In recent years, the US Department of Justice has been aggressively investigating the use of bank accounts outside the US to evade tax. While emphasizing that its enforcement activities are and must remain global, the DOJ has taken public actions relating to banking activities in Switzerland, India, Luxembourg, Israel, the Caribbean and Lichtenstein. These initiatives and ongoing investigations have resulted in the prosecutions of multiple banks, 68 US persons, and professionals (including approximately 30 banking professionals).
In August 2013, the Swiss Federal Government and the DOJ announced a first of its kind program (the New Program) that will enable eligible Swiss banks to address and resolve their status with regard to the DOJ’s ongoing enforcement investigations.
The New Program, which is open only to Swiss banks not currently under investigation by the DOJ, is effectively a voluntary disclosure program for banks, with features comparable to those of the voluntary disclosure programs offered by the US Internal Revenue Service in recent years to US persons with undisclosed financial accounts outside of the United States (referred to collectively as the OVD Initiatives), incorporating definitions, due diligence procedures and compliance program approaches contained in the Foreign Account Tax Compliance Act (FATCA) as implemented by Switzerland and the United States in the Swiss-US Intergovernmental Agreement (Swiss IGA).
The New Program, similar to the OVD Initiatives, will provide the US with data regarding US taxpayers who hid their income and assets from the US and with a list of financial institutions and financial advisors who participated in the tax non-compliance of US persons. (Please see our reports on these developments, listed below.) With the knowledge that the IRS and the DOJ through their ongoing investigations into tax evasion have already uncovered extensive data through the OVD Initiatives, the IRS whistleblower program, bilateral double tax treaty, tax information agreements and informal cooperation agreements with other countries, the New Program enables Swiss Banks not already targeted in a DOJ investigation to help ensure that they are not targeted or prosecuted going forward.
The New Program is voluntary and permits eligible banks to avoid US criminal prosecution (often fatal irrespective of the merits or ultimate outcome) in exchange for detailed disclosures, the payment of financial penalties (in some instances), and various undertakings, to include maintaining compliance systems, closing accounts of recalcitrant account holders and waiving the statute of limitations.
The New Program applies to “Swiss Banks,” defined in the Swiss IGA to include Depository and Custodial Institutions, but not Investment Entities or Specified Insurance Companies. The New Program sets forth detailed terms and conditions for a Swiss Bank to request a Non-Prosecution Agreement or a Non Target Letter, depending on which of the categories a bank falls within, as described below.
POTENTIAL NEW PROGRAM PARTICIPANTS
Category 1. The 14 Swiss Banks currently under investigation by the DOJ as of August 29, 2013 are not eligible for the New Program. Non-Swiss Banks and individuals (such as banking professionals and financial advisors) are not eligible for the New Program.
Category 2. Swiss Banks that have “reason to believe” they may have committed tax-related or monetary transaction offenses in connection with undeclared “US Related Accounts” (accounts that exceed US$50,000 in value and that were either directly or indirectly related to a Taxpayer) held by the Swiss bank between August 1, 2008, and either the latter of December 31, 2014, or the effective date of an FFI Agreement under the Swiss IGA, or the date of the Non-Prosecution Agreement or Non-Target Letter if that date is earlier than December 31, 2014 (the Applicable Period). This category of banks must provide a letter to the DOJ of their intent to request a non-prosecution agreement and their commitment to comply with the terms and conditions applicable to this category no later than December 31, 2013. The terms and conditions applicable to this category, as well as the requirements of the letter of intent, are described below.
Category 3. Swiss Banks that have not committed any tax-related or monetary transaction offenses in connection with undeclared US Related Accounts held during the Applicable Period. These banks may request a Non-Target Letter based on satisfying certain conditions, including demonstrating the existence of an effective compliance program. A bank requesting a Non-Target Letter under this category must provide a letter to the DOJ no earlier than July 1, 2014, and no later than October 31, 2014. This category effectively requires certitude that the bank “has not committed” any tax-related or monetary transaction offenses. If a bank belatedly discovers that it previously committed a tax-related or monetary offense, the DOJ will not permit the bank to reapply as a Category 2 bank. However, the DOJ may use its “sole discretion” to make an exception to this rule, but only under “extraordinary circumstances.”
