Thursday, January 2, 2014

Some Swiss Banks Spin Their Self-Identification as Category 2 Banks (1/2/14)

Some Swiss banks are in full spin mode, explaining why they are joining category 2.  Just to remind readers, Category 2 is defined as follows (emphasis supplied):
 A. Any Swiss Bank
  1. as to which the Tax Division has not authorized a formal criminal investigation concerning its operations as of August 29, 2013 (i.e., that is not a Category 1 Bank);
  2. that is not a Category 4 Bank; and
  3. that has reason to believe it may have committed tax-related offenses under Titles 18 or 26, United States Code, or monetary transactions offenses under §§ 5314 or 5322, Title 31, United States Code, in connection with undeclared U.S. Related Accounts held by the Swiss Bank during the Applicable Period,
I guess that the use of the word "may" offers some wiggle room for banks to argue / spin that joining Category 2 is protective only and not an admission of guilt of violating U.S. law.  Consider the following article:  Peter Siegenthaler, Zug bank says US disclosure is not a guilty plea ( 12/27/13), here.  Key excerpts are:

Category Two banks acknowledge that they may have some US assets on their books and may be liable for fines even if they only have a single US tax evader as a customer.
Pascal Niquille, chief executive officer of Zug Cantonal Bank, explains why his institution has opted for this category. Banks which are classified in Category Three, like Bank Vontobel, are giving themselves a clean bill of health. Is classification in Category Two, on the other hand, the same as a guilty plea? 
Pascal Niquille: This opposite conclusion is invalid and superficial. The range of banks classified in Category Two is very broad in terms of the business model. 
 At one end there are banks, such as the Zug Cantonal Bank, which never really pushed this business and were never active in the American market. If you happen to be in a very international place like Zug where there are people from 127 countries, it is normal that there will also be people from the US. At the other end of the spectrum, there are banks that have actively pursued business with customers in the US and still are. What considerations were key to your decision? 
P.N.: The criteria for the classification into these categories are so narrow that even a bank with a single case in which a US customer has not fulfilled his tax liability should not be classified in Category Three or Four. It is consistent with our risk behaviour to err on the side of caution. : In your communiqué, you write that Zug Cantonal Bank cannot rule out it may have been sporadically involved in customers’ tax offences. With this passive formulation are you implying that the bank may have been drawn into a customer’s offence but certainly hasn’t actively contributed to it? 
P.N.: This is about customers who have ties to the US, who are taxable in the US and may not have properly fulfilled their tax obligations. Just maintaining a relationship with such customers could already amount to “support for non-compliance of legal requirements” as far as the US is concerned.
* * * * How big a share of all customers are US customers at Zug Cantonal Bank? 
P.N.: A fraction of a per cent. It’s about so-called US persons. This includes not only customers who live in the US, but also, for example, dual nationals who were born in canton Zug and have always lived here. Until now, they were not obliged to inform us of their US passport, but are taxable in the US and may not have complied with this obligation. 
* * * * And you now have to notify the DOJ as to where these clients have moved? 
P.N.: Yes, the so-called “leaver lists” are part of the information that we have to provide to the DoJ.  In this case, however, no customer names will be given, just transaction details. And do you think that consequences from the past will be settled with this programme, or do you still reckon with civil liability? 
P.N.: This question is premature. We cannot even say whether we have consequences from the past and if so, what would this mean. What are the risks for employees? Can you and your staff travel abroad without concern, even to the US? [Sic - P.N.]: Under this programme, we are cooperating with the Swiss and US authorities. So there is no reason for us to have any travel restrictions.
Zug is not the only Swiss bank publicly atttempting to mitigate the consequences of its accepting a consequences as if it were a real bad actor, while proclaiming or at least suggesting that it is not really a bad actor.

In U.S. law, these protestations of innocence or at least not guilt are like the Alford plea or the nolo contendere plea.  The following is a brief introduction on those concepts (from my Federal Tax Crimes book):
The types of pleas allowed are not guilty, guilty, and nolo contendere (which means, essentially, I’ll take conviction but won’t plead guilty and won’t admit my guilt).  Nolo contendere pleas must be approved by the court, and many courts will not approve them because they equivocate on criminal culpability.  More importantly, DOJ Tax has a policy of not agreeing to nolo pleas in tax cases.  A plea of guilty may also be made where the defendant denies guilt or equivocates as to his guilt.  This is called an Alford plea, named for the Supreme Court decision in North Carolina v. Alford, 400 U.S. 25 (1970).  DOJ Tax also has a policy of generally not agreeing to Alford pleas.  It is beyond the scope of this book to discuss the social and judicial utility of nolo contendere and Alford pleas.  I do note that a sentencing judge who accepts the Alford plea will be comforted by the requirement that there be on the record a factual basis for the plea, which will usually come from a presentation by the prosecution plus such other questioning and evidentiary demands of the sentencing judge.  Note that the nolo contendere is less troublesome to the sentencing judge because the defendant is not denying guilt, but even for nolo contendere pleas the prosecutor must insure that there is a factual basis for the plea.
Some of the banks doing these spinnings say -- I guess consistently with the spin -- that they may re-classify to Category 3 later.  I suspect that, in most cases, the Category 2 banks will not re-classify.  And, if the quantum of potential accounts and amounts is really low as some of these spinning banks claim, the penalty cost will not be that great.


