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Valiant Holding AG Enters DOJ Program for Banks; Others will Follow

With the Swiss Financial Market Supervisory Authority (“FINMA”) deadline ending today on December 9, 2013, Valiant Holding AG made it official – it is the first bank to officially announce its intention to enter the The Program for Non-Prosecution Agreements or Non-Target Letters for Swiss Banks (the “Program”). While the first one to do it, Valiant Holding AG will definitely not be the only bank to do it. As Sherayzen Law Office predicted earlier, there will be an avalanche of Swiss Banks following in the footsteps of Valiant Holding AG.

Background

On August 29, 2013, the U.S. Department of Justice (“DOJ”) and the government of Switzerland issued a joint statement instituting The Program for Non-Prosecution Agreements or Non-Target Letters for Swiss Banks (the “Program”). Sherayzen Law Office, Ltd. has covered the specific details of the Program in a previous article. Essentially, the Program functions as a voluntary disclosure program for Swiss banks, similar to the US Internal Revenue Service’s Offshore Voluntary Disclosure Program (“OVDP”) now closed for U.S. taxpayers holding undisclosed offshore accounts. In general, in return for providing extensive disclosure of the accounts held by U.S. taxpayers, banks that qualify for the Program can avoid U.S. criminal prosecution.

As also explained earlier, the Program is only open to non-“Category 1” banks (fourteen Category 1 Swiss banks are already under criminal investigations by the DOJ, including Credit Suisse, Rahn & Bodmer, Zuercher Kantonalbank, Basler Kantonalbank, and Bank Leumi, among others). As I explained earlier in another article, under the Program, “Category 2” banks will face potentially substantial penalties.

There is actually fear that the costs of compliance combined with penalties will simply overwhelm a large portion of small Swiss banks, with some predicting the loss of at least one-quarter of the Swiss banks who enter the Program. It is not known whether Valiant Holding AG has sufficient resources to sustain the effort required to participate in the Program, though no one really raised this issue yet.

FINMA Deadline of December 9, 2013

According to Swiss regulatory officials, Swiss banks had it until today (December 9th) to notify the FINMA whether they intend to participate in the Program. This is why Valiant Holding AG announced its participation today.

FINMA Encourages Swiss Banks to Participate in the Program

Recently, various members of the FINMA, such as their CEO, Dr. Patrick Raaflaub, have issued statements and press releases encouraging various Swiss banks to enter the Program. (FINMA is responsible for implementing the Financial Market Supervision Act and financial market legislation, and according to their website, “As an independent supervisory authority, FINMA acts to protect the interests of creditors, investors and insured persons and to ensure the proper functioning of the financial markets.”) For example, in a recent edition of the Swiss Neue Zürcher Zeitung newspaper, Raaflaub emphasized the strong possibility that Swiss banks that chose not to enter the Program would likely face years of costly legal risks and even more coercive enforcement measures by the DOJ in the future. Further, although participation in the Program is onerous, he noted that it would provide participating Swiss banks with long-needed legal certainty.

Adding to the pressure that Swiss banks face is the fact that Raoul Weil, former UBS Chairman and chief executive officer of Global Wealth Management & Business Banking, was arrested in October while on holiday at a luxury hotel in Italy. Weil agreed to extradition to the US for trial for allegedly assisting U.S. persons in hiding $20 billion from the IRS.

The various public statements by FINMA, however, have understandably caused consternation among Swiss bankers. There is a sentiment in Switzerland that FINMA is not doing enough to protect Swiss interest and to counter the U.S. DOJ’s tactics.

Many Swiss Banks Likely to Enter the Program Following Valiant Holding AG

Despite the anti-US rhetoric, however, it appears that numerous non-Category 1 Swiss banks will follow the example set by Valiant Holding AG and will likely enter the Program today. According to recent US news reports, most of Switzerland’s approximately 300 or so smaller banks are expected to enter the Program (FINMA has not disclosed yet as to how many have done so). Therefore, Valiant Holding AG announcement, while somewhat historic, is not actually surprising.

A spokesman for Berner Kantonalbank noted that, “Participating in the program is absolutely an issue for us” and that the board would take a final vote on the matter; a spokeswoman for south Switzerland’s Corner Bank also stated that the bank was considering entering the Program. Other banks, such as Vontobel, EFG International, Banque Cantonale Vaudoise, St. Galler Kantonalbank, and Linth Bank, either have not made a decision yet, or did not issue public comments as of last week.

U.S. Taxpayers With Undisclosed Accounts In Valiant Holding AG and Other Swiss Banks Must Act Quickly

The Program presents a tremendous risk to U.S. taxpayers with undisclosed financial accounts in Valiant Holding AG and other Swiss Banks. Not only are their accounts likely to be disclosed to the IRS, but it will be done in a very short period of time.

As noted earlier, the due date for these banks is today; within a short period of time, Valiant Holding AG and other Swiss Banks will likely proceed with their disclosures to the DOJ and the IRS. In these case, U.S. taxpayers will likely face substantial civil and potential criminal penalties if they continue to hold undisclosed accounts or if their cases are not handled properly.

Therefore, U.S. taxpayers who either hold or previously held undisclosed bank accounts in Valiant Holding AG or any of the Swiss banks eligible for the Program should seek competent and experienced legal assistance as soon as possible to avoid potentially disastrous consequences.

Contact Sherayzen Law Office for Experienced, Professional Legal Help With Your Offshore Voluntary Disclosure

The experienced offshore voluntary disclosure attorney Mr. Eugene Sherayzen at Sherayzen Law Office, Ltd. can help with your all of your voluