Monday, July 21, 2014

Article on Swiss Bank Attempts to Reduce DOJ Penalty (7/21/14)

The Wall Street Journal has an interesting article on Swiss banks' attempts to reduce the DOJ penalties for their misbehavior in assisting clients' hide untaxed funds.  John Letzing, Swiss Banks Use Carrot and Stick in Addressing Hidden Accounts (WSJ Markets 7/18/14), here.  Key excerpts:

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. 
* * * * 
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. 
* * * * 
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. 
* * * *  
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:
  1. for the bank to disclose the account to the IRS.
  2. 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.
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.

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.


  1. The last sentence by Jack was, "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?"

    I don't have the answer but it's certainly possible that this would become known. In such a case, the bank could be in very hot water and liable for damages. Since many of these accounts are probably disclosed by now (through OVDI) the client would have no fear of going to court. And, since in such a case the bank(s) would likely have illegally disclosed many accounts th pattern of misconduct would be there as well.

  2. Let's assume that the U.S. person has come into compliance and the Swiss bank improperly discloses to DOJ. Then, in the unlikely event that the U.S. person becomes aware of the wrongful disclosure, the U.S. person then might have a claim for wrongful disclosure. What are the damages? Doesn't appear to me to be any damages. Perhaps Swiss law has a concept of some minimum damages for wrongful disclosure, but short of some such minimum damages, the U.S. person will be unable to show any damages.

  3. The TAS has just released its FY 2015 objectives. Pages 91-101 deal with OVDI, Streamlined, FATCA.

  4. Michael J. MillerJuly 22, 2014 at 5:47 AM

    This may be an extremely ignorant question (I have many of those) but could it be argued (persuasively) that the damage is whatever price (if one could determine the price) the bank would have paid for consent to such disclosure?

  5. Michael J. MillerJuly 24, 2014 at 7:36 PM

    FYI, a lawyer for a Swiss bank told me earlier this week that they are not certain if they will be able to avoid the penalty in the case of accounts that were initially noncompliant and were disclosed pursuant to a voluntary disclosure if the voluntary disclosure was done before the bank sent letters to its account holders.

  6. Michael,

    I will check on this tomorrow, but as I recall the penalty reduction applies in three cases --

    (i) the US person was always compliant (the seems like it is a little off, but I think that was the concept);

    (ii) the bank turns over the US person specific information; or

    (iii) the following steps, in order are taken, (a) the bank notifies/encourages the US person to become compliant, (b) the US person becomes compliant, (c) the US person provides the bank some evidence of compliance, and (d) the bank provides that evidence to DOJ.

    So, I think that if the US person gives the bank a waiver / release permitting the bank to disclose the US person specific information and documents (ii) above, the bank can get the penalty relief without any showing of US tax compliance under (iii). But, of course, the US person will not give the waiver / release unless he or she has become compliant and, of course, may not give the waiver / release even if he or she has become compliant.

    I will check on this tomorrow.


  7. I'm a Swiss citizen and resident who is unaffected by the Swiss/US tax controversy. I don't work for a bank or a law firm. But I have many friends and associates who are US(or dual) citizens. While there are biases on both sides of the argument, I personally see one major flawed bias on the part of the US side. Namely, that all(or the vast majority) of US persons who had Swiss accounts were non-complaint. Item (I) in Jack's comment above seems to imply that unless I misunderstand. I've certainly seen that implication/bias many times in other posts. It has been bothering me so I feel I need to add my perspective.
    The tax controversy is a big deal in Switzerland and the topic of many conversations both during and after business hours. What I see is that many people have been compliant - especially the more sophisticated from a business perspective. The others either were not aware of the requirement to file US taxes or assumed it was not necessary because it was largely an unenforced law until the past few years. I don't think any of them have any tax liability after taking credits for Swiss taxes paid. Not being aware is totally understandable in my opinion because of the unique situation of the US taxing world income rather that just US based income. That is a totally alien concept to a European.
    I don't know anybody who has tried to cheat the US government out of what is owed. I'm sure there are some but I think they are a small minority compared to the people that fall into the categories I described in the previous paragraph.
    I don't very well know any people living in America who have Swiss accounts. They might be a different case but I can't believe that all of them were noncompliant. But the main point of what I am sayings is that it is not at all unusual that a Swiss account be non-compliant as implied in (i) in the above post. I think a very substantial number of account will be found to be in compliance. Not everybody who has a Swiss account is a tax cheat. There are many valid reasons to have a Swiss account.
    I thank Jack for this very interesting and professional blog and for the opportunity to give you my perspective from the "other side of the pond."

  8. After reading your comment and Jack's I realize that I had misinterpreted what Jack meant in (i) in his reply. Sorry! The agreement that the banks have doesn't say always complaint. It just says "was not an undeclared account". That is a bit ambiguous. It doesn't necessarily say "never was an undeclared account". So what happens if someone did a QD before the bank's letter? If I was the bank, I would say it was a declared account even if it was declared after the tax due date. For accounts that disclosed to the voluntary disclosure program before the bank letter, there should be FBARS that can be provided to show the account was disclosed. I'm not sure why a bank would put anybody into the OVDP category if the OVDP was done before any bank letter.

  9. I've read some articles that talk about banks jumping from category 2 to category 3. I haven't seen any articles about this from US news reports but there are several articles in German language newspapers. Nobody has any verified numbers and I'm sure some banks are still on the fence wit this. But, it seems that maybe as many as 20 to 30 of the category 2 banks are going to move to category 3.

  10. I was going to ask the same thing, just a little differently.

    I would contend that the damage would not be the price the bank would have paid, but the asking price (for example 20% of high balance.)
    If someone illegally copies music or computer software, the damages sought would be the retail (asking) price. I don't think that the argument that the copyright violator would have wanted to pay a lower price or nothing at all would be a valid defense.

    And the injured party might even ask for punitive damages. The courts don't look kindly on those who take what they want without paying for it.

    Finally, in such a case the US government might even say that the intent wasn't to reduce the penalty for illegally-provided information, so the bank might pay damages and not get the penalty reduction.


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