U.S. DOJ Offers Landmark Non-Prosecution Deal for Swiss Banks

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On August 29, 2013, the U.S. Department of Justice announced a program, supported by the Swiss government, to encourage all Swiss banks to admit their role in U.S. tax evasion in exchange for non-prosecution agreements and substantial monetary penalties. To participate, Swiss banks have to undertake internal investigations and make a complete disclosure of their cross-border activities; provide detailed information on U.S. taxpayers' accounts; and pay a penalty of 20, 30 or 50 percent of the maximum value of all non-disclosed U.S. accounts that were held by the banks, depending on when the accounts were opened. This will likely attract many Swiss banks and may be a template for future programs with other countries' banks.

Swiss banks would also have to cooperate with treaty requests for account information and provide detailed information on other banks that transferred funds into secret accounts or that accepted funds when secret accounts were closed. In addition, the banks must agree to close accounts of account holders who fail to come into compliance with U.S. reporting obligations. This program will exclude Swiss banks that are under U.S. criminal investigation for their offshore activities (so-called "Category 1" banks).

The program ratchets up the penalties for banks that allowed customers to open secret accounts after it became publicly known that the U.S. government was actively investigating offshore tax evasion in Switzerland. Under the penalty provisions of the program, banks seeking non-prosecution agreements ("Category 2" banks) must agree to a penalty in an amount equal to 20 percent of the maximum aggregate dollar value of all non-disclosed U.S. accounts that were held by the bank on August 1, 2008. The penalty amount will increase to 30 percent for secret accounts that were opened after that date but before the end of February 2009 and to 50 percent for secret accounts opened later than that. Category 2 banks will also have to undertake thorough internal investigations that are verified by an "independent examiner." The program defines an independent examiner as "a qualified independent attorney or accountant."

The program also allows banks that did not assist U.S. taxpayers in opening secret accounts to seek final resolution of their status with the U.S. government through the issuance of "non-target letters" to the banks. Most of these banks ("Category 3" banks) will be asked to provide an internal investigation report prepared by an independent examiner, as well as any additional information requested by the U.S. Department of Justice. A smaller group of banks ("Category 4" banks) will be allowed to show that they met certain criteria for deemed-compliance under the Foreign Account Tax Compliance Act (FATCA). Banks in Categories 3 and 4 will be eligible to receive non-target letters.

Category 2, 3 and 4 banks requesting non-prosecution agreements or non-target letters must do so via a letter to the U.S. Department of Justice Tax Division. The letter has to 1) include a plan for complying with the program's reporting requirements within 120 days; 2) provide the identity and qualifications of the independent examiner; 3) state that the bank will maintain all appropriate records; and 4) state that the bank agrees to waive any statute of limitations that has not yet expired.

Crucially, the 120-day clock begins to run for Category 2 banks on December 31, 2013, the due date of the letter to the Tax Division. The corresponding dates for Category 3 and 4 banks are "no earlier than July 1, 2014, and no later than October 31, 2014."

Depending on the bank's category, the program requires the bank to conduct an internal investigation of varying thoroughness. The detailed rules for the internal investigation must be approved by the Department of Justice.

An important mitigating provision applies for those financial institutions who have U.S. customers who made a voluntary disclosure through the IRS' Offshore Voluntary Disclosure Program before the request for a non-prosecution agreement is requested.

The program does not address current investigations and pending cases concerning bank employees, financial advisors and other individuals.

 

Topics:  Banks, DOJ, Foreign Banks, Non-Prosecution Agreements, Tax Evasion

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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