Critics say Paul’s hold just hamstrings the Justice Department’s tax evasion work. Paul in cross hairs of tax evasion war

When a bipartisan Senate panel last week lambasted Swiss bank Credit Suisse for helping rich Americans evade billions in taxes, some watching the high-profile hearing couldn’t help but notice an elephant in the room.

That is, Sen. Rand Paul.


The connection? Paul for years has single-handedly blocked an obscure U.S.-Swiss tax treaty that lawmakers, prosecutors, diplomats and banks say makes the difference between U.S. law enforcement rooting out the names of a few hundred fat-cat tax evaders — and many thousands more.

Kentucky’s tea party darling says the treaty infringes on privacy rights. But his critics say Paul’s hold just hamstrings the Justice Department’s tax evasion work.

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“Credit Suisse is ready, at this moment, to provide the additional information about Swiss accounts requested by U.S. authorities but has been unable to do so because the U.S. Senate has not yet ratified the protocol,” said Credit Suisse CEO Brady Dougan at a hearing on the topic Wednesday — just after admitting his institution helped Americans evade taxes.

Paul’s hold came to a head on Wednesday as the Senate Permanent Subcommittee on Investigations’ leaders, Carl Levin (D-Mich.) and John McCain (R-Ariz.), released an inch-thick report chiding the Justice Department for not using all the “tools in the toolbox” to catch Americans eluding the IRS. They called out Credit Suisse as a prime example.

The Justice Department responded at the hearing with a plea: Ratify our treaty with Switzerland.

“It just went up in priority,” McCain said of the treaty after the hearing.

“We ought to go after people who don’t pay their taxes, and that tax treaty will help us go after people evading taxes, so we ought to get it ratified,” Levin said.

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Levin and McCain grilled executives of Credit Suisse, the second-biggest Swiss bank, for refusing to hand over more than 230 names of Americans with offshore accounts — a mere 1 percent of the 22,000 who hid more than $10 billion there, according to the committee.

But the executives blamed the Senate for failing to ratify the 2009 Swiss-U.S. protocol, arguing it would allow them to pass off more names.

Paul wasn’t in the room for the hearing, but his hold was certainly on people’s minds. International tax experts for years have seethed over Paul’s block on the Swiss and several other tax treaties.

These sorts of mundane tax protocols used to get approved by unanimous consent without anyone batting an eyelash — until Paul came to town.

Paul, a libertarian Republican widely believed to be eyeing a 2016 presidential run, says his hold stems from concerns about Fourth Amendment protections against “unreasonable search and seizure.”

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“These are people that are alleged, not convicted of doing anything wrong,” Paul said a few weeks ago. “I don’t think you should have everybody’s information from their bank. There should be some process: accusations and proof that you’ve committed a crime.”

Most lawmakers, Republicans included, support the treaty — and Majority Leader Harry Reid (D-Nev.) could override Paul’s hold if he brought the treaty to the floor. In that vein, Democrats share some blame for the holdup by not making it a priority.

Reasons aside, Paul’s critics say his rationale doesn’t change the fact that his hold has hampered the Justice Department’s efforts to hold tax cheats accountable.

“He’s concerned about protecting tax evaders? I don’t quite understand that,” said Catherine Schultz, vice president of tax policy for the National Foreign Trade Council, a business group lobbying hard to get the tax treaties moving again in the Senate.

Switzerland, a well-known tax haven that prides itself on banking secrecy, bars the disclosure of account information unless permission is granted by government or court officials. So Swiss banks and bankers under investigation in the United States have found themselves caught between U.S. authorities, who want client information to settle their cases, and breaking Swiss law.

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The 1996 version of the U.S.-Swiss treaty now in place makes exceptions to those Swiss laws, allowing requests for such information. The Justice Department, which is investigating 13 major Swiss banks beyond Credit Suisse for tax evasion, has tried to use the treaty to get tax evader names in return for nonprosecution agreements.

But the standard for getting such approval is tough under the old treaty. Law enforcement must establish that certain taxpayers have committed “fraud” — which is more severe than simple “tax evasion,” such as failure to file.

The new treaty lowers that standard to include simple tax evasion and would “enhance our ability to get information in those ways,” Kathryn Keneally, assistant attorney general for the tax division, said at the hearing.

Justice received only 238 of the 22,000 Credit Suisse names because the old treaty is the one in effect, say Swiss lawyers, who dispute the total assets hidden there. The rest “would be covered by the new treaty,” Romeo Cerutti, Credit Suisse’s general counsel, told lawmakers.

In January, a Swiss court shot down an IRS request for the names of Americans hiding money in Julius Baer, another Swiss bank under DOJ investigation, saying the request didn’t meet the old treaty’s standard.

The lower standard that tax enforcement wants in the new treaty is exactly what makes Paul nervous. The treaty allows Switzerland to pass account information that may be “relevant” to an investigation, which a senior Paul aide said sounds “a little scary and opposed to Fourth Amendment mentality.”

Credit Suisse just days ago sent representatives to Paul’s office to try to change his mind.

Paul’s office acknowledges that they’re in a “difficult situation” politically on the topic, but they say their constitutional priorities “take precedent” over Swiss bankers’ concerns.

“If people are breaking the law, they should be punished, … but we can’t capitulate on Americans’ privacy rights in order to handle this one issue at this one moment in time,” the senior aide said.

Paul’s office points out that the treaties aren’t the only way to get tax cheats’ names. Justice also has the option of using “John Doe summons” and court subpoenas. Those methods were used to get the names of 4,500 American UBS clients in that bank’s tax evasion settlement in 2009.

Paul’s protest is also linked to his abhorrence of the soon-to-take-effect Foreign Account Tax Compliance Act, which will force foreign banks to disclose U.S. account information to the IRS, and domestic banks to reciprocate to other nations’ revenue departments.

A Treasury official recently told Paul’s staff that FATCA “doesn’t work” without the treaties — though there seems to be disagreement on that point, even in the executive branch.

That sent up red flags anew to Paul because the senator has legislation to repeal FATCA and hesitates to support a treaty that enables a law he views as U.S. government overreach.

His office has met with businesses that have a stake in those tax treaties — which also include pacts with Chile, Hungary and Luxembourg — and are asking him to release his holds. Beyond tax evasion, companies say the treaties are needed to settle double-taxation disputes that take years to resolve, leaving businesses’ financial books in limbo when it comes to what they owe.

That’s why Paul’s office said the senator is contemplating releasing these holds, but he wants a number of questions answered first. Last summer, his office reached out to the Joint Committee on Taxation and Democrats on the Senate Foreign Relations Committee staff to learn about ways to amend the treaty to his liking. He may offer up report language to narrow the treaty interpretation in the next few weeks.

“Sen. Paul would like nothing more than these treaties to pass,” his staffer said.

And contrary to some reports, the senator isn’t demanding FATCA repeal in order to advance the treaties, he added.