Bloomberg Tax
May 9, 2023, 8:45 AM

Catering to Tax Evaders Is a Poor Prescription for Bank Health

Andrew Leahey
Andrew Leahey
Hunter Creek Consulting

The banking industry may be going through consolidation, but the US is overbanked by all measures. The sheer number of banks in the US can destabilize competition and force smaller institutions within a sector to find competitive advantages.

This broad push for advantage can lead to risky endeavors, such as catering to tax evaders, as it has in the past. The IRS has indicated it will devote more than half of its $80 billion funding injection to enforcement efforts directed to “taxpayers with complex tax filings and high-dollar noncompliance” and “certain international issues.”

This can’t work in a vacuum—the IRS only has standing jurisdiction over financial institutions not regulated by federal banking agencies or the Securities and Exchange Commission. An investment of interagency cooperation and pursuit of tax cheats now will pay dividends later, and a failure to act will beget issues that are magnitudes greater in size and impact.

There are packs of roving banks out there for any edge they can find, and one of them eventually will land on a new tax scheme.

This connection isn’t idle speculation. Right as the dust was settling on the collapse of Credit Suisse, it turned out that it was an aider and abettor of tax evasion, in addition to being a house built on sand. That information wouldn’t be particularly useful if it wasn’t for the additional fact that it took a $2.6 billion plea deal for doing essentially the same thing in 2014.

Of course, Credit Suisse has been acquired by UBS Group AG—so unless UBS has also been at the center of these kinds of controversies, we have nothing to worry about from that sector.

But wait. UBS was at the center of a similar fraud in 2009 and paid $780 million to settle that tax investigation, $4.9 billion to settle similar claims in France, and is embroiled in ongoing investigations in Germany and Belgium. UBS has total assets of just a hair above $1.1 trillion, and its acquisition of Credit Suisse will turn it in to a juggernaut. Any indicia of instability at that scale should warrant use of the biggest and most powerful of magnifying glasses.

The problem isn’t limited to UBS. For the sake of heading off the next financial crisis, tax evasion mills need to be rigorously pursued. They present a threat to the stability of their local market and, given time and the inevitability of acquisition and merger, a future threat to the global economy writ large.

UBS may now indeed be too big to fail, and any enforcement efforts against ongoing tax evasion will need to be handled with kid gloves—owing both to the systemic risk to their instability and the limited reach of US authorities against a Swiss bank. But for the 4,700 some-odd domestic banks and innumerable foreign financial institutions, tax evasion must be stamped out by leveraging existing laws such as the Foreign Account Tax Compliance Act and, where necessary, seeking out additional statutory authority.

A traffic light is seen in front of an office of the Swiss banking giant UBS in Lausanne.
Photographer: Fabrice Coffrini/AFP via Getty Images

The causal arrows point in both directions between a financial institution courting tax evaders and said institution’s health taking a turn for the worse. A healthy bank weighs the potential harm from sheltering funds from US tax authorities against the benefits, and determines that there are greener pastures on the up-and-up side of the mountain. One that is facing some hardship, however, may think rolling the dice on increasing deposits and not being shuttered by the US government is worth the risk.

Following causality in the opposite direction, Wegelin & Co. is an example of a bank that largely ceased to exist after it catered to tax evaders. There, it seems clear the substantial fines and forfeits in a default judgment in US district court was the bank’s undoing. This is yet another reason to chase down institutions that facilitate fraud—preventing their growth to a degree that their collapse stemming from an enforcement action is tantamount to a global collapse.

There are more historical touchstones connecting tax evasion to future collapse, such as Lehman Brothers. Prior to Lehman’s implosion, one of its more noteworthy scandals involved using and promoting derivatives as dividend-tax dodges. By the time the wheels were off the wagon—or rather, immediately prior—Lehman had $600 billion in total assets, significantly less than UBS has today.

There are many structural reasons why a similar collapse at UBS likely wouldn’t cause the same knock-on effects as with Lehman, but that should be slim comfort. Add a sprinkle of time and a merger or two, and most any financial institution can be sewn into the economy so as to be wearing a metaphorical explosive vest.

Look for Leahey’s column on Bloomberg Tax, and follow him on Mastodon at

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