Bank Sparhafen Zurich AG Reaches Resolution with DOJ

On June 19, 2015, the Department of Justice announced that Bank Sparhafen Zurich AG (Bank Sparhafen) has reached resolution under the department’s Swiss Bank Program.

Bank Sparhafen Background Information

Bank Sparhafen was founded in 1850 and has its sole office in Zurich. Bank Sparhafen knew that U.S. persons had a duty under U.S. law to report their income to the Internal Revenue Service (IRS) and to pay taxes on that income, including all income earned in accounts that Bank Sparhafen maintained in Switzerland. Despite this knowledge, Bank Sparhafen opened, maintained and serviced accounts for U.S. persons that it knew or had reason to know were likely not declared to the IRS or the U.S. Treasury, as required by U.S. law.

After August 1, 2008, U.S. persons opened 32 U.S.-related accounts at Bank Sparhafen, and only one of them provided a Form W-9 to Bank Sparhafen upon opening an account. In most cases, the U.S. persons who opened accounts at Bank Sparhafen during this period had been required to close their accounts at other Swiss banks, and Bank Sparhafen knew or had reason to know that most of these accounts were likely not declared to the IRS. Moreover, 22 of the U.S.-related accounts opened during this period were funded by transfers from banks that were or are the targets of Justice Department criminal investigation.

Two relationship managers at Bank Sparhafen were responsible for managing most of its U.S.-related accounts in the period since August 1, 2008, and one of those managers directly reported to Bank Sparhafen’s chief executive officer. Bank Sparhafen relationship managers assisted U.S. persons in executing waiver forms that directed the bank not to acquire U.S. securities in their accounts. Bank Sparhafen knew that the purpose and effect of these forms was to avoid disclosing the identities of the U.S. persons to the IRS.

Until 2012, Bank Sparhafen provided its U.S. clients with an option for hold-mail agreements, even though it understood that providing these agreements upon request could allow U.S. persons to keep evidence of their accounts outside of the United States in order to conceal assets and income from the IRS. One U.S. client told his Bank Sparhafen relationship manager by email that the hold-mail fee was “cheap insurance against having my dealings with you come to the attention of the government revenue authorities.”

Bank Sparhafen also offered travel cash cards to its clients, including U.S. persons. A client could instruct Bank Sparhafen to load up to 10,000 Swiss francs, U.S. dollars or euros from his or her Bank Sparhafen bank account onto a travel cash card. The client could then use the card for purchases or remit unused balances back to the Bank Sparhafen account. U.S. persons’ use of these cards facilitated access to or use of undeclared funds on deposit at Bank Sparhafen. One Bank Sparhafen relationship manager sent a brochure about travel cash cards to a U.S. client who did not wish to transfer money to the United States because of “surveillance” concerns.

Bank Sparhafen’s Participation in the Swiss Program for Banks and DOJ Non-Prosecution Agreement

In accordance with the terms of the Swiss Bank Program, Bank Sparhafen described in detail the structure, operation and supervision of its U.S. cross-border business, including the names of relevant individuals and entities. It also encouraged existing and prior holders of U.S.-related accounts to disclose their accounts to the IRS through the Offshore Voluntary Disclosure Program.

According to the terms of the non-prosecution agreements signed on June 19, 2015, Bank Sparhafen agreed to cooperate in any related criminal or civil proceedings, demonstrate its implementation of controls to stop misconduct involving undeclared U.S. accounts and pay penalties in return for the department’s agreement not to prosecute these banks for tax-related criminal offenses.

Since August 1, 2008, Bank Sparhafen held 91 U.S.-related accounts, with over $25 million in assets. Bank Sparhafen will pay a penalty of $1.81 million. In accordance with the terms of the Swiss Bank Program, Bank Sparhafen mitigated its penalty by encouraging U.S. accountholders to come into compliance with their U.S. tax and disclosure obligations.

Consequences for US Taxpayers with Undisclosed Accounts at Bank Sparhafen

On August 4, 2014, the IRS increased the OVDP penalty to 50 percent from 27.5 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. This means that, starting June 19, 2015, noncompliant Bank Sparhafen’s U.S. accountholders are likely to now pay a 50 percent penalty to the IRS if they wish to enter the IRS Offshore Voluntary Disclosure Program.