  1. Great post, Jack.

    I read the interview with Pascal Niquille from the Zug bank with disgust. Let's call it for what it is: it is a lying and self serving diatribe. It is an amateur attempt to color the truth to uninformed readers.

    They filed in category 2 not because of a single customer who might have not paid all his taxes, not because of a dual citizen whose status they did not know and not because they did not understand the admission they made. They filed in category 2 because they were dirty, criminal institutions that acted unlawfully in a manner attributable to the institution from the conduct of top management. They made this admission of wrongdoing after hiring high priced legal advisors.

    There is something to be said for a bank converting to category 3. Presently, a bank doesn't know if it is a target. Before converting, the bank will need permission. Presumably, a bank facing an indictment will not be granted permission. It seems to be a safe way to test the waters, so to speak. But, as you, I suspect the number of converting banks will be small. It may be a logical strategy for some, however. It was a possible strategy allowed by the program. It is very surprising that so many banks essentially 'pled' to criminal misconduct. It is also possible a bank needed more time to obtain the independent review required for category 3, so played it safe by filing in category 2. Nevertheless, category 2 is an admission of criminal misconduct at the level of top management, and these banks deserve no sympathy.

  2. Pascal Niquille's comments about employees being free to travel is probanly welcome advice to the DOJ.

    Everyone else knows that the bank employees did not receive amnesty. To the contrary, category 2 banks must identify their involved employees. The Swiss wanted employee amnesty, but did not get it. The category 2 banks threw their employees under the bus.

  3. You wrote:

    "they were dirty, criminal institutions that acted unlawfully in a manner attributable to the institution from the conduct of top management."

    Nazis said the same about Jews. So far, I've seen nothing to support such allegations.

  4. You are right that the employees don't need amnesty for doing nothing wrong. So, does this suggest that the US is seeking to wrongly harm the innocent?

  5. Why would a category 2 Jew not "re-classify"? Are you suggesting that all Jews are automatically guilty by default since innocence is undefined or undesired by those making unproven accusations of guilt?

    Since it is an established fact that the innocent Jew was pushed into category 2, it is only fair and just to view that all Jews will re-classify to innocent unless, of course, the Nazis continue to insist on guilt.

    I replaced the word "bank" with "Jew" and "Americans" to "Nazis" to paint the picture of bigotry more graphically, since normally the innocent is innocent unless proven guilty.

  6. SwissTechie,

    I presume that you post frequently because you want readers to read your posts and possibly even be persuaded by them. As I have suggested before, your rhetoric probably works against either of those goals. For example, I think is too much to claim that the U.S. DOJ action is racism, bigotry or anything other than trying to protect the U.S. fiscal base.

    I think the point you have made over and over is that you feel that the U.S. DOJ should not be trying to protect the U.S. fiscal base by this treatment of Swiss banks. I think readers get your point. I suspect that some may even agree with your point. Some may not.

    Jack Townsend

  7. Jack is correct. I disagree with citizenship based taxation. The US is a pariah in this regard. With that said, there is nothing racist about the DOJ enforcing US law and external acts directed towards circumventing US tax laws and fiscal interests. The category 2 banks are nothing more than criminal organizations who underestimated their adversary. History is full of foreign authorities who underestimated the reach of US law. Just ask Manuel Noriega and the Colombian and Mexican drug lords.

  8. They admit to it by joining category 2.

  9. I post because I am a victim of this bad policy that you are obligated to defend. We may be at opposite ends of the stick.

    There are some advantages to not living in the US. When some Americans accused my parents of being Nazi bankers under the assumption that I was only Swiss, I could immediately identify that such American interests were obviously heavily influenced with racism, since my American parents were clearly not Nazi bankers!

    When all banks were then later accused of being guilty and forced to prove their innocence, I couldn't help but to see this generalization as being heavily influenced by the racism that I had witnessed in the past.

    Living in Switzerland, I bank at Swiss banks, read Swiss news, vote in Swiss politics, communicate with the people and live the life here as it is offered.