Category 4. Swiss Banks that as of December 31, 2009, and as of August 29, 2013, would have satisfied the 10 conditions to be classified as a “Financial Institution with a Local Client Base” under the Registered Deemed Compliant Category of Annex II of the Swiss IGA. In general, in order for a Swiss bank to come within this low-risk “Deemed Compliant” category, it is necessary that the bank (and any more than 50 percent controlled affiliates) each are Swiss incorporated banks whose presence and activities are limited to Switzerland, 98 percent or more of whose account holders by value are residents of Switzerland or a member state of the EU, policies and procedures are maintained to ensure there are no US account holders not resident in Switzerland and there are no policies or practices that discriminate against opening or maintaining accounts for US persons such as US citizens who are residents of Switzerland. A Swiss bank requesting a Non-Target Letter under this category must submit its written request to the DOJ no earlier than July 1, 2014, and no later than October 31, 2014.
REQUIREMENTS AND POTENTIAL PENALTIES
Category 1 banks and non-participating banks
Category 1 banks are those banks which have been notified that they are already under investigation by the DOJ; these institutions may be subject to prosecution and a full panoply of penalties.
Swiss banks who choose not participate in the New Program may also be subject to investigation and prosecution, commencing January 1, 2014. However, unlike those banks that choose to participate in the New Program, all legal defenses, including statutes of limitation, will continue to be available to them.
Category 2 banks seeking non-prosecution agreements
A Category 2 Bank requesting a non-prosecution agreement must submit a letter of intent to the DOJ no later than December 31, 2013, setting forth a plan for compliance with the New Program requirements, the identity and qualifications of the Independent Examiner, an agreement that the bank will maintain all records required for compliance with the terms set out below, and an agreement that the bank will waive any applicable statute of limitations that has not expired as of the date of the announcement and that the bank will waive any defense based on the statute of limitations for the period from August 29, 2013 to the issuance of the non-prosecution or deferred prosecution agreement.
Within 120 days of the date that the letter of intent is submitted and prior to the issuance of an agreement, any participating bank must disclose information regarding how the cross-border business for US related accounts was structured, operated and supervised, the names and functions of the individuals who structured, operated, or supervised the cross border business, how the bank attracted and serviced clients, and the total number of US related accounts and the maximum dollar value, in the aggregate, of these accounts that existed on or after August 1, 2008. The participating bank must also make an in-person presentation and provide properly translated documentation supporting the disclosed information as well as cooperate and assist with further explanation of information and materials presented or requested.
Once an agreement has been executed, the participating bank must provide information regarding all US related accounts that were closed after August 1, 2008, including the total number of accounts closed, as well as specifics relating to each account, such as, but not limited to: the maximum value, in dollars, in each account; the number of taxpayers or U.S. entities affiliated or potentially affiliated with each account and the relationship of these taxpayers or US entities with the account (e.g., a financial interest, beneficial interest, ownership or signatory authority); the relationship manager, client advisor, asset manager, financial advisor, trustee, fiduciary, nominee, attorney, accountant, or other individual or entity functioning in a similar capacity affiliated with said account on or after August 1, 2008; and any information concerning the transfer of funds into and out of the account on or after August 1, 2008, on a monthly basis. Although information regarding all US related account will not be provided to the US until after an agreement has been executed, all such information must have been verified by an independent examiner prior to the execution of any agreement.
In addition, Category 2 banks who enter into an agreement with the US, must continue to provide upon request testimony of a competent witness or information as needed to enable the US to use the information and evidence obtained pursuant to the New Program or separate treaty request in any criminal or other proceeding. Further, the Swiss banks must agree to close the accounts of any account holders who fails to come into compliance with the US reporting obligations.
A bank that satisfies the requirements of Category 2 will not be subject to prosecution but will be subject to a penalty for “US Related Accounts,” as defined under FATCA. Under the New Program’s penalty provisions, Swiss Banks will be held to a higher degree of responsibility for opening “secret” accounts after it became publicly known that the DOJ was actively investigating offshore tax evasion in Switzerland. Penalties will range from 20 percent of the maximum aggregate dollar value for all non-disclosed US accounts that were held by the bank on August 1, 2008; to 30 percent for “secret” accounts that were opened after that date but before the end of February 2009, and to 50 percen for “secret” accounts opened after that date.
A Swiss Bank within this category may obtain a credit against its penalty for US Related Accounts that (i) were not undeclared, (ii) were disclosed by the Swiss Bank to the IRS or (iii) were disclosed through an OVD Initiative, following notification by the Swiss Bank of such a program and prior to execution of the Non-Prosecution Agreement. Consistent with that approach, the Swiss Financial Market Supervisory Authority apparently intends to encourage all Swiss banks to send a letter to US person or Entities with US accounts at Swiss banks, informing them of the New Program and the OVD Initiatives.
