The recently announced voluntary bank disclosure program between Switzerland and the US offers worried Swiss banks the possibility of peace of mind from future prosecution. The question now confronting Swiss banks is whether to take advantage of this program and, if so, how best to enter the program.
While these decisions are, of course, extremely important, Swiss banks should not necessarily be feeling a sense of panic or dread. Department of Justice internal guidelines discourage corporate prosecutions where a relatively low-level employee was involved in isolated or discrete transgressions. DOJ’s own policies dictate that it consider a variety of factors before determining to bring a prosecution in such instances. These factors include:
- the nature and seriousness of the offense
- the pervasiveness of wrongdoing within the bank, including the complicity in, or the condoning of, the wrongdoing by management
- the existence and effectiveness of the bank’s pre-existing compliance program
- the bank’s remedial actions, including any efforts to implement an effective compliance program or to improve an existing one, to replace responsible management and to discipline or terminate wrongdoers
- whether prosecution will cause significant collateral consequences on non-culpable parties
- existence of other, non-criminal remedies.
While no single factor above will be dispositive, the greatest emphasis will be placed on the perceived pervasiveness of the misconduct, and whether senior management either played a direct role in the misconduct or condoned it.
With these factors in mind, banks must determine whether they have previously engaged in conduct that DOJ would consider to be a violation of US law. In particular, DOJ is looking for evidence that banks, through their employees, conspired with US taxpayer-account holders to evade US taxes. Conspiracy is nothing more than an agreement -- generally tacit rather than explicit -- between two persons to violate US law. In particular, DOJ will be seeking evidence similar to that which they identified in the prosecution of Wegelin, such as whether the bank:
- Opened and serviced undeclared accounts for US taxpayer-clients in the names of sham corporations and foundations formed under the laws of well-known tax havens, such as Liechtenstein, Panama and Hong Kong for the purpose of concealing the clients’ identities from the IRS
- Permitted certain US taxpayer-clients to open and maintain undeclared accounts at the bank using code names and numbers to minimize references to the actual names of the US taxpayers on Swiss bank documents
- Ensured that account statements and other mail for US taxpayer-clients were not mailed to them in the United States
- Communicated with US taxpayer-clients by using their personal email accounts to reduce the risk of detection by law enforcement
- Issued checks drawn on, and executed wire transfers through, its US correspondent account for the benefit of US taxpayer-clients with undeclared accounts by structuring the payments to be less than US$10,000 to reduce the risk that the IRS would detect the undeclared accounts
- Used third-party websites to solicit US customers and promising complete confidentiality from the IRS
- Advised US taxpayer-clients that the bank would not disclose information to the IRS and highlighted the fact that the bank has no physical presence in the US
- Marketed its services to US taxpayers as they fled UBS and other Swiss banks known to be under active investigation.
Only after analyzing the results of a careful, internal review, conducted by qualified, independent outside counsel, can a bank realistically consider the potential risk it is facing and whether the new program is a wise option. Armed with the facts concerning past conduct, and understanding the factors that DOJ will consider before prosecuting a case, a bank can then consider its options regarding the new voluntary disclosure program.
The program establishes four distinct categories of banks:
Category 1 banks are those banks already under US criminal investigation; these banks are not eligible for the program.
Category 2 banks are those banks that have reason to believe they have violated US tax law; banks in this category must pay a fine but are then eligible for a non-prosecution or deferred prosecution agreement.
Category 3 banks are banks that have not violated US tax law; these banks are eligible for non-target letters.
Category 4 banks are local banks that qualify as a “Deemed Compliant Financial Institution” under FACTA; these banks may also apply for a non-target letter.
The threshold question a bank must confront is whether it should even seek entry into the program. Certain banks with very low risk profiles and a very high degree of confidence in their adherence to a well-crafted compliance program may feel comfortable in sitting tight and doing nothing. Of course, by doing nothing the bank will be unable to obtain the written assurance from the DOJ that they will not be targeted for any possible past misconduct, which entering the program could provide. Determining whether to opt out of the program is a significant decision, with important ramifications, and can only be made after careful review of a bank’s risk profile and past banking practices.
Which category? Deadlines loom
Assuming a bank wishes to take advantage of the program, the next critical decision it will have to make, prior to the December 31, 2013 deadline, is whether to enter the program as a Category 2 or Category 3 bank. This decision is particularly difficult because of timing issues: a decision to enter Category 2, which will likely require the payment of possibly significant fines, must be done by December 31. Entry into Category 3, which is for banks which believe they have been fully compliant with US law and requires the payment of no fines, cannot be done until July 1, 2014.
The dilemma occurs because if a bank mistakenly believes that it has been compliant with US law, and thus waits to enter Category 3 in July 2014, and then only later realizes that misconduct had occurred, it may be too late: DOJ has made clear that only under “extraordinary circumstances,” and under its sole discretion, will it permit a bank in Category 3 to move to Category 2. Such a situation would be so serious – the bank would have exposed itself to criminal prosecution with – that some banks may feel compelled to simply enter the program as a Category 2 bank. Then, if the bank later determines that, in fact, no misconduct had occurred at the bank, it can seek to move to Category 3. Note, however, that there is no provision in the program for a bank’s transfer from Category 2 to Category 3, and such a move would require an appeal to the discretion of the prosecutors.
If the internal review reveals tangible evidence that the bank did knowingly assist US taxpayers in evading their US tax liabilities, then the bank should opt for Category 2. If no evidence of misconduct is found, then the bank should opt for Category 3.
Banks tempted not to enter the program at all must be fully confident that they have no criminal exposure. It would be extremely rare for this confidence to be justified absent a thorough review of its past banking practices. If the bank turns out to have exposure and has not taken advantage of the protections offered by the program, its fate could be no different than Wegelin’s.
If a bank has any concerns that its past practices may be deemed to have transgressed US law, then the new program provides an opportunity that should not be overlooked.