United States: A Race To Disclose Secret Offshore Accounts: New Justice Department Program Pits Swiss Banks Against Their U.S. Accountholders

Last Updated: December 19 2013
Article by Stephanie C. Chomentowski and Matthew D. Lee

For The Defense

The Department of Justice has announced another program designed to identify United States taxpayers who have unreported foreign bank accounts.  Continuing the unprecedented cooperation between U.S. and Switzerland to combat tax evasion, the two countries issued a joint statement earlier this fall announcing a new program entitled "Program for Non-Prosecution Agreements or Non-Target Letters for Swiss Banks."  Available only to Swiss banks not currently under criminal investigation, this unique program is designed to provide Swiss banks a roadmap to resolving any potential criminal exposure under U.S. tax laws.  Switzerland has encouraged its banks to "give serious consideration to their participation" in the program and announced last week that it had authorized a number of Swiss banks to cooperate with the U.S. under the program. 

A Swiss bank that has reason to believe that it may have committed tax-related or monetary transaction offenses in connection with undeclared U.S. accounts may apply to the program.  The bank then will be required to provide detailed information on all accounts held by U.S. taxpayers and pay substantial penalties based upon the amount held in the identified accounts.  In exchange, the government will agree not to prosecute the participating bank.  The result of this program will be to fully eliminate any ability of a U.S. taxpayer to conceal a Swiss bank account from the IRS.

Initial Disclosures Required for a Non-Prosecution Agreement

A Swiss bank interested in the program must send a letter to the Department of Justice by December 31, 2013, requesting entry into a non-prosecution agreement.  In this letter, the bank must set forth its plan to comply with the program; identify an independent examiner (a qualified attorney or accountant) who will verify all account information ultimately disclosed to the U.S.; affirm that it will maintain all records and comply with treaty requests for records; and waive certain statute of limitations defenses.  The bank then has 120 days from December 31 to meet the program's requirements, subject to one 60-day extension, for good cause shown. 

Following the bank's initial letter expressing interest in the program, several disclosures are required.  The bank must provide information regarding how it structured, operated, and supervised its cross-border business, including the name and function of the individuals responsible for that business; how account holders were attracted and serviced by the bank; and the total number of U.S. accounts and the maximum aggregate dollar value of each account in existence on August 1, 2008, opened between August 1, 2008 and February 28, 2009, and opened after February 28, 2009.  In addition, the bank must make an in-person presentation with documentation supporting these initial disclosures and agree to cooperate or provide further information as requested.  If the Tax Division determines that the bank fulfilled the program's requirements, then it will agree not to prosecute the bank for those tax-related or monetary transaction offenses, and the bank will then begin disclosing U.S. taxpayer information.

Disclosure of Taxpayer Information

Upon entry into a non-prosecution agreement, the Swiss bank must disclose detailed financial information on all accounts in which any U.S. taxpayer has any kind of interest.  Basic information must be turned over, including the maximum value of each account, the identity of any individual or entity affiliated with each account, and the interest that each individual or entity has in each account.  But the program also requires the Swiss bank to identify all professionals, including any "relationship manager, client advisor, asset manager, financial advisor, trustee, fiduciary, nominee, attorney, accountant, or" any such similar individual, affiliated with each account.  Information regarding all transfers of funds into and out of the account, including whether the transfers were made in cash, whether the funds were transferred through an intermediary, and all countries to or from which the funds were transferred, also must be provided.  Importantly, all of this information must be compiled by the bank prior to execution of the non-prosecution agreement, because the government will execute the non-prosecution agreement only upon receipt of a verification from the bank's independent examiner attesting that the information is accurate and was compiled appropriately.

Swiss banks in the program also are subject to ongoing obligations.  The bank must retain records for ten years after the termination of the non-prosecution agreement, provide testimony to allow the information provided to be used in any United States proceeding, and generally cooperate with treaty requests or other requests for additional information.  Banks also must close all secret accounts that have not otherwise been disclosed and implement procedures to thwart any account holder from being able to further conceal unreported funds.

Payment of Penalty

The penalties to be imposed are defined in the program.  For unreported accounts in existence prior to August 1, 2008, the penalty is 20% of the accounts' maximum aggregate dollar value.  For accounts opened between August 1, 2008 and February 28, 2009, the penalty increases to 30% of the maximum aggregate account value.  Accounts opened after February 28, 2009 are subject to a 50% penalty based upon their maximum aggregate value.

Program for Swiss Banks that Have Not Violated any U.S. Laws

Even a Swiss bank that has not violated U.S. laws may participate in the program and obtain assurances that it is safe from prosecution.  These banks must send a letter to the Department of Justice between July 1, 2014 and October 31, 2014, requesting a non-target letter.  Along with providing the initial information described above, the banks must conduct an internal investigation to confirm that no unreported U.S. accounts exist and otherwise verify that the bank's compliance program is effective.  A report from the bank's independent examiner regarding the internal investigation is to be provided to the Tax Division.

