Swiss banks are seeking to chip away at potential penalties from the U.S. Justice Department by offering to compensate American clients who disclose their hidden accounts, according to people familiar with the matter.
More than 100 Swiss banks have signed up for a self-reporting program offered last year by the Justice Department, which can result in penalties for harboring undeclared American accounts. Banks can mitigate penalties by encouraging clients to pre-emptively disclose those accounts to the U.S. Internal Revenue Service.
Some banks have dangled financial incentives in front of current and former clients to entice them to divulge accounts to the IRS. In some instances token amounts of around $5,000 are being offered, attorneys and financial advisers say. In other cases significantly larger offers are selectively being made to share the legal and accounting costs that accompany the voluntary disclosure process.
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The Justice Department is aware of such transactions, but hasn't offered guidance on whether or not they may ultimately be objectionable. "We are currently looking at all the factors that contribute to a bank's compliance with the program," a Justice Department spokeswoman said.
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Category 2 banks have until mid-September to provide proof that they encouraged clients to enter the IRS's disclosure regime. Hidden funds disclosed by those clients could then be subtracted from a bank's penalty amounts, which may be severe. A single, undeclared account containing $2 million opened after early 2009 could result in a penalty of $1 million, for example.
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Switzerland's financial regulator, Finma, says banks in the program are free to mitigate penalties as they choose.The penalty is 20, 30 or 50^ and applies to the maximum aggregated dollar value during the period. The ability to obtain a penalty reduction is set forth in the DOJ announcement as follows:
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.Since the bulk of the accounts in issue are undeclared accounts, the two ways to achieve the penalty reduction are:
Of course, for the second alternative to operate, the bank will need some proof from the U.S. person. I think that is the thrust of the WSJ article. Some banks are in essence paying for that proof. But some of the banks' positions seems equivocal in terms of proving U.S. tax compliance. For example, just paying for a U.S. persons consultation with a U.S. tax professional does not seem to be proof that the U.S. person disclosed the account. I have reported on such negotiations before. See blog entries listed below.
- for the bank to disclose the account to the IRS.
- for the U.S. person to disclose the account through OVDI/P (presumably including Streamlined) after the bank's notice to the U.S. person of the U.S. programs.
The big issue, for me, is what kind of pressure this puts on banks to disclose the account to the IRS. Of course, banks are seeking all sorts of waivers and consents permitting the banks to disclose. Depending upon how the waiver or consent is worded, the bank may have a basis to avoid the general Swiss secrecy requirement and disclose the account to the IRS. I suspect that a lot of U.S. customers who have already become compliant may have given those waivers or consents, thereby achieving penalty reduction for the banks. But, I suspect that Swiss banks will have a lot of pressure to construe client correspondence or documents as authorizing consent in order to obtain the penalty reduction. And, how will the U.S. person know that the bank has improperly disclosed or aggressively claimed waiver or consent thus arguably making the disclosure improper?
For related blogs, see
- Swiss Banks' Requests to U.S. Depositors for Waivers and Proof of Entry Into OVDP (Federal Tax Crimes Blog 6/11/14), here.
- DOJ Tax Issues Comments on the DOJ Swiss Bank Initiative (Federal Tax Crimes Blog 6/5/14), here.
- Should Swiss Banks Committing U.S. Tax Crimes Pay for Their Conduct? (Federal Tax Crimes Blog 5/7/14), here.