US targets tax evaders in Asia with HK investigators

American tax investigators stationed in the US consulate in Hong Kong have offered a clear sign that the hunt for taxation evaders is spreading to Asia.

The consulate confirmed that two investigators are currently stationed there. The move comes following a sustained US crackdown on Americans evading tax by using havens in Europe.

US authorities may be targeting financial institutions in Asia rather than clients, however, in a bid to obtain data on their clients.

In recent years, large private banks in Switzerland have been named, shamed and fined for assisting tax evasion, including the likes of UBS and Credit Suisse. As a result, conditions are seen as ripe for the US Internal Revenue Service to begin investigations in Asia, not least because the money trail through its European investigations are pointing to potential tips to follow up in the region.

Other conditions have also made Asia fertile ground, with the proportion of mainland Chinese receiving EB-5 investor visas numbering over 9,000 people in 2014, or 85% of the total investment visas issued by the US. The visas provide a residency in return for investments in the US. Those applying for such visas would also be caught under US tax rules.

Meanwhile, the private wealth management industry’s Asia headcount rose by 7.5% year-on-year in 2014. While the increase may in part reflect increasing numbers of compliance staff, some are also on the frontline, reflecting increasing wealth generation in the region, as well as more potential targets for the US tax authorities to target.

But the IRS is more likely to be focused on financial institutions which hold swathes of data on individuals, noted William McGovern, partner at litigator Kobre & Kim.

“Individual US taxpayers can be an initial target of investigators but more often they are just a link in a chain of evidence that leads to the private wealth teams who advise them or the banks that hold their accounts,” McGovern said. “When an individual taxpayer faces the prospect of a criminal conviction his only recourse may be to trade information about others for more lenient treatment.”

Potential targets also include bankers, wealth advisors, accounts and lawyers. The IRS may demand to know how offshore accounts hiding assets were set up.

One of the latest tools for the taxman is Fatca (Foreign Account Tax Compliance Act), the US extraterritorial tax law that will allow American tax authorities to examine records of US taxpayers and assets kept in non-US accounts. The law reached a new milestone two weeks ago when Hong Kong financial institutions had to make their first Fatca reporting.

The IRS also uses tips gleaned from whistleblowers, bank amnesty programmes and offshore voluntary disclosure programmes.

Another US lawyer, who declined to be named due to the sensitivity of the matter, noted that prosecutors will be particularly on the hunt for financial institutions that could be suspected of hiding significant amounts of US taxpayer assets.

“The prosecutors are no different to anybody else. They … want low-hanging fruit and they are motivated by career-making cases,” said the lawyer. “Those things came together in Switzerland with low-hanging evidence for them.

“A lot of energy was then organised around that and influential voices in the Department of Justice and very skilled prosecutors signed on and they drove it to the tune of $2.8 billion to Credit Suisse and hundreds of millions against UBS and others,” said the source.

While such a case has yet to show up in Asia, the source suggested that leads could start flowing in soon when information gathered by Fatca reporting starts getting prosecutors’ attention.

When asked by AsianInvestor whether the US consulate general has two IRS staff working in Hong Kong, spokesman Scott Robinson responded: “Like a number of US embassies and consulates around the world, the US Consulate General to Hong Kong and Macau includes attachés from the US Internal Revenue Service Criminal Investigation Division.

“These attachés are based in Hong Kong but are responsible for supporting criminal investigations into US tax evasion and money laundering not only in Hong Kong and Macau but also in many other countries throughout the Asia-Pacific region.”