Two More Banks Obtain NPAs under DOJ Swiss Bank Program (9/25/15)

On September 25, 2015, DOJ announced here that Migros Bank AG (Migros) and Graubündner Kantonalbank (Graubündner) have entered an NPA under the DOJ program for Swiss banks, here.  The penalties are:

Migros Bank AG (Migros)	$15.037 million
Graubündner Kantonalbank (Graubündner)	$3.616 million

Here are key excerpts.

Migros was founded in 1957 and is headquartered in Zurich.  As of Dec. 31, 2014, Migros Bank had 66 offices (all in Switzerland) and more than 1,300 employees.  In January 2001, Migros Bank entered into a Qualified Intermediary (QI) Agreement with the Internal Revenue Service (IRS).  The QI regime provided a comprehensive framework for U.S. information reporting and tax withholding by a non-U.S. financial institution regarding U.S. securities.  Migros Bank issued several directives to its employees concerning the QI Agreement.  An October 2000 directive stated that persons subject to U.S. taxes who did not want to be disclosed to the “U.S. tax authority” would not be authorized to hold or purchase U.S. securities in their accounts beginning on Jan. 1, 2001.  The directive further stated that persons subject to U.S. taxes who disclosed their identities to the U.S. tax authority via an IRS Form W-9 could purchase and sell U.S. securities without restriction. 

Migros Bank also created a handbook regarding the QI Agreement, which was first issued to its employees in 2003.  The handbook recognized that “the U.S. retains the right to full taxation of its citizens,” but also that a “U.S. person has the option not to disclose to U.S. tax authorities.”  The handbook instructed Migros Bank employees that “[i]f a U.S. person does not wish to disclose to U.S. tax authorities, it is sufficient if the W-9 form is not filled out for Migros Bank,” and that the customer could sign a waiver to forego investing in U.S. securities.  The handbook further instructed Migros Bank employees that clients residing in the United States “who would like to refrain from disclosure” could be “tended to” by, among other things, retaining their mail in Switzerland through hold-mail agreements, not making regular fund transfers  to the United States and not sending payment orders from the United States. 

From 2001 until 2005, Migros Bank accepted referrals of U.S. persons as new clients from an external asset manager based in Switzerland.  The external asset manager brought a total of 165 U.S.-related accounts to Migros Bank during that period, and most of those accountholders were U.S. residents.  The maximum value of these accounts during that period was approximately $62 million.  The external asset manager had full control of his clients’ accounts, and Migros Bank’s relationship managers usually interacted with him rather than with his clients.  In 2005, Migros Bank decided to terminate its relationship with the external asset manager, but it did not end the relationship until the end of 2006 in order to provide the external relationship manager with additional time to contact his clients and possibly move their funds to other depositary banks.  Alternatively, his clients could elect to stay at Migros Bank and give the external asset manager powers of attorney to continue managing their accounts. 

In December 2008, Migros Bank’s executive board established a working group of bank officials to study the situation of U.S.-domiciled clients, whom Migros Bank considered to be the riskiest U.S. persons from a U.S. tax-enforcement perspective, identify any related risks to Migros Bank and propose measures to limit such risks.  The working group assessed the risk of U.S. tax authorities taking actions against additional Swiss banks as moderate and the risk of Migros Bank’s website and e-banking services causing it to fall under U.S. bank supervision as low.  They also assessed the risk of relationship managers’ insufficient legal and linguistic knowledge causing erroneous advice to U.S.-domiciled clients as moderate. 

The working group considered discontinuing business with all U.S.-domiciled clients to be a “low priority” because that business generated earnings with hardly any additional expenditure and had “further potential as various banks are discontinuing the provision of advisory services.”  Instead, the working group considered the creation of a U.S. desk to be a top priority.  The working group presented a business case for this option that envisioned obtaining an additional one percent share of the total U.S.-domiciled clients with more than 1 million Swiss francs in assets then being served by all Swiss banks.  The working group estimated that there were more than 2,500 UBS clients alone in that category.  The business case also envisioned potentially obtaining an additional two percent share of all other U.S.-domiciled clients, “depending on the strategy.”  The working group estimated that this course of action would result in Migros Bank having 250 million Swiss francs under management from U.S.-domiciled clients. 

The executive board ultimately decided, starting in 2009, to create a U.S. desk by re-assigning all U.S.-domiciled clients, whether in premium or retail banking, to a group of premium-banking relationship managers who spoke English and had received specialized regulatory training.  The head of the premium-banking department had ultimate responsibility over this team, which eventually included nine relationship managers.  In May 2009, Migros Bank issued a directive requiring that the head of the premium-banking department approve all new U.S.-domiciled clients, prohibiting Migros Bank employees from sending correspondence to the United States or accepting orders received by telephone, fax or mail from the United States, and prohibiting U.S.-domiciled clients from initiating transactions through the e-banking system.  After issuing the directive, Migros Bank accepted 37 new U.S.-related accounts in the remainder of 2009.  Of these, 17 were funded by transfers from banks with operations already under investigation by the department, or Category 1 banks. 

Since Aug. 1, 2008, Migros Bank provided banking services for 898 U.S.-related accounts, with more than $273 million in assets.  Migros Bank will pay a penalty of $15.037 million. 

