemma. On the one hand, UBS and its employees would face potential criminal sanctions if they violated Swiss bank secrecy laws to comply with a U.S. court order. On the other hand, UBS could decline to comply with a potential U.S. court order and face contempt of court....
...U.S. courts thus have a dilemma when the United States, through its executive agencies, wants parties to disclose foreign accounts for tax or other investigatory purposes but bank secrecy laws stand in the way of these investigations. While many courts have used balancing tests to solve this problem, they have found that U.S. law-enforcement interests trump the interests of foreign nations. This places a defendant financial institution in the position of either providing client data in violation of its home state’s laws to meet the demands of the United States or disregarding U.S. discovery orders to meet its home state’s legal requirements.  
... One of the factors for a court to weigh in the balancing formula is “the availability of alternative means of securing the [requested] information.” 
This Comment uses the recent tax investigation into UBS and its account holders as a case study to argue that the alternative means factor from the Third Restatement should be a mandatory step for Executive Branch agencies to exhaust before they can petition a court to compel disclosure of foreign discovery that would require the defending party to violate foreign law. 
This mandatory step, which this Comment terms executive exhaustion, is derived from the concept of administrative exhaustion, in which courts decline to hear cases until the moving party has exhausted all available administrative remedies. The application of executive exhaustion will prevent courts from having to engage in the Third Restatement’s balancing test. By avoiding the Third Restatement’s balancing test, a court can avoid placing parties in a catch- 22—following one state’s laws at the expense of violating those of another state.
And from the conclusion:
[F]ederal courts are aware of the various international interests at stake in certain high-profile litigation. .... Even after the United States, the Swiss government, and UBS came to an agreement regarding the transfer of data, the independent Swiss judiciary held that the UBS client data could not be transferred pursuant to the Treaty Request Agreement because the agreement was not actually a treaty—and thus not officially Swiss law.  If the Swiss government was unable to transfer data pursuant to an agreement it drafted and signed, how did the IRS and the DOJ realistically believe that UBS would be able to comply with a possible order compelling disclosure? An order compelling disclosure would have resulted in a full-blown diplomatic disaster, with the Swiss seizing UBS client data and the IRS and DOJ moving to have contempt-of-court sanctions imposed against UBS.   
In light of the powerful international interests at stake when it comes to an order compelling disclosure of information in violation of foreign law, it is imperative that Executive Branch agencies seek all alternative means before petitioning a court for disclosure. Federal courts should be the last resort for compelling disclosure when an Executive Branch agency seeks information from abroad that would require the violation of foreign law.
 You can read the full paper at the link.

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