Undeclared accounts are the latest bane for Swiss banks, which are being pushed to the brink by U.S. authorities to release details of their U.S. accountholders who park assets there in order to avoid paying U.S. taxes. Many Swiss banks have what are referred to derogatively as, “recalcitrant accountholders.” Recalcitrant accountholders are those who, despite the bank’s prodding, refuse to report their foreign accounts to the IRS. Very simply, this group is what stands in the way of a “cooperating” bank opening up the kimono – i.e., by sending the U.S. government the records of its U.S. accountholders – and the pot of gold at the end of the rainbow: immunity from prosecution and overbearing penalties. Soon, the Foreign Account Tax Compliance Act (FATCA) will change all that. If the United States’ demands to expose tax-evaders are fulfilled, all data on these recalcitrant accounts will be within the possession of the IRS in a matter of days.
The French Connection
Among those resisting the FATCA is Micheline Fournie, a French citizen with a U.S. residency permit. Her mother was named as the beneficiary of her friend Maurice Pinot’s will, who had deposited 1 million francs in an account at Swiss Bank Corporation before he died. The bank was a predecessor to UBS AG, and when Liechtenstein’s LGT Group acquired the latter for its Swiss banking unit, they acquired Mr. Pinot’s account as well.
Ms. Fournie’s mother was entitled to receive the dividends and interest from the capital amount. After her mother died, Ms. Fournie continued to receive them. Ms. Fournie has no rights to the capital itself, which is destined for charity after her death.
Ms. Fournie, now 81 and a French citizen with a green card, is being urged by the bank to declare the account to the Internal Revenue Service (IRS). She has resisted their requests so far, requests that have come from great urgency: the U.S. is investigating all Swiss banks that are abetting citizens in evading U.S. taxes. For her part, Ms. Fournie insists that the bank should provide her with more details about Mr. Pinot’s account, which credited her U.S. account with $15,924 only in January 2008. She contends that Mr. Pinot’s account has been mismanaged and she deserves more details about the structure of the account.
United States vs. Swiss Banks
Swiss banks have historically helped clients from all over the world funnel their cash into accounts that eluded local taxing authorities. Foreign accountholders could take comfort in the fact that these accounts were kept hidden by Switzerland’s time-honored tradition of bank secrecy. By “hidden,” what I mean is that they were numbered accounts, or anonymous accounts, that could not be easily traced to their true owners.
Many of these clients were American, and the IRS was not going to take that lying down. Six years ago, the U.S. unleashed an investigation on a level that has not been seen in decades. That probe resulted in the “take down” of some wildly popular Swiss banks with storied traditions that the U.S. branded “aiders and abettors” of U.S. tax evasion. These banks suffered the worse fate of all. They became ensnared in the coils of the U.S. justice system and were prosecuted so aggressively that they were unable to live to fight another day. The tentacles of the U.S. government had pierced a hole that was so deep that it ultimately led to their demise.
This was not lost on other Swiss banks. And how could it be? With all the media coverage, they would have had to be buried deep inside a bunker not to know what was going on. Indeed, not a day went by that the media didn’t recount the salacious details of how HSBC assisted its U.S. clients in hiding their foreign accounts from the IRS. Not wanting to become the next cooked goose lying on the IRS’s table, many Swiss banks have begun waiving the white flag.
They have entered a U.S. Justice Department self-reporting program that on its face purports to offer two enticing guarantees: immunity from prosecution and from hefty penalties (both criminal and civil). But this does not come without a price. In order to qualify, Swiss banks must disclose their U.S. clients’ accounts to the IRS. And therein lies the problem. Given the choice, the vast majority of U.S. clients would prefer not to have their bank disclose their account information to the U.S. government. While the reasons for this might appear obvious, it’s worth taking the time to recount them. Consenting to the disclosure of account information that has gone unreported is the equivalent of giving the IRS the ammunition that it needs to prosecute a U.S. person for willfully failing to file a Foreign Bank Account Report (FBAR) and/or to assert onerous FBAR penalties, willful or otherwise. In the worse case scenario, it could cost the taxpayer his freedom. And in the best-case scenario, it could leave the taxpayer with nothing more than the shirt on his back.
A bank that decides to participate in the self-reporting program will automatically be thrust into the role of “enforcer,” in the sense that they must put the feet of their U.S. accountholders to the fire in order to get them to declare their foreign accounts. Otherwise, they won’t be able to live up to their end of the bargain with the U.S. government. Essentially, the bank becomes the enforcement arm of the U.S. Treasury, forced to do its “dirty work.” In exchange, the bank obtains a rather illusory guarantee of immunity from prosecution along with financial incentives.
If you’re wondering why Swiss banks don’t just automatically turn over the names and details of their U.S. accountholders to the U.S. government and why they must first go through the rigmarole of obtaining the consent of their U.S. accountholders, you’ve identified a critical issue. While Swiss bank secrecy has been mortally punctured with enough blows to render it virtually obsolete, it still presents a formidable barrier to Swiss banks reporting the accountholder information of un-consenting foreign clients to their respective taxing authorities. U.S. accountholders are no exception.
While Swiss banks are far from thrilled over the role that they have been cast in, they also recognize that it is better than the alternative: not participating in the government’s self-reporting program at all. Those banks that remain on the sidelines, choosing instead to protect their clients’ identities from U.S. authorities than to submit to the United States’ strong-armed demands, do so at their own peril. While they might be hailed as “martyrs,” the fact remains that they risk being the next cooked goose on the IRS’s table this Thanksgiving. They could become the target of a U.S. investigation that is more probing than a rectal examination, not to mention criminal prosecution and penalties that could blow the roof off of the Taj Mahal (the U.S. government calculates penalties based on the amount of undeclared U.S. money on the bank’s books).
