U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001

58–198—PDF 2008

S. HRG. 110–1077

THE CAYMAN ISLANDS AND

OFFSHORE TAX ISSUES

HEARING

BEFORE THE

COMMITTEE ON FINANCE

UNITED STATES SENATE

ONE HUNDRED TENTH CONGRESS

SECOND SESSION

JULY 24, 2008

(

Printed for the use of the Committee on Finance

COMMITTEE ON FINANCE

MAX BAUCUS, Montana, Chairman

JOHN D. ROCKEFELLER IV, West Virginia

KENT CONRAD, North Dakota

JEFF BINGAMAN, New Mexico

JOHN F. KERRY, Massachusetts

BLANCHE L. LINCOLN, Arkansas

RON WYDEN, Oregon

CHARLES E. SCHUMER, New York

DEBBIE STABENOW, Michigan

MARIA CANTWELL, Washington

KEN SALAZAR, Colorado

CHUCK GRASSLEY, Iowa

ORRIN G. HATCH, Utah

OLYMPIA J. SNOWE, Maine

JON KYL, Arizona

GORDON SMITH, Oregon

JIM BUNNING, Kentucky

MIKE CRAPO, Idaho

PAT ROBERTS, Kansas

JOHN ENSIGN, Nevada

JOHN E. SUNUNU, New Hampshire

RUSSELL SULLIVAN, Staff Director

KOLAN DAVIS, Republican Staff Director and Chief Counsel

(II)

C O N T E N T S

OPENING STATEMENTS

Page

Baucus, Hon. Max, a U.S. Senator from Montana, chairman, Committee

on Finance ............................................................................................................ 1

Grassley, Hon. Chuck, a U.S. Senator from Iowa ................................................. 3

WITNESSES

Brostek, Michael, Director, Tax Issues, Government Accountability Office,

Washington, DC ................................................................................................... 5

Ng, Frank, Director, Large and Mid-Sized Business, Internal Revenue Service, Washington, DC ............................................................................................. 7

Blum, Jack, counsel, Baker and Hostetler, Washington, DC ............................... 8

ALPHABETICAL LISTING AND APPENDIX MATERIAL

Baucus, Hon. Max:

Opening statement ........................................................................................... 1

Blum, Jack:

Testimony .......................................................................................................... 8

Prepared statement .......................................................................................... 33

Brostek, Michael:

Testimony .......................................................................................................... 5

Prepared statement with attachments ........................................................... 41

Bunning, Hon. Jim:

Prepared statement .......................................................................................... 123

Grassley, Hon. Chuck:

Opening statement ........................................................................................... 3

‘‘A Question of Calculation,’’ Chronicle of Philanthropy article by Peter

Panepento and Grant Williams, February 7, 2008 .................................... 124

Ng, Frank:

Testimony .......................................................................................................... 7

Prepared statement .......................................................................................... 130

COMMUNICATION

Maples and Calder ................................................................................................... 145

(III)

(1)

THE CAYMAN ISLANDS AND

OFFSHORE TAX ISSUES

THURSDAY, JULY 24, 2008

U.S. SENATE,

COMMITTEE ON FINANCE,

Washington, DC.

The hearing was convened, pursuant to notice, at 10:04 a.m., in

room SD–215, Dirksen Senate Office Building, Hon. Max Baucus

(chairman of the committee) presiding.

Present: Senators Conrad, Kerry, Salazar, and Grassley.

Also present: Democratic Staff: Bill Dauster, Deputy Staff Director and General Counsel; John Angell, Senior Advisor; Josh Odintz,

Tax Counsel; and Mary Baker, Detailee. Republican Staff: Ellen

McCarthy, Tax Counsel; and Nick Wyatt, Tax Staff Assistant.

OPENING STATEMENT OF HON. MAX BAUCUS, A U.S. SENATOR

FROM MONTANA, CHAIRMAN, COMMITTEE ON FINANCE

The CHAIRMAN. The hearing will come to order.

The American poet Ella Wheeler Wilcox once wrote, ‘‘Feast, and

your halls are crowded; fast, and the world goes by.’’

Today we will take a look at some ostensibly crowded halls, those

of the Ugland House in the Cayman Islands. That is a remarkable

5-story building that the GAO tells us has some 18,857 tenants.

Today we will examine whether many of those tenants are feasting

at America’s taxpayers’ expense.

The last time that the press and the Senate looked at the Ugland

House in 2004, it had 12,748 tenants. We asked GAO to go down

and look for itself. Remarkably, in the last 4 years the Ugland

House has found room for 6,000 new tenants without even adding

a new floor.

GAO found some interesting things about the Cayman Islands.

The Cayman Islands have a mutual fund or hedge fund for every

five residents. The Caymans have two registered companies for

every resident. And the Caymans have $41 million in bank assets

for every resident.

Plainly, there is a lot of financial activity in the Caymans. There

is a virtual feast going on down there, and that has led to some

crowded halls in the Ugland House. Up to half of those Ugland

House tenants, about 9,000 entities, are Americans.

Of course, those Americans are not physically in the building.

They are represented by computer files, some documents, and a

handful of lawyers. Today we will hear a lot of complicated reasons

for why those 9,000 Americans chose to conduct business out of the

2

Ugland House in the Cayman Islands, and today we will also hope

to get some straight answers from witnesses about why they do so.

The answers have a lot to do with tax evasion. Offshore tax evasion costs Americans tens of billions of dollars every year, and that

contributes to our Nation’s $345-billion annual tax gap, the difference between the taxes legally owed and the taxes timely paid.

We owe it to hardworking, honest taxpayers to make sure that

their tax burden does not increase because sophisticated tax cheats

moved dollars offshore. It is sometimes tough to identify which activity is legal and which is not. Transparency in offshore financial

transactions is severely limited. The IRS is hobbled by limited resources, and tax haven countries are reluctant to dig into the activities of their offshore entities.

Good law enforcement can ferret out offshore tax evasion. For example, German investigators paid around $7.5 million to an informant to provide a list of tax evaders in Liechtenstein, and the

Department of Justice is mounting a strong effort to unveil the offshore holdings of dozens of U.S. citizens who have held assets overseas in the Swiss-based UBS Bank. We cannot just depend on good

luck or foreign law enforcement. The IRS needs better tools to identify and shut down offshore tax evasion.

I am pleased to say the Finance Committee has already acted

this year to shut down offshore tax abuse. We found that U.S. companies, companies like Kellogg, Brown, and Root, were using foreign shell corporations to avoid paying employment taxes. Under

this scheme, the foreign shell ‘‘hires’’ American employees to provide services on behalf of the U.S. parent, i.e., Kellogg, Brown, and

Root.

Because of its foreign status, the foreign shell company is not required to withhold or pay Social Security or Medicare taxes. This

practice gives companies who do not play by the rules an

undeserved competitive advantage. It leaves employees in the lurch

at tax time because they have not been paying the taxes they owe

during the course of the year.

I am pleased to say that this is one scheme that we were able

to stop. We did so as part of the military tax bill that we enacted

last month. The law not only requires that these foreign shells be

treated like American employers, but they must pay their fair

share of employment taxes. They cannot take advantage of unintended loopholes in the tax law, and they cannot shortchange workers and the U.S. Treasury.

I also want to thank Senator Kerry in this regard for his help

in shutting down this practice. But we need to do more.

Today, Senator Grassley and I are announcing our plan to introduce six new measures that we believe will help curb offshore tax

evasion. We should lengthen the statute of limitations, for example,

for prosecuting individuals who failed to file a Foreign Bank Account Report; we should give IRS authority to enforce filing requirements for these reports; we should clarify the information that

must be included in these reports; we should require taxpayers to

file these reports with their individual and corporate income tax returns; we should revise the definition of ‘‘ownership’’ to include

‘‘beneficial ownership’’ of a corporation; and we should include in

the tax code a section that causes the statute of limitations not to

3

* ‘‘Selected Issues Relating to Tax Compliance With Respect to Offshore Accounts and Entities,’’ Joint Committee on Taxation staff report, July 23, 2008 (JCX–65–08), http://www.jct.gov/

publications.html?func=startdown&id=1274.

expire before 3 years after the taxpayer furnishes the required information.

But we still need to do more. We also need to reform our tax code

to make moving business offshore less attractive. That is a tall

order, but I intend to focus the Finance Committee on necessary

tax reform in the next Congress.

Let us take a look at the crowded halls of the Ugland House. Let

us see whether many of its tenants are not feasting at the tax law’s

expense. Let us do what we can to ensure that the American taxpayers are not stuck holding the bill.

Senator Grassley?

OPENING STATEMENT OF HON. CHUCK GRASSLEY,

A U.S. SENATOR FROM IOWA

Senator GRASSLEY. Thank you, Chairman Baucus, for holding

this very, very important hearing.

This committee has hearings that are enjoyable and productive,

and it has hearings that are very enjoyable and very productive.

I categorize this one as one of those that is very enjoyable, and I

think will be very productive.

I say that from the standpoint that, when we find out that there

are problems of people not paying taxes, there might be two reasons. One that is our fault. Maybe we have not written the laws

in a finite enough way to make sure that revenues are collected

that we intended to have collected, so people can, in a sense, legally

avoid taxes. Then the other aspect of it is, those people who owe

taxes and are illegally not paying their taxes. In either case, it is

kind of regretful. But I feel the worst about the people who would

go to the point of cheating 137 million other taxpayers in America

by finding out what they can do to illegally not pay taxes.

So this is a very important meeting in regard to the Cayman Islands and offshore tax evasion. We need to give a great deal of

thanks to the Joint Committee on Taxation for preparation of a

pamphlet on tax evasion in anticipation of this hearing.* The focus

today is to discuss the findings of the Government Accountability

Office and their investigation into the Ugland House. Chairman

Baucus and I asked the Government Accountability Office to investigate this house, a law firm’s office building in the Cayman Islands and the registered home of many thousands of corporations.

The hearing will also examine the problems of U.S. tax evasion

by taxpayers who hide their assets and incomes in foreign bank accounts and foreign entities. The tax code has reporting requirements to make the IRS aware of foreign activities of U.S. taxpayers; however, these reporting requirements are largely a matter

of self-reporting. Since this information is self-reported, its accuracy is dependent upon the accuracy of the self-disclosure, and I

would like to say the honesty of the person disclosing.

This is complicated further by the fact that some U.S. persons

have been known to hide their assets in complicated webs of foreign companies and trusts. Information exchanged with other jurisdictions such as the Cayman Islands is an important tool for the

4

U.S. Government to obtain information on its taxpayers. Our income tax treaties contain an article on information exchange, designed to help the government obtain quality information to enforce

our laws.

Taxpayers who know the IRS can get access to tax information

from foreign jurisdictions will think twice before willingly failing to

satisfy the self-reporting requirements. I have been aggressive in

combatting abusive tax shelters and offshore tax evasion. For example, the 2004 JOBS bill shut down the tax benefits for companies that enter into corporate inversions and abusive domestic and

cross-border leasing transactions. In 2006, I got legislation passed

that would increase rewards for individuals who blow the whistle

on tax cheats and create an office at the IRS to coordinate such

whistle blower claims.

These improvements were based on my experience with the False

Claims Act, which I changed back in 1986, rewarding whistle blowers who helped the government find fraud in government contracting. This allows the IRS to take better advantage of whistle

blower information that is often detailed ‘‘inside information.’’ This

is information the IRS may not otherwise have received.

I am pleased that many at the IRS and the Treasury now recognize the benefits of rewarding tax whistle blowers. It is vital that

the IRS take full advantage of those who are willing to blow the

whistle on tax fraud.

Now, as ranking member I saw to it that the minimum wage and

small business tax relief package that passed the Senate last year

also contained anti-tax loophole provisions, including shutting off

tax benefits for corporations that inverted, shutting off benefits

from abusive foreign leasing transactions, and doubling penalties

and interest on offshore financial arrangements.

Finding tax cheats is a bit like a game of cat-and-mouse, only the

mouse is hiding its cheese offshore. The IRS needs to be able to

stay ahead of the schemers who hide their incomes offshore. Congress needs to continue giving the IRS tools to trap tax cheats. The

chairman and I will be releasing a set of proposals that he has already talked about. So, I look forward to continuing this very enjoyable effort of more accurately rewriting our tax laws that we did

not write accurately the first time, and then making sure that people who are cheating illegally do not cheat any more.

Thank you.

The CHAIRMAN. Thank you, Senator Grassley.

I now want to welcome our three witnesses. First, we have Michael Brostek, the Director of Tax Issues for the Government Accountability Office. Next, we have Frank Ng, Commissioner of the

Large and Mid-Sized Business Division at the Internal Revenue

Service. Third, Jack Blum, who is counsel at the law firm of Baker

and Hostetler.

I would note that the committee invited UBS to send a representative today to discuss reports that its employees have helped

U.S. citizens to hide assets overseas. UBS declined to attend. Next

week, I intend to send UBS management a letter asking about

their policy in handling the foreign accounts of U.S. citizens.

I thank all the witnesses who did agree to come today. As a reminder, all written statements will be automatically included in

5

the record, and I ask each witness to hold his remarks to approximately 5 minutes.

So, Mr. Brostek, you are first at the end of the table there to my

left, so why don’t you begin?

STATEMENT OF MICHAEL BROSTEK, DIRECTOR, TAX ISSUES,

GOVERNMENT ACCOUNTABILITY OFFICE, WASHINGTON, DC

Mr. BROSTEK. Thank you, Mr. Chairman, Senator Grassley, and

members of the committee. Thank you for inviting me to discuss

U.S. persons’ involvement with Ugland House entities, what attracts persons to establish entities in the Cayman Islands, what information is available on U.S. persons’ activities there, and the

Federal Government’s compliance and enforcement efforts.

As that board shows, Ugland House is solely occupied by the

Maples and Calder law firm, which provides registered office services to approximately 18,857 entities—I say approximately because

the figure changes over time—that are established in the Cayman

Islands.

The firm’s services are similar to those of corporate service providers in the U.S. Maples’s partners estimated that about 5 percent

of Ugland House registered entities are wholly U.S.-owned, and between 40 and 50 percent are U.S.-connected in the sense that they

have a U.S. billing address.

The concepts of ownership and control are complex for most

Ugland House entities because many are related to structured finance and to investment funds. For example, structured finance

entities are not typically carried on a company’s balance sheet, and

ownership can be through a party, like a charitable trust, or spread

across investors from around the world.

Investment funds may be established and managed by U.S.-

based managers, but the funds are essentially owed by investors,

again, possibly from around the world. U.S. persons commonly establish entities in the Caymans to gain business advantages, which

can include minimizing taxes.

The Caymans’ reputation for stability, a business-friendly environment, a familiar legal system, and prominence as an international financial center, underpin its attractiveness to businesses.

U.S. persons may establish Cayman entities to attract foreign

business, such as when, for political, regulatory, or tax reasons, foreign business partners or foreign investors prefer not to do business in the U.S. itself.

U.S. persons can also obtain legal tax advantages by establishing

or investing in Cayman Islands entities. For example, U.S.-based

corporations may legally reduce their taxes by holding foreign active business income in the Cayman Islands, in Cayman entities,

and either not repatriating it or doing so when the income would

be minimally taxed in the U.S.

U.S. tax-exempt investors, like pension funds or university endowments, can maximize their investment earnings by investing

through a Caymans’ corporation because the dividends are not subject to U.S. unrelated business income tax and the Caymans do not

tax corporate income. In a small number of the cases that we

found, Cayman entities were used for illegal tax evasion by U.S.

6

persons, but we do not have an estimate of the dollars that were

involved.

The U.S. Government has access to several sources of information about U.S. persons’ activities in the Caymans. Much of this information is self-reported, and its completeness and accuracy cannot be easily verified. In addition to self-reported information, U.S.

officials, when they have sufficient identifying information, can formally request information on U.S. persons’ Cayman Islands activities under a recently implemented Tax Information Exchange

Agreement and a Mutual Legal Assistance Treaty.

U.S. and Cayman regulatory officials have also coordinated to

share financial intelligence information. U.S. officials consistently

told us that the Cayman government has been cooperative when

they have made requests, and have shared useful suspicious activity information at their own initiative.

Across multiple jurisdictions, IRS has targeted abusive transactions in such areas as hedge funds, offshore credit cards, and promoters of offshore shelters. The extent of Cayman Islands entity involvement is unclear, however, because jurisdiction-specific information is not compiled.

IRS officials did tell us that, in 45 instances over the past 5

years, its field agents have requested information regarding suspected criminal activity of U.S. persons in the Cayman Islands, or

involving the Cayman Islands. U.S. officials also said that there

were fewer criminal investigations involving the Cayman Islands

than for some other offshore jurisdictions.

The use of multiple entities in multiple countries is one of several enforcement challenges that U.S. law enforcement, and the

IRS in particular, faces. Others include the amount of time it takes

to do investigations when individuals are trying to hide the ball behind multiple foreign entities, and because the IRS cannot seize assets that are in another country.

The Cayman government has taken steps to meet international

standards and has been cited by the Caribbean Financial Action

Task Force and the International Monetary Fund for its compliance

initiatives. Maples’s partners told us that they perform the required due diligence and have provided suspicious activity reports

in some instances. However, they note that the responsibility for

compliance with U.S. tax laws lies with those U.S. taxpayers who

create and use Cayman entities.

Before closing, I would like to acknowledge the extensive cooperation and assistance that we did receive from both the Cayman

Islands government and from the Maples and Calder law firm. As

you know, we were dependent on their cooperation in gathering the

information that is presented today, both in my testimony and in

the report that is being released at this time.

This concludes my oral statement. I would be happy to answer

any questions you have.

The CHAIRMAN. Thank you, Mr. Brostek, very much.

[The prepared statement of Mr. Brostek appears in the appendix.]

The CHAIRMAN. Mr. Ng?

7

STATEMENT OF FRANK NG, DIRECTOR, LARGE AND MID-SIZED

BUSINESS, INTERNAL REVENUE SERVICE, WASHINGTON, DC

Mr. NG. Good morning, Chairman Baucus, Ranking Member

Grassley, and members of the committee. My name is Frank Ng,

and I am the head of the IRS’s Large and Mid-Sized Business Division, responsible for the IRS international administration strategy

and programs.

Thank you for the opportunity to appear before you today to discuss an important critical issue of tax administration in this country: the practice of shifting and sheltering income and hiding assets

in foreign jurisdictions as a means of avoiding and evading U.S.

taxation.

At the IRS, we are very concerned with the recent identified patterns of tax evasion through the use of offshore accounts and firmly

believe that it is the responsibility of every taxpayer to properly file

and pay their tax obligations. We will continue to take every effort

to ferret out offshore tax abuse and evasion. Ensuring compliance

with the international aspects of the U.S. tax law is a high priority

at the IRS.

We have strengthened our organizational focus to address these

tax administration challenges with the development of the first

comprehensive service-wide strategy on administration of international matters, one that integrates the international perspective

and all of our business unit strategies and processes.

With increasing globalization, virtually every large business return, as well as returns of many small companies and individuals,

has international features due to the ease of cross-border transactions. Today, the IRS has approximately 1,500 employees focused

primarily on international compliance activities, which include

international examiners, economists, attorneys, criminal investigators, and others. Developing a sustainable group of skilled technical

employees to handle the wide range of complex international issues

is a key priority for the IRS.

The IRS has targeted specific tax issues as an area of emphasis

for international tax compliance attention, and these issues are

subject to mandatory review by our compliance personnel. For example, five of our corporate priority issues are international issues

involving billions of dollars. In addition, we have significant ongoing civil and criminal activities related to individuals failing to

properly report income and hiding assets in offshore accounts.

This morning I would like to hit on some of these tools we have

in place to combat offshore non-compliance and what Congress

could do to help assist us as we move forward.

