DoJ Unveils Agreement to Allow Certain Swiss Banks to Avoid U.S

9/3/13 DoJ unveils agreement to allow certain Swiss banks to avoid U.S. prosecution (09/03/2013)

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09/03/2013

DoJ unveils agreement to allow certain Swiss banks to avoid U.S. prosecution (09/03/2013)

International Taxes Weekly,

DoJ unveils agreement to allow certain Swiss banks to avoid U.S.

prosecution

The U.S. Department of Justice (DoJ), August 29, announced that it had signed an agreement with the Swiss

government to allow some Swiss banks to avoid or defer prosecution stemming from a long-running probe of tax

evasion by U.S. persons using Swiss bank accounts.

"The whole goal from the DoJ is to make it as difficult as humanly possible for Americans who want to conceal

money to continue to do so," said trail attorney Jeffrey A. Neiman. "This is yet another way to push those who

still have money overseas and who don't want to come clean further and further into the shadows and they are

running out of places to go with FATCA, with whistleblowers, with the OVDI, with bankers now voluntarily showing

up in the U.S. and cooperating, and now with what I call the bank voluntary disclosure program, the time to come

forward is now or soon because it is only going to get worse and more difficult as time goes on."

Background. In February 2009, UBS entered into a deferred prosecution agreement with the DoJ on charges of

conspiring to defraud the U.S. by aiding clients in avoiding their U.S. tax obligations. As part of the deferred

prosecution agreement, UBS paid $780 million in fines, penalties, interest, and restitution. (See International

Taxes Week ly, 07/06/09)

By mid-2008, UBS had stopped servicing undeclared accounts for U.S. taxpayers. In the wake of the DoJ's

investigation of UBS, Wegelin sought to capture some of the illegal business that UBS had exited.

On February 2, 2012, the DoJ indicted Wegelin, alleging that the bank was attracting U.S. tax evading clients

leaving UBS at a time when the U.S. was stepping up its efforts to crackdown on UBS between 2007 and 2009.

(See International Taxes Week ly, 02/07/12)

According to the DoJ, some of Wegelin's employees told various U.S. taxpayer-clients that their undeclared

accounts would not be disclosed to the U.S. because the bank had a long tradition of secrecy. They also

persuaded U.S. taxpayer-clients to transfer assets from UBS to Wegelin by emphasizing that, unlike UBS,

Wegelin did not maintain offices outside of Switzerland and was therefore less vulnerable to U.S. law enforcement

pressure.

Founded in 1741, Wegelin effectively broke itself up following the indictment by selling the non-U.S. portion of its

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business. In a statement, the bank said it had set aside money to pay the fine, restitution and forfeiture.

Additionally, DoJ currently has more than a dozen banks under formal investigation, including Credit Suisse,

Julius Baer, the Swiss arm of the U.K.'s HSBC, privately held Pictet in Geneva and local government-backed

Zuercher Kantonalbank and Basler Kantonalbank.

Agreement tailored to banks marketing themselves to customers fleeing banks under

investigation

Under the program, eligible banks would pay penalties and disclose account information about U.S. customers in

order to avoid prosecution.

The program is only available only to institutions not currently under criminal investigation by the DoJ and

imposes penalties ranging from 20 percent to 50 percent. Specifically, for U.S. related accounts related accounts

that: (1) existed on August 1, 2008, a 20 percent penalty applies; (2) were opened between August 1, 2008 and

February 28, 2009, a 30 percent penalty applies; and (3) were opened after February 28, 2009, a 50 percent

penalty is applicable.

"The U.S. believes that a number of Swiss banks marketed themselves to customers leaving banks under

investigation, and the penalty structure in this agreement is meant to sanction such efforts," said Mark Matthews

of Caplin & Drysdale. "Having said that, for any bank that wishes to avoid criminal prosecution, this agreement

presents a clear and attractive opportunity to obtain peace with the U.S."

The program creates four categories of Swiss banks, three of which can take action to lessen the severity of DoJ

actions against them.

