The next step in the United States’ campaign against offshore tax evasion
July 2014 | SPECIAL REPORT: WHITE-COLLAR CRIME
Financier Worldwide Magazine
In light of historic Swiss bank secrecy laws, many have questioned whether, and how, the US Justice Department will obtain information about those US taxpayers who have maintained secret, undisclosed accounts at Credit Suisse and other Swiss banks. That question was answered, in part, most recently when Credit Suisse (the second largest bank in Switzerland, after UBS) pleaded guilty to aiding and abetting its US accountholders in committing tax evasion and agreed to pay a $2.6bn criminal penalty. In addition to Credit Suisse’s admission of guilt, approximately 106 other Swiss banks have now enrolled in the US government’s Program for Non-Prosecution Agreements of Non-Target Letters for Swiss Banks. As a result of these developments, Credit Suisse and the banks participating in the Swiss Bank Program are now obligated to disclose to the US government certain account data (such as the value of and the number and type of persons identified with each account held by a US taxpayer), but not account holder names. Obtaining account data appears to represent the new US strategy for pursuing non-compliant taxpayers.
The Justice Department presumably believes that account data will be key to identifying offending taxpayers, at least until an amendment to the US-Switzerland tax treaty can be ratified, which would broaden the Justice Department’s ability to seek personal identifying information on US taxpayers. Though it is unknown whether this account data will sufficiently assist in identifying non-compliant taxpayers and whether the treaty amendment will be ratified by the Senate, non-compliant US taxpayers still risk criminal prosecution.
A bank enrolled in the Swiss Bank Program (the enrolment deadline was 31 December 2013) may receive immunity from criminal prosecution through a non-prosecution agreement with the US government in exchange for supplying data about its US accounts (and paying substantial penalties). The Justice Department appears to have crafted the program to obtain account data without violating Swiss laws. Pursuant to its bank secrecy laws, Switzerland prohibits the turnover of personal identifying account information, and the treaty is likewise restrictive, only allowing information and documents relating to certain conduct to be turned over. This program therefore appears to require the maximum available account data, but no personal identifying information. The account data required to be provided, however, must be significant and meaningful to the Justice Department, otherwise the significant incentive of a non-prosecution agreement would have never been offered. Further emphasising the apparent importance of this data is the fact that a provision was expressly incorporated into Credit Suisse’s plea agreement obligating that bank to disclose the same data required by the Swiss Bank Program.
The account data to be disclosed by Credit Suisse and the 106 Swiss banks include the total number of US accounts at each bank since 1 August 2008, and, for each account, the bank must disclose the maximum value of the account and the number of US persons affiliated (or potentially affiliated) with each account along with the nature of the relationship between the US person and the account (e.g., owner, beneficiary, signatory authority). The bank must also disclose whether each account was held by an individual or entity and the name of any financial adviser, attorney or other representative associated with the account, as well as information about funds transferred into and out of each account, including whether the transfers were made in cash, whether the funds were transferred through an intermediary, and all countries to or from which the funds were transferred. Each bank must also describe its basic banking operations, including how the cross-border business operated, identify those individuals responsible for that business, and how the bank attracted and serviced its accountholders.
It is unknown when the Justice Department will obtain this account data, but a reasonable estimate is that it will be turned over before the end of this year, if not sooner. The Credit Suisse plea agreement does not contain a specific timetable for the turnover of account data, other than it be done ‘promptly’. In contrast, the 106 Swiss banks in the program are required to supply account data only after receipt of a non-prosecution agreement. Based upon the program’s timetable (Swiss banks have until 30 June 2014, to provide information on basic banking operations and would thereafter finalise each non-prosecution agreement), it is unlikely that any of the Swiss banks have turned over this account data yet, but they could well be on pace to do so before the end of 2014.