The first of these tools is tax return and information reporting

obtained from tax forms routinely filed by our taxpayers. The second is our qualified intermediary program. This program was created in 2001. Under this program, foreign financial institutions voluntarily agree, by contract directly with the IRS, to act and operate

as a withholding agent, subject to the sitting requirements. To

date, we have 7,007 QI agreements, of which 5,660 are currently

active. The QI program is critically important to sound tax administration in a global economy, but it needs some updates and modifications. My written statement addresses some changes and modifications to the QI program that we are currently considering.

8

The third tool we utilize is our tax treaties and tax information

exchange agreements with other countries. We currently have

agreements for information exchange with 73 jurisdictions and

have expanded the program in recent years to include offshore jurisdictions such as the Cayman Islands and the Bahamas. We continue to expand the number of countries with which we have agreements, as well as renegotiating other agreements, such as the U.S.

Belgian Tax Treaty, to improve information exchange.

A fourth tool that has been particularly effective is the use of informants. Informants have been a valuable source of information

for IRS’s civil and criminal investigations in the offshore tax evasion area.

The final tool I mentioned to fight offshore evasion is the use of

information we will receive from the use of ‘‘John Doe’’ summonses.

The IRS generally uses a John Doe summons authority to identify

individuals, groups, or classes of U.S. taxpayers whose identity is

unknown, who are involved in specific areas of tax non-compliance

and cannot be identified through any other means.

Congress has an important role in this arena as well. We urge

that the administration’s request for the IRS’s annual budget be

fully funded. We need the necessary resources to continue to address many of the issues that I have discussed.

Another area where Congress could help is to allow more time

to help us conclude these investigations. Currently, the statute of

limitations is 3 years. However, as you can see, many of these

cases are very complex and often take additional time.

Finally, it is important that Congress continue to support and

strengthen our network of tax treaties and information exchange

agreements. They provide a basis for exchanging critical information.

Mr. Chairman, you and the committee have been on the forefront

in pursuing important areas of Federal non-compliance, and we

support your efforts. Thank you, Mr. Chairman. I would be happy

to respond to your questions.

The CHAIRMAN. Thank you, Mr. Ng.

[The prepared statement of Mr. Ng appears in the appendix.]

The CHAIRMAN. Mr. Blum?

STATEMENT OF JACK BLUM, COUNSEL,

BAKER AND HOSTETLER, WASHINGTON, DC

Mr. BLUM. Good morning, Mr. Chairman, Mr. Ranking Member,

members of the committee.

I listened to the comments about Ugland House and must say to

you that Ugland House represents the best of offshore because the

Cayman Islands actually keeps better records than most of the

other jurisdictions and has fewer corporations. If you really want

to worry about things, look at the British Virgin Islands, with

500,000 corporations, no records on any wall. You cannot go to a

place and find an office, because there is none, and no regular

records to find out who currently owns the corporation.

You could go to the Island of Nevis, and you will not even be able

to find an address for the corporation. There are, on Nevis, nominee shareholders, directors, officers. If you were to take those people, send them to Guantanamo and waterboard them, you could not

9

find out who owned the corporation or what the corporation was

doing.

Now, this would all be kind of an amusing matter but for the fact

that there is an industry that is operating that creates structures

based on these entities: trusts, offshore corporations, bogus insurance policies. They tell Americans, look, you do not have to pay tax,

we will get this sufficiently scrambled up in a sufficient number of

places so that nobody will be able to follow the trail.

There are banks that do this for a living, a lot of them, major

banks. You have, in the hearings of the Permanent Investigation

Subcommittee, laid out very clearly the saga of LGT Bank in Liechtenstein, the kinds of structures that they put in place, the way

that their people sat and counseled with the very rich to figure out

how to set up a structure that would conceal their assets.

Now, you have to ask, well, how can they do this and how can

they get away with it? A lot of this goes back to the common law

revenue rule that came about during the Napoleonic wars when a

British port decided that it was all right for private parties to cheat

French customs without violating British law.

Since that time, around the world that has become enshrined as

doctrine. It is in the restatement of laws, it has been repeatedly argued in American courts, it is why no American tax judgment is

enforceable anywhere in the world outside of the United States.

Now this, in the kind of world we are in, is insane.

The CHAIRMAN. Would you repeat that again, that common law

tenet? Repeat that one more time, please.

Mr. BLUM. All right. The revenue rule is that the only time that

tax laws are enforced are within the border of one’s own country,

and that it is perfectly all right to run a business helping people

cheat taxes in other jurisdictions. So as a result, we have people

in the United States who run the business of helping Mexicans

cheat their government of Mexican tax. In a case that I worked on,

someone had a problem and wanted to hide money offshore. They

went to a Philadelphia law firm that referred the guy to their London office. The London office had no problem setting up the structure.

Now, this is madness in a world where there is instant communication, where there is the opportunity to create virtual entities

and a kind of virtual reality, and where information exchange is

limited in ways that are quite amazing. So, for example, we have

these wonderful MLATs, but they are perfectly useless, because to

use an MLAT you have to know what the MLAT would give you.

The CHAIRMAN. Use a what?

Mr. BLUM. They are useless.

The CHAIRMAN. Use a what?

Mr. BLUM. The MLATs, Mutual Legal Assistance Treaties.

The CHAIRMAN. All right.

Mr. BLUM. The deal is, if I know that you have an account in the

Cayman Islands, I can go to the Cayman Islands government, only

in a criminal case, and say, ‘‘Guys, we know that Senator Baucus

has an account in the Caymans, get the records,’’ and they will.

They might send them even by Federal Express because they are

protecting the 20,000 other people whom the IRS does not know

about. That is how these treaties have worked. We have an extraVerDate 11-MAY-2000 14:29 Sep 23, 2010 Jkt 000000 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 58198.000 TIMD PsN: TIMD
10

dition treaty with Liechtenstein. I would bet anything that Mr.

Schtagel, who has been indicted in connection with the UBS case,

will never be extradited.

This is the kind of problem we have. We have to really begin to

look at the revenue rule and begin to look at the full global scope

of this problem, because it has implications way beyond the borders

of the United States. It is bad enough that we are losing, I would

guess, well over $100 billion a year in revenue, but, if you look at

some of the problems on our borders—for example, Mexico, where

there is a drug war that is going on, violence all over the place,

corruption beyond belief. The Mexicans cannot solve their problems

if their people are cheating. There should not be a global industry

helping people cheat on tax.

Finally, this is the most profitable area of banking, because the

bankers who do this, the private bankers who do this, are able to

make more money on people who are hiding money than they can

on normal customers. There are much more interesting services

that they perform, they can charge much higher fees, and in effect

they are capturing some of the lost tax revenue, which is why it

is going to be very hard to get some of these banks to give up.

Finally, there is a problem here. The problem goes way beyond

the issue of tax. All financial regulation is put in jeopardy by the

kind of arrangements we have allowed to come into being. That is

the kind of problem we have had with regulating the mortgage

markets, regulating the hedge funds. It is a problem of allowing

virtual reality to become the rule. That is something we cannot

permit. We cannot assume that companies in offshore jurisdictions

are real. We have to say, prove to us that there is a management,

that there are real people, that there are people who have fiduciary

responsibility, and they are doing their jobs, if we are to take a corporation as a valid entity.

Thank you. I will be glad to answer any questions.

The CHAIRMAN. Well, I guess we thank you. [Laughter.] We do

thank you.

[The prepared statement of Mr. Blum appears in the appendix.]

The CHAIRMAN. I would like to just hold up a chart here which

kind of gets at what you are getting at, Mr. Blum. I know you cannot read it, but I will read it for you. Essentially, this is off the

web site of a bank, it might even be in the Caymans. It is

Butterfield Bank. They list their services, what they provide, et

cetera. One of the services I have highlighted in yellow there—we

printed it down at the bottom here—one of their services is to ‘‘provide nominee shareholders.’’ This is to ensure that shares are not

registered in the beneficial owner’s name. That is obviously a way

to hide the true owner of the assets or the account in the Caymans

in a certain bank account.

So, Mr. Blum, I think it sounds like you have a pretty good idea

of the scope of the problem here. So the obvious question is, what

are some of the solutions? How do we begin to get at this? One,

two, three, how do we begin to get at this?

Mr. BLUM. There are some simple steps, the first of which is,

never should anyone be allowed to file a W–8 with IRS that has

the name of a corporation in one of these tax haven countries and

say that that is the beneficial owner of the account, which is what

11

the law now permits. If you go to the instructions for section 1441,

it says that ‘‘if a financial institution has actual knowledge or has

reason to believe that a false W–8 has been filed’’——

The CHAIRMAN. And just to refresh our recollection, what is a

W–8?

Mr. BLUM. The W–8 is the form that gets filed by a foreign entity

so that it can take advantage of tax treaty and foreign tax status.

The CHAIRMAN. All right. So the solution with W–8s is what?

Mr. BLUM. Do not accept shell corporations as beneficial owners.

Section 1441, in effect, allows people to fill in the name of a Cayman corporation and say that is the beneficial owner. At that point,

IRS is flat stuck. That is idiocy.

The CHAIRMAN. So what do we do to change that?

Mr. BLUM. You very simply say that any corporation that cannot

show real business activity in a location cannot file a W–8 as a

beneficial owner. You have to then go beyond that and say who

owns the corporation. You can make exceptions for public corporations, you can set certain size tests in there, but you really have

to get the beneficial ownership.

There are tens of thousands of brokerage accounts in the U.S. in

the name of BVI corporations, Nevis corporations, every one of

these offshore places that is in the incorporation business. They do

their business in the U.S., happy in the knowledge that IRS only

has the corporate name and nothing more.

The CHAIRMAN. Can you just kind of outline a little more for us,

what could a person, an American citizen, do? One who is not required to disclose beneficial ownership? Why would somebody not

want to disclose beneficial ownership?

Mr. BLUM. Well, there are multiple reasons. In the cases—and

many of them I have worked—one reason is obviously tax. But in

a number of the other cases, it turns out that they are involved in

other criminal activity—offshore credit card stock fraud, penny

stock manipulation, various confidence schemes. One of the stories

that I think is very striking is when I was consulting with IRS on

the offshore credit card project. IRS worked out an arrangement

with the State of California and the District Attorney’s Office in

Manhattan to turn over leads which IRS could not follow up on.