    All of this is beyond the imagination of the individuals writing this bad policy. They have no idea! The best that they can do is to rely on generalizations and stereotypes with the hope of understanding that they might get a tiny glimpse of something that they will never understand.

  10. This is the same incorrect logic used with OVDI, where it also ended with failure.

    Category 2 simply means that one doesn't know if one's clients did their taxes since there is no way of doing that they did their taxes.

    Your assignment, as a defender of corrupt policy, is to hate, blame and condemn the innocent no matter what they do, just like how the Nazis did the same.

  11. Accusing category 2 entities of being "criminal organizations" is a type of racism since one automatically condemns the innocent even though no trace of wrong-doing exists.

  12. Here is something I received from a very knowledgeable CPA living in Switzerland, and I am passing it on to add to the various POVs and understanding of what Category 2 means.

    "The problem with these categories is that the whole thing was so unclear when it was published in August that the Swiss Banking Association (or some such body of banks) wrote to the US Justice Dept to ask for clarifications.

    On November 5th the JD wrote back and said that even ONE undeclared American account requires that the bank be in category 2, not 3 or 4. Meaning, there IS no category 3 or 4 (even though some banks have signed up for those).

    How can any bank in Switzerland guarantee that they have no dual national Swiss-American who opened the account under his/her Swiss passport and has no clear indicia of being American ?????

    Staggering. It really blows me away. It's punishment, pure and simple, nothing to do with law."

  13. With due respect, SwissTechie, what you describe as racism is not racism. Here is a description / definition of the word and concept as most people understand it:

    Racism is generally defined as actions, practices or beliefs, or social or political systems that are based in views that see the human species to be divided into races with shared traits, abilities, or qualities, such as personality, intellect, morality, or other cultural behavioral characteristics, and especially the belief that races can be ranked as inherently superior or inferior to others, or that members of different races should be treated differently.

    I don't think that is what you are describing. Indeed to drum-beat the charge, as you do over and over, is to weaken the force of your comments.

    I infer that what you really mean is taking action that assumes guilt without proof of guilty conduct. If so, you might be better off just to say what you mean. Then you can engage in a discussion of whether the DOJ program assumes guilt without proof.

    On that particular point, the DOJ program requires the Swiss banks to self-assess their own facts and risk that those facts could be criminally culpable. Those banks have all engaged competent U.S. counsel. Based on the counsel they have received, the ones joining Category 2 have made the determination, based on their own assessment of their own conduct, that they are at risk of criminal prosecution. DOJ did not say that they were guilty. They said that they are at risk of criminal prosecution and desire to join the program.

    But they are your comments and if you want them weakened through use of inappropriate words and concepts, then so be it.

    Jack Townsend

  14. 1. I think most observers do not view OVDI a failure; indeed, it is a tremendous success for the IRS and the American people.

    2. Sure, OVDI could have been designed differently, but as designed, it has been successful and the perceived rough edges have been worked out over time. And the ultimate failsafe for unfair results is the opt out that taxpayers can take. My experience is that, if the taxpayers have a good story to tell, they will get a good result in which the penalties, if asserted,will be substantially mitigated according to the facts and circumstances of their cases.

    3. I am not a defender of corrupt policy. I condemn corrupt policy. The problem is that the OVDI program and the U.S. Swiss bank program are not corrupt policies.

    4. For the same reason, I condemn U.S. taxpayers who deliberately do not comply with U.S. tax law, whether by use of foreign banks or otherwise. I also condemn on moral grounds those who actively enabled them to not comply with U.S. tax law. And, I think it entirely appropriate that criminal sanctions apply to those U.S. taxpayers and to those who enabled them, depending upon their moral and legal culpability.

    5. I would also condemn any American individual or entity that affirmatively enabled any Swiss individual or entity to avoid Swiss law as well. And, I would have no problem if Swiss law criminalized that conduct as well. (Note that, in many respects, the U.S. even criminalizes some types of conduct to violate foreign law, via the Foreign Corrupt Practices Act.

    Jack Townsend

  15. No bank in the world knows or is required to know if their client filed FBAR (undeclared accounts). As such, I really don't follow all of this bias crime chatter. Wouldn't it make much more sense to discuss why Swiss residents do not live in US jurisdiction?

  16. With the way that the US designed this "program", all banks are "at risk of criminal prosecution" since no bank in the world requires their clients to be compliant with US taxation, since no bank in the world requires their clients to file FBARs and since no bank in the world knows if their clients are Americans since even America doesn't know who is American outside of US jurisdiction.

