For more than six years—since the United States first indicted UBS in July of 2008 in the Southern District of Florida—Swiss banks have been closely scrutinized by the United States Department of Justice (“DOJ”) over their alleged assistance of US tax evaders. On August 29, 2013, the DOJ and the Swiss Federal Department of Finance issued a joint statement (the “Joint Statement”) announcing a DOJ Program for Non-Prosecution Agreements or Non-Target Letters for Swiss Banks (the “Program”) that is intended to provide a secure resolution for all Swiss banks not currently under DOJ investigation. (Capitalized terms not defined in this essay refer to defined terms under the Program.)
According to the Joint Statement, any Swiss Bank that had not been notified by August 29, 2013 that it was under investigation is eligible for a Non-Prosecution Agreement or Non-Target Letter from the DOJ, provided the Swiss Bank agrees to comply with the terms of the Program. The Program, however, comes with historically unprecedented fines for Swiss Banks seeking a Non-Prosecution Agreement, which Patrick Odier, the Chairman of the Swiss Bankers Association, described in his Chairman’s Address at this year’s Swiss Bankers Day as “at the upper end of legally acceptable and economically bearable levels.”
Overview of the Program
Under the Program, Swiss Banks are divided into four categories. Category 1 Banks are excluded from the Program, as they are currently under DOJ investigation (and were notified of their status by August 29, 2013). All other Swiss Banks can choose to opt into the Program under the terms of the three remaining categories. For participating Swiss Banks, the Program offers immunity from prosecution for tax-related offenses. It does not, however, protect any individual employees or decision-makers at the participating Swiss Bank from prosecution (and, indeed, appears to contemplate the possibility of using the information banks provide under the Program’s disclosure requirements for prosecutions).
Category 2 Banks are Swiss Banks that, after an internal investigation, determine that they have “reason to believe [they] may have committed tax-related offenses” under US law during the “Applicable Period” (i.e. August 1, 2008 to the present). Category 2 Banks are subject to significant fines—ranging between 20% to 50% of the aggregate value of each undeclared US Related Account—and disclosure requirements in exchange for a Non-Prosecution Agreement by the DOJ. Category 2 Banks must also agree to assist the DOJ in subsequent investigations and requests made under applicable income tax treaties (including by drafting criteria necessary for the DOJ to formulate a treaty request). Banks opting into the Program under Category 2 must send a Letter of Intent to the DOJ by December 31, 2013.
Category 3 Banks, by contrast, are Swiss Banks that, after an internal investigation, determine that they have not committed a tax offense under US law. Category 3 Banks must have the determination verified by an Independent Examiner and must keep all records related to this verification process—including all work product that the Independent Examiner produces and all documents provided to the Independent Examiner—for a period of 10 years from the date of the Non-Target Letter. Banks opting into Category 3 must do so no earlier than July 1, 2014 and no later than October 31, 2014. There is limited relief available for Swiss Banks that belatedly determine that they are not a Category 3 Bank and wish to enter the Program under Category 2, provided that the bank undertook a timely investigation in good faith and could not have previously discovered the wrongdoing.
Category 4 Banks are Swiss Banks that have a “Local Client Base.” Banks can qualify under Category 4 if 98% by value of their accounts are held by a resident of Switzerland or a European Member State. However, recent statements by Kathryn Keneally, who heads the Tax Division of the DOJ, to the American Bar Association indicate that Category 4 Banks will not be safe from prosecution merely by having a local client base if they committed US tax-related offenses (and, thus, these banks likely will need to undertake an internal investigation to determine their compliance as well). Banks opting into Category 4 must do so no earlier than July 1, 2014 and no later than October 31, 2014.
Additional FINMA Requirements
Whether or not a Swiss Bank opts into the Program, the Swiss Financial Market Supervisory Authority (FINMA), has imposed additional reporting requirements on all Swiss Banks, including documentation of the decision whether or not to enter the Program and the approximate fine banks entering under Category 2 expect to sustain. It has yet to be seen how these additional requirements will work with the Program, which appears to allow Category 2 Banks to undertake efforts to mitigate the fines they must pay (by notifying non-compliant bank customers of the IRS Offshore Voluntary Disclosure Programs and Initiatives) up to the date of the execution of a Non-Prosecution Agreement.
Comparison of Historic Penalties for Swiss Banks Who Admitted to Aiding US Tax Evasion and the Program
The penalty scheme for Category 2 Banks under the Program—which assesses penalties of between 20% and 50% of the value of each US Related Account (i.e. financial accounts with the Swiss bank and its affiliated banks)—is harsh in comparison to the historic fines paid by Swiss banks that admitted to criminally facilitating tax evasion. Under the Deferred Prosecution Agreement UBS entered into with the DOJ in 2009, it agreed to pay $780 million in fines, penalties, disgorgement of profits and restitution of taxes that should have been paid to the IRS. United States of America v. UBS AG, Case No. 09-60033-CR-COHN (Southern District of Florida, 2009) (Deferred Prosecution Agreement). This amounted to approximately 4% of the $ 20 billion in assets the DOJ claimed UBS held for U.S. tax evaders. In January 2013, Wegelin entered a guilty plea on charges the DOJ brought in the Southern District of New York. United States of America v. Wegelin & Co. et. al., Case No. S1 12 Cr. 02 (JSR) (Southern District of New York, 2013) (Guilty plea and plea agreement accepted by Judge Rakoff). As part of Wegelin’s guilty plea, and a civil forfeiture by its correspondent bank, Wegelin agreed to pay fines, penalties, restitution and forfeitures amounting to $74 million. This amounted to approximately 6.1% of the $1.2 billion the DOJ claimed Wegelin held in undeclared assets by US tax evaders. The increasing harshness of the fines imposed under the program indicates that the DOJ is taking an increasingly hard line with respect to financial institutions that aid US tax evaders.
End of Swiss Bank Investigations May Be Just the Beginning for the DOJ
Swiss Banks entering the Program under Category 2 agree to provide the DOJ with aggregate information on all US - Related Accounts that the bank has closed since August 1, 2008. This information must be verified by an Independent Examiner, and the bank’s Letter of Intent opting into the Program must provide a plan for gathering this information and having it verified within 120 days after December 31, 2014 (so by the end of April 2014), with the possibility of a one-time 60 day extension. Upon execution of a Non-Prosecution Agreement, the information must be turned over to the DOJ. This information includes a list of countries to which funds from the closed accounts were transferred and the names of the financial institutions in those countries that received the funds. This strongly indicates that the DOJ intends to begin investigating banks in jurisdictions other than Switzerland and perhaps to take its lucrative program on the road. Based upon the foregoing, the end of DOJ investigations of banks in Switzerland could be the beginning of new investigations in the rest of the world.