As the 2015 filing deadline for the Report of Foreign Banks and Financial Accounts (FBAR) inches ever closer, the Swiss are apparently trying to shed their image as jovial and happy-go-lucky chaps who never share their banking secrets with anyone, no matter how much beer they may consume. “Transparency” is the new buzzword inside Zurich bank lobbies and on reasonably secure financial websites, as Swiss banks try to deal with an unprecedented government crackdown on foreign account holders.
These banks are not motivated by an altruistic impulse to help their valued customers “do the right thing.” One Swiss private bank – BSI SA, which is nestled on the peaceful shores of Lake Lugano – recently paid a whopping $211 million in fines for issuing nameless debit cards and coding transactions. When your friendly neighborhood banker is faced with a choice between helping you shave a few thousand dollars off your tax obligation and paying record penalties that could force the institution into bankruptcy and put her on the street, who do you think is going to get thrown under the bus?
Now, the heat is really on. When announcing the BSI deal in March, federal prosecutors admitted that the crackdown had already consumed considerably more resources than they had originally anticipated. A self-imposed deadline of September 2014 has come and gone, and with the FBAR deadline at the end of June, expect the Feds to end things on a big note.
Essentially, the banks are trying to reduce any fines they face. Under the amnesty program, if banks can’t show clients paid any taxes owed, the U.S. government will assume they didn’t – and fines will be larger.
The Numbers
The program requires banks to pay 20 percent of the value of undisclosed accounts on Aug. 1, 2008, 30 percent for accounts opened between then and February 2009 and 50 percent for those opened later.
To complicate matters, client lists are confidential. No one, not even the banker, knows what’s behind Door Number One. Most account-holders are completely law-abiding, although, records indicate that over 100 convicted tax cheats have money in a Swiss bank. “Client 6”, a nickname that sounds like it came from a Ray Bradbury novel, had nearly $300 million in assets, according to a November indictment. Since banks are not necessarily aware of an account’s tax status, they must contact clients to find out.
What’s Going On?
As you probably already know, Switzerland has some of the strongest financial privacy laws in the world. But ink on paper is not enough to keep bankers from strong-arming their customers, as they attempt to avoid the U.S. government’s unflinching eyes.
According to Thierry Boitelle, a lawyer with Bonnard Lawson in Geneva, financial institutions are using a variety of tactics. Some banks are withholding funds, and essentially escrowing them against a future imposition of penalties. So far, about 100 Swiss banks are pressuring U.S. accountholders to disclose any hidden assets. In some cases, banks are blocking up to 35 percent of their customers’ funds. The Swiss banking ombudsman admitted that a “handful” of assets had been frozen, and the banks have rather meekly pointed to confusion over the use of wire transfers.
Other customers may be cajoled into signing a “waiver of professional secrecy,” like this one from Royal Bank of Canada Suisse. Whether or not these CYA letters would deter a federal prosecutor remains to be seen. Still other banks are threatening to name names, but due to the privacy laws, such saber-rattling may largely be an empty threat. Finally, banks are offering money to the holdouts. Some institutions may offer thousands of dollars to help cover their customers’ legal fees, if they only sign the forms.
All these tactics are generating a lot of pushback, because these customers are not easily intimidated. In most cases, they knew the risks and paid a premium for banking privacy, and they do not appreciate being treated like wayward children who roamed into a busy intersection. Even worse, most of the targeted people have done nothing wrong. It’s guilty until proven innocent – banks are asking most account-holders to prove that they do not owe taxes before bank execs no longer tighten the screws.
So, according to one lawyer, people are saying, “I’m finished with this bank. I’m right with my government, I don’t care what happens to the bank. Go jump in the lake and don’t call me again.”
Why It Matters
It could be the end of the world as we know it, at least as far as bank privacy laws are concerned.
The U.S. assault on offshore tax evasion has dealt a heavy blow to the bank secrecy that has helped Switzerland become the world’s largest center for offshore deposits. The country manages about $2.3 trillion for clients who don’t reside there, according to estimates from the Boston Consulting Group. As they prepare to reach a settlement, some banks are pressing American clients to forgo their rights to secrecy under Swiss law.
As mentioned, Swiss law bars banks from revealing client names without their consent. While U.S. authorities can request names through a tax treaty with Switzerland, the Swiss government is obliged to comply only with very targeted requests under terms agreed on by the two governments. The Justice Department is glad to lend a helping hand, as its program helps the U.S. gather more information to make such demands from the Swiss authorities.
There’s a very good chance that, even as we speak, meetings are convening and numbers are being crunched. Swiss bankers have made an awful lot of money handling foreign accounts. However, at some point, someone may decide that the influx of fees isn’t worth it, if the Service is going to be breathing down their necks like a fire-breathing dragon.
More settlements may be forthcoming in the next month or so, according to Tomasz Grzelak, analyst at MainFirst Bank AG in Zurich. “They’re ready to sign an agreement so the final big issue is tackling the size of the fine,” added Milan Patel, a lawyer with Anaford AG in Zurich.
How to Respond
The foreign account crackdown is a microcosm for what’s going on in many other agencies. Last year, partially due to the government shutdown, prosecutions and collections were down almost across the board, and the Feds are determined to make up the difference in this year. If you’ve been living comfortably in the shadows for the last few years, things may very well be changing.
Swiss bankers are scared. They know that the $211 million that BIS shelled out is small potatoes compared to the fines the big banks may face. When people are scared, they make poor decisions and sometimes act irrationally. So, don’t expect foreign bankers to do any favors for their American customers in the next few months, if they even pick up the receiver when their phones ring.
One of the reasons I post these blogs is so that you will be informed about what’s going on in the worlds of international personal finance and complex income tax. I don’t want you to be surprised. Hopefully, instead of hitting the panic button when you’re asked to sign a statement or when you notice some unusual activity on your account, you’ll have the tools you need to deal with the situation.
Just a reminder that my door is always open – metaphorically speaking – and that consultations are always completely confidential and totally free. Connect with me on TaxConnections.
Original Post By: Michael DeBlis
1 comment on “Cliffhanger”
Bank transparency is great! When’s the US going to join in? (I’m thinking FATCA reciprocity, a commitment to the OECD “GATCA” by the US).
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