    This means that the program was designed to harm all banks regardless if they are innocent or not, but only those are "Swiss". The Swiss aspect is a shared trait, which leans towards racism since the US is attacking the Swiss for something that is shared by all banks globally.

    Shouldn't this program be equally attack all banks worldwide since all banks share the same problem of being unable to identify their clients and their filing habits?

    Yet, even then, why does the US need to attack any bank for anyone who does not live in US jurisdiction?

  17. If the OVDI program is not a corrupt program, then why does it fail in warning individuals that the program is only for tax cheats? Why does it wrongly harm individuals who do not live in US jurisdiction?

    if the U.S. Swiss bank "program" is not corrupt, then why did it force innocent banks into category 2 simply because America has failed to abolish citizenship-based taxation and its related national origin discrimination which is a US federal crime? To not be corrupt, the U.S. Swiss bank program would have to focus on US residents with the recognition that there is not a single bank in the world which understands their clients tax filing habits.

  18. Swisstechie,

    The U.S. did not force any bank into category 2. Nor did it force any innocent bank into category 2. The banks self-identified themselves after getting competent tax advice that their own actions put them at criminal risk.

    You are just too blind to accept that veritude.

    So, although I like to respond to readers comments when I can, I will not longer respond to nor even read your comments because you are incapable of entering a meaningful discussion.

    I will post your comments, however, so that if other readers want to respond, they can. My suspicion is that most readers have long since quit looking at your comments.

    Jack Townsend

  19. You are speaking for the banks, but this is not what the banks spoke.

    The banks stated that they entered category 2 since they don't know if their clients did their taxes, given that they can't know if their clients did their taxes, since no bank knows if their clients did their taxes.

    Your remark confirms my suspicion that this "program" is just as flawed as OVDI, since its main purpose is to grab money from the innocent.

  20. Jack...

    Thanks for your comment. Yes, of course, I could be misinformed. I am just passing on what I hear from folks on the ground and close to the banking industry, and not specifically to the article itself.

    That is their understanding as passed onto to me.

    It seems to me the DOJ has determined that the entire Swiss Banking community is guilty of supporting U.S. tax evasion, and now each one has to do a LOT of work to do to prove innocence, But then again, I could be wrong as you say.

    We can call the explanations for joining in Category 2 spin, but I am sure, if you were advising one of these Cantonal Banks that has NO idea if their clients or customers have dual U.S. citizenship, or haven't declared their accounts to the IRS, that is probably the characterization you would advise them to take. Banks are by nature, risk adverse, and so some attorney is probably advising this explanation. I can accept it at face value for what it is.

    All I understand is what I passed on above, so program FAQs aside, when you ask for clarification, and a DOJ attorney tells you if you have ONE client than Category 2 is the choice you should make, what do you do? Maybe the Presidents of the banks should be reading more closely the rules or your blog, and not just accepting KPMG advice or other U.S. attorneys who are there in the droves getting rich!

    As we know, printed rules vs actual application or separate guidance can be different. I have no sympathy for banks that were on the American homeland shores soliciting tax evasion, but the others, well I don't know enough to really argue the points, but I do see this as a plea bargain ending for them.

    I am sure some feel that they are being extorted for doing nothing wrong certainly by Swiss law, but will pay up just to get it behind them. UBS actions tainted them all. They still think having access to American Financial markets is a necessity, so let's settle, take our financial lumps and get it behind us. A simple business proposition. That is spin I can understand.

    Whatever the outcome, this is an astounding development, and I would not expect this to create more goodwill towards America especially given the hypocritical nature of U.S.foreign focus which still has NOT imposed a domestic DATCA on the homeland, or beneficial ownership transparency on USFIs and corporations.

    This Swiss banking drama is not a legal or a moral one. It is a hard nosed economic "might makes right" strong arm realpolitik solution. We want OUR citizens funds back under OUR CONTROL, tax compliant or not, consequences be damned. That's it in the nutshell, pure and simple, imho.

  21. Here Jack...

    I am sure you will enjoy this interview with Ex UBS CEO... :)

    The United States legal system combines great expertise with ‘absurd, imperialistic brutality’, warns former UBS bank chairman Peter Kurer in an interview in the Die Zeit newspaper.

  22. Jack though I agree with you as far as the legal theory of how the law should work, the IRS public pronouncements and actions have been quite different. It has assumed that US persons with foreign accounts are bad actors, look at all the words about "hiding" "secret" accounts and of banks "conspiring" in doing so. From a practical point of view v\banks such as ZKB, Migros etc. whose US person clientele is a fraction of 1% have made the decision that it's cheaper to pay 40% of a tiny tiny fraction of deposits in order to get rid of the risk.


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