Bank Ordered to Compensate Client for Avoidable Tax Penalties

In a case before the Liechtenstein High Court, LGT Treuhand (now known as Fiduco Treuhand), the largest bank in the principality, has been ordered to pay 7.3m euros compensation to one of its customers, who was prosecuted for tax evasion in Germany following the divulging of confidential data by one of the bank's employees to the German authorities.  The case comes as a salutary lesson for UK financial institutions that they might similarly be held liable if they do not take steps to warn clients if they have been required to pass information to HM Revenue & Customs.

Background

In 2008, an employee of the bank, Heinrich Kieber, sold details of 1,400 of the bank's foreign account holders to the German authorities. The German authorities prosecuted various German nationals who had not disclosed their LGT accounts on their tax returns.

In July 2008, one of the bank's customers was ordered to pay over 6m euros in back taxes and over 7m euros in penalties. He also received a two year suspended jail sentence. He claimed the bank should have warned him immediately on knowing of the passing of information to the German authorities that his account had been compromised, so that he could have voluntarily disclosed the tax irregularities to the German authorities and so escaped prosecution and steep penalties.

The Liechtenstein Court found LGT liable to compensate him for the amount he had been fined in Germany. The court refused to hold the bank liable for the 6.3m euros that Schulte had to pay the German authorities in back taxes.

Going Forward

There are comparisons to be drawn between this case and the situation that the 300 or more financial institutions with UK operations face in connection with the "class" disclosure notices HMRC has obtained against them.  If the institution does not tell its clients promptly that it has disclosed information to HMRC, it potentially faces action.   Tax penalties are much lower if a taxpayer volunteers information to HMRC, and much higher if HMRC tackles the taxpayer.  If clients of affected institutions are not told that HMRC has relevant information, and they therefore miss an opportunity to come clean, the institution may be liable for the higher penalty.  Indeed, HMRC typically indicate their preference for institutions to contact clients.  Any institute which did not follow that suggestion might want to consider its position.

For further information, please contact:

Jason Collins
Partner, Tax Disputes and Investigations
Tel +44 (0)207 054 2727
Email jason.collins@mcgrigors.com