DOJ Tax Announcement on U.S. Swiss Deal (8/29/13; Updated 8/30/13)

DOJ Tax Press Release is here.  The press release links to two documents -- Joint Statement and Program, here, and Signed Joint Statement and Program, here.

Key excerpts from the press release (emphasis supplied) are:

“This program will provide us with additional information to prosecute those who used secret offshore bank accounts and those here and abroad who established and facilitated the use of such accounts,” said Deputy Attorney General James M. Cole.  “Now is the time for all U.S. taxpayers who hid behind Swiss bank secrecy laws or have undeclared offshore accounts in other foreign countries to come forward and resolve their outstanding tax issues with the United States.” 

Under the program, which is available only to banks that are not currently under criminal investigation by the department for their offshore activities, participating Swiss banks will be required to: 

• Agree to pay substantial penalties 
• Make a complete disclosure of their cross-border activities
• Provide detailed information on an account-by-account basis for accounts in which U.S. taxpayers have a direct or indirect interest
• Cooperate in treaty requests for account information
• Provide detailed information as to other banks that transferred funds into secret accounts or that accepted funds when secret accounts were closed
• Agree to close accounts of account holders who fail to come into compliance with U.S. reporting obligations

The program holds banks to a higher degree of responsibility for opening secret accounts after it became publicly known that the department was actively investigating offshore tax evasion in Switzerland.  Under the penalty provisions of the program, banks seeking a non-prosecution agreement must agree to a penalty in an amount equal to 20 percent of the maximum aggregate dollar value of all non-disclosed U.S. accounts that were held by the bank on Aug.1, 2008. 

 The penalty amount will increase to 30 percent for secret accounts that were opened after that date but before the end of February 2009 and to 50 percent for secret accounts opened later than that.     

The program will significantly assist the department’s efforts to investigate and prosecute U.S. taxpayers who, when faced with the risk of detection, chose to move funds away from banks under investigation to banks that they believed might be better havens for tax secrecy.  A key component of the program requires cooperating banks to provide information that will enable the United States to follow the money to other Swiss banks and to banks located in other countries.

I focus my comments below on what this new initiative means to U.S. depositors who have not yet joined OVDI/P.

1.  First 2 key definitions.

6. "Applicable Period" shall mean the period between August 1, 2008, and either (a) the later of December 31, 2014, or the effective date of an FFI Agreement, or (b) the date of the Non-Prosecution Agreement or Non-Target Letter, if that date is earlier than December 31, 2014, inclusive. 

9. "U.S. Related Accounts" means accounts which exceeded $50,000 in value at any time during the Applicable Period, as measured by the account balance on the last day of each month during the Applicable Period, and as to which indicia exist that a U.S. Person or Entity has or had a financial or beneficial interest in, ownership of, or signature authority (whether direct or indirect) or other authority (including authority to withdraw funds; to make investment decisions; to receive account statements, trade confirmations, or other account information; or to receive advice or solicitations) over the account, as determined by applying the due diligence procedures applicable to "Lower Value Accounts" in the FATCA Agreement, Annex I, Part II, for accounts with $250,000 or less in value at all times during the Applicable Period, and by applying the due diligence procedures applicable to "High-Value Accounts" in the FATCA Agreement, Annex I, Part II, for accounts with more than $250,000 in value at any time during the Applicable Period, notwithstanding the amounts and dates set out in the FATCA Agreement, Annex I, Part II.

2.  The Fourteen Swiss banks currently under criminal investigation are not covered by the initiative.  (Perhaps some of these have just found out that they were under criminal investigation.)  These banks are called Category 1 Banks.  Several of those in this group have been identified publicly.  I believe that they include Bank Frey, Basler Kantonalbank, Credit Suisse, HSBC, Julius Baer, Pictet, and Züricher Kantonalbank.  I presume that most or all of these 14 were identified via the disclosures required in the various iterations of OVDI/P as the most egregious offenders based on that dataset.  There is no doubt that the IRS will get U.S. depositor information and documents from these 14 banks, and some have already advised U.S. depositors of the expected turnover and have started the process.

3.  The other Swiss banks fall into two groups -- those that have affirmatively assisted U.S. persons in a way that commits "tax-related offenses under Titles 18 or 26, United States Code, or monetary transactions offenses under §§ 5314 or 5322, Title 31, United States Code." (Category 2 Bank) and those that have not (Category 3 and 4 Banks).  The banks are required to self-identify which group they fall into, and to engage an Independent Examiner to oversee the process.  By entering the process, the Banks will have a powerful incentive to comply and properly self-identify.  I will not focus on those incentives, but suffice it to say that the self-identification process will almost certainly pick all but the outlier Swiss banks that may have played this game.

4. The consequence to the U.S. persons having deposits in the Banks violating the law (Category 2 Banks) are that the banks will provide the following information in order to obtain an NPA:

a. Before execution of NPA, information in the aggregate on the total number of U.S. depositor accounts (i) exisitng on 8/1/08, (ii) opened between August 1, 2008 and February 28, 2009, and (ii) opened after February 28, 2009.
b.  Upon execution of NPA, as to each U.S. Related Account, (i) maximum value during the Applicable Period, (ii) the number of U.S. persons affiliated with the account and the relationships (not clear but probably requires identifying each such person); (iii) identifying any entity related to the account; (iv) identifying all enablers; and (iv) specific informaition about transfers in and out of the accounts, including the source or destinations for such transfers..

In short, the process entails identifying U.S. persons and their relationships to the U.S. Related Accounts.

I project that as this information flows into the DOJ Tax, the Government database the information and, by correlating it to the database of persons joining OVDI/P, identify the persons who have not joined OVDI/P and the characteristics of their Swiss bank activities.  In short, with database searching, sorting, slicing and dicing, DOJ Tax will be able to identify the best targets for criminal prosecution based on the characteristics of the accounts.  DOJ Tax will then proceed accordingly and deliver the balance of the information to the IRS.  [While I expect this to happen, I have some concerns about the process by which it is done and may write on that later.]

Certainly, the more egregious violators should move immediately to join the OVDP 2012.  The less egregious violators should consult with counsel as to whether they should join.  Most of them, I suspect, when counseled will choose to join in order to get some certainty as to the possible outcome.  But that is too large a subject to address here and now.

Other resources:

• Jullia Werdiger, Tax Havens Close for Wealthy Americans NYT Dealbook 8/30/13), here.