Local banks that service Swiss residents, including those already qualified as a "Deemed Compliant Financial Institution" that is a "Financial Institution with Local Client Base" under the Foreign Account Tax Compliance Act ("FATCA"), also can request a non-target letter.  These banks must provide certain minimal disclosures, including a statement that an independent examiner has verified that the bank has met the FATCA standard. 

Importantly, if the Department of Justice later learns of criminal culpability for any bank that received a non-target letter, then the bank will not be protected from prosecution and will be exposed to increased liability if the bank hid or misrepresented its activities in order to obtain the non-target letter.

What Taxpayers Can Do

From now until the end of the year, no new criminal investigations of Swiss banks will be initiated, thereby offering qualifying banks a narrow window of opportunity to investigate their accounts and apply to the program.  Swiss banks are likely evaluating their accounts now to meet the year-end deadline.  Indeed, some taxpayers already have received correspondence from Swiss banks revealing their intention to participate in the program and requesting confirmation about what the taxpayer has disclosed to the IRS in order to determine potential reporting requirements and penalty exposure.

Therefore, any United States taxpayer who still has an interest, no matter how indirect, in funds held in an unreported Swiss bank account may want to consider disclosing that account now to the IRS.  For instance, eligible individuals can enroll in the IRS's Offshore Voluntary Disclosure Program ("OVDP") and disclose their foreign accounts, pay certain penalties, forego the risk of criminal investigation or prosecution, and otherwise become compliant with their U.S. tax obligations.  Once a Swiss bank complies with the initial disclosures of this program and receives an executed non-prosecution agreement, taxpayer information will be turned over.  The IRS has historically been unwilling to permit a taxpayer to enter into the OVDP after the taxpayer's unreported foreign bank account has been disclosed to the U.S. 

Other Efforts to Identify Undisclosed Offshore Bank Accounts

In addition to the unique program directed to Swiss banks described above, there are two other recent legal developments that may impact the ability to conceal foreign accounts from the IRS and provide additional incentives for noncompliant U.S. taxpayers to consider enrolling in the OVDP at this time.

On November 7, 2013, two United States District Judges for the Southern District of New York entered orders authorizing the IRS to issue "John Doe" summonses to a number of U.S. banks to produce information about U.S. taxpayers that may have committed tax evasion by not disclosing their interests in undisclosed foreign accounts.  The orders are directed to the Bank of New York Mellon, Citibank NA, JPMorgan Chase Bank NA, HSBC Bank USA NA, and Bank of America NA.  The five banks will be required to produce correspondent banking information regarding any U.S. taxpayer that maintains accounts at Zurcher Kantonal bank and its affiliates in Switzerland and The Bank of N.T. Butterfield & Son Limited and its affiliates in the Bahamas, Barbados, Cayman Islands, Guernsey, Hong Kong, Malta, Switzerland, and the United Kingdom. 

Finally, Liechtenstein, Hungary, and Andorra were the most recent countries to join Switzerland, China, and others in agreeing to sign the Multilateral Convention on Mutual Administrative Assistance in Tax Matters by the Organisation for Economic Co-operation and Development.  The purpose of this agreement is for signatory nations to be able to participate in automatic exchanges in order to share information, conduct tax examinations abroad, and assist in tax collection all to combat tax evasion.  Actions from countries like Switzerland and Liechtenstein, which have a history of being safe havens for tax avoidance, indicate an international focus on eliminating tax evasion and tax fraud.  The United States signed this agreement in 1989.

FATCA Update:  Cayman Islands and Costa Rica Sign Intergovernmental Agreements with the U.S.

Finally, last week, the Department of the Treasury announced that the Cayman Islands and Costa Rica have agreed to cooperate in the tax transparency sought by FATCA.  Pursuant to intergovernmental agreements signed by the Cayman Islands and Costa Rica, the two countries will make U.S. taxpayer account information available to the IRS in an effort to combat and deter offshore tax evasion.

FATCA requires U.S. financial institutions to withhold certain payments made to foreign financial institutions ("FFI") that do not agree to report U.S. taxpayer account information to the IRS.  In order to prevent those withholdings, an FFI can enter into an agreement directly with the IRS or through one of two possible agreements between the U.S. and the home country.

The Cayman Islands agreed to a Model 1B agreement where FFIs in the Cayman Islands will report information on U.S. account holders to the Cayman Islands Tax Information Authority, which will then relay that information to the IRS.  Costa Rica agreed to a Model 1A agreement where FFIs in Costa Rica will provide account information to the IRS, and the U.S. will in turn provide information on Costa Rican account holders in the U.S.

The Cayman Islands and Costa Rica are the first Caribbean and Central American countries, respectively, to enter into agreements relating to FATCA compliance.  They join ten other countries that have already pledged cooperation, including Denmark, France, Germany, Ireland, Mexico, Norway, Spain, and the United Kingdom.  The Treasury Department announced that it has reached agreements with 16 other countries, further highlighting the government's focus to obtain cooperation internationally in its efforts under FATCA to quell tax evasion.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Matthew D. Lee
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