The Manhattan D.A.’s Office got the list of leads and discovered

about half of them had outstanding warrants or investigations of

various forms of criminal activity and financial fraud. So there are

multiple reasons for concealing this ownership. There may be some

legitimate reasons, but believe me, the legitimate reasons are far

outnumbered by the tax and other motivations.

The CHAIRMAN. You kind of touched on it. Are there any down

sides to requiring beneficial ownership disclosure?

Mr. BLUM. Not that I am aware of. I would venture to say that

you could bring some people in and ask them, but I cannot see it.

The CHAIRMAN. Why not just go to the heart of the matter and

require that any U.S. citizen who transfers assets overseas has to

file with the IRS a disclosure form of some kind? All of us have our

W–2s.

Mr. BLUM. Yes. Well, we do have that requirement. We have—

I cannot remember the form name. I think it is 371, or whatever.

But you are required, when you are transferring assets to an offVerDate 11-MAY-2000 14:29 Sep 23, 2010 Jkt 000000 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 58198.000 TIMD PsN: TIMD
12

shore corporation, to file a form. That, for the most part, is not enforced.

The CHAIRMAN. Why?

Mr. BLUM. How do you do it? How do you match the activity that

has been reported with a tax return, and then begin an audit to

figure out what has happened? This is just too difficult an undertaking. This is part of the entire tax problem in offshore. The entire U.S. tax system is built on auditing returns that are filed with

the U.S. Government. The problem here is not what is on the return, is it correct or not correct. It is what is not on the return.

Those cases are incredibly difficult to build. The way we go about

it now is to use all kinds of external information, stuff that comes

in through depositions, Information Document Requests, various

other forms of discovery, public databases, to get to the people so

they understand that they are people who have evaded taxes. That

is a very difficult process. To go through and match and put all this

together and then begin an investigation without more, is really

way too difficult. It is not only in that arena, it is in the arena that

requires tax returns from corporations owned or controlled by

Americans. I believe there is tremendous under-reporting in that

area as well.

The CHAIRMAN. Let me ask this. My time has expired.

Senator GRASSLEY. I would not mind if you continued along this

line, if your colleagues over there do not mind, because I think this

is very interesting.

The CHAIRMAN. If the Senators will indulge me, I will be very

quick here.

What about this as an idea: U.S. entities that transfer funds to

foreign accounts on behalf of an individual must issue an information document to the IRS and FinCEN—that is Treasury—and the

individual must report the cumulative gross dollar amount of funds

transferred during the calendar year.

Mr. BLUM. It is a good idea. The problem here, again, will be enforcing it.

The CHAIRMAN. How do we get around the enforcement problem?

Mr. BLUM. The issue would be getting the financial institutions

that do the transferring to file the reports. So, if there is a wire

transfer out to an offshore jurisdiction and an offshore entity from

an individual, perhaps they file some sort of electronic report of

that transfer, and perhaps it should be limited to a certain dollar

amount so we do not capture a lot of noise.

The CHAIRMAN. But something along these lines, you think,

makes some sense?

Mr. BLUM. Could be, yes.

The CHAIRMAN. All right. Thank you. My time has expired.

Thank you.

Senator Grassley?

Senator GRASSLEY. Mr. Ng, during our budget debate we heard

arguments that billions of dollars would be raised from tax revenues allegedly hidden in the Ugland House. Your testimony states

that you cannot quantify the magnitude of the tax evasion through

the use of offshore entities and accounts. So my question: would

you not agree that there is no evidence available to base that allegation and to quantify the amount?

13

Mr. NG. Senator, I would agree that it is very difficult for us to

estimate the level and the amount of non-compliance because, keep

in mind that many of these organizations and entities operate in

the Cayman Islands or in low- or no-tax jurisdictions and, as Mr.

Blum commented, do it with us not able to detect the kinds of activities in their reporting.

Under the IRS laws and regulations there are a number of requirements in terms of information reporting, but quite often, when

people choose to hide assets and not report income, they do not

properly file and report. So what we have chosen to do is really to

focus on the kinds of activities in terms of where we believe there

is potential compliance risk.

As we look at the Ugland House, when I see 18,000 entities, potentially 9,000 with respect to U.S. companies or U.S. persons, I

am concerned, as a tax administrator: why are companies operating in the Cayman Islands?

While we recognize that taxpayers and citizens have the right to

operate in global trade, really, at the end of the day, our focus is

around: what is the right amount of tax that they are reporting to

the U.S. Government? So we look at the size—and not necessarily

trying to estimate—looking at specific instances, looking at specific

issues, and looking at specific approaches to groups of taxpayers

that may choose to minimize their tax administration responsibilities.

When we look at complexity of law and complexity of transactions, in this age today when you have the ability to move funds

across borders easily, it raises the question of the ability, the easier

ability, to manipulate transactions and to minimize your tax, and

in some cases, even evade your taxes.

Senator GRASSLEY. On another point, your written testimony

states, Mr. Ng, that an important tool in the IRS arsenal for fighting tax evasion would be for Congress to enact legislation requiring

merchant card issuers to report annually on reimbursement to

business entities. The Senate passed the merchant card reporting

proposal in the Housing Recovery Act earlier this month. Certain

groups, however, have claimed that the merchant card reporting

proposal is a violation of taxpayers’ privacy. Could you comment on

whether or not it is an invasion of taxpayers’ privacy?

Mr. NG. Senator, I would say that, in terms of third party reporting to the government, it really is a benefit in terms of deterrence

to tax avoidance/evasion. And on the issue of the challenge to taxpayer privacy, the answer is no. We would get no information

about the cardholders who made the charges or what they purchased with the payment cards. We will be getting aggregated information about a merchant’s gross receipts from having accepted

payment cards in payment for goods or services.

Senator GRASSLEY. Mr. Brostek?

Mr. BROSTEK. I just thought I would mention that all of us who

have W–2 statements that are filed with IRS, or Forms 1099 on

our interest or dividend income, have our privacy circumscribed by

those requirements. The reporting that is being suggested by the

administration on merchant credit card receipts is roughly akin to

the kind of reporting that occurs on most individuals now.

14

Senator GRASSLEY. All right. Mr. Brostek, I have a question for

you, and then this will be my last one because my time is up.

GAO found that the large majority of offshore tax evasion is

among individuals, small businesses, and promoters rather than

large, multinational corporations. Why do you think this is so? Before you answer that, the GAO report also found that multiple entities are frequently used to obscure individual taxpayers’ activities

and evade taxes. Are you aware of any legitimate reason individual

taxpayers would have for forming multiple entities?

Mr. BROSTEK. On the first point, I would be very careful about

going too far with our information. What we have are 21 cases that

we were able to find that involved Cayman entities where there

were some tax or other criminal violations involved. I do not know

that the characteristics of those cases are necessarily common for

all the types of evasion that might be occurring. They are just the

ones that we know about.

Regarding why it would be smaller individuals or entities that

are involved, one possibility is that this could be people who have

a lot of cash income who would like to not report that to IRS and

perhaps not make it available to others for other legal proceedings,

like divorce actions. It is also possible that larger organizations,

multinational corporations, focus more on legal provisions that can

reduce their taxes in order to minimize their taxes, maybe the less

certain areas of tax law where they can take an aggressive position

that maybe will be challenged by IRS, but maybe not. So those

large corporations have other techniques besides hiding the ball to

help reduce their taxes.

Senator GRASSLEY. Thank you.

Thank you, Mr. Chairman.

The CHAIRMAN. Senator Conrad?

Senator CONRAD. Thank you, Mr. Chairman. Thank you very

much for holding this hearing. I think it is critically important.

In a previous life, I was tax commissioner of my State, and for

two terms chairman of the Multi-State Tax Commission. During

the Reagan administration, I served on a commission on the taxation of multinational corporations. So, I have spent a significant

amount of time on these very issues and, during my time as tax

commissioner, was responsible for overseeing the audits of hundreds of multinationals.

Somebody might wonder why somebody from North Dakota

would be engaged in looking at the books and records of large multinationals. It turns out, North Dakota is a large oil and gas State,

so we have a nexus with many large oil and gas companies, as well

as grain companies. I can remember very well one audit that we

did pursuing a grain company, and we found the grain traded

hands about a dozen times before it left the United States, one

shell company to another shell company. It finally disappeared offshore. We could no longer pierce the veil when it got to the Caymans. This was not done for a business purpose, this was done for

the purpose of avoiding and evading legitimate U.S. tax.

So this is not an academic question to me. I have seen it with

my own eyes. I have seen it repeatedly. I have seen it in very, very

substantial amounts. I may still be bound by certain settlement

agreements that I entered into when I was tax commissioner, so

15

there are things I cannot say. What I can say is, it was shocking—

I mean, absolutely shocking—what I saw going on. There is absolutely no question, none, that this was done to avoid and evade legitimate U.S. tax.

On the question of how big this is, the ranking member of the

committee references statements. I think he is probably referring

to statements I made on the floor, that there are hundreds of billions of dollars involved here. I do not think there is any question

about that, none.

Why do I say that? Well, we have the Permanent Subcommittee

on Investigations, who have determined in their belief that it is

$100 billion a year that we are losing. This is just on offshore tax

havens. One hundred billion dollars a year. If you pierce the veil,

you read this story, they talk about UBS alone having $20 billion

in assets in undeclared accounts for U.S. taxpayers. That is one financial entity that has $20 billion in undeclared accounts. Why are

they undeclared? They are undeclared for a reason. The reason is,

they do not want to pay taxes. They do not want to pay their U.S.

taxes.

Now, how do we know that? Well, let us go to the Web. It is very

instructive to go to the Web. It is amazing what you find. Punch

in ‘‘offshore tax havens.’’ Here is what you will find. The last time

I gave a speech on the floor, I thought you would get a million hits.

Not any more. Now it is almost 2 million offshore tax havens.

And let us go and let us just read what they are telling us. This

is not hard to figure out, because they are telling us what they are

doing. It is right there for anybody to read who cares. What do they

say? ‘‘Index of offshore investment resources.’’ This is my favorite:

‘‘Your money belongs to you and that means it belongs offshore.’’