Category 3 and 4 banks seeking non-target letters
Any Swiss Bank that does not believe that it has committed any wrongdoing, is confident that it can establish the absence of any wrongdoing to the DOJ’s satisfaction, and that wishes to affirmatively move past this moment in Swiss banking history, may request a non-target letter by expressing its intent to request such a letter no earlier than July 1, 2014, and no later than October 31, 2014, setting forth a plan for compliance with the New Program requirements, the identity and qualifications of the Independent Examiner, an agreement that the bank will maintain all records required for compliance with the terms set out below, and an agreement that the bank will waive any applicable statute of limitations that has not expired as of the date of the announcement and that the bank will waive any defense based on the statute of limitations for the period from August 29, 2013, to the issuance of the non-target letter.
Subsequent requirements of the program vary depending on whether or not the Swiss bank requesting a non-target letter is deemed a compliant financial institution as a “financial institution with local client base under the Swiss IGA (Category 4). For those Swiss banks that are not deemed compliant financial institutions (Category 3), the Swiss banks requesting a non-target letter and the Independent Examiner must verify certain information, including the percent of the account holdings and assets under management that are US Related Accounts and whether they have an effective compliance program in place. The banks and the Independent Examiner must also provide a report regarding the Examiner’s internal investigations. Similar to banks requesting non-prosecution agreements, banks requesting a non-target letter must also agree to close accounts of account holders who failed to come into compliance with US reporting obligations and not to open any US Related Accounts except on the condition that will ensure that the account will be declared to the US and will be subject to disclosure by the Swiss bank. A Swiss bank that is a deemed compliant financial institution must provide verification executed by the Swiss Bank and the Independent Examiner that it has satisfied the necessary requirements.
WHAT SHOULD SWISS BANKS DO?
The December 31, 2013, deadline for Category 2 banks to indicate an intent to participate requires banks to act quickly to evaluate their conduct for the Applicable Period (since August 1, 2008). By that date, banks should (i) assess their potential US criminal exposure and potential criminal exposure elsewhere, and determine how best to proceed in the short term (including whether to participate in the New Program and whether individuals associated with such banks might require separate counsel); (ii)determine how to proceed going forward, in terms of compliance (including becoming compliant with the Swiss IGA) and, (iii) how to interact with the DOJ, with employees who may have facilitated tax evasion, with clients with undeclared offshore accounts, with other banks and with other governments.
In this era of expanding tax transparency and automatic exchange of information among countries, financial institutions must be concerned about reputational risk and how they are perceived by potential investors and counterparties. The deadlines for entering the New Program are fast approaching, particularly for Category 2 banks, and an evaluation of a particular bank’s potential exposure, including a review of its activities and accounts, will require a significant expenditure of resources through forensic investigation and Swiss and US legal work.
WHO ELSE IS AT RISK AND WHAT SHOULD THEY DO?
The IRS now offers US persons who evaded tax an opportunity to voluntarily disclose such activity through OVD Initiatives and avoid criminal prosecution. The DOJ is now offering Swiss Banks an opportunity to voluntarily disclose any potentially criminal conduct related to such tax evasion through the New Program. However, no opportunity to voluntarily disclose is affirmatively being offered by the DOJ either to those professionals who may have facilitated tax evasion through accounts held outside the US or to non-Swiss Banks outside of the US Those professionals (including bank employees, financial advisors, lawyers, accounts and others) and institutions, as well any US persons with previously undisclosed financial accounts outside of the US should also seek legal counsel as soon possible to identify and evaluate their options, particularly given the additional information that will be provided to the DOJ in connection with the New Program and FATCA.
For further information, please contact the authors.
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 The definition of US Related Accounts is opaque, at best. In illustration, the references to Annex I, Part II to the Swiss IGA incorporates preexisting individual accounts of US$50,000 or less that are not required to be reviewed, identified or reported, but it appears that the intent of the definition is also to include preexisting accounts maintained by entities, which is contained in Annex I, Part IV and not in Annex I, Part II. Further, the reference to the US$250,000 in the definition is puzzling, since that would appear to relate to the exemption for preexisting entity accounts that are not required to be reviewed, identified or reported. Further, the definition of US Related Accounts contained in the new program appears to be broader than that of Annex I of the Swiss IGA.
 This requirement was described in the DOJ press release relating to the New Program as “[a] key component of the program…that will enable the United States to follow the money to other Swiss banks and to banks located in other countries.”