Graubündner was founded in 1870.  It is headquartered in Chur, Switzerland, and has 63 branches, all located within the Canton of Graubünden. 

With respect to its U.S.-related accounts, Graubündner offered a variety of traditional Swiss banking services that, though available to all of its clients, were used by some U.S. taxpayers to conceal their undeclared assets and income.  These services included code word or numbered accounts and assisting U.S. clients in executing forms that directed Graubündner not to disclose their names to the IRS.  For approximately 76 U.S-related accounts, Graubündner provided hold mail services, through which Graubündner held bank statements and other mail in Switzerland rather than sending the documents to the United States.  In a few cases, Graubündner processed substantial cash withdrawals in connection with U.S. clients’ closure of their accounts.  For example, at an account closing in December 2009, the bank permitted a U.S. taxpayer to withdraw approximately $112,000 in cash.  Graubündner also closed a U.S.-related account held by a U.S. citizen and resident by transferring the account funds to another Graubündner account held in the name of the U.S. client’s parents, who lived in Switzerland. 

Graubündner opened and maintained accounts for seven U.S. taxpayers in the names of offshore structures where the U.S taxpayer’s interest in the account was not reported to the IRS.  Five U.S. citizens were the beneficial owners of accounts held in the names of nominee entities, including four Liechtenstein foundations and a British Virgin Islands company.  Two of these accounts had traded in U.S. securities, but Graubündner did not report account earnings or transmit withholding taxes to the IRS as required.  Graubündner also opened and maintained two accounts in the names of Swiss companies, one for a Swiss citizen and one for a German citizen, both of whom resided in the United States. 

In December 2008, Graubündner required that all new and existing U.S. clients, irrespective of domicile, submit a handwritten declaration of compliance with their U.S. tax obligations, waive Swiss banking secrecy and provide a Form W-9.  Graubündner also prohibited the opening of new accounts for entities with a U.S. beneficial owner, even with a Form W-9 and confirmation of tax compliance.  New U.S. clients who failed to submit the requested documents were not supposed to be accepted, though initially some relationship managers continued to accept U.S. customers without securing a Form W-9.  Existing clients who failed to meet these requirements were to be exited by June 2010.  In July 2009, Graubündner stopped accepting any new U.S. clients, with the exception of U.S. nationals residing in Switzerland or Swiss nationals temporarily residing in the United States. 

Graubündner has fully cooperated with the department, providing all relevant and requested information and documents as part of its participation in the Swiss Bank Program.  Further evidencing Graubündner’s cooperation is the fact that its employees and members of the board of directors have not objected to the disclosure of their names and functions at Graubündner to the department.  In compliance with Swiss privacy laws, Graubündner has sought and obtained bank secrecy waivers from many of its U.S. customers, whose names were then provided to the U.S. government. 

Since Aug. 1, 2008, Graubündner had 364 U.S.-related accounts with an aggregate maximum balance of approximately $105.5 million.  Graubündner will pay a penalty of $3.616 million. 

In accordance with the terms of the Swiss Bank Program, each bank mitigated its penalty by encouraging U.S. accountholders to come into compliance with their U.S. tax and disclosure obligations.  While U.S. accountholders at these banks who have not yet declared their accounts to the IRS may still be eligible to participate in the IRS Offshore Voluntary Disclosure Program, the price of such disclosure has increased. 

Most U.S. taxpayers who enter the IRS Offshore Voluntary Disclosure Program to resolve undeclared offshore accounts will pay a penalty equal to 27.5 percent of the high value of the accounts.  On Aug. 4, 2014, the IRS increased the penalty to 50 percent if, at the time the taxpayer initiated their disclosure, either a foreign financial institution at which the taxpayer had an account or a facilitator who helped the taxpayer establish or maintain an offshore arrangement had been publicly identified as being under investigation, the recipient of a John Doe summons or cooperating with a government investigation, including the execution of a deferred prosecution agreement or non-prosecution agreement.  With today’s announcement of these non-prosecution agreements, noncompliant U.S. accountholders at these banks must now pay that 50 percent penalty to the IRS if they wish to enter the IRS Offshore Voluntary Disclosure Program.

The banks will be added to the IRS's Foreign Financial Institutions or Facilitators, here.  As indicated in the last quoted paragraph, accountholders in the listed banks joining OVDP after one of their banks are listed will be subject to the 50% penalty in OVDP (provided that they do not opt out, in which case, who knows).

Here are the updated statistics for the Swiss Bank Program:

US DOJ Swiss Bank Program	Number	Number Resolved	Total Costs
U.S. / Swiss Bank Initiative Category 1 (Criminal Inv.) *	17	5	$3,470,550,000
U.S. / Swiss Bank Initiative Category 2 **	79	39	$351,146,990
U.S. / Swiss Bank Initiative Category 3	14		$0
U.S. / Swiss Bank Initiative Category 4	8		$0
Swiss Bank Program Results	118		$3,821,696,990
* Includes subsidiary or related entities counted as separate entities, so the numbers may exceed the numbers the IRS and DOJ posted numbers which combine some of the entities.
** DOJ says original total was 106 but that it expects about 80 to complete the process.