‘‘Live tax-free and worldwide on a luxury yacht.’’ ‘‘Moving offshore

and living tax-free just got easier.’’ ‘‘Live tax-free and worldwide on

a luxury yacht.’’ Then they say, ‘‘Exciting stuff.’’ That is exciting

stuff. You know, the problem with it is, all the rest of us, the vast

majority of us who pay what we legitimately owe, are getting

cheated, and we are getting cheated big-time. This is not academic

to me. I have seen it with my own eyes. I know this is going on,

and it has grown dramatically since I was in the business of trying

to enforce tax laws.

I would ask you, Mr. Blum, do you think this is a minor issue,

or do you think there is a hemorrhage going on?

Mr. BLUM. It is a huge issue. There is a hemorrhage going on,

there is no question about it. The amazing thing is, even though

there have been sporadic attempts to bring it under control and

some valiant efforts by people inside IRS, the problem grows rather

than shrinks.

The CHAIRMAN. Why does it grow? That is astounding. IRS

should be doing their job. I am astounded, frankly, that they have

not asked for more tools to do their job better. Why are they allowing it to grow?

Mr. BLUM. It is not that they are allowing it to grow, as much

as this——

The CHAIRMAN. In effect, they are.

Mr. BLUM. First of all, very few people are aware that people do

get caught and penalized. Because of 3106, all of the civil settleVerDate 11-MAY-2000 14:29 Sep 23, 2010 Jkt 000000 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 58198.000 TIMD PsN: TIMD
16

ments are kept secret. As a consequence of that, the success of the

offshore credit card project, which brought in thousands of people

who were cheating offshore, is absolutely hidden from public view.

The people who were caught in that have simply gone about their

business, and the people who are the purveyors of offshore schemes

have said, hey, the project failed, not many people got caught, why

do you not go about doing it with us?

So I suggest you amend 3106 to make public settlements involving offshore cheating, period, and not tie this up in secrecy, so that

people know, when salesmen come calling, that this is not something you can get away with. Point two——

The CHAIRMAN. I am sorry to intrude on my colleague’s time, but

why is that not public today?

Mr. BLUM. Because of the secrecy provisions of 3106.

The CHAIRMAN. Well, why were they enacted in the first place,

and what is the down side of repealing it?

Mr. BLUM. The secrecy provisions are part of what happened

when Richard Nixon politicized the Internal Revenue Service, and

that was Congress’s response. But the response was quite Draconian. I think it is time to take a look at that, rethink it, and understand the importance of deterrence. Now, deterrence is the name

of the game, because there is no way, in law enforcement, you are

going to catch everybody. What you have to do is persuade people

who would otherwise be tempted to be dishonest that crime does

not pay. The way you do that is making public convictions, and in

this case, making public various settlements and other agreements

with IRS involving offshore schemes. They have to know that——

The CHAIRMAN. Off the top, that sounds like a great idea.

Senator Conrad, I am sorry to have taken your time.

Mr. BLUM. There is a second part.

The CHAIRMAN. Let us get the second part, here.

Mr. BLUM. The second part is, to answer your question, it is

growing because there are salesmen who are selling it. Now, you

have up there the Bank of Butterfield. I happen to have run into

the Bank of Butterfield more than 20 years ago, working for a client, believe it or not, in the Cayman Islands. What I learned was,

Butterfield regularly sent salesmen into Florida, selling their services, their offshore services, to U.S. citizens. They regularly called

on lawyers all over Florida to tell people, this is how you get

around estate tax, this is how you get around gift tax, this is how

you get around income tax. At the time, Butterfield was carefully

structured—I am not sure where they are today—so that they were

in Bermuda, Bahamas, Caymans, Jersey, and had a representative

office in the city of London, but clearly out of subpoena reach of the

U.S. authorities.

Senator CONRAD. Can I just conclude on my time? In an attempt

to answer part of the chairman’s question, here is what I found: it

is almost impossible to pierce the veil, no matter how skilled your

people are, when you have a circumstance in which one company

may have hundreds of subsidiaries around the world, and they sell

from one, to another, to another, to another and make very little

profit in these transactions where there are taxes, but, when they

get offshore and they get into tax haven countries, all of a sudden

they show substantial profits. What the IRS has to try to do is

17

recreate arm’s-length transactions between all of these entities. I

will tell you, it is almost an impossible task.

The CHAIRMAN. Well, I am sorry. This is unconventional, how we

are conducting this hearing. How do we answer that one, Mr.

Blum?

Mr. BLUM. Which?

The CHAIRMAN. All the layers.

Mr. BLUM. The layers. Well, again, it is: do not recognize them.

We have a terrible penchant for accepting bogus entities as real

and following paper trails that do not mean anything. I would say,

shift the burden so that, if somebody comes in and says, hey, this

was the structure and this is how we do business, what they would

have to do is demonstrate to the IRS that there is a real business

behind whatever the entity happens to be. The minute you do that,

the whole thing falls down because, when you look at these offshore

corporations and trusts, there is no business.

The directors do not know what the company does, the shareholders have no idea that they are shareholders, and the same 20

people are the directors of all 30,000 corporations registered in

Nevis. It really is a bogus set-up, so why do we treat it as real?

In the documents, in the Liechtenstein documents, there was actually a list of countries whose corporations would be automatically

accepted as real entities. These are corporations that perhaps could

be used in their structuring.

Now, why would we accept those corporations as real unless the

government involved insists that there be real business entities?

We have to just make it plain that shells are shells and we are

going to disregard them, no protection.

The CHAIRMAN. Thank you very much.

I apologize to the members here. Senator Kerry, you are next.

You have been very, very patient.

Senator KERRY. No, that is fine. I think it is important to get it

out.

Mr. Chairman, thank you for having this hearing. I appreciate

that you and the ranking member are focusing on this. I appreciate

the comments you made in your opening statement about the effort

we made to close the abusive offshore havens on the KBR effort.

The KBR effort is just a tiny piece at the top of this pyramid. Jack

Blum and I worked on this for a long time. I hired him as the counsel to our committee when we looked at this issue in the late 1980s

and early 1990s. We then discovered the BCCI Bank, with billions

of dollars of fraud. This was the late 1980s.

That effort led to the negotiation of agreements with Panama

and Venezuela for banking transactions to try to track some of this

money, particularly focusing on drugs, narcotics, and money laundering, but also we discovered back then the name of one Osama

bin Laden, who had accounts with that bank. What people do not

understand is, this is not just a tax issue, Mr. Chairman. This is

a national security issue. It is also an issue that goes to the fundamentals of governance.

I remember, after Mr. Blum came back from some of the discoveries that we put together, I went to meet with the Governor of the

Bank of England, precisely because of the problem we had with

these offshore havens. The Cayman Islands are British territory,

18

and they work under their banking rules. Frankly, those laws are

soft, unbelievably, purposefully enhancing these kinds of hidings of

wealth and havens. Here, you have this island area, 1.5 miles,

something like that. It is about the size of Washington, DC. There

are 47,000 residents, a lot of water, a lot of sand, not a heck of a

lot of production of anything.

Yet, you have, what is it, 277 licensed banks, over 80,000 registered companies, more than 9,000 registered investment funds,

760 captive insurance companies, and, according to the Department

of Treasury, U.S. investors held $376 billion in Cayman-issued securities. Now, what is that about? Do they do something in the

Cayman Islands you cannot do in New York, or London, or Singapore, or Shanghai? It is absurd. What Mr. Blum just said is the

nub of this. We treat these things with legal justification. There is

no fundamental purpose in that, other than hiding wealth, moving

it, getting into all these corporate entities where you cannot pierce

the corporate veil, and we are trapped. The problem is, the American taxpayer picks up the difference. The average person in this

country who cannot do this, who does not do this, does not even

know about it, pays the difference. We are losing, unbelievably, billions of dollars of revenue.

Right now, we also need to close—and I hope we can do this before October. Representative Rahm Emanuel and I have a provision

to prevent CEOs and hedge fund managers from deferring unlimited amounts of compensation offshore, which is what they do. The

sole purpose: evading taxes. So, Mr. Blum, let us kind of get at the

heart of this thing.

Mr. Ng, I have to concur with the chairman here. It really bothers me that the IRS—I know you are working behind the 8 ball.

You have a budget and you have too few people, and it is very, very

tough stuff to track and put together. But I do not see the focus.

I do not see the request for the resources. I do not see the sort of

urgency of legitimizing the tax structure by which most Americans

operate.

What happens when you do not do that—and you know this—is

the underground economy in our country grows. More and more

people go work off the books, and they find a way to do cash transactions and work off the books because they see everybody at the

top able to get away with it. They say, what the hell, I am going

to do the same thing. So, how much is the underground economy?

Do you know, Mr. Ng?

Mr. NG. Well, our general tax gap number of $345 billion includes a wide range of potential unreporting of income in all categories.

Senator KERRY. Three hundred and forty-five billion? When was

that?

Mr. NG. That is based on the most recent——

Senator KERRY. That is an annual figure?

Mr. NG. Yes.

Senator KERRY. So, if you have an annual figure of $345 billion,

once again, what would that represent, in your best estimate? That

taxable income, what would that represent in revenue to the

United States?

19

Mr. NG. Well, Senator, I would put it in the context of this, that

the tax gap is kind of just a projected estimate based on some studies that have been done over the years in terms of——

Senator KERRY. It is getting bigger, not smaller.

Mr. NG. I would suspect that it is.

Senator KERRY. You only suspect?

Mr. NG. Well, I believe what we are trying to do in terms of trying to address the issue that the committee is talking about today

is really to give you the assurance that we are doing a great deal

of activity in trying to tackle this issue.

Senator KERRY. But you see, it is not on the G–8 agenda. If you

do not get other countries with major financial centers agreeing to

leverage the transparency and accountability, this is just going to

remain a game. There is nothing that can be done here if you do

not have a global agreement about transparency and accountability.

Is that accurate, Mr. Blum?

