Wednesday, June 11, 2014

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.


From: Jack Townsend []
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 []
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,


  1. I have no experience in this space, but the thing that comes to mind first is witness tampering. And this is theoretical, not accusatory and not based on any real knowledge of criminal law but I guess an aggressive prosecutor could say that the Swiss bank provision of information somehow places them within the cope of 18 USC 1512, then I guess the question is does the request for compensation satisfy any of (b), (c) or (d) of that section. In particular, (d)(2) "Whoever intentionally harasses another person and thereby hinders, delays, prevents, or dissuades any person from reporting to a law enforcement officer or judge of the United States the commission or possible commission of a Federal offense or a violation of conditions of probation [supervised release,,parole, or release pending judicial proceedings." Seems a stretch to me, but then again, who knows. If it were to be determined a crime, then presumably the "noetigung" (which generally means compulsion/coercion to do something) element would be that you are somehow coercing them to commit a crime.

  2. the legal term is Nötigung and means duress,coercion

  3. Can you help me understand why a person doing something that the law permits him to do (withhold his private documents) or, more particularly, for charging something to disclose his private documents is coercion?

    By analogy, I have just found a the largest diamond ever, is it coercion to offer it for sale for the largest price ever for a diamond? The buyer does not have to buy. The seller does not have to sell. Nobody is coerced and will enter the commercial transaction, if at all, based each parties respective legal bargaining positions.

    Does Swiss law really prohibit the banks from paying for the release of private documents?


    Jack Townsend

  4. Thanks gottaloveUStax1,

    I will try to work through the Code Sections and their interpretations at least sufficiently to determine whether that is a real issue or not.

    Thanks again for your comments.

    Jack Townsend

  5. I don't think that is the way to look at it. I think the coercion would be for them to do something illegal (in their opinion, obstruction of justice) to obtain something from you. Another question: presumably that payment would be taxed? Would it be Swiss or US source income?

  6. gottaloveUStax1:

    I am not sufficiently experience in the sourcing rules, but I do know that the payment would be taxed under U.S. law, Perhaps, perhaps, the U.S. depositor could claim some cost offsets (certainly the cost of negotiating the payment and perhaps even any costs such as professional fees in OVDP that might be attributed to the production of the income). But, the starting point is that the gross payment would be reported somewhere, directly or indirectly, on the U.S. tax return.

    I think your way of looking at it might be right. Focus on the payor's -- the bank's -- side. Is it obstruction of justice for them to seek the OVDP documents under some guise other than that they need those documents to avoid a penalty? Isn't the bank misleading the U.S. depositor? Isn't it the bank that is obstructing justice, at least in a common lay sense by withholding key information from the person to whom its fiduciary relationship has never been severed (even if the depositor closed out the account)?

    There are many facets of this that could come back to haunt the depositor and the banks. But I don't represent the banks. I think that, at least in the instance cited in the blog, the attorney representing the banks have overstepped proper boundaries. But that is just my opinion, and my opinion has been proved wrong before. On many occasions.


    Jack Townsend

  7. Jack,

    I have read that the Category 2 process will be a hand of anonymized data to the DOJ and then treaty requests will come after the data handovers.

    Do you (or anyone else) have an idea how long the data handover, review, and treaty requests will take?

    It will be interesting to see how much data they actually get. 100K customers? 10K customers?

  8. Under the UBS treaty request, only accounts meeting certain criteria were reported, for example personal accounts with high balance over $1 million, and entity accounts over $250K. (Actually the criteria were more complicated than that, including (if my memory is correct) not reporting accounts of US persons who had been legal residents of Switzerland the entire 2003-2008 period.)

    In the case of CS, I seem to recall that the initial request for entity accounts over $250K was rejected, but I don't know whether or how it may have been modified and resubmitted.

    There is no telling of course of what the treaty request criteria might be for other banks, but it would seem likely that minnow accounts might not get reported through a treaty request (where the line would be drawn is something nobody knows.) Also, given the fact that it may take a year or two for the IRS to process OVDI disclosures when there have been 30,000 disclosures over the past five years, it seems unlikely that the IRS would dedicate the resources to pursue most minnows.

