U.S. Department of Justice Awaits Swiss Banks’ Voluntary Disclosure of Banking Activities

The U.S. Department of Justice (“DOJ”) established a Program for Non-Prosecution Agreements or Non-Target Letters for Swiss Banks (the “Program”) on August 29, 2013. The Program is intended to facilitate a resolution with the approximately one hundred Swiss Banks not already under investigation in connection with the DOJ’s ongoing probe of the use of foreign bank accounts to commit tax evasion from August 2008 forward (the “Applicable Period”). The DOJ and Swiss authorities are cooperating, having jointly announced the Program, and in that announcement noting that Switzerland “intends to draw the attention of the Swiss Banks to the terms of the Program and encourages them to consider participating therein,” with the DOJ further warning of “significant risks for individuals and banks that continue to fail to cooperate.”

The Program identifies four categories of Swiss Banks, and permits three of the four categories to participate in the Program. Category 1 Banks, those which are already subject to DOJ investigation, are ineligible. Swiss Banks may self-identify as a Category 2, Category 3, or Category 4 Bank, but the DOJ requires that a bank’s categorization ultimately be verified by a qualified independent attorney or accountant (an “Independent Examiner”). While specific approval of the Independent Examiner is not required, the DOJ reserves the right object to a particular attorney or accountant (although the Program states that the DOJ will not act unreasonably in this regard).

Bank Categories

The categories of Banks are summarized as follows: 

  • A Category 1 Bank is one that is currently under investigation by the DOJ (based on prior statements, there are at least 14 financial institutions in this category).
  • A Category 2 Bank is one “that has reason to believe it may have committed tax-related offenses . . . or monetary transactions offenses” under certain provisions of U.S. law (the “Tax Offenses”) and is seeking a Non-Prosecution Agreement (“NPA”) from the DOJ.
  • A Category 3 Bank is one that does not have reason to believe it may have committed any Tax Offenses and is seeking a Non-Target Letter (“NTL”) from the DOJ.
  • A Category 4 Bank is seeking an NTL due to its qualification as a financial institution which, among other things, has a client base comprised almost exclusively of residents of Switzerland.

Benefits and Costs of a Non-Prosecution Agreement

A Category 2 Bank that executes an NPA and meets all of the obligations of the NPA will not be prosecuted by the DOJ for any of the Tax Offenses which occurred during the Applicable Period. However, if facts are later discovered by the DOJ which contradict the conclusions of the NPA, the United States may pursue any and all legal remedies available to it against the Swiss Bank (with the Swiss Bank agreeing to prosecution for any offenses for which the statute of limitations had not expired as of August 29, 2013).

A Swiss Bank that executes an NPA must agree to pay as a penalty an amount determined by reference to the maximum aggregate dollar value of its “U.S. Related Accounts” (which, generally, includes accounts beneficially held by U.S. persons that exceeded $50,000). The penalty is equal to the sum of (A) for all such accounts that existed on August 1, 2008, 20% of the maximum aggregate dollar value of those accounts during the Applicable Period, plus (B) 30% of the maximum aggregate dollar value of all such accounts opened between August 1, 2008 and February 28, 2009, plus (C) 50% of the maximum aggregate dollar value of all such accounts opened after February 28, 2009. The maximum dollar values used for determining this penalty may be reduced to exclude accounts that if their existence was declared or disclosed to the IRS.

The DOJ retains the right to require a Swiss Bank seeking an NPA to enter into a Deferred Prosecution Agreement (DPA) instead of an NPA.

Benefits and Costs of a Non-Target Letter

A Swiss Bank that successfully requests an NTL will receive a letter from the DOJ stating that, as of the date of the NTL and based on the facts at that time, the bank is “not the target of a criminal investigation” related to the Tax Offenses. In contrast to an NPA, and because it confirms that there has been no wrongdoing, there is no penalty associated with obtaining an NTL. However, if facts are later discovered by the DOJ which contradict the conclusions of the NTL, the United States may pursue any and all legal remedies available to it against the Swiss Bank (with the Swiss Bank agreeing to prosecution for any offenses for which the statute of limitations had not expired as of August 29, 2013).

Requirements of a Request for a Non-Prosecution Agreement or Non-Target Letter

Category 2 Banks are required to request an NPA on or before December 31, 2013, while Category 3 Banks and Category 4 Banks may request an NTL Letter between July 1, 2014 and October 31, 2014.

A request for an NPA must include a plan for complying with the requirements of an NPA (described below) within a reasonable time, but not to exceed 120 days from the date of the letter of intent (subject to a potential 60 day extension). In addition it must provide the identity and qualifications of the Independent Examiner, state that the Swiss Bank will maintain all records required for compliance with the terms of an NPA, including all records that may be sought by treaty requests; and state that the Swiss Bank agrees that with respect to any applicable statute of limitations that has not expired as of August 29, 2013, the Bank waives any potential defense based on the statute of limitations for the period from August 29, 2013 to the issuance of an NPA or a DPA.