Mr. BLUM. I think so. I think there are some things that you can

do. So, for example, we have a hedge fund problem. Hedge funds

are in Connecticut, the managers are in Connecticut, the shareholders are in the United States, but they are Cayman Islands

companies. Excuse me, that is ridiculous. If the business is here,

the people are here, and the transactions are here, they ought to

be U.S. taxpayers. You should not respect that offshore entity.

So there are things we can do for some of it unilaterally, but I

quite agree that the international agreement is essential. This

business that I talked about, namely the revenue rule, that is, that

it is all right to help people of another country cheat their government, really is something that has to be taken down as an international premise. We have to get to the point where we work together.

I have talked to the revenue commissioners of India and the Finance minister of Mexico in the course of my work. In fact, I was

on a panel at the U.N. with the revenue commissioner of India,

who was saying this is a huge problem for India because they do

not have the revenue for their infrastructure. What happens is, in

these countries we make that up with foreign assistance, with

World Bank loans, and that money comes flowing into offshore accounts.

Senator KERRY. But once you get a network, you do not need a

lot. Once you get a string of places where you have this obfuscation

and this ability to create these veiled entities, the commingling of

funds becomes very, very complicated because you put—one pot of

money comes in and marries another pot of money, which marries

another pot of money in another deal, in another country, and then

they move it all together under some holding company and put it

into another country where you do not have accountability. Then

the string goes on.

Mr. BLUM. That was in the Liechtenstein documents, where the

plan for moving the money was laid out. We will put it into accounts in a Canadian company because IRS will not suspect Canada, and then we will put it into a concentration account, and then

we will move it into the accounts in our bank. It is all laid out.

20

Senator KERRY. So does that mean that what you really need is

some kind of computer tracking ID number that is attached to the

movement of any particular money, where you can break it out and

there has to be a tracking system? What is the method here?

Mr. BLUM. There are several different areas here. One of them

is, on wire transfers from outside the United States, there have to

be rules that require the identification of the source of the incoming wire. An incoming wire should never be allowed to say ‘‘from

one of our valued customers.’’ That is what banks now do to conceal

the source of the money coming in.

Second, there are now suspicious activity reports that are filed

by banks and brokerage firms, but those suspicious activity reports

are not available to the civil side of IRS. That is a huge mistake.

That is the best single source of information about offshore tax evasion. That is a very simple thing to fix, and it is an administrative

fix. I know that there have been people who have been advocating

for it, but for some reason it has not happened.

Senator KERRY. Some people have made an argument—Mr.

Blum, I think we ran into this back in that period—that in some

countries where you have a particularly brutal dictator or particularly oppressive regime, there may be good folks who have a legitimate reason to want to be able to move some money and hide it

and keep it from the bad folks. What do you do in the situations

where there may be a human rights and/or other interest in some

kind of secrecy?

Mr. BLUM. Well, we have political exceptions and extradition

treaties. There are ways to deal with this problem. The problem

now is that it is the universally accepted business that you do not

report and you keep everything secret. That should be the exception, not the rule. It should be based on the individual case, not

as a general principle of, it is all right to help anybody who wants

to hide money do it.

The CHAIRMAN. Senator Salazar, you are next.

Senator SALAZAR. Thank you. Thank you very much, Senator

Baucus.

Let me also, just at the outset, say that it is a great part of being

on this committee to have people like you, Senator Baucus, Senator

Grassley, Senator Conrad, and Senator Kerry, who know so much

about this very, very important issue. It is an issue obviously that

has been around a long time, and it is an issue that obviously is

looking for some kind of a cure here.

I want to just say at the outset, having a fair tax system, I think,

is something that we can all agree on. It is not a Republican or

Democratic issue; it is something that we just need to make sure

is there as an underpinning of one of the fundamentals of our tax

code here in this country.

Second of all, I have been a supporter of Senator Conrad and his

whole effort on pay-go here in this Congress. I think it is the right

thing for us to do in order to be fiscally responsible, and I do think

that what we have seen in the last 7 years has been, frankly, a

very fiscally irresponsible set of policies that have created now

what is nearly a $10-trillion national debt for our country and deficits that go as far as the eye can see, now over half a trillion dollars a year. So, these issues in terms of how we bring in the revVerDate 11-MAY-2000 14:29 Sep 23, 2010 Jkt 000000 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 58198.000 TIMD PsN: TIMD
21

enue and balance the books are some things which are very important to me and important, obviously, to my colleagues. The $345-billion tax gap, Mr. Ng. I want to ask you about that.

Based on some of the questions that Senator Conrad was asking

with respect to these offshore tax havens, how comfortable are we

that that $345-billion tax gap is an accurate number? Is it a number we take out of the air and we just say, this is what we think,

or what kind of analysis went into getting to that number?

Mr. NG. Well, Senator, the tax gap is based, in part, on a number

of studies and audits that project out that estimate. While segments of the tax gap are dated in terms of the studies, that is the

best information we have today in terms of the gap.

Senator SALAZAR. How much of the $345-billion tax gap would

you say you could account for with respect to offshore tax havens?

Mr. NG. Unfortunately, the tax gap does not break it down into

that specificity in terms of——

Senator SALAZAR. Could it be broken down?

Mr. NG. Probably not, without a great deal of research and activity. I think, as the committee has suggested and people have suggested, there is a great deal of unreported income, hiding, and misleading information provided to the government in terms of trying

to develop that.

Senator SALAZAR. I understand that. I understand the cash

transactions that Senator Kerry and others were alluding to that

occur here in this country which are not reported. But when we

start looking at how much of that tax gap may come from the offshore tax havens, do you have any sense at all of what magnitude

the problem is? It has to do with the question then of resources because, if 50 percent of the tax gap problem is related to offshore

tax havens, then it seems to me that one of the things the IRS

ought to be doing is taking a look at whether or not we have the

right resources assigned where the problem is. So, do you have a

sense of what the magnitude of the problem is and how we are allocating our resources? If not you, Mr. Blum?

Mr. NG. Yes. Our focus in this area—we know this is a significant compliance problem for us. There are billions of dollars involved in terms of transactions. As you can see from the activities

that we have ongoing in terms of the audits and the investigations

going on and the cases that have gone to indictment and prosecution, it represents billions of dollars of unrecovered taxes. As we

begin to identify those pockets of taxpayers that are non-complying,

we are able to really move our resources quickly throughout the organization.

Senator SALAZAR. Well, let me ask you this. You have a set number of personnel/investigators/agents/accountants working for the

IRS. What percentage of them do you have assigned to dealing

with these offshore tax havens?

Mr. NG. Today we do not break it out that narrowly, but we have

about 1,500 compliance people that are really focused purely on

international kinds of activities.

Senator SALAZAR. Give me a sense of—I have no idea whether

that is 1 percent, 50 percent.

Mr. NG. Well, if you look at our compliance personnel, I think it

is about 42,000 service-wide.

22

Senator SALAZAR. So you have 42,000 FTE and you have 1,500

of those dealing with international transactions?

Mr. NG. Yes. And they cover a whole wider range of activity, including the offshore.

Senator SALAZAR. It seems to me, from what my colleagues have

said here, that this is a huge problem, as it apparently is. I think

everybody here agrees it is. That may be one of our problems, that

we are not putting enough attention on this problem itself.

Let me ask another question before my time is up. Senator Kerry

talked about agreements that we enter into with other countries

that have been involved in some of those transactions on the criminal side. We have extradition agreements with most countries

around the world. Why can we not enter into those same kinds of

agreements with these nations where we can have the kind of

transparency and the kind of compliance that we need?

Mr. NG. Yes. On the tax side, our purview with our colleagues

at Treasury is to deal solely with tax treaties and tax information

exchange agreements which our jurisdictional authority provides

for us. When we have those agreements, they do act as somewhat

of a deterrent in terms of taxpayers’ willingness to go into those jurisdictions, with the fear that they could be uncovered. We really

focus on, as I said in my testimony, the importance of tax exchange

information agreements because they do give us a light into information that often is not available to us directly.

Mr. BLUM. Senator, if I may.

Senator SALAZAR. Mr. Blum?

Mr. BLUM. There are two points I would like to make. First, in

terms of the number of people assigned to working international

problems, it takes a very well-trained, sophisticated revenue agent

to work these issues. This is not routine audit work. They have to

learn about the offshore jurisdictions, the kinds of entities, the

sources of information, the tools that are available to them.

Then the problem that they have, if they are working one of

these cases on the civil side, is trying to reconstruct what the tax

return should have looked like so they can send the taxpayer a bill

and begin a process of collecting the tax. This is very tough, complicated work that requires a lot of training, and it takes a lot of

time.

Senator SALAZAR. So has the IRS not created that kind of expertise?

Mr. BLUM. I would say that they are working at it, but they need

more money, more people, and more trained people. The emphasis

ought to be here instead of doing things like auditing people who

have home offices. God help us, there probably is a need to do that

too, but this really is a crying need.

Senator SALAZAR. My time is up. I appreciate your responses.

Thank you.

Mr. BLUM. Just one final point on the treaties. It is essential that

treaties contain provisions for exchange of information in civil

cases and that they require a compliance from those subpoenas.

Right now, the Swiss government is going to start blocking the

UBS information requests.

They are going to say, well, we will give you information if you

tell us who the taxpayers are, but we cannot give you information

23

if you simply say, well, we know there are 19,000 Americans at a

particular bank who are cheating on tax. They will read our treaty

that way. That is the argument that is being used in the Cayman

Islands right now to say that the tax information exchange agreement cannot be breached. They are saying it is only in criminal

cases, and only when there is a specific request.

Senator SALAZAR. Thank you.

The CHAIRMAN. Thank you very much, Senator.

Senator Grassley?

Senator GRASSLEY. I just have one question in the second round.

Mr. Ng, during a September 26, 2007 hearing on offshore tax

issues, we had an expert by the name of Suzanne McDowell testify

to the complexities of the unrelated business income regime and

the ability of tax-indifferent organizations to circumvent UBIT

through the use of blocker corporations. The Government Accountability Office also highlights the use of these entities in its report.

I also note with interest a Chronicle of Philanthropy article,

which I would like to enter into the record, Mr. Chairman.

[The article appears in the appendix on p. 124.]

