Friday, April 17, 2015

Swiss Banks Scramble to Mitigate U.S. Penalties (4/17/15)

BloombergBusiness has an article describing the banks actions to mitigate the penalty under the U.S. DOJ Program for Swiss Banks.  Giles Broom and David Voreacos, Swiss Banks Strong-Arm Clients in U.S. Tax-Evasion Endgame (BloombergBusiness 4/14/15), here.  From my perspective, the interesting excerpts are:
Faced with the threat of penalties that could bankrupt some of them, almost 100 of the country’s banks are calling thousands of U.S. clients in an 11th-hour push to get them to disclose any offshore accounts they may be hiding. Customers are being asked to prove they have paid any taxes due, according to a dozen lawyers for banks or their customers. Some have even had their accounts partially blocked to force them to comply, according to the Swiss banking ombudsman. 
As the U.S. government’s largest crackdown on offshore tax evasion enters its final stretch, the banks are trying to reduce any fines they face. Under the amnesty program, if banks can’t show clients paid any taxes owed, the government will assume they didn’t -- and fines will be larger. U.S. prosecutors have already put one bank out of business over tax evasion: Wegelin & Co., Switzerland’s oldest private bank, closed in 2013 after being indicted. 
* *  * * 
Several banks are using tactics clients consider as strong-arming, such as blocking funds or threatening to reveal names, said Thierry Boitelle, a lawyer with Bonnard Lawson in Geneva. He has advised U.S. taxpayers and Swiss private banks involved in the program.
“We have seen banks making withholdings on U.S. client accounts,” he said. “They’re holding back 25 to 30 percent of the funds to compensate for potential fines.” 
Switzerland’s banking ombudsman said it received a “handful” of complaints of accounts being frozen. Banks ascribe such actions to uncertainty over whether a client controlled an account or because he tried to withdraw all holdings in cash instead of making wire transfers, said deputy ombudsman Rolf Wuest. 
Still Resisting 
As clients aren’t legally required to help, many banks have agreed to pay legal costs that sometimes reach tens of thousands of dollars, lawyers say. 
In some cases, customers are still resisting, saying they paid banks high fees for holding money in confidence. 
“Some clients felt that they were misled by the bank as far as secrecy was concerned, and that’s left them with no reason to cooperate,” said Leigh Kessler, a former tax prosecutor now at Rosenberg Martin Greenberg LLP, a Baltimore firm advising some Americans who received calls. 
Customers who are tax compliant can also be uncooperative, said Larry Campagna, tax attorney for Chamberlain, Hrdlicka, White, Williams & Aughtry. The Houston-based firm has represented about 100 clients in connection with the program. 
“They would say, ‘I’m finished with this bank,’” he said. “‘I’m right with my government, I don’t care what happens to the bank. Go jump in the lake and don’t call me again.’”
JAT Comment:  I had thought the window had long passed that the Swiss banks could get the proof required to mitigate the penalties.  But, recently, at least one bank has made inquiries that, while not acknowledging that the bank was seeking penalty mitigation, that seemed to the focus of the inquiries.


  1. Within the last few days, I have seen a push by Swiss banks to offer to reimburse my clients for their legal fees in bringing their accounts into US tax compliance. Seems that it is a logical business decision on the part of the bank: if the amount reimbursed to the client results in a penalty savings greater than the amount reimbursed, that would be of benefit to the bank. The bank, in return for the reimbursement, would seek the client's written agreement, W-9 form and copy of the Form 906. I'll also note that at least one bank, which previously rejected any client reimbursement, is now quite keen on getting the clients' cooperation.

  2. I am not familiar with Swiss law but I would expect that the bank has no legal basis for refusing to release funds or assets in custody. The only exception is a CD or savings account whih tpically has a notice period (in practice usually waived if the customer useds the funds to buy other assets within the bank account. In practice also banks will charge an interest penalty for premature withdrawal. But these rules I would expect wuld need to be applied to all customers across the board. Otherwise I believe that a bank refusing to release funds is considered bankrupt. At last I believe that is the aw in the US. Savings passbooks in the US typically used to have a small print notice that advance notification was required before making substantial withdrawals, though in practice I don't know of that being enfrced. In any case, I believe that threatening to withhold funds or reveal the client's information would be considered blackmail under US law.

  3. If the banks are scrambling to get permission to release client data and offering tens of thousands of dollars for that permission, they darn well know that 1) they need the client's permission to release it and 2) that the signed release has a value to them significantly greater than what they offer to pay.
    Therefore, I would contend that a bank releasing client data without permission knows it is breaking the law and is doing so for financial gain, therefore setting itself up to be sued. Keep in mind that many of these clients have disclosed the acounts through OVDI or otherwise and havo no fear of filing a lawsuit.
    Don't know whether such a suit can be tried in the US, or whether Switzerland allowscalss action suits, but it seems like an opportunity for enterprising lawyers.

  4. Asher, I wonder whether the offer varies depending on account balance? $25K reimbursement on a $100K account would be 25%, which is greater than the bank's savings of 20%. On the other hand, on a $1M account, 25K is only 2.5% which seems a paltry offer in relaion to 200K in savings to the bank.
    By the way, professors have done game theory studies on this type of situation. Two people are ffered $20 which they can split between them in any way that both agree. If there is no agreement, each gets nothing. It was found that agreements at 50/50 or near that (60/40 or 40/60) worked, but that if the parties were too far apart (90/10 split fr example) one party though that he was better off with both getting nothing than he getting 10% and the other party 90%.

  5. Addendum: to my knowledge, Swiss bans are allowed to block the entire account on their own initiative, but only for three days, to give the Swiss government time to act on the bank's suspicions. If the government doesn't act to impose its own freeze, the funds must be released.

  6. In any negotiation with the bank keep in mind that any legal fee reimbursement will be taxable to you (if you deducted it previously.) ou could try to ask for accounting fees also.
    I am curious as to how people would ensure they get paid. Escrow account with a lawyer?

  7. A month ago a Zurich court ruled against a Swiss bank.
    William H Millard faced a $118 million tax bill from the Northern Mariana Islands (a US possession.) Credit Suisse/Clariden Leu negotiated directly with the Marian gov't and agreed to pay $1.4 million to get itself off the hook, all this without informing Mr. Millard. The bank then tried to get Mr. M to reimburse it for the $1.4 m plus a few hundred thousand in legal expenses. The court ruled against the bank.
    There are interesting parallels between this case and Swiss banks' negotiations with the IRS.
    Sources (in French and German, the German more thorough)

  8. Dolphin, thanks for your comment. I suspect that Mr. Millard's move to the Commonwealth of the Northern Mariana Islands (CNMI) was occasioned by CNMI's double tax regime (piggybacked on Guam's) which, in effect, said that, if a U.S. citizen were a resident of CNMI, he would file a single tax return each year with CNMI (and not the U.S.) and would calculate his gross tax liability the same way. The tax gambit of CNMI residence was that the person could then get a 95% rebate on income sourced anywhere other than in the U.S. I saw that deal promoted by Arthur Andersen to a number of wealthy clients of AA, and actually litigated one of them. I have written on this before:

    Jack Townsend


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