As for U.S. accountholders with unreported Swiss accounts, they are feeling the heat too. With the threat of prosecution hanging over their heads like the Sword of Damocles, it should come as no surprise that many U.S. accountholders have come out of the shadows to voluntarily disclose their foreign accounts to the IRS.
And they have every incentive in the world to do so. Why? If the IRS discovers that a U.S. taxpayer has an unreported foreign account before he voluntarily discloses it, then it is too late for the taxpayer to participate in any of the IRS’s voluntary disclosure programs. And by voluntary disclosure programs, I am not only referring to the Offshore Voluntary Disclosure Program (OVDP) but also the streamlined procedures.
The analogy that I like to use here is that if the bloodhound has already caught the scent of the fox and is hot on his trail, then the fox is “squat.” No amount of pleading will save the fox from the sharp and carnivorous teeth of the salivating bloodhound. Similarly, the taxpayer risks a number of parade of horribles, from audit to investigation to prosecution to cataclysmic FBAR penalties.
Once again, the mass media has played its part by reporting recent cases involving U.S. citizens who were prosecuted for offshore tax evasion. Notwithstanding all of this, Milan Patel, a Zurich-based attorney, estimates that there are thousands, and possibly tens of thousands of recalcitrant accounts in Switzerland. He expressed surprise that in spite of all the pressure from the U.S. government, Americans hold unreported accounts in Switzerland.
This is wreaking havoc on Swiss banks that have signed on to the self-reporting program. Saddled with a hopeless number of U.S. accountholders who have resisted any and all attempts to disclose, these banks have resorted to such draconian measures as closing the accounts of all recalcitrant taxpayers rather than risk being unable to satisfy their end of the bargain.
While drastic times call for drastic measures, participating Swiss banks might be able to breathe a sigh of relief. Why? Tax professionals predict that the U.S. government might be willing to cut banks some slack vis-à-vis their inability to prod their recalcitrant accountholders into disclosing so long as they have at least made a good faith attempt at doing so.
However, Swiss banks should not pop open the cork on the bottle of champagne so quickly. Those that get carried away by indulging in the fantasy that if they have at least urged a U.S. accountholder to disclose but were unsuccessful, that it is no longer the bank’s problem, will be in for a rude awakening. Indeed, it is very dangerous for the bank to brazenly sit back and argue, “we did all we could do but threw in the towel when we realized that it was an exercise in futility.”
Returning to Ms. Fournie, it is not a matter of “if,” but “when” her account will come to the attention of the IRS. Why? Thanks to FATCA, Swiss banks must send data on recalcitrant accounts – including Ms. Fournie’s – to the IRS by the end of March 2015.
What does this mean for Ms. Fournie? If the U.S. government learns about her undisclosed account before she voluntarily discloses it, not only will she become ineligible to participate in any of the IRS’s voluntary disclosure programs, but she could be prosecuted criminally if the IRS is able to marshal together enough badges of fraud to establish that her failure to file an FBAR was willful.
Even if the government chooses not to prosecute Ms. Fournie, the IRS could assert onerous FBAR penalties for every year – within the statute of limitations period – that she failed to report the account. Of course, there is no statute of limitations when it comes to non-filing. Therefore, the IRS could theoretically go back to time and memorial to assert FBAR penalties. This could catapult Ms. Fournie’s FBAR penalties into the penalty stratosphere.
An ironic twist to all of this is that Liechtenstein’s LGT group, the bank holding Mr. Pinot’s account, does not participate in the U.S. Justice Department’s self-reporting program, despite the fact that its CEO is the son of Liechtenstein’s head of state.
Notwithstanding, it has made (and continues to make) covert and ominous demands to Ms. Fournie to declare the account, telling her that her continued defiance puts her at “serious risk.” U.S officials had earlier described LGT as “a willing partner” to tax evaders.
Despite its reluctance to bow under pressure and turn over the details of Ms. Fournie’s accounts, insiders believe that LGT will be able to avoid the IRS’s chopping block (i.e., the penalties borne by indicted Swiss banks).
They reason that because the bank had informed Ms. Fournie about her legal obligation to disclose her account, it is not responsible for her subsequent refusal. Ms. Fournie now finds herself between a rock and a hard place. She has to weigh the cost of making a voluntarily disclosure against doing nothing.
While doing nothing might appear to be harmless, it has risks far greater than can be imagined. If the U.S. authorities obtain Ms. Fournie’s account details before she voluntarily discloses them, she is likely to be handed a hefty fine, and may even be indicted for willfully failing to file an FBAR (Foreign Bank Account Report). She should perhaps take a page out of the playbook of those Americans who have sought to “get right” with Uncle Sam by making a streamlined submission or seeking shelter in the OVDP bunker.
While the future is uncertain for Ms. Fournie – in the same way as it was for Anakin when Obi-Wan introduced him to Yoda for the first time: “Clouded, this boy’s future is. Masked by his youth” – one thing is clear. The fact that LGT has frozen Ms. Fournie’s account, coupled with her insistence on the bank clearing their own position on Mr. Pinot’s account first, will give the U.S. all the time that it needs to conduct its own investigation of Ms. Fournie’s overseas assets.
Ms. Fournie has since moved back to France and has her son, David Fournie, at her side. David staunchly asserts that, “This is going to be the last recalcitrant account to come out of Switzerland.” From where I come from, “them’s fightin’ words!”