On August 29, 2013, the U.S. and Switzerland issued an historic Joint Statement regarding Swiss banks and U.S. tax evasion investigations and established a “Program for Non-Prosecution Agreements or Non-Target Letters for Swiss Banks.” The announced program (the “Program”) is open only to, and to all, Swiss banks, other than those considered Category 1 Banks. Category 1 banks are the fourteen Swiss banks currently under criminal investigation by the U.S. Department of Justice’s (DOJ) Tax Division. According to the Joint Statement there are other banks which were notified through their respective counsel by certified mail on August 29, 2013, who will also be Category 1 Banks. These banks are excluded from the Program.
Also excluded from the Program are individuals, insurance companies, asset managers and others such as fiduciaries, financial advisors, and lawyers, whether currently under investigation or not. The Department of Justice’s Press Release states that these cases will be addressed only with the individual’s counsel giving consideration to the particular facts and circumstances of each case.
The Program creates four categories of Swiss banks. In addition to the Category 1 banks excluded from the Program there are: Category 2 Banks—a bank which has “reason to believe” it may have committed tax-related offenses or monetary transactions offenses under U.S. law in connection with undeclared U.S. taxpayer accounts; Category 3 Banks—a bank which has not assisted U.S. taxpayers with undeclared accounts (not committed any tax-related or monetary transactions offenses) ; and Category 4 Banks—a bank which is purely local in nature and does not have U.S. or other non-Swiss customers (deemed to be a “Compliant Financial Institution” as a “Financial Institution with Local Counsel Base” under the FATCA Agreement, Annex II Paragraph 11.A.1, as if the FATCA Agreement were in force and must meet the requirements of Annex II, Paragraph 11.A.1e on December 31, 2009 and on August 29, 2013).
Under the Program, Category 2 banks may request a Non-Prosecution Agreement; Category 3 and 4 books may request a Non-Target Letter.
To be sure a Swiss bank is not pursued by the DOJ Tax Division and to avoid the possibility of a criminal indictment, both the U.S. and Swiss governments strongly encourage all Swiss banks to participate in the Program. Participation in the Program enables Swiss banks to avoid criminal investigation and potential prosecution. The fate is unknown for the 14 Swiss banks currently under criminal investigation by the DOJ-- whether the investigation will be closed without further action, whether it will result in a deferred prosecution agreement, which will likely include substantial penalties and which was the fate of UBS in February 2009 or in an indictment such as the indictment against Wegelin in February 2012 to which Wegelin pled guilty in January 2013 and then closed its doors.
Applicable U.S. federal law
The DOJ Tax Division is interested to know which Swiss banks have violated U.S. law in connection with assisting U.S. taxpayers with undeclared offshore accounts. An important reminder is that the ultimate goal of the new Program is to enhance the DOJ’s pursuit of U.S. taxpayers who hide assets outside the U.S. and who do not comply with their U.S. tax reporting and compliance requirements.
The U.S. laws that the DOJ, Tax Division, is invoking are:
- tax-related offenses under Titles 18 or 26 of the U.S. Code; Title 18 makes it criminal to conspire to “defraud the U.S. government.” All the DOJ’s past indictments of Swiss entities or persons in connection with undeclared accounts in Switzerland have been based in whole or in part on this law.
- any tax-related offenses under Article 26 of the U.S. Code. Article 26 is the Internal Revenue Code, the U.S. federal tax law;
- monetary offenses under Sections 5314 and 5322 of Title 31 of the U.S. Code, which are the federal law provisions dealing with records and reports on foreign financial agency transactions (section 5314) and the criminal penalties as a result (Section 5322) of any violation.
The procedure for participating in the Program includes four steps—
- Delivery of a Letter of Intent by the required deadline;
- Appointment of an Independent Examiner;
- Signing of a Non-Prosecution Agreement or Non-Target letter; and
- For Category 2 banks providing required information and paying penalties.
Conditions Precedent—Agreement for Continuing Obligations
All Category 2, 3, and 4 banks as part of the Program must agree to certain continuing obligations as conditions precedent to entering into a NPA or Non-Target Letter, as the case may be. These continuing obligations include retention of records for 10 years after the date of signing of the NPA or Non-Target Letter, closing all U.S. taxpayer non-declared accounts, and refusing to open non-declared accounts for U.S. taxpayers. For Category 2 Banks, after signing the NPA, the bank must then provide the required information, agree to cooperate to provide any supplemental information, and to assist with any treaty requests.
Participation in the program includes a waiver by the banks of any statute of limitation defense and other defenses. The DOJ retains sole discretion to decline to enter into a NPA or in cases of “extraordinary culpability” by a Category 2 Bank to enter into a Deferred Prosecution Agreement (DPA), or to decline to enter into a Non-Target Letter for a Category 3 or Category 4 Bank. Banks that enter the program as a Category 3 Bank and then it is found or realized that it is in fact a Category 2 bank can change to a Category 2 bank without additional penalties.
The amount of information to be provided by Category 2 banks is extensive. It includes information about all the bank’s cross-border business with U.S. taxpayers including providing names of involved individuals and detailed information about money transfer transactions including names of banks and the countries in which located.
The timeframe for compliance with the Program’s requirements is short. A letter of intent to join the program as a Category 2 Bank must be received by the DOJ, Tax Division, no later than December 31, 2013, with a commitment to be in full compliance with the Program’s requirements within 120 days after submission of the letter of intent; that is by April 30, 2014, for those banks which file on the absolute deadline of December 31, 2013. A one-time extension of 60-days may be granted upon a showing of “good cause.”
Penalties for Category 2 Banks
The potential penalties to be paid by Category 2 Banks are significant. Penalties are assessed based on the aggregate amounts held in accounts, and not on the amount of revenues earned from the accounts with the penalty percentage starting at 20% on the aggregate amount held on August 1, 2008, then increasing to 30% on the aggregate amount on accounts opened thereafter and until February 28, 2009. For accounts opened after February 28, 2009, the penalty amount jumps to 50% on the rationale that as time passed after the UBS DPA in February 2009, banks were aware that handling undeclared accounts for U.S. taxpayers was in violation of U.S. law. Even if a Swiss bank has not been involved in providing banking services to U.S. taxpayers holding undeclared accounts (Category 3 and 4 Banks) each bank must essentially prove to the DOJ that it has not done so in order to take advantage of the program’s protection from criminal prosecution.
As part of the Program the DOJ has agreed: (i) to abstain from commencing any additional criminal investigations against Swiss banks for the period August 29, 2013, through January 1, 2014; (ii) that personal data received will only be used for law enforcement in the U.S. or as otherwise permitted by U.S. law; and (iii) that the Agreement (and Program) is conditioned on the understanding that Switzerland will encourage Swiss banks to participate in the Program; and if Switzerland does not do so or should there be legal obstacles preventing Swiss banks from participating, the DOJ may terminate the Program.
The joint statement and the Program can be found here:http://www.justice.gov/iso/opa/resources/7532013829164644664074.pdf.