Though some have criticised the Justice Department for failing to demand that Credit Suisse turn over US accountholder names, that criticism should instead be levelled at the US Senate. The US is confined by Swiss law and the US-Switzerland treaty process in terms of the scope of information the Justice Department may demand from a Swiss bank. Swiss bank secrecy and due process laws protect personal identifying account information, and requests for information on this subject must go through the treaty process. The 1996 US-Switzerland tax treaty allows taxpayer information to be exchanged for “the prevention of tax fraud or the like”. But Swiss law does not consider the underreporting of income (tax evasion) to be tax fraud. Rather, tax fraud under Swiss law requires that false documents, false statements, or some other fraudulent scheme was involved. To further delineate between tax fraud and tax evasion, Switzerland and the US executed a 2003 mutual agreement that outlined 14 hypothetical exemplars that would meet the ‘tax fraud and the like’ standard, and holding funds in a foreign bank account with unreported income was not included. It is now well-accepted that tax evasion is not covered by the treaty. Consequently, the US cannot legally obtain information relating to tax evasion from the Swiss government and banks.
One exception arose in the case of UBS. In 2009, UBS avoided prosecution in the US by agreeing to pay $780m, admitting to having aided US tax evasion, and turning over the names of approximately 4700 US accountholders. Because the basis for turning over those US accountholder names was mere tax evasion (and not tax fraud), a Swiss court later held that UBS’s disclosure was not permitted by the ‘tax fraud or the like’ standard and therefore violated Swiss law. This court decision could have caused the collapse of the US-UBS agreement, which in turn could have jeopardised the future viability of UBS as a financial institution. Faced with the potential economic failure of Switzerland’s largest bank, the Swiss parliament swiftly enacted legislation that retroactively authorised UBS’s disclosure of accountholder names without having violated Swiss law.
The deferred prosecution agreement with UBS, and the later rejection of that agreement by the Swiss courts, prompted Switzerland and the US to sign a protocol in 2009 that would amend the 1996 treaty to expand the scope of requests a county can make and eliminate objections raised by the responding county. Specifically, that protocol replaced the ‘tax fraud and the like’ standard with that ‘may be relevant…to the administration or enforcement of the domestic laws concerning taxes’. This standard encompasses tax evasion and would permit the US to request – and Switzerland to provide – ‘information for cases under examination or criminal investigation, in collection, on appeals, or under prosecution’, a much broader class of cases than under the 1996 treaty. The 2009 protocol also eliminates a bank’s refusal to provide account information because of secrecy laws. It does not, however, abrogate the right to raise a challenge under due process principles, which, under Swiss law, is an immutable right.
When this treaty amendment was signed by Switzerland in September 2009, it was considered to be a ‘near certainty’ that the US Senate would soon thereafter ratify it. However, ratification still has not occurred. The ratification process requires the president to submit the signed treaty to the Senate, which immediately routes it to the Senate Committee on Foreign Relations for review and approval. Following that approval, a positive vote of two-thirds of those Senators present and voting ratifies the treaty. In this case, President Obama sent the protocol to the Senate in January 2011, and the Foreign Relations Committee approved it on 26 July 2011. Senator Rand Paul, a Kentucky Republican who won his Senate seat in 2010 through the Tea Party movement, however, has blocked further consideration of the 2009 protocol, claiming that the new standard threatens accountholders’ due process rights. The protocol, however, does not usurp Swiss due process law, and US accountholders, for example, could challenge the turnover of their records on due process principles in the Swiss courts. Until the concerns about the 2009 protocol are resolved, obtaining account data from Credit Suisse and the 106 participating Swiss banks appears to represent the Justice Department’s ‘back-up plan’.
Before the Justice Department is able to utilise this account data to construct a roadmap to identify specific non-compliant US taxpayers, accountholders can still take advantage of the safe harbour offered by the Internal Revenue Service’s Offshore Voluntary Disclosure Program (OVDP). Under the OVDP, eligible individuals disclose their foreign accounts, pay back taxes, interest and penalties, and become tax compliant in exchange for amnesty from criminal prosecution. But the protection offered by OVDP is available only if the individual comes forward before the US learns, from whatever source, of the offshore account. Time is thus of the essence for US taxpayers who have not yet disclosed their Swiss bank accounts (even if those accounts have already been closed). Once the IRS obtains accountholder information from any participating Swiss bank, amnesty offered by the OVDP is no longer available.
Matthew D. Lee is a partner and Stephanie C. Chomentowski is an associate at Blank Rome LLP. Mr Lee can be contacted on +1 (215) 569 5352 or by email: firstname.lastname@example.org. Ms Chomentowski can be contacted on +1 (215) 569 5344 or by email: email@example.com.
© Financier Worldwide
Matthew D. Lee and Stephanie C. Chomentowski
Blank Rome LLP