Kathryn Keneally, assistant attorney general in the tax division at the US Department of Justice (DOJ) stated just a few days ago that 106 Swiss banks have already signed on to the Swiss-DOJ non-prosecution program (Program) announced at the end of August 2013. The Program is designed to encourage all Swiss banks to come forward and admit the role they played in assisting US persons to evade tax. Participating banks that meet all of the demands made by DOJ are eligible for non-prosecution agreements (employees and agents of the banks are not protected). Any Swiss bank that was already a target of US criminal investigation could not apply – 14 Swiss banks are ineligible under this provision.
The number of banks signing on to the Program (approximately one-third, as it was offered to about 300 Swiss banks) indicates clearly that the US has been very successful in getting Swiss banks to fully cooperate with its demands. The Swiss government acted as an ally and strongly encouraged its financial institutions to sign up. It is possible that the herd mentality is also playing a part here.
Swiss Bank Amnesty (of Sorts)
In order to participate, the Swiss banks are required to carry out arduous internal investigations to find “US related accounts”. They must appoint an independent examiner to review the due diligence they have undertaken. They must make a complete disclosure about the bank’s cross-border activities; provide detailed information on all US related accounts that existed on August 1 2008; and pay a penalty of 20, 30 or 50 percent of the maximum value of all non-disclosed US accounts that were held by the bank. The applicable penalty percentage depends on the date the accounts were opened with the bank with the penalty increasing after news became public that the US government was investigating Swiss banks for offshore tax evasion.
A 20 percent penalty is imposed on the maximum aggregate dollar value of all undisclosed US accounts that existed at the bank on August 1, 2008. The penalty increases to 30 percent for undisclosed accounts that were opened after August 1 2008, but on or before February 28, 2009 and jumps to 50 percent for undisclosed accounts opened after February 28,2009.
Ms. Keneally noted that every new bank joining the non-prosecution Program is a new source of information that can lead the IRS to discover more and more unreported offshore accounts. The information that is especially valuable involves accounts that were closed out since the banks participating in the Program must reveal where the money went, whether to other Swiss banks or banks elsewhere around the world.
The Swiss Banker’s Association leveled criticism at the Program focusing on the astronomical cost to the banks to meet the demands and the ambiguity with respect to certain questions, such as who qualifies as a US client and what assets are considered undisclosed. The answers to these questions directly relate to how much a bank will ultimately pay in penalties.
Swiss Banks Do NOT Automatically Release Names of Account Holders Under the Program
Much confusion apparently surrounds the program. I have seen blog posts and tax articles stating that the terms of entry into the Program require the bank to reveal the names of US taxpayers who had or have accounts at the bank. This is simply not true. A participating Swiss bank must carry out internal investigations to find any “US related accounts”. What does this mean, and once the bank finds such an account, what must be done about it?
Generally, a US-related account means an account which exceeded $50,000 in value at any time since August 1 2008 as measured by the account balance on the last day of each month, and as to which “indicia exist” (unsurprisingly, this is not defined) that a US person or entity “has” or “had” a financial or beneficial interest in, ownership of, or signature authority (whether direct or indirect) or other authority (including authority to withdraw funds; to make investment decisions; to receive account statements, trade confirmations, or other account information; or to receive advice or solicitations) over the account.
Once a US related account is found, there is a presumption that all funds in the “US related” account are undeclared . This means that the value of the account must be included in the bank’s penalty base, UNLESS the bank can prove otherwise. Generally, in order to be eligible to exclude the value of the account from the penalty base, the bank must be able to demonstrate to the Tax Division of DOJ one of various possibilities – including that the account was not “undeclared”.
What does this mean? There is no clear answer to my knowledge, but what we are seeing is that if a taxpayer has signed a W-9 for the bank certifying that he is a US person this is helpful; if the taxpayer shows that the account was reported on his filed tax returns (look at Schedule B) – this may generally be sufficient. FBARs alone might not be sufficient since these are not sent to the IRS, but rather to the Department of the Treasury. The issue is gray and murky since it has not yet been put to the test. The banks must eventually present evidence to the US authorities to show the account was not an “undeclared account”, and therefore that the bank owes no penalty with regard to that account. At this point, no one knows definitively what is required to prove the account is not “undeclared”. Other possible methods exist for the bank to exclude the value of an account from the penalty base : showing that the bank disclosed the account to the IRS, or that the account was disclosed in an IRS Offshore Voluntary Disclosure Program.
Treaty Requests for Names of Account Holders
Participating Swiss banks must cooperate with Treaty requests for account information; provide details about any other banks that transferred funds into undisclosed accounts or that accepted funds when such accounts were closed out. Furthermore, participating banks must agree to shut down the accounts of any “recalcitrant” US account holders. Generally, these are account holders who do not comply with US reporting obligations disclosing their US status to the bank, or those who refuse to sign a waiver of rights under Swiss banking secrecy laws.
Names of account holders are not turned over under the Program unless, pursuant to the US-Switzerland Income Tax Treaty request procedure it is determined by a Swiss court that the provisions of Article 26 of the Treaty are satisfied. Article 26 of the US–Switzerland tax treaty allows the two countries to exchange information “as is necessary … for the prevention of tax fraud or the like.” The protocol to the treaty defines tax fraud as “fraudulent conduct that causes or is intended to cause an illegal and substantial reduction in the amount of tax paid” to one of the countries. Any type of fraudulent conduct requires a showing of “intent”, and “intent” is not so easy to prove.
Full details can be found in the Swiss-DOJ signed Agreement.
What Does this Mean if You Have Undisclosed Offshore Accounts?
I believe this Program will serve as a template for banks in many other countries. If you had an undisclosed offshore account in existence on August 1, 2008 you should seek appropriate legal advice. Simply closing out the account won’t help and in fact, can serve as evidence against you – perhaps indicating you had some kind of “intent”, for example, to evade tax. Depending on the facts of your case, there may be various options available for you to remedy a tax problem involving an offshore account that has not been disclosed. Get the right advice and be mindful that no attorney-client privilege exists for information revealed to an advisor who is not acting as your attorney – so, telling your accountant or financial advisor your problem may only make it worse.