Wednesday, October 2, 2013

What are the Incentives for Swiss Banks to Join the New U.S. Swiss Bank Initiative? (10/2/13)

In response to yesterday's posting on an article about the new DOJ Tax initiative for Swiss Banks to buy their peace with the U.S., a reader with the nom de plume "noone" raised some interesting questions as to the incentives for Swiss Banks to participate in the initiative.  Yesterday's posting on the article is Article on DOJ's Swiss Bank Initiative (Federal Tax Crimes Blog 10/1/13), here; and an earlier blog on the initiative is DOJ Tax Announcement on U.S. Swiss Deal (Federal Tax Crimes Blog 8/29/13; Updated 8/30/13), here.  The author of the response raised good questions and hence post the response here for other readers' to discuss:
This article fails to address some key issues. The program is voluntary for the Swiss banks. The only banks for which it makes sense to participate are those with a high risk of prosecution and a manageable penalty. Even a high risk bank that cannot afford the Category 2 fines, will stay out of the program, because they have a choice between seeking protection for a possible risk or a certain death through the fines. 
What reason does a category 3 bank, who thinks it did nothing wrong, have to go into the program and face the risk of being moved to category 2 based upon its own disclosures. Maybe it will decide to 'let sleeping dogs lie'? And, if you really think you did nothing wrong, why do you have to ask for the US to agree, instead of just defending yourself if attacked. After all, just having had a US customer does not make a bank a criminal organization. The bank is going to have to evaluate its own risk of being prosecuted and being found guilty. If the bank is worried, and can afford the penalty, then why not join? Maybe try for category 3 and switch to category 2 if necessary, perhaps. The US is probably going to closely scrutinize banks who apply for category 3 status, and a bank in the program at that point will have no alternative but to pay the category 2 fines if challenged by the US. 
Any bank faced with devastating fines will avoid the program, that much seems clear. There are about 300 banks in Switzerland. The first focus for the US would seem to be to go after the banks who are 'dirty', but didn't join the program because they could not afford the fines.
The banks will have a huge incentive to avoid participating in the program. If a bank had 50 US customers with an average $2 million deposit, the fine could reach $50 million. (By the way, it doesn't mean that the bank acted illegally with all 50 customers, but the same across the board penalty structure will apply to all customers in the voluntary program.) The annual gross fees earned by the bank could have been half a point or less, or maybe $500k/yr., on these $100 million of deposits. The net income to the bank on $100 million of deposits could have been $100k - $200k/yr., after costs of doing business are calculated. A $50 million fine from a business that might have generated this level of income is huge, and will provide a significant disincentive for a bank to participate. Moreover, even if a bank is later targeted, will the bank have to pay more than 50% to resolve the matter?
One interesting point raised in the article deals with Swiss banks who still have undisclosed US customers. Is there really such a beast? Banks all around the world are kicking out US customers. It's hard to believe there are really some Swiss banks who still have undisclosed US customers. 
It would be interesting to see some discussion on these issues. I am having trouble understanding why great numbers of banks will go into this voluntary program.
Readers of this blog entry may be interested in going to noone's actual response, here,  in case other readers have posted responses to that comment rather than to this blog.


  1. That's a pretty good explanation which helps me to understand the insanity of Lex USA a bit better. The only part that I disagree with is where you wrote "Swiss bank deal". This is not a "deal", but rather American blackmail, American bullying, American financial greed. I'm all for taking legal measures against tax evasion, but not when the innocent are required to pay huge sums of money to prove their innocence.

  2. Unsurprisingly, an article has appeared in a Swiss publication, basically restating what has been discussed in this blog. Here is the link to the english translation:

    The US exasperated the negative implications for the Swiss banks to participate with its recent clarification to the bank deal. That clarification effectively took away Category 4, because if even a local bank (defined as a bank with less than 2% non-Swiss and non-EU clients, had just one small bad US client relation, then it had to pay the Category 2 fines on all its US customers, whether the bank acted unlawfully or not towards all but the small bad customer. Thus, Category 4 was effectively taken away; because, if a bank truly had no bad customers, it would just pass on the program. Moreover, practically speaking, the bank might not even know if it had one bad customer relation from a lower level employee's conduct.

    Category 3 was also taken away for similar reasons, because if the bank had one bad apple, the whole bunch would be tainted and the bank forced to pay Category 2 fines on all its customers. A Category 3 bank will also be vulnerable to the US changing its classification. (Indeed, the US might even have information on a Category 3 bank's customers that the bank's own management might not have, because of the voluntary disclosure programs.)

    The Swiss government is publicly encouraging its banks to join the program. The speculation is that it is doing so because the participation rate is so low. Here is the Reuters article:

    This program only makes sense for banks with serious and known exposure of criminal indictment, and a manageable fine under Category 2. Even if the bank knows it is in trouble, if it cannot afford the Category 2 fines, it will avoid the program.

    US - Swiss relations have been seriously strained from all this. There is a referendum process taking place to force Switzerland out of having accepted FATCA. (China refuses to agree to FATCA, so it will be interesting to see how the US handles that one. Speculation is that the US will not be as aggressive towards China as it has been towards Switzerland.) The US certainly has the 'might' to enforce its will; although, this may come at a significant and unpredictable price.

    Interesting situation.


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