Swiss Banks' Requests to U.S. Depositors for Waivers and Proof of Entry Into OVDP (6/11/14)

As readers of this blog are aware, under the U.S. DOJ program for Swiss banks, Category 2 banks -- those that admit having criminally misbehaved -- can suffer a penalty of from 20% to 50% of the high amount in U.S. depositors accounts after 8/1/08.  The banks can avoid the penalty for each account that the banks can establish to DOJ's satisfaction are U.S. tax compliant.  The language for the requirements to avoid the penalty is:

The determination of the maximum dollar value of the aggregated U.S. Related Accounts may be reduced by the dollar value of each account as to which the Swiss Bank demonstrates, to the satisfaction of the Tax Division, was not an undeclared account, was disclosed by the Swiss Bank to the U.S. Internal Revenue Service, or was disclosed to the U.S. Internal Revenue Service through an announced Offshore Voluntary Disclosure Program or Initiative following notification by the Swiss Bank of such a program or initiative and prior to the execution of the NPA.

Now, at the risk of redundancy, I think it helpful to list the ways the bank can get the reduction:

1.  Showing that the account was not undeclared.  This will be a tough one for many, probably most, accounts since the advantage of Swiss banks to many and maybe most was not to declare the account.

2.  The Swiss bank discloses the information to the IRS.  The information is subject to Swiss secrecy law at this time, although as I noted in an earlier blog today, the IRS may be able eventually to request the information, but that will be after the  window for the penalty mitigation has closed.  This is probably the reason that some Swiss banks are insistently requesting a waiver permitting them to disclose the accounts to the IRS.  So far as I know, there is no legal requirement that the U.S. depositor sign such a waiver.

3.  The U.S. depositor enters the voluntary disclosure initiative (referred to here as OVDP, although it includes related initiatives as well) following notification by the Swiss bank of the initiative.  So far as I  know, there is no legal requirement that the U.S. depositor provide OVDP proof to the DOJ.  And, there is no indication that DOJ will on its own determine whether the U.S. depositor has entered OVDP (perhaps because DOJ does not have access to return information under Section 6103).

I focus on #3, although my comments probably relate to #2 as well (since both have the key feature that the U.S. depositor is not required to do  anything to assist the bank in meeting the requirements).  This Swiss bank penalty mitigation regime shows that there is great value to Swiss Category 2 banks showing proof of U.S. tax compliance via OVDP.  How do they do that?  Obviously, that is up to the banks and the DOJ to work out.  However, Category 2 banks have for some time now asked for proof that the U.S. depositor joined OVDP.

The proof requested by the banks is not consistent.  Sometimes it is the OVDP preclearance letter; sometimes it is the Form 906 or Form 4549; sometimes the initial request is not specific as to the documents desired; sometimes, I understand, the interim request for preclearance may suffice.

What is clear, however, is that the U.S. depositor is not required to provide the OVDP proof.  The economic phenomenon therefore is that the U.S. depositor who joined OVDP has something in his possession of potential great value to the bank.  In a market system, someone holding something of great value to another person can sell it to that person, with the price being negotiated between them.

The question is whether the U.S. depositor can enter such negotiating and be compensated for his thing of value (proof of OVDP).  I have sought to enter negotiations with Swiss banks to be compensated.  To date, I have only received offers to pay token or minimal amounts ($1,000 or $2,000).  I have requested substantially more, so we are at a standstill.  My clients' position is that clients are required to do nothing and therefore will not, absent a negotiated meaningful amount.

The rumor mill among practitioners is that some banks are offering meaningful amounts.  Some will agree to pay professional fees (attorneys and other professionals fees) incurred in OVDP processing.  Some will insist adamantly and vaguely that paying anything or paying the penalties the U.S. depositor incurred or paying anything in excess of professional fees would be illegal under Swiss and U.S. law.  Sometimes, although nominated as payment for attorneys fees, the amount will actually be in excess of attorneys fees (I could speculative on that but won't)  Or, they may insist that paying anything at all is illegal.

As an example of the banks' claims to avoid having to pay or having to pay much for the proof of entering OVDP, I enclose at the end of this blog entry an email trail of a conversation I had with a Swiss bank's attorney about the issue.  The issues raised in that email are whether the request for compensation violates U.S. law (alleging that the DOJ has suggested that it would be obstruction of justice) or Swiss law (something called notigung).  Obviously, that is a serious accusation. I don't think the allegation is correct.  I don't think most practitioners think it is correct, although there are some who are not sure one way or the other.  I will say that, as I note in the email trail below), the DOJ AAG Tax has indicated that the DOJ takes no position (so unless the DOJ is speaking out of both sides of it collective mouth on this issue, I question that DOJ has told any Swiss bank or representative that the request for compensation would be obstruction of justice).

One thing that has occurred to me and other practitioners is whether attorneys or even the Swiss banks should be making that type of allegation in an attempt to extract from U.S. persons something they have no right to extract.  I could go further with that, but do not need to in this blog where I merely hope to alert readers as to the issues swirling around the issue of compensation for penalty relief for the banks.

And, finally, as I noted above,  this analysis probably also applies to the waivers that the banks are requesting under #2.

I would appreciate readers' comments on the issues presented in this blog.

EMAIL TRAIL (LATEST EMAIL FIRST]

From: Jack Townsend [mailto:jack@tjtaxlaw.com]
Sent: Friday, June 06, 2014 2:10 PM
To: [Bank's Lawyer's Name Omitted]
Subject: RE: Confirmation etc.
[Bank's Lawyer's Name Omitted],
Thank you for your email.

First, I neglected to include in my email a requirement that, before a final deal is reached, the bank deliver an opinion of counsel addressed to my client and me that the agreement, if one is reached, does not violate Swiss or U.S. law.  it appears based on your email that that condition could not be met by your bank.  Our negotiations (if they ever rose to that level) are over because, based on your email, an essential condition cannot be met.

Second, I am not aware that DOJ considers such emails obstruction of justice, but certainly have no problem with your turning my email over to DOJ.  In fact, I encourage you to do so.

Third, at a recent May ABA Tax Section meeting in Washington, DC, AAG Kathy Keneally was asked about the DOJ position on payments from the banks to the U.S. depositors for the proof required for the banks’ penalty mitigation.  As I understand her response, she said that DOJ has no position.

Fourth, I do understand from reports of other practitioners that some banks are paying to induce the U.S. depositors to deliver proof of U.S. tax compliance by joining OVDI/P.  Those payments may be characterized as reimbursement of costs or whatever.  But, at the end of the day, it is compensation paid by the banks to induce the U.S. depositor to deliver such proof.  I infer that, if your claims are true, there is a lot of obstruction and notigung (whatever that is) going around.  Simple critical mass in violating the law does not make it right, of course (a lesson the Swiss banks have learned for following the herd of Swiss banks into U.S. tax evasion).  But I would be surprised if the banks would be engaging in this behavior with their practices under the microscope that DOJ is putting on them.

Fifth, I am not aware that U.S. depositors in Swiss banks – including my client in particular – have any obligation to deliver to the banks such proof, if it exists, so that the banks can mitigate their penalties for their criminal misconduct.

Sixth,  in this environment, it  is a simple commercial transaction.  U.S. depositors have something of value to Swiss banks.  They are not required to give that something to Swiss banks.  Swiss banks, if they choose, can pay inducements to U.S. depositors to deliver such something.

Seventh, I think DOJ would mitigate the force of its penalty program for Swiss banks by taking the position that U.S. depositors are not entitled to seek compensation from Swiss banks.  Think about it conceptually focusing on one depositor simply as an example (and not implying anything as to any particular depositor).  U.S. person A has an account in Swiss bank X.  The penalty base (high amount) for that account is $1,000,000.  There is no question that the Swiss bank and the U.S.  person were criminally culpable in their activity with respect to that account.  The U.S. person joins the OVDP program and incurs significant costs in doing so.  Swiss bank X now wants to avoid any penalty for its criminal misconduct with respect to that account and push all the cost, aggravation, etc. to U.S. person A.   Does it make any sense that the Swiss bank can walk away from its criminal misconduct with no cost whatsoever?  I would hope that the DOJ did not design a program that permits banks conducting criminal misconduct to avoid prosecution and all costs for its misbehavior.  I understand that there may be some conceptual problems with structuring payments to reimburse a client for its penalties.  We have not asked for reimbursement of the clients penalties.  The offer was simply a commercial transaction, without any regard to whether my client has incurred or will incur any penalties.  The client has have something of value to the bank. The client is not required to deliver that something to the bank.  What is the bank willing to pay for it?

Eighth, given the seriousness of the claims of criminal misconduct that you make, I strongly encourage you to share these emails with DOJ as you say you will by the end of the day.  I will send the email to  DOJ as well.  If the DOJ position is that such emails are obstruction of justice, as you allege, I would hope that it would inform its citizens accordingly, because it is not at all evident to me  that it is obstruction  of justice.

Thank you, and best regards,

Jack Townsend

From: [Bank's Lawyer's Name Omitted]
Sent: Friday, June 06, 2014 4:17 AM
To: Jack Townsend
Cc: [Bank's Officer's Name Omitted]
Subject: FW: Confirmation etc.
Dear Jack,

I refer to your email to [Bank's Officer's Name Omitted]. I am counsel to [Bank's Name Omitted] in the Swiss-US Program.

The DOJ has informed us that they view emails like yours below as Obstruction of Justice.  Further, the email below constitute notigung under Swiss law.  We have been instructed by our DOJ trial attorney to hand these types of emails to the DOJ.  We will do so before the end of the day.

Best regards,

[Bank's Lawyer's Name Omitted]

From: Jack Townsend [mailto:jack@tjtaxlaw.com]
Sent: 05 June 2014 21:18
To: [Bank's Officer's Name Omitted]
Subject: RE: Confirmation etc.
[Bank's Officer's Name Omitted]

Our understanding is that the bank will achieve a significant penalty savings if our client provides you information and/or documents regarding his U.S. tax compliance (if such compliance even exists, which we do not acknowledge).

If you want any proof of U.S. tax compliance (if it exists), we will require appropriate compensation for information and/or documents we are not required – either legallyl or ethically -- to produce.  That compensation should be 50% of the penalty savings the bank will achieve should we produce proof of U.S. tax compliance (if it exists) or such other amount as we should negotiate.

If the bank wants to make a counteroffer it certainly may do so.  But, to set the parameters on our discussions, we will accept only one counteroffer and we will not make other counteroffers.  So, the bank’s choice is to make a single counteroffer that, it should calibrate, to be an acceptable counteroffer.  The bank will take the risk that its counteroffer, should it make one, is not acceptable to my client, in which case, we will provide the bank nothing – repeat, nothing – that will achieve penalty relief.  To illustrate, if the bank counteroffers 25% of its penalty savings, that will not be acceptable.  The discussions are over and the bank can do whatever it can to avoid the penalty.  If, however, the bank makes a meaningful offer, we will either accept it or reject it.  And we will either reach agreement or we will not.

And, finally just so we are clear, the example above is not a signal that we will accept 25%.  In truth, we will not even accept 30%.  If the bank wants to make a counteroffer, it will need to be a real, significant and substantial counteroffer.  There is a point in between 30% and 50S that we would find acceptable if you  make the offer.  But, we will accept one offer and we will not counter your counteroffer.

Thank you,
Jack