Senator GRASSLEY. According to this article, almost 50 percent of

the tax-indifferent parties that report unrelated business income do

not actually pay any tax on this income. Is the IRS studying the

UBIT compliance, including the use of blocker corporations?

Mr. NG. Senator, yes. I think in that reference, in the reference

in the GAO report in terms of how tax-exempt organizations use

entities in the Cayman Islands, we are aware of this particular

transaction. It is an issue that we are looking at. In the Service,

we have focused some effort around looking at hedge funds in general, which includes this kind of transaction. So we are exploring

and evaluating the nature of this transaction and the impact on tax

reporting.

Senator GRASSLEY. All right. Thank you.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you, Senator, very much.

These suggestions that I had in my opening statement, I would

like to just ask you, Mr. Blum, or anybody, how important these

might be. Do they help or go to the heart of the matter, or not?

Frankly, after I listened to your testimony, Mr. Blum, I think they

are a little tepid, but I will ask you anyway. We need to do much

more. One is to increase the statute of limitations to 6 years for

individuals who failed to file an FBAR.

Mr. BLUM. Absolutely essential.

The CHAIRMAN. Let me ask you, Mr. Ng. Would that help you or

not?

Mr. NG. Yes. I think, consistent with the complexity that we

have seen in these types of transactions, additional time is something that should be looked at.

The CHAIRMAN. Mr. Brostek?

Mr. BROSTEK. I think it should be broader than just the FBARs.

We did some work for this committee where we reported that,

when there is an offshore case involved in IRS, it takes, on average, 500 more days than any other case.

The CHAIRMAN. So what else besides FBARs?

24

Mr. BROSTEK. I think individuals or businesses who are deliberately trying to hide the ball through, in essence, offshore corporations ought to be treated differently than the citizen who makes an

error and is susceptible to audit for 3 years.

The CHAIRMAN. All right.

Next is to include a penalty from IRS for failure to file an FBAR.

Mr. BLUM. That is already the law. It is a 5-year felony for failure to file. What you really need to do is clarify the FBAR law and

clarify it in a way that does not allow people to say, well, the account is with a U.S. bank or with a U.S. brokerage firm, ergo, it

is a domestic account and I did not have to file, even though it is

owned by a U.S. bank.

The CHAIRMAN. Right. That is my next point, to clarify the items

that must be reported on the FBAR.

Mr. BLUM. You bet.

The CHAIRMAN. All right.

Mr. Ng?

Mr. NG. I would agree. Any clarification or anything that can be

done as a deterrent will be useful.

The CHAIRMAN. All right. Here is one: require taxpayers to file

the FBAR with their tax return. Right now, as I understand it, the

FBAR goes to Treasury, the tax return goes to IRS; they do not see

each other.

Mr. BLUM. I think that makes sense.

The CHAIRMAN. Would that help?

Mr. BLUM. I think it should. I think the key part of that, though,

is making sure that the FBARs are filed accurately. Right now, one

of the things that people do to get around the FBAR is file something, but fill in the spaces incorrectly. Because Treasury was not

actually sending it back and saying, this thing has not been filled

in properly, people were able to say, when caught, well, I sent in

an FBAR, here it is, and of course there was no way to find it,

given the way they had been filed.

The CHAIRMAN. All right.

We have already talked about this one: revise the definition of

ownership to include beneficial ownership of a corporation. I would

like to bore down on that a little bit more. Where do we make that

requirement, do you suggest?

Mr. BLUM. Well, it is 1441 that is the problem that suggests that

a corporation can be the beneficial owner. Once you have the corporation, that is enough. We do not look behind it. In the area of

W–8s, that is completely unacceptable.

The CHAIRMAN. Mr. Ng?

Mr. NG. Yes. I think as we look at it, it is always going to be

important that we pierce through the beneficial ownership of who

actually owns the asset. With regard to how it should be done, the

W–8 today and the filing regime requires that that form be filed

with the withholding agent—in many instances, the bank—in a

self-certification process. So, as we begin to look at how we pierce

that veil of beneficial ownership, I think we need to assess what

the impact will be in terms of withholding agent filing and a host

of administrative issues that would be——

25

The CHAIRMAN. Well, wait a minute. You sound like you are

throwing up lots of problems. The goal here is to find out who the

beneficial owners are.

Mr. NG. Exactly. I share that view. I think we want to do that,

but we also recognize that, in our tax regime and in our responsibility in administering the tax, that we have to recognize, today,

kind of legal entities in terms of ownership and structures that are

legally recognized. So, there needs to be some reconciliation of how

a proposal will impact that.

The CHAIRMAN. So how do we do that? If you want to do a good

job, and I know you do, how would you do it? What would you recommend so we could get to the heart of the matter and find out

who the beneficial owners are?

Mr. NG. I think some of the suggestions are reflected in some of

our suggestions that we are making to the QI program in terms of

some filters that would help identify the beneficial owner.

The CHAIRMAN. To be honest, Mr. Ng, in your opening statement,

when you mentioned that, it sounded kind of bureaucratic. It did

not sound like we were getting to the heart of the matter. I do not

know. Mr. Blum, what is the QI issue?

Mr. BLUM. I am not a fan of QI. I personally think it ought to

be abolished. It is a device for allowing foreigners to put their

money in the U.S. in a way that leaves no trail in the U.S. What

it does is block the exchange of information with treaty partners.

So, if I am British and I want to evade British tax, I can go to a

QI bank, open an account through a shell company, and put my

money in New York, and IRS has nothing to give the British government. Whereas, if I opened an account with a brokerage firm in

New York directly, there would be a 1042 and an exchange of information with the British under a treaty. So, as far as I can tell,

what QI does is simply open a door for foreign tax cheats.

The CHAIRMAN. What about that, Mr. Ng?

Mr. NG. Yes. I think our proposed changes to the QI regime will

allow us to pierce through to beneficial owners. For example——

The CHAIRMAN. Why do we even need a QI?

Mr. NG. Well, the QI, I think, gives us sight to taxpayers. Without the QI today, we will not know who these investors are or customer account holders. So I think in a broad, global sense of looking at what is going on, the QI regime actually gives us at least

a source and a direction to identify who the actual recipients of the

income are.

Mr. BLUM. Mr. Chairman, I would respectfully disagree with

that. Right now, American brokers and banks are required to know

their customer. They are required to get behind the shell entities.

The problem is, that information is information that does not go to

IRS. I think there is no real purpose to QI at all.

The amount of money that is being collected through QI is minimal because withholding is limited to dividends and interest, and

most of the people who play the offshore game do it for capital

gains. Now, I would put withholding on all sales and forget the

dividends and interests, and put the burden on the withholding

agent and make them liable. That would be very self-enforcing, and

it would work.

26

The CHAIRMAN. Another thought here on the list is another statute of limitations proposal which gives the IRS 3 years after they

get the correct FBAR information, no matter how long after the 6-

year limit referred to above.

Mr. BLUM. If you give incorrect information, you automatically

are involved in some kind of fraud, and the statute is extended. So,

I do not think that would be a problem.

The CHAIRMAN. Let me go back to the QI. One of the weaknesses

in the current QI program, as we have discussed, is the ‘‘know your

customer’’ rules. IRS says that UBS helped U.S. investors hide behind the sham officer or corporations to circumvent the ‘‘know your

customer’’ rules. Now we learn that Liechtenstein banks may know

the true identity of the person opening the account, but interprets

the QI ‘‘know your customer’’ rules differently so that banks do not

have to file information reports.

Mr. BLUM. Mr. Chairman, I saw all of those Liechtenstein bank

documents in the slide shows for the Liechtenstein bankers on how

to get around QI. These Power Points were shown to them as QI

was coming into effect. An American law firm advised the bank on

how to get around QI. That is in the papers as well.

We had also, at the time QI came in, banks around the world

that mailed out letters to their customers—and I have seen several

of them—saying, here is how you get around QI: open up a shell

company at our bank, we will arrange to have somebody open it up,

close out your personal account, everything will be fine.

The CHAIRMAN. I am way over time.

Senator Conrad, go ahead.

Senator CONRAD. I thank the chairman.

Mr. Ng, the tax gap number that you quoted, the $345 billion,

what year does that apply to?

Mr. NG. 2001 is when most of the research was done.

Senator CONRAD. 2001.

Mr. NG. Some aspects of it were maybe even older.

Senator CONRAD. And this is 2008. That is not good enough. I

mean, that is just not serious.

I will tell you, I have been a big defender of the IRS as chairman

of the Budget Committee and as a Senator on this committee. I

want the word to go back that my defense of you guys is over. I

do not think you are taking this seriously. I do not think the testimony you have given here today demonstrates seriousness. I do not

think the effort on tax gap, on offshore tax havens, shows me that

there is any kind of serious effort under way, and I am all done

defending you.

Mr. Blum, the estimate of the Special Subcommittee on Investments is we are losing $100 billion a year just on offshore tax havens. Do you believe that is credible?

Mr. BLUM. I believe it is low and conservative.

Senator CONRAD. You believe it is low?

Mr. BLUM. Yes.

Senator CONRAD. And on what basis do you believe it is low?

Mr. BLUM. If you take a look at the amount of money in the private banking world and the analyses that have been put forward

of offshore jurisdictions and then estimates of where the people

who are using these facilities are—these are all available—the

27

numbers are enormous. If you look at UBS, $20 billion and 19,000

customers in one offshore bank—remember, there are hundreds

competing for this business—you have to believe that these numbers are very large, indeed.

Senator CONRAD. You mentioned 500,000 companies in the British Virgin Islands.

Mr. BLUM. The Virgin Islands. Yes.

Senator CONRAD. Five hundred thousand?

Mr. BLUM. Yes. I think it is around that number.

Senator CONRAD. What percentage of those are American?

Mr. BLUM. Who knows? What we can——

Senator CONRAD. And we do not know because they do not have

reporting?

Mr. BLUM. None.

Senator CONRAD. No reporting?

Mr. BLUM. No reporting.

