Neutrality is Switzerland’s unwritten motto. This devotion to conflict avoidance kept the Swiss out of two World Wars. The Swiss are known for their diplomacy, hospitality, and the ability to keep a secret. So, it came as a shock when 73 Swiss banks joined ranks to inform the U.S. Department of Justice and the IRS, politely but firmly, that they would not be signing a proposed amnesty deal under FATCA.
The Basic Facts of FATCA
In March of 2010, the Department of Justice and the IRS were given a new enforcement weapon. The Foreign Account Tax Compliance Act (FATCA) has three primary objectives regarding foreign financial institutions:
1. It requires foreign financial institutions to enter into an agreement with the IRS to identify their U.S. personal account holders.
2. It also allows the DOJ to pursue Intergovernmental Agreements with other countries to ensure the requirements of FATCA are followed by foreign financial institutions.
3. Non-compliant foreign financial institutions face a mandatory 30% withholding on payments from U.S.-based financial institutions.
The Back Story
After the passage of FATCA, the Departments of Treasury and Justice wasted no time in testing the range of their new powers. No one needed to be clairvoyant to know Switzerland would be the first target.
You didn’t need a crystal ball to know UBS would be the bank the DOJ would take down first. UBS was forced to turn over the names and information of 4,000 U.S. taxpayers. In order to settle a corporate criminal action for failure to comply, UBS paid a $780 million dollar fine. Many Swiss institutions got the point and came into compliance.
Some traditions, like the secrecy surrounding Swiss banking, die hard. To prove its power to bankers who didn’t comply after UBS, the DOJ next put the full-court press on Switzerland’s oldest bank: Wegelin & Co. It’s not clear whether the DOJ was attempting to wound Wegelin, or if they were going for the kill. The shot proved fatal. Wegelin paid $74 million in fines, restitution and forfeitures, and ceased to do business to avoid criminal liability.
In August of 2013, to avoid further prosecutions, Switzerland signed an agreement in exchange for non-prosecution agreements (NPAs) for banks that have facilitated American tax evasion. In December, 100 Swiss banks joined in the proposed amnesty deal with the DOJ.
The Swiss Grow a Backbone
In September, the DOJ released the terms of the amnesty agreement to the Swiss banks. Seventy-three banks responded in a joint letter saying they would not sign the NPA as proposed.
It appears that the DOJ may have attempted to slide a couple of extra provisions into the non-prosecution agreement, including:
• Cooperate fully with the DOJ, the IRS, and any other domestic or foreign law enforcement agency designated by the DOJ regarding all matters related to the NPA.
• Assist the DOJ or any designated domestic or foreign law enforcement agency in any investigation, prosecution, or civil proceeding arising from or related to the NPA.
• Provide testimony as needed to enable the U.S. to use the information and evidence provided by the bank under the NPA.
• Provide the DOJ all requested information, documents, records, or other tangible evidence, not protected by legal privilege, regarding the covered conduct.
• To retain all records relating to its U.S. cross-border business for a period of 10 years from the NPA’s termination date.
• The agreement also describes the circumstances under which the DOJ may determine that a bank has violated the NPA and may be prosecuted.
The Banks’ objections are fairly simple:
1. Since when does the United States Department of Justice have the authority to make a foreign institution cooperate in investigations by other foreign governments?
2. The fact that the NPA contains language basically saying the DOJ reserves the right to change its mind and prosecute anyway. So, is that really a non-prosecution agreement or a license for a fishing expedition that may lead to prosecution anyway?
Stay tuned. This is going to get interesting.
Original Post By: Michael DeBlis