Article on DOJ's Swiss Bank Initiative (10/10/13)

Sharp-Kemm, here, firm attorneys William M. Sharp, Sr., here, Larry R. Kemm, here, and William T. Harrison, III, here, have published an article on the new U.S. Swiss bank initiative. The Swiss-U.S. Banking Compliance Program- A Final Settlement?, Tax Notes International, September 30, 2013, at 1345, here.  See other blogs on this initiative here.

Excerpts that I found interesting and of possible interest to many readers of this blog:

The new initiative is not obligatory: The three separately defined categories of Swiss banks may freely elect to participate in the program. Nonetheless, the Swiss government will strongly encourage its banks to participate in the program to finally resolve the U.S. assault on the Swiss banking system — and for sound reasoning. The benefits accruing to the Swiss banking system and to participating Swiss banks are clear: Such banks will no longer be possible targets of the U.S. criminal legal system, and they will walk away with a clean bill of health. This also will end the hemorrhaging of millions of francs of resources that the Swiss government and many of its regulated banks have dedicated to this dispute over the past several years. Finally, and perhaps most important, the global private banking and investment community should have an elevated confidence in the historically preeminent Swiss private banking brand — the number one private banking sector in the world. 

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It is also interesting to note that the joint statement includes a commitment by the Swiss government to handle all treaty requests on an ‘‘expedited basis,’’ and this will include providing additional personnel and other resources to process treaty requests. These statements indicate that the U.S. government is most certainly preparing to launch a series of requests under the treaty presumably on a ‘‘behavioral pattern’’ basis and presumably on the basis that the limiting ‘‘tax fraud or the like’’ standard under the 1996 treaty will have been eradicated upon the ratification by the U.S. of the 2009 protocol. This remains to be seen because no apparent progress toward approval of the protocol appears to be in the works at the Senate Foreign Relations Committee level. 

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A key feature of the penalty provision under the program is the allowance of a credit to the Swiss bank for U.S.-related accounts that were: 

• not undeclared;   

• disclosed by the Swiss bank to the IRS; or 

• disclosed to the IRS through an announced offshore voluntary disclosure program or initiative following notification by the Swiss bank of such a program or initiative and before the execution of the NPA. 

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Also, the language contained in the program requires that in order to obtain corresponding penalty reduction, disclosure of an account to the IRS through one of the voluntary disclosure programs occurs ‘‘following notification by the Swiss bank’’ of the program and before execution of the NPA.40 But what if a U.S. noncompliant customer independently learns about the voluntary program, say in 2009, goes through the voluntary disclosure program and becomes compliant, and at the time of signing the NPA was thus not undeclared and the Swiss bank never made any notification?  It would seem reasonable that a Swiss bank should be entitled to a penalty reduction for any account that was declared before execution of the NPA (otherwise both the bank and the account holder are subject to penalty on the same account). There also needs to be clarification on how a bank could show that a customer became U.S. tax compliant, particularly if the bank was unaware of the customer’s participation in the voluntary disclosure program or if the customer was U.S. tax compliant. There are likely numerous situations where banks may have encouraged account holders to enter voluntary disclosure, but have no knowledge concerning whether the account holders in fact participated in an offshore voluntary disclosure program or initiative. 

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As another substantial precondition to any NPA granted for a Category 2 bank, the Swiss bank must provide all necessary information for the U.S. by reason of treaty requests to seek account information. As noted in the joint statement, Switzerland intends to process on an expedited basis treaty requests according to the existing treaty as well as the 2009 protocol, if and when it comes into force.41 Thus, the cooperation of Category 2 banks with the Tax Division will provide an even greater amount of information that can be used to identify and prosecute U.S. taxpayers who violate U.S. laws by concealing assets abroad. Primary targets of this valuable information, as emphasized by the DOJ in its August 29, 2013, press release, are ‘‘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.’’ The press release notes that ‘‘[a] key component of the Program requires cooperating banks to provide information that will enable the U.S. to follow the money to other Swiss banks and to banks located in other countries.’’