Law360 - April 23, 2015

On March 30, 2015, the U.S. Department of Justice announced that it had entered into a nonprosecution agreement with BSI SA, the first Swiss bank to reach resolution with the U.S. government as to its potential criminal exposure for assisting its U.S. clients in engaging in tax evasion.^[1] As part of its agreement, the nearly 150-year-old bank disclosed that for decades it aided and assisted its U.S. clientele in opening and maintaining undeclared accounts, and concealing the assets and income they held in those accounts.

In agreeing to a nonprosecution agreement, the Justice Department acknowledged that BSI had made a timely, voluntary and thorough disclosure of its illegal conduct; fully cooperated with the Justice Department, including by conducting an internal investigation and presenting the findings of its investigation to the government; and produced voluminous, detailed information about the U.S. accounts maintained at BSI, including the fact that the bank managed approximately 3,500 U.S. accounts, valued at approximately $2.8 billion, since August 2008.

The BSI nonprosecution agreement demonstrates the extraordinary level of disclosure and cooperation that Swiss banks are required to undertake in order to qualify for such a resolution, and provides a detailed road map for other Swiss banks seeking similar treatment.

The Swiss Bank Program

Announced on Aug. 29, 2013, the so-called “Swiss Bank Program” affords banks in Switzerland a path to resolve their potential criminal liabilities in the United States.^[2] Banks eligible to enter the program were required to advise the Justice Department by Dec. 31, 2013, that they had reason to believe that they had committed tax-related criminal offenses in connection with undeclared U.S. accounts. Banks already under criminal investigation related to their Swiss banking activities and all individuals were expressly excluded from the program.

Under the program, banks are required to:

• make a complete disclosure of their cross-border activities;
• provide detailed information on an account-by-account basis for accounts in which U.S. taxpayers have a direct or indirect interest;
• cooperate in treaty requests for account information;
• provide detailed information as to other banks that transferred funds into secret accounts or that accepted funds when secret accounts were closed;
• agree to close accounts of account holders who fail to come into compliance with U.S. reporting obligations; and
• pay penalties calculated at 20 percent of the value of undeclared accounts on Aug. 1, 2008; 30 percent for accounts opened between Aug. 1, 2008, and February 2009; and 50 percent for accounts opened after February 2009.

Banks meeting all of the above requirements are eligible for a nonprosecution agreement. Following the Dec. 31, 2014, deadline for entering the program, it was reported publicly that at least 106 Swiss banks had submitted letters of intent to enter the program.

The BSI Nonprosecution Agreement

Pursuant to the terms of the nonprosecution agreement, the Justice Department agreed not to prosecute BSI for any tax-related offenses or monetary transaction offenses. In return, BSI agreed to cooperate in any related criminal or civil proceedings, demonstrate its implementation of controls to stop misconduct involving undeclared U.S. accounts and pay a $211 million penalty.

According to the nonprosecution agreement, BSI helped its U.S. clients create sham corporations and trusts that masked the true identity of its U.S. account holders. Many of its U.S. clients also opened “numbered” Swiss bank accounts that shielded their identities, even from employees within the Swiss bank. BSI acknowledged that in order to help keep identities secret, it issued credit or debit cards to many U.S. account holders without names visible on the card itself.

BSI also assisted its U.S. clients in repatriating cash by utilizing code words in emails with account holders seeking access to funds. BSI disclosed instances where its U.S. clients would use coded language, such as asking their private bankers, “can you download some tunes for us?” or stating that their “gas tank is running empty” when they required additional cash to be loaded to debit cards.

In resolving BSI’s criminal liabilities under the program, the Justice Department acknowledged that the bank made a full disclosure of its illegal conduct, including (1) how its cross-border business was structured, operated and supervised; (2) the name and function of the individuals who structured, operated and supervised the bank’s cross-border business; (3) how BSI attracted and serviced account holders; and (4) an in-person presentation and documentation (properly translated) supporting the disclosure.

The Justice Department also found that BSI fully cooperated in all respects, including by conducting an internal investigation and sharing the results of that investigation with the U.S. government. Importantly, BSI voluntarily approached the U.S. government about resolving its potential criminal exposure in early August 2013, even before the Swiss Bank Program was unveiled. BSI also voluntarily exited the cross-border business involving U.S. accounts one year earlier and, apparently, of its own accord and without prompting by the U.S. government.

BSI also made a full production of information regarding its U.S. accounts to the Justice Department, including the total number of U.S. accounts open at BSI since Aug. 1, 2008; the number of U.S. accounts closed since Aug. 1, 2008; and the identity of financial institutions that received funds transferred from closed accounts. Finally, BSI retained an independent examiner who verified all information disclosed to the Justice Department by the bank. Pursuant to the terms of the nonprosecution agreement, BSI agreed to continue to cooperate with ongoing U.S. investigations and assist the U.S. with treaty requests for information.

