Why it matters: On March 30, 2015, the DOJ announced that it had entered into a non-prosecution agreement with BSI SA under its Swiss Bank Program, pursuant to which the bank agreed to pay a penalty of $211 million. It is the first such successful resolution with a Swiss bank since the program was announced by the DOJ in 2013.

Detailed discussion: As part of its ongoing efforts to combat offshore tax evasion, the DOJ announced the “Swiss Bank Program” on August 29, 2013. The program provides a path for Swiss banks to resolve potential criminal liabilities arising from undeclared U.S.-related accounts used to evade U.S. taxes. Swiss banks eligible to enter the program were required to advise the Department by December 31, 2013, that they had reason to believe that they had committed tax-related criminal offenses in connection with such undeclared U.S.-related accounts (banks already under criminal investigation for such activities and all individuals were expressly excluded from the program).

Under the program, a Swiss bank will be eligible for a non-prosecution agreement (NPA) if it meets all of the following requirements: (1) makes a complete disclosure of its cross-border activities; (2) provides detailed information on an account-by-account basis in which U.S. taxpayers have a direct or indirect interest; (3) cooperates in treaty requests for account information; (4) provides detailed information as to other banks that transferred funds into secret accounts or that accepted funds when secret accounts were closed; (5) agrees to close accounts of accountholders who fail to come into compliance with U.S. reporting obligations; and (6) pays appropriate penalties.

On March 30, 2015, BSI SA (BSI), one of the ten largest private banks in Switzerland, became the first bank to enter into an NPA with the DOJ under the Swiss Bank Program, pursuant to which it agreed to pay the DOJ a penalty of $211 million. In a press release announcing the deal, Acting Deputy Attorney General Sally Quillian Yates said that “[w]hen we announced the program, we said that it would enhance our efforts to pursue those who help facilitate tax evasion and those who use secret offshore accounts to evade taxes. And it has done just that. We are using the information that we have learned from BSI and other Swiss banks in the program to pursue additional investigations into both banks and individuals.”

The agreed-upon “Statement of Facts” (Exhibit A to the BSI NPA) states that, for decades prior to and through 2013, BSI knowingly conducted a U.S. cross-border banking business that aided thousands of U.S. clients in opening undeclared accounts in Switzerland and concealing the assets and income they held in such accounts. This concealment took many forms, including (a) assisting clients in using sham offshore entities or “bogus” financial insurance products (known as “insurance wrappers”) as nominee beneficial owners of the undeclared accounts; (b) accepting and suggesting the use of IRS forms that falsely stated under penalty of perjury that the sham entities beneficially owned the assets in the undeclared accounts; (c) providing offshore debit cards to repatriate funds from the undeclared accounts; (d) facilitating withdrawals of funds from the undeclared accounts back to the United States through nominee non-U.S. accounts; and (e) structuring transfers of funds from the undeclared accounts to evade currency transaction reporting requirements.

The DOJ found that BSI has held and managed approximately 3,500 U.S. client accounts, both declared and undeclared, with peak assets under management of $2.78 billion since August 2008. Approximately 2,160 of these accounts were acquired by BSI as part of its purchase of other Swiss banks in 2006 and 2008, respectively. The remaining accounts were opened by BSI directly. Private bankers, or relationship managers (RMs), were the primary contacts for U.S. clients with undeclared accounts at BSI. Prior to 2009, the RMs could open the undeclared accounts on their own volition. In January 2009, the bank required new U.S. client accounts to also be approved by senior management to ensure compliance with its U.S. client policies. BSI acquired U.S. accounts predominantly from direct referrals, walk-ins and business arrangements with external asset managers (EAMs). As of the end of 2008, approximately 265 RMs and 198 EAMs were responsible for managing at least one U.S. client account. The RMs were compensated by BSI in part based on the amount of business they generated for the bank. The EAMs were also compensated by BSI based on the amount of business generated but pursuant to a negotiated fee structure. During 2008 and most of 2009, BSI accepted an “inflow” of U.S. accounts from EAMs that were forced to exit their prior banking arrangement due to the UBS investigation. After 2009, the circumstances under which BSI would accept such EAM accounts were limited.

The findings detail how BSI maintained the undeclared U.S. accounts in different units throughout the bank, although the accounts were primarily serviced at the bank’s international desk in Zurich (referred to internally as the “North America” or “U.S.” desk due to the disproportionately high percentage of U.S. clients it serviced); its two Latin America desks in Zurich and Geneva; EAM desks in Lugano, Geneva and Zurich; and 22 other private banking desks in Geneva, Lugano and the greater Ticino area. The RMs typically communicated with U.S. clients by telephone, fax, email and mail, and prior to 2008, several RMs traveled to the United States one to two times per year to maintain existing relationships with U.S. clients. In July 2008 BSI adopted U.S. business travel restrictions for senior management and RMs with more than ten declared U.S. accounts.

The DOJ found that BSI offered U.S. clients a variety of traditional Swiss banking services that it knew could assist in the concealment of assets and income from the IRS. For example, approximately two-thirds of the U.S. clients paid BSI a quarterly fee to use a “hold mail” service. Another one-third of the U.S. clients paid a quarterly fee to use code name or numbered account services pursuant to which the identity of the accountholder could be replaced with a code name or number on bank statements and other documentation (in accordance with Swiss law, however, BSI’s internal records still reflected the accountholder’s identity).

In some cases, the findings show that the RMs assisted their clients in structuring U.S. accounts so that they appeared to be held by non-U.S. legal structures, such as offshore corporations or trusts, thus aiding the clients to conceal their undeclared accounts from the IRS. The DOJ found that, after August 2008, 12% of BSI’s U.S. client accounts were held in the name of offshore structures incorporated or based in the British Virgin Islands, Panama and Liechtenstein.

In late 2008 and 2009, in the wake of the UBS investigation, the findings show that BSI began to assess the risk of its cross-border business and issued a series of policies that served to (a) eliminate undeclared U.S. client accounts that were not financially worth the risk; (b) cut off the paper trail back to the United States for accounts not reportable by the bank to the IRS; and (c) insulate the bank’s exposure for undeclared U.S. client accounts behind its contractual relationships with EAMs. Although these policies helped remediate some of the bank’s undeclared U.S. accounts, the DOJ found that these efforts were “flawed” because RMs were still allowed to open and maintain undeclared U.S. accounts that were highly profitable. Starting in 2010, however, BSI issued a series of gradually restrictive policies that resulted in the bank exiting most of its undeclared U.S. client accounts by the end of 2012.

In December 2013, BSI voluntarily entered into the DOJ’s Swiss Bank Program. The Statement of Facts details the ways in which BSI has fully cooperated with the U.S. government throughout its investigation and made timely and comprehensive disclosures regarding its U.S. cross-border business.

See here to read the BSI NPA Exhibit A “Statement of Facts” (3/30/15).

See here to read the Joint Statement between the DOJ and the Swiss Federal Department of Finance establishing the Swiss Bank Program (8/29/13).

For more on this matter, refer to the following:

DOJ Press Release issued 3/30/15.

BSI NPA (3/30/15).

BSI NPA Exhibit B “Resolution” (3/30/15).