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Michael Parets and David Adler work for Withers LLP in Switzerland.
The recently announced “Program for Non-Prosecution Agreements or Non-Target Letters for Swiss Banks” or “the Programme” was launched to finally settle the ongoing dispute between the United States and Switzerland over the criminal investigation of Swiss banks in connection with alleged tax evasion of US taxpayers with Swiss accounts. This article examines the Programme, its applicability and implications.
For more than five years now, the United States government has been engaged in aggressive enforcement efforts against the Swiss banking industry in pursuit of undisclosed Swiss accounts of US taxpayers. We have witnessed criminal investigations and indictments of Swiss banks, account holders, bankers, lawyers and other advisors, as well as the closure of banks in Switzerland as a direct or indirect result of these and other efforts by the US government to clamp down on undisclosed offshore accounts of US taxpayers.
In March 2010, the United States passed a legislation introducing the Foreign Account Tax Compliance Act (“FATCA”), which comes into effect next year. What FATCA attempts to do is provide a mechanism that “encourages” non-US financial institutions to conduct due diligence procedures and submit to reporting obligations that effectively prevent such institutions from engaging in activities that might be treated as aiding individuals in US tax evasion. FATCA deals with cleansing the future.
On August 29, 2013, the United States and Switzerland issued a joint statement introducing a means to cleanse the past--a programme that essentially amounts to a voluntary disclosure programme for Swiss banks (Programme for Non-Prosecution Agreements or Non-Target Letters for Swiss Banks or, hereafter, the “Programme”).
In concept and function, the Programme very much resembles the Offshore Voluntary Disclosure Program (“OVDP”) offered to US taxpayers with undisclosed offshore accounts. The Offshore Voluntary Disclosure Programme was a great success for the US government in many ways. Not only did it bring in additional revenue in the form of previously unpaid taxes and penalties. It yielded a treasure trove of information for the US government to further fuel its investigations into the activities of financial institutions and individual advisors who may have assisted US taxpayers conceal undisclosed accounts. The Programme is likely to yield similar results. It will have serious implications for banks within Switzerland, but it will also have an impact on financial institutions beyond the Swiss borders, on US taxpayers who have yet to declare offshore accounts held by a participating bank during the Programme's applicable period and on bank employees, lawyers and other advisors who may be found culpable of aiding such US taxpayers in evading their US tax and reporting obligations.
The Programme is exclusively open to “Swiss Financial Institutions” that meet the definition of a “Custodial Institution” or a “Depository Institution,” as defined in the Agreement between the United States and Switzerland for the Cooperation to Facilitate the Implementation of FATCA signed on February 14, 2013 (the “Swiss IGA”). It is not open to individuals or to Swiss banks that are under a formal investigation authorised by the Tax Division of the US Department of Justice (the “Tax Division”) as of the date of the announcement of the Programme. These banks are referred to as “Category 1 Banks”. All Category 1 Banks should know their status at this point, as the Department of Justice was to notify all such banks of the existence of a criminal investigation by certified mail contemporaneously with the announcement of the Programme, to the extent that such banks had not already received notice of the same by the time the Programme was announced. Swiss banks that are eligible to participate in the Programme may fall into one of three other categories.
A Category 2 bank is one that has reason to believe a violation under US law has occurred with respect to its activities during the period of August 1, 2008 through August 29, 2013 (specifically, tax-related offences under Titles 18 or 26 of the United States Code, or monetary transaction offences under Sections 5314 or 5322 of Title 31 of the United States Code, hereinafter, an “Offence”) and that seeks a non-prosecution agreement in connection with the same. Category 2 banks have until December 31, 2013 to provide a letter of intent to the Tax Division setting forth, among other items, the bank's plan to comply with the requirements of the non-prosecution agreement within 120 days thereafter.
As a preliminary matter (prior to entry into force of the non-prosecution agreement), a Category 2 Bank would have to provide:
• information as to how the cross-border business for US accounts was conducted;
• the names and positions of the individuals who conducted such cross-border business for US accounts;
• an in-person presentation of and supporting documentation for the foregoing items; and
• pooled information on the US accounts (total number of accounts and aggregate value as existed (i) on August 1, 2008, (ii) that were opened after August 1, 2008 but before February 28, 2009; and (iii) that were opened after February 28, 2009).
To the extent any applicable statute of limitations has not expired as of August 29, 2013, a Category 2 bank would have to waive any statute of limitations defence for the pendency of its application for a non-prosecution agreement.
Assuming the admittance of a Category 2 Bank to the Programme, upon the execution of the non-prosecution agreement, a Category 2 Bank must provide further information regarding the US accounts, including:
• the maximum value of each account during each of the three aforementioned periods;
• the number of US persons interested in each such account and the nature of the interest (e.g., signature authority, beneficial interest, etc.);
• whether the account was an individual or an entity account;
• whether any US securities were held in the account;
• the name and function of any professional advisor related to the account (e.g., a relationship manager, client advisor, asset manager, attorney, or accountant);
• information regarding account transactions on a monthly basis (e.g. whether funds were withdrawn in cash, the identity of any intermediaries, and the identity of any destination financial institutions as well as the countries where funds were received from or sent to the US account.
This information will have to be verified by an “Independent Examiner”--a qualified independent accountant or lawyer--at the expense of the Category 2 bank. There are additional record keeping and further assurance-type obligations that will be a part of any non-prosecution agreement. For instance, a Category 2 bank is be obliged to provide witness testimony in civil and criminal proceedings, as well as to identify and translate documents, as needed, at the bank's expense. Any “recalcitrant” accounts (accounts the owners of which do not provide appropriate documentation to prove their US or non-US status) would have to be closed, and any new US accounts would have to be reported to the US.
