Justice Department Bureaucrats May Set Risky Precedent with Extra-Territorial Tax Persecution

Bush Administration appointees involved with issues such as the Iraq war and coercive interrogation of suspected terrorists probably don’t spend much time thinking about international tax policy, but they may rue the day that the Justice Department decided to persecute Swiss banks and Swiss bankers for obeying Swiss law and protecting the financial privacy of customers. What’s the connection? By going after Swiss banks and Swiss bankers in hopes of finding a few Americans who might be hiding money from the IRS, the Justice Department is embracing the notion that governments should not be constrained by national boundaries and national laws. Richard Rahn already has an excellent piece explaining why this is an absurd policy, but let’s consider some of the broader implications.

What if John Yoo or Donald Rumsfeld travel to Europe in the near future for business or personal reasons and some European government decides to throw them in jail for violating “international law”? This may sound fanciful, but German authorities already have moved in this direction by asserting universal jurisdiction, and it doesn’t take much imagination to foresee politically ambitious officials from other nations grabbing the baton. The Wall Street Journal report does not cover these broader implications, but it is a good summary of the Justice Department’s fishing expedition:

The Justice Department, in an unprecedented move against a foreign bank, is seeking to force UBS AG to turn over the names of wealthy U.S. clients who allegedly used the giant Swiss bank to avoid taxes. …U.S. authorities have been holding discussions for several weeks with UBS and Swiss banking authorities to identify the U.S. account holders. People familiar with the talks say UBS officials floated the possibility that the U.S. could obtain the names through a request to Swiss regulators. Monday’s federal court filing instead puts the bank in direct conflict with the U.S. government. …The filing is the first against a non-U.S. bank by the Justice Department using what it calls a “John Doe summons,” a maneuver typically used to investigate tax fraud by people whose identities are unknown. The move could spark a major legal battle because the Justice Department is essentially gambling that courts will bless the move when it’s directed at a company with extensive U.S. operations but that isn’t based in the U.S.