US Senate committee charges top Wall Street firms for tax evasion

Auction rate securities and diminishing account sheet numbers aren't the only problems haranguing Wall Street majors.

According to a report released today by a US Senate committee investigation, several of them are apparently involved in an elaborate scheme of tax evasion.

Lehman Brothers Holdings Inc., UBS AG and Merrill Lynch & Co. are among Wall Street firms that concocted derivatives and stock-loan deals to help offshore hedge funds dodge hundreds of millions of dollars in US taxes, according to the report by the US Senate Homeland Security subcommittee on permanent investigations.

Of course, Swiss institution UBS, the world's largest wealth manager, is not exactly a stranger to such charges of tax evasion. In fact, investigations into its questionable activities had caused it to shut down its offshore banking business for US clients.
(See: UBS under US investigation for tax evasion; senior executive detained and UBS exits offshore business in US)

The report said investment bankers use phrases like "dividend enhancement," "yield enhancement" and "dividend uplift" to market an array of transactions "whose major purpose is to enable non-US persons to dodge payment of US taxes on stock dividends."

According to Democratic Senator Carl Levin, who chaired the committee, the Internal Revenue Service (IRS) looked the other way while securities firms sold complicated financial products designed to skirt a law requiring them to withhold US taxes on stock dividends paid to offshore investors. He said he wants the IRS to pursue back taxes or penalties against Wall Street firms and their hedge-fund clients that got around a 30 per cent dividend tax.

''We are going to press the IRS to go after what is obviously a scheme,'' Levin said, while briefing reporters yesterday about the committee's yearlong probe. ''The IRS should be going after this. They are not. They have been pussyfooting around this.''