The Category 2 bank would then pay a penalty determined by reference to the value of the US accounts existing during the applicable time periods: 20 per cent of the aggregate value of the US accounts as existed on August 1, 2008; 30 per cent for the accounts that were opened after August 1, 2008 but before February 28, 2009, and 50 per cent for the accounts that were opened after February 28, 2009. While the account values may be diminished if it can be shown that the accounts have otherwise been declared through an offshore voluntary disclosure programme or initiative introduced by the Internal Revenue Service, the Category 2 bank would have to demonstrate that it notified the account holders of the existence of such programme. The intention appears to be to allow penalty reductions only to the extent to which the bank can demonstrate that it encouraged the non-compliant US account holders to regularise their US tax affairs through the current OVDP or predecessor programmes. It is unclear whether penalties would be reduced for accounts where an account holder has regularised through the new “Streamlined” procedure introduced by the IRS in September 2012. But it seems clear that penalties would not be reduced for accounts regularised by way of the so-called “quiet” method (i.e., by filing amended or delinquent returns outside of an IRS disclosure programme).
In contrast to Category 2 banks, Category 3 and Category 4 banks may seek a “non-target letter,” which is simply a letter from the Tax Division stating that the applicant bank is not presently the target of a criminal investigation for tax or financial reporting offences.
A Category 3 bank is a bank that has not committed an Offence and is not a Category 1 bank or a Category 4 bank. A Category 3 bank requesting a non-target letter must engage an Independent Examiner to verify the extent of the bank's US accounts and to verify that the bank has an effective compliance programme and provide the Tax Division with a report that includes a list of witnesses interviewed by the Independent Examiner, identification of files reviewed, and its factual findings and conclusions.
Interestingly, a Category 3 bank may only apply for a non-target letter between July 1, 2014 and October 31, 2014. As we previously noted, the deadline for filing a letter of intent to request a non-prosecution agreement is December 31, 2013. As a result, banks that mistakenly believe prior to the Category 3 deadline that they would qualify as a Category 3 bank and later find that Offences may have been committed may be left ineligible for a non-prosecution agreement and potentially exposed to criminal prosecution.
A Category 4 bank, on the other hand, need not certify in its application for a non-target letter that no Offence exists, but the class of banks eligible for Category 4 is limited to “Deemed Compliant Financial Institutions” which have such status as a “Financial Institution with a Local Client Base” as defined under the Swiss IGA. Among other criteria, these are banks that do not have a fixed place of business outside Switzerland, that do not solicit business outside Switzerland, 98 per cent (by value) of the accounts of which are held by Swiss or EU residents, and that, effective as of January 1, 2014, do not provide accounts to US persons not resident in Switzerland (but that, nonetheless, do not discriminate against opening or maintaining accounts for US persons resident in Switzerland).
There is no question that the deal reached by the US and Swiss governments that resulted in this Programme will have a deeply-resonating impact on the Swiss private banking industry and its traditions. Perhaps less obvious are its far-reaching implications.
The Programme provides no protection for individuals. Among the information that must be provided by a participating bank are “the name and function of any individuals who structured, operated, or supervised the cross-border business” for US accounts and, casting an even broader net, the name of any relationship manager, financial adviser, attorney, accountant, or similar adviser known by the bank to be “affiliated” with the account. Individuals within and outside the borders of Switzerland who may be viewed as having assisted US taxpayers conceal previously undisclosed accounts disclosed under this Programme run the risk of investigation by US authorities.
Also, the Programme essentially serves as a fishing expedition for information on other financial institutions, including those beyond the borders of Switzerland that may have actively solicited and knowingly serviced undisclosed accounts of US taxpayers. Participating banks are required to provide the names and locations of financial institutions that transferred funds into or received funds from the account being disclosed under the Programme. Moreover, if the Programme is successful, it could encourage the US to seek similar arrangements with other jurisdictions.
Finally, US taxpayers who continue to hold undisclosed accounts in Switzerland, or who held undisclosed accounts in Switzerland but transferred them out and continue to conceal their existence, are running a serious risk. They urgently need to come forward on a voluntary basis. Under the Programme, participating Swiss banks will be required to provide detailed account information, including account values, trust or entity structures connected with the account, and information concerning the transfer of funds into and out of the account. The participating bank must provide all information, other than the identity of the US taxpayer, necessary for the US authorities to prepare an adequate request under the terms of the US-Swiss tax treaty to obtain the identity of the account holder.
As is well known at this point, the various voluntary disclosure initiatives to date for non-compliant US taxpayers with offshore accounts have brought in additional revenue in the form of previously unpaid taxes and penalties, as well as yielding a tremendous amount of information for the US government for further investigations into the activities of financial institutions and individual advisers who may have assisted US taxpayers conceal undisclosed accounts. One should expect the Programme to yield similar results by providing US authorities with a bounty of information concerning additional US taxpayers with previously undisclosed accounts, as well as information on financial institutions and individuals who may have assisted US taxpayers conceal those accounts.
Michael Parets is Partner at Withers LLP in Zurich and he may be contacted by email at firstname.lastname@example.org or by telephone at +41 0 44 488 88 03.
David Adler is Associate at Withers LLP in Geneva and he may be contacted by email at email@example.com or by telephone at +44 0 22 593 77 03.
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