Penalties and Enforcement
The United States has stepped up its efforts to seek out Swiss bank accounts held by US residents, citizens or persons in and doing business in the United States, citing banking secrecy as a means to violate or evade domestic tax and regulatory requirements. The Internal Revenue Service (IRS) has made this statement in a report to Congress pursuant to the USA Patriot Act.(1) Such persons or entities who hold Swiss bank or other financial accounts are required to disclose the existence of these accounts or face civil and/or criminal penalties. The report discussed in this update suggests that significant focus will be placed in future on this often-overlooked legal requirement, and that prosecutions for failure to disclose will increase.
In its report to Congress on April 26 2002, pursuant to Section 361(b) of the USA Patriot Act, the IRS asserted that it has begun a "large-scale initiative to seek out taxpayers who have undisclosed accounts overseas". It cited banking secrecy as the main obstacle to enforcement, thereby directly targeting jurisdictions like Switzerland.
The Banking Secrecy Act(2) authorizes the secretary of the Treasury to require residents, citizens and persons in and doing business in the United States to keep records and/or file reports concerning transactions with a Swiss financial agency. Specifically, the law provides as follows:
"Each person subject to the jurisdiction of the United States (except a foreign subsidiary of a US person) having a financial interest in, or signatory or other authority over, a bank, securities or other financial account in a foreign country shall report such relationship to the commissioner of the Internal Revenue for each year in which such relationship exists, and shall provide such information as shall be specified in a reporting form."(3)
The people or entities who meet the description above are by law supposed to disclose the existence of Swiss accounts that at any time during the calendar year meet or exceed $10,000 in value. This is done using a special form, entitled the Report of Foreign Bank and Financial Accounts (FBAR), TD F90-22.1, which is filed with the Detroit Computer Centre as indicated on the form. It must be filed by June 30 of each reporting year. Once filed, these forms are made available to Financial Crimes Enforcement Network (FinCEN) analysts, law enforcement and other appropriate regulatory agencies to track money flows.
Under the existing law, the failure to file an FBAR is punishable by a fine of not more than $250,000 and/or five years' imprisonment. When the failure to file is part of a pattern of illegal activity, the punishment is increased to a fine up to $500,000 and/or 10 years' imprisonment. In addition, the director of FinCEN can assess against a person who wilfully fails to file an FBAR money penalties equal to the balance at the time of the violation not to exceed $100,000 or $25,000, whichever is greater.
To date there have been a limited number of 'failure to file FBAR' charges brought by the IRS and the Department of Justice. The IRS is putting people on notice with this report. The IRS estimates that there are over a million accounts abroad that should be reported, but it only received 177,151 for the calendar year ending 2001. The US Embassy in Berne has also stated that approximately 33,000 US citizens are living in Switzerland, not including other US persons required to file under the rule. Utilizing the average filing rate provided by the IRS, there could be up to 26,000 unreported accounts held in Switzerland.
The IRS's official stance is that it intends to increase compliance with this rule using a two-step approach. The first step is to educate filers who would report if they were aware of the law, and to step up stand-alone failure-to-file cases and penalty assessment. The second is to prosecute actively those who fail to file because they are concealing income or are engaged in some type of criminal activity. On this level the IRS will not only prosecute the underlying crime, but will bring stand-alone failure-to-file charges when such accounts are discovered.
Through this report the IRS is making it clear that people with Swiss bank accounts who do not file FBAR disclosures will be prosecuted in the near future. It is therefore advisable to inform clients of this particular regulatory scheme to determine whether they are covered persons, and if so, of their duties to file, in default of which they could face the severe penalties described above. This is particularly important for Swiss banks and financial service providers, given the relationship of this report to the USA Patriot Act. Swiss institutions that are actively shielding US clients could face severe penalties, including being effectively shut out of the US markets.
For further information on this topic please contact David Forbes-Jaeger or John McBrayer at Secretan Troyanov by telephone (+41 22 789 70 00) or by fax (+41 22 789 70 70) or by email ([email protected] or [email protected]). The Secretan Troyanov website can be accessed at www.secretantroyanov.com.
(1) 'USA Patriot' is an acronym for "Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism".
(2) 12 USC 1829(b); 12 USC 1951-1959; 31 USC 5311-5330.