A request for an NTL (as a Category 3 Bank or Category 4 Bank) must include a plan for complying with the requirements of an NTL (described below) within a reasonable time, but not to exceed 120 days from the date of the letter of intent. In addition it must provide the identity and qualifications of the Independent Examiner, state that the Swiss Bank will maintain all records required for compliance with the terms of an NTL; and state that the Swiss Bank agrees that with respect to any applicable statute of limitations that has not expired as of August 29, 2013, the Swiss Bank waives any potential defense based on the statute of limitations for the period from August 29, 2013 to the issuance of an NTL.

Conditions to receiving a Non-Prosecution Agreement 

A Category 2 Bank requesting an NPA must cooperate in the disclosure of certain evidence and information and have that information verified by an Independent Examiner. That evidence and information includes: 

  • prior to executing the NPA, an in-person presentation and documentation conveying information as to how the bank’s cross-border business was structured, operated, supervised, and marketed to U.S. account holders, along with the names and functions of those individuals who managed and service U.S. Related Accounts;
  • prior to executing the NPA, the total number of U.S. Related Accounts and the maximum dollar value, in the aggregate, of the U.S. Related Accounts in existence on August 1, 2008, opened between August 1, 2008 and February 28, 2009, and opened after February 28, 2009; and
  • upon execution of the NPA, the total number of U.S. Related Accounts that were closed during the Applicable Period, and for each account (1) the maximum value during the Applicable Period, (2) the number of U.S. persons or entities affiliated (or potentially affiliated) with each account and the nature of such affiliation, (3) whether the account was held in the name of an individual or an entity, (4) whether it held U.S. securities, (5) the name and function of any relationship manager, client advisor, asset manager, financial advisor, trustee, fiduciary, nominee, attorney, accountant, or other similar person known to the bank to be affiliated with the account, and (6) information related to fund transfers into and out of the account.

While the bank will not be required to provide specific account information (e.g., accountholder names and addresses) to the DOJ, the bank must agree to cooperate with the United States in its investigations. This cooperation includes: 

  • providing information for the DOJ to draft treaty request to seek account information, and collecting and maintaining all records that are potentially responsive to those requests;
  • retaining all records relating to its U.S. cross-border business, for a period of 10 years;
  • providing, upon request, testimony or information as needed to enable the United States to use the information obtained through the Program or a treaty request in a future proceeding, and assistance in identification and transaction of significant documents at the expense of the bank;
  • closing any and all accounts of recalcitrant account holders, and implementing procedures to prevent further concealment of those accounts in connection with closing the account or transferring any funds; and
  • only opening U.S. accounts on conditions that ensure the account will be declared to the United States and will be subject to disclosure by the Swiss Bank.

Conditions to Receiving a Non-Target Letter

A Swiss Bank requesting an NTL as a Category 3 Bank must engage an Independent Examiner to conduct an independent internal investigation, and the bank and the Independent Examiner must:

  • verify the percent of the Swiss Bank’s account holdings and assets under management that are U.S. Related Accounts;
  • verify that the bank has an effective compliance program, and provide a description of that program; and
  • provide a report that includes a list of witnesses interviewed by the Independent Examiner and a summary of the information provided by each witness, identification of the files reviewed by the Independent Examiner and the factual findings and conclusions of the Independent Examiner.

The Category 3 Bank does not have the same level of information reporting requirements as a Category 2 Bank requesting an NPA, but the bank must still agree to:

  • maintain all notes, drafts correspondence, etc. created by, prepared by, reviewed by or provided to the Independent Examiner for a period of 10 years;
  • close any and all accounts of recalcitrant account holders, and to implement procedures to prevent further concealment of those accounts in connection with closing the account or transferring any funds; and
  • only open U.S. accounts on conditions that ensure the account will be declared to the United States and will be subject to disclosure by the Swiss Bank.

A bank requesting an NTL as a Category 4 Bank must also engage an Independent Examiner for the purpose of verifying that it has met the requirements to be a Category 4 Bank described above. The bank must also agree to maintain records sufficient to establish the basis for verification of its status for a period of 10 years.

Questions Remain

The announcement of the Program has piqued the interest of the Swiss banking community as well as the U.S. and Swiss press. The Program raises many questions, and there is the hope that the DOJ will release additional guidance to assist with Program. In particular, 

  • What are the criteria that the DOJ is looking for in an Independent Examiner? What type of accountant or attorney would the DOJ object to?
  • Under what circumstances would the DOJ allow a bank applying for an NPA as a Category 2 Bank to shift its position to apply for an NTL?
  • What will the DOJ require of a Category 2 Bank in order to exclude the value of its compliant U.S. Related Accounts to reduce the required penalty payment?
  • What is the likelihood of investigation of a bank that does not submit a request under the Program, or one that submits a request but ultimately withdraws that request?

The determination of whether a Swiss Bank is able to obtain an NPA or an NTL under the Program is a difficult one, and the decision to participate in the program is a decision that should not be made lightly. Dechert tax and internal investigation lawyers can work with banks to examine these questions under the Program and help to determine the correct approach. Clients regularly count on our lawyers for skillful representation in all aspects of contested tax matters, including investigations, and we have an impressive track record of resolving these difficult and sensitive matters discreetly and favorably without prosecution.

Topics:  Banks, DOJ, EU, Foreign Bank Accounts, Non-Prosecution Agreements, Non-Target Letters, Tax Evasion, Voluntary Disclosure

Published In: Criminal Law Updates, Finance & Banking Updates, International Trade Updates, Tax Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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