Category 1 banks are the 14 banks currently under DoJ criminal investigation. The program does not provide

actions for these banks to take to lessen the severity of DOJ actions against them.

Category 2 banks can obtain DoJ non-prosecution agreements (NPAs) if they:

(1) agree to pay penalties (ranging from 20 percent to 50 percent) according the schedule referenced above;

(2) make a complete disclosure of their cross-border activities;

(3) provide detailed information on an account-by-account basis for accounts in which U.S. taxpayers have a

direct or indirect interest;

(4) cooperate in treaty requests for account information;

(5) provide detailed information as to other banks that transferred funds into secret accounts or that accepted

funds when secret accounts were closed; and

(6) agree to close accounts of account holders who fail to come into compliance with U.S. reporting

obligations.

Each Category 2 Bank requesting an NPA must provide a letter of intent to DoJ, no later than December 31,

2013, that expresses its intent to participate in the program. The letter must, among other things, include a plan

for complying with the above requirements, within a reasonable time, but not to exceed 120 days from the date of

the letter of intent. If a bank is not able to comply with the requirements set out in the program within 120 days



from the date of the letter of intent, DoJ will grant a one-time extension of 60 days upon a showing of good cause.

Category 3 and Category 4 banks are Swiss banks that were not engaged in wrongful acts with U.S. taxpayers

but nonetheless want a resolution of their status. They are eligible under the program to receive “non-target

letters” (NTLs). NTLs are DoJ letters stating that, as of the date of the letter and based upon information then

known to DoJ, the Swiss bank to which the letter is addressed is not the target of a DoJ criminal investigation in

connection with undeclared “U.S. Related Accounts” held by the Swiss bank.

Category 4 banks meet the requirement of a “Financial Institution with Local Client Base.” They will be eligible for

NTLs if they show that they met certain criteria for deemed compliance under the Foreign Account Tax

Compliance Act (FATCA).

Category 3 banks don't meet the above local client base requirement and are subject to slightly more lengthy

requirements, including providing an internal investigation report prepared by an independent examiner.

Like Category 2 banks, Category 3 and 4 banks must provide a letter of intent to participate in the program.

The program does not address current or future investigations and pending cases concerning bank employees,

financial advisors and other individuals. DOJ will address each of these cases only with the individual's counsel in

a manner that gives consideration to the particular facts and circumstances of each case. In those cases in

which indictments are pending, any resolution will also require addressing outstanding issues with the relevant

court. Personal data provided by the banks is only to be used for purposes of law enforcement, which may

include regulatory action, in the U.S. or as otherwise permitted by U.S. law.

Many Swiss banks likely to find DoJ's deal attractive

"The DoJ has held the carrot out – the NPAs, the reduced penalties, and the question is – is the Wegelin case,

the UBS case, the Landesbank case – enough of a public stick to drive other banks to voluntarily come forward?"

asked Neiman, who was an Assistant U.S. Attorney involved with the prosecution of the UBS AG case.

Cono Namorato of Caplin & Drysdale said that many directors of Swiss banks would find the DoJ's deal as an

attractive way to reduce their own penalties. "Affected account holders should in any event seriously consider

immediately undertaking a voluntary disclosure to protect themselves," he added.

The information received from the U.S. under the agreement would be to form a roadmap for the U.S. to file treaty

requests requiring banks to disclose account holder names, said Scott Michel, also with Caplin & Drysdale. "The

agreement requires the participating financial institution to cooperate with any treaty request, and the Swiss

government has agreed to treat such requests expeditiously," he added.

Tiered penalty regime for banks but not for individuals unfair, practitioner says

Neiman said that it was unfair that the DoJ's agreement with the Swiss banks provides for different tiers of

penalties based on the bank's level of culpability when compared with the one-size fits all OVDI approach.

"Why don't we have a similar [tiered] arrangement for individuals?" he asked. "What about the poor American who

has signature authority over their elderly mother's bank account outside the U.S. shouldn't have to pay a penalty?

It's in everybody's interest to get these folks into compliance. And this one-size fits all for individuals is frustrating



and it is forcing many folks to not come forward because they are afraid of the potential penalties."

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