What the Future Holds

The BSI nonprosecution agreement is the first public declaration of how the Justice Department will treat banks participating in the Swiss Bank Program, and offers guidance to the more than 100 other participating Swiss banks who are awaiting such agreements. In particular, it confirms that Swiss banks seeking similar treatment must (1) make full disclosures to the U.S. authorities of their illegal activities; (2) cooperate fully with the U.S. and its ongoing investigations, including by conducting internal investigations and sharing the findings of such investigations; and (3) turn over all information and documents pertaining to their cross-border businesses involving U.S. accounts and account holders. Participating Swiss banks that fail to make the kind of full and complete disclosures that BSI appears to have made do so at their peril.

The BSI announcement also represents another significant milestone in the U.S. government’s crackdown on offshore tax evasion. Since 2009, the Justice Department and the IRS have waged a high-profile, global campaign to combat the use of undeclared foreign bank accounts by U.S. taxpayers. To date, the Justice Department has brought criminal charges against more than 100 offshore bank account holders, dozens of facilitators (many of who are foreign nationals and are now fugitives), and Swiss financial institutions, such as UBS, Credit Suisse and Wegelin & Co. These enforcement efforts have reached far beyond Switzerland, as evidenced by publicly announced actions involving banking activities in India, Luxembourg, Liechtenstein, Israel, and the Caribbean.

BSI and other banks in the Swiss Bank Program are also providing detailed information to the U.S. government about transfers of money from Switzerland to other countries, which are referred to as the so-called “leaver lists.” The Justice Department and IRS are using this data to “follow the money” to uncover additional tax evasion schemes. Finally, with the Foreign Account Tax Compliance Act now fully implemented, the U.S. is now receiving a wealth of data from non-U.S. financial institutions about their U.S. accounts.

The Good News: Options for Noncompliant U.S. Taxpayers Still Exist

These enforcement efforts demonstrate that the U.S. government has wielded an enormous “stick” in its efforts to eliminate bank secrecy and ensure global transparency in tax matters. At the same time, the U.S. has offered a substantial “carrot” to entice noncompliant U.S. taxpayers to come forward and declare their offshore bank accounts.

Since 2009, the IRS has offered, in various forms, an Offshore Voluntary Disclosure Program (OVDP) that offers amnesty from criminal prosecution for taxpayers who voluntarily disclose their offshore accounts and pay back taxes, interest and substantial penalties. Over 50,000 taxpayers have taken advantage of these programs since their inception, paying over $7 billion to the U.S. Treasury, and making this the most successful tax amnesty program in U.S. history. Since June 2014, the IRS has also offered a popular program for nonwillful taxpayers called the Streamlined Filing Compliance Procedures.

While BSI’s U.S. account holders who have not yet declared their accounts to the IRS may still be eligible to participate in the OVDP, the price of such disclosure has dramatically increased. Most U.S. taxpayers who enter the OVDP to resolve undeclared offshore accounts will pay a penalty equal to 27.5 percent of the highest value of their offshore accounts.

On Aug. 4, 2014, the IRS announced that such penalty would increase to 50 percent if, at the time the taxpayer initiated their disclosure, either a foreign financial institution at which the taxpayer had an account or a facilitator who helped the taxpayer establish or maintain an offshore arrangement had been publicly identified as being under investigation, the recipient of a John Doe summons, or cooperating with a government investigation, including the execution of a deferred prosecution agreement or nonprosecution agreement. With the announcement of BSI’s nonprosecution agreement, its noncompliant U.S. account holders must now pay that 50 percent penalty to the IRS if they wish to enter the OVDP.

Conclusion

The BSI nonprosecution agreement is the first such resolution to be publicly announced under the Swiss Bank Program. With more than 100 Swiss banks said to be participating in the program, additional public announcements of resolutions are expected soon. Given what appears to have been substantial disclosure of illegal conduct by BSI and an enormous amount of cooperation undertaken by that bank, the Justice Department may have deliberately chosen to announce the BSI nonprosecution agreement first, to demonstrate to other Swiss banks, and the global financial community, the measures it expects from banks seeking to avoid prosecution. Other banks in Switzerland and around the world seeking similar treatment would be well-advised to follow BSI’s lead and ensure that their disclosures and cooperation are equally impressive.

Footnotes

[1] See Justice Department Press Release, “BSI SA of Lugano, Switzerland, is First Bank to Reach Resolution Under Justice Department’s Swiss Bank Program” (March 30, 2015) (available at http://www.justice.gov/opa/pr/bsi-sa-lugano-switzerland-first-bank-reach-resolution-under-justice-department-s-swiss-bank).

[2] See Justice Department Press Release, “United States And Switzerland Issue Joint Statement Regarding Tax Evasion Investigations” (Aug. 29, 2013) (available at http://www.justice.gov/tax/pr/united-states-and-switzerland-issue-joint-statement-regarding-tax-evasion-investigations).

"BSI Provides Road Map for Future Swiss Bank Agreements," by Matthew D. Lee appeared in the April 23, 2015, edition of Law360. To learn more, please click here or visit www.law360.com. Reprinted with permission from Law360.