Senator CONRAD. So at least in the Caymans, we are able to go

find out there are 18,000 registered in Ugland House, but we cannot determine, in the British Virgin Islands, that——

Mr. BLUM. You cannot find out much of anything. There are requirements in the Caymans that they file annual corporate reports,

and some of that information is kept by the government and kept

confidentially so that, on a specific request, information may be

available. But that is not the case in the BVI. The BVI prides itself

in offering products to help people evade. I listened to some of their

sales people, at a conference in Miami, describing a new trust arrangement under which the trustee would have no knowledge of

who the beneficiaries were or what the corpus of the trust was,

other than the fact that the trust controlled a corporation, about

which they knew nothing.

Senator CONRAD. Mr. Ng, is the IRS doing something about that?

Mr. NG. I think, as I said earlier, we look at all the entities that

we can identify through our tax return information.

Senator CONRAD. Yes. But how can you identify these entities?

Mr. NG. The only way we can identify them is if there are foreign

companies operating in a foreign country and have filing requirements as a controlled foreign corporation, where they answer the

foreign bank account questions, or whatever return information

that we get in terms of identifying entities in other jurisdictions.

Senator CONRAD. Mr. Blum, what is wrong with that?

Mr. BLUM. Well, there is the source of suspicious activity reporting. The brokerage firms of the banks are required to file reports

when they see weird offshore structures, because they do not know,

and cannot know, what kind of criminal activity it is being used

for. They are required to file SARs if there is suspected tax evasion.

The problem I see is, those reports are not made available to the

civil side of IRS, and there is absolutely no reason for not doing it.

Senator CONRAD. What are the resources devoted to piercing the

veil, Mr. Ng? The British Virgin Islands, 500,000 companies claim

they are doing business there. They have people coming to conferences here, openly bragging about how to evade U.S. taxes.

What are the resources dedicated to going after what is going on

in the British Virgin Islands?

28

Mr. NG. Well, I think when we look at all the jurisdictions where

we believe there may be some tax non-compliance, we take every

effort we can in terms of——

Senator CONRAD. No, no, no. That is not my question. I am asking the question, what are the resources devoted specifically to the

British Virgin Islands where we have a description here of 500,000

companies, and they are openly saying, come here and we will help

you avoid your taxes?

Mr. NG. We have a number of our revenue agents, both doing research and doing compliance.

Senator CONRAD. How many? How many?

Mr. NG. I do not have an exact number because we do not——

Senator CONRAD. Can you get the committee that number?

Mr. NG. We could get some numbers in terms of the broad resources allocated to offshore sort of non-compliance.

Mr. BLUM. Senator, in defense of Mr. Ng, I should say that there

were a number of IRS agents at this conference. They heard it, and

they are perfectly aware of what is going on. The question will be

how to convert that into appropriate leads and ways to follow up

to get individual taxpayers who are using it.

Senator CONRAD. Mr. Ng, the estimate of the Permanent Subcommittee on Investigations is that we are losing $100 billion a

year to offshore tax havens. What is your reaction to that number?

Do you believe it? Do you disagree with it? Do you think it is high,

do you think it is low?

Mr. NG. We believe there is significant non-compliance in the billions. Is it $100 billion? We do not have studies to calculate that.

But we agree that there is a significant compliance problem. It is

something that is in the billions of dollars, and we are trying to address all of these issues that we see.

Senator CONRAD. Do you know what disturbs me, honestly? I

have defended the IRS for 22 years here, and in this last period

of time I have not had you come one time and ask for additional

tools to go after this problem. Not once have you come to me, or

any representative, and asked for additional tools to go after this

problem. Meanwhile, people in the tax world are telling me this

problem is growing geometrically. People I know in major accounting firms are telling me this problem has grown like a cancer.

Mr. Blum, do you have any sense of whether or not it is growing?

Mr. BLUM. I think it is.

Senator CONRAD. I just had major partners in major accounting

firms tell me, off the record, that this is growing like a cancer.

Mr. BLUM. I think the problem is growing. But again, there is

always this difficulty with any kind of criminal activity. They do

not file reports with the government. There are no clear statistical

markers. There is a great effort under way on all sides not to let

people know how big it is. But what I can tell you is, if you look

at the growth in private banking, the emergence of new ‘‘private

banks’’ that suddenly spring up and have offices everywhere, you

know something is happening. I just think that it is obvious. If we

cannot put our arms around it, we have a tax system that works

for people who actually have money withheld and who get 1099s

and not for everybody else.

29

Senator CONRAD. If you just go to the Web, I find I can learn

more on the Web about what is going on here because they are advertising.

Mr. BLUM. If you go to the Web and look at the websites for some

major law firms, and for that matter major American brokerage

firms, look under ‘‘wealth preservation’’ and read the rather cryptic, but not-so-cryptic descriptions of the services.

Senator CONRAD. Descriptions.

Mr. BLUM. You will get an idea that this problem is not limited

to foreign institutions.

Senator CONRAD. Yes. This is huge. Offshore tax havens. As I

said, we punched it in. I did this maybe 3 years ago, and it was

a million. Now it is 1.9 million hits. You start reading them. They

are not even subtle about it. They just are blatant: come out here

and you will not pay any taxes. Well, I guess what gets my ire

more than anything is, the significant majority of people in this

country pay what they owe. I think the vast majority of people pay

what they owe. Then to have these people dodging what they owe

and sticking all the rest of us with the bill, I mean, that really angers me. I think, as people learn about this, it is going to anger

the American people.

And Mr. Ng, I have to say, I do not want to beat up on you personally, because I think you are a very fine person, but the agency

itself, I must say, I am incredibly disappointed in because there

has just been no—I am known as somebody who could help them.

There has been absolutely no attempt to get something done. I

mean, it is just beyond me, what is going on there.

I thank the chairman.

The CHAIRMAN. Thank you, Senator.

Let me ask kind of a different set of questions. What are other

countries doing? They must be facing the same problem. I mean,

the U.K., for example, the E.U., maybe Japan, I do not know. But

is that an issue or not, and what are they doing about it?

Mr. BLUM. It is a huge issue. The European Union has put pressure on Switzerland, Luxembourg, and Liechtenstein. They got a

withholding agreement out of Switzerland. The withholding agreement, I think, is rather pathetic because it is limited to interest income. Switzerland said, we will order our banks to withhold on accounts held by your Nationals in our banks, but we are not going

to tell you who they are and we will just give you a check for the

full amount.

Now, that sort of gets around the whole issue of capital gains

and other elements of tax, so it is not a very effective program. But

they did force Switzerland to come up with that part. It is a worldwide problem. The dilemma is huge. Gordon Brown—the British

have a system under which non-domiciliaries do not pay tax in the

U.K., so as a result lots of people live in the U.K. but claim they

are not domiciled there.

The consequence of that has been massive evasion and huge

problems, so Gordon Brown said, we are not going to do that anymore. The city of London came in and put all kinds of pressure on

them, and they backed down and said, well, what we are going to

do is charge a flat tax on all the so-called ‘‘non-doms’’ of 30,000

30

pounds a year. If you pay that, you do not have to pay anything

else. It was a terrible compromise. But this is a global problem.

The Mexicans have it, the Brazilians have it, the Indians have

it; everybody has it. That is why the point here is, we have to get

around this business of a revenue rule and saying it is all right for

bankers in country X to help citizens of country Y cheat their government. That, as an international law proposition, is ghastly.

The CHAIRMAN. The problem with this too is, with advances in

technologies, communications technologies, and other technologies,

people who want to make a buck are way ahead of governments,

of Congress, who are trying to find ways to catch up.

Mr. BLUM. To be blunt about it, the problem is that we have a

system of law that is built on national jurisdiction and a world

economy that is seamless.

The CHAIRMAN. Right.

Mr. BLUM. The functional situation is that we have—the analogy

I use in my statement is, it is like an Autobahn without a speed

limit and a bunch of cops on bicycles trying to keep law and order.

It does not work.

That is also true in the area of financial regulation. The SEC is

up against the same problems. All of the financial regulatory agencies are up against the same problems. The Cayman entities in

Ugland House were some of the entities in the Enron mess. The

offshore off-the-books accounts of various banks are, again, some of

those very same entities.

So the problem cuts across bank regulations, securities regulations, tax; every form of financial regulation dependent on national

law runs up against these issues. We cannot have a seamless global economy with national borders as barriers to any kind of regulation. It is at the heart of our current economic crisis.

The CHAIRMAN. Well, we are going to have borders for Americans.

Mr. BLUM. Well, we are going to have borders, but that does not

mean we cannot come up with ways to work around the problem

cooperatively. The beginning point of any solution to this is real

public discussion, a real public airing of the whole issue of cooperation and what it ought to entail, and not one cooperation, case-bycase cooperation, but really a rethink of how this global enterprise

is to work.

Now, we have certain institutions that are supposed to be doing

that, the G–8, the Bank for International Settlements in Basel,

there is a group of tax authorities who work together. But this has

to be done at a whole different level, with new urgency and new

resources.

The CHAIRMAN. It is a challenge. I thank all of you very, very

much. This has been very provocative, and you have given this

committee many very good ideas. I intend to follow up vigorously.

I do not know how long it is going to take, but we are going to find

a way to make a huge, big dent in this problem, and hopefully

more than a dent, so we can finally begin to solve it. But it is going

to take a lot of work. It is going to take the cooperation of a lot

of Senators, take a lot of ingenuity from very bright people to help

us figure out how to do it responsibly, reasonably, but just helping

31

American taxpayers make sure they get their dollars’ worth and

stop this tax evasion.

Thank you very much. The committee is adjourned.

[Whereupon, at 11:45 a.m., the hearing was concluded.]

(33)

A P P E N D I X

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

34

35

36

37

38

39

40

41

42

43

44

45

46

47

48

49

50

51

52

53

54

55

56

57

58

59

60

61

62

63

64

65

66

67

68

69

70

71

72

73

74

75

76

77

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

100

101

102

103

104

105

106

107

108

109

110

111

112

113

114

115

116

117

118

119

120

121

122

123

124

125

126

127

128

129

130

131

132

133

134

135

136

137

138

139

140

141

142

143

(145)

COMMUNICATION

146

147

148

149

150

151

152

Æ