  9. Anonymous,

    Read this post that Jack discussed in an earlier post:

    The above article is calling into question whether the Category 2 bank is technically even allowed to even disclose the information. Most Swiss bank accounts were closed down in 2009 and the banks are now using a clause in the FATCA IGA to release the information...

    Granted, we are discussing the Swiss and anything goes to save the banks, but (in theory) it is not even legal under "Swiss" law.

  10. We are talking 100+ Category 2 banks, versus two banks (UBS and CS) so I expect it to take a while. Only around 3,000 UBS customers and 300 CS customers met the criteria (account size, etc.) for disclosure. These are the largest two Swiss banks. Many of the Category 2 banks are regional and small, and not too attractive to a US resident who speaks only English. And I would expect that the vast majority of those banks did not have bankers travel to the US, so my guess is that if the disclosure criteria are similar, the number of accounts disclosed by those 100 banks combined would be even less than 5K. The big unknown is what the disclosure criteria will be.

  11. Michael J. MillerJune 11, 2014 at 4:05 PM

    You pose an interesting question as to whether an "old" voluntary disclosure, prior to receipt of any letter from the bank, suffices for the bank to avoid a penalty. I have been told by several persons (including someone at one of the Swiss banks whose job is to collect the necessary documents to allow that bank to avoid penalties) that it does suffice, but it's not clear to me why that is, or in which category of penalty exception it falls (the category being relevant because the banks have different extensions for different categories of penalty exceptions). Perhaps Jack or others who are in the know can chime in.

  12. GlobalCapitalismJune 11, 2014 at 4:26 PM

    With regards to using the word "Nötigung" I am surprised that legal counsel of the swiss bank went this direction in describing your motives . This is NOT the legal standard according to the "Strafgesetzbuch" Art.180 and not appropriate here. The "Tatbestand der Nötigung" or the offence of coercion does only exist with regards to...."Androhung ernstlicher Nachteile oder durch andere Beschränkung seiner Handlungsfreiheit nötigt etwas zu tun, zu unterlassen oder zu dulden......" -Threat of serious harm or other restriction of his freedom of action compels to do something or to refrain or to tolerate ......

    In the case of a transfer of personal data outside of Switzerland, special requirements need to be met and, depending on the circumstances,the Swiss Federal Data Protection and Information Commissioner must be informed before the transfer is made. Most Swiss cantons have enacted their own data protection laws regulating the processing of personal data by cantonal and municipal bodies. The DPA applies to the processing of personal data by private persons and federal government agencies. Unlike the data protection legislation of many other countries, the DPA protects both personal data pertaining to natural persons and legal entities.
    The Swiss Federal Data Protection and Information Commissioner in particular supervises compliance of the federal government agencies with the DPA, provides advice to private persons on data protection, conducts investigations and makes recommendations concerning data protection practices.

  13. Jack..

    I have little to contribute in the way of knowledgeable comment, other than to point you to a posting at Forbes the other day which I found interesting... It was by Stephen Dunn

    Title: Beware Of Swiss Banks Urging Offshore Voluntary Disclosure To IRS

    Just throwing this into the mix of discussion, and what he has apparently been advising one of his clients.

  14. I posted a blog expanding on Dunn's Forbes blog. My blog expansion is Reminder: Category 2 Banks Will Serve Up Their U.S. Depositors (6/11/14), here:

    Jack Townsend

  15. Thanks Jack. I am obviously behind in my reading. I will got back and have a look at what you had to say. Appreciate the alert.

  16. Michael J. MillerJune 15, 2014 at 8:17 AM

    I have heard vague suggestions that attempting to secure compensation of this kind from a Swiss bank may resemble extortion or may otherwise be improper, but of course this was from the lawyer for a Swiss bank, and he did not offer any specifics. If there is a real legal issue here, someone ought to be able to articulate it; but thus far I have not heard any such articulation.

    One thought that comes to mind is that it could conceivably be considered akin to selling a $2 bottle of water for $1,000,000 in the desert. There are, of course, important distinctions between the scenarios, but to address that potential argument I think I prefer disregarding what penalty the bank may pay and focussing on the fact that my client incurred costs (including attorneys' fees, accounting fees, and penalties) in securing his closing agreement. If the bank wants to benefit from that closing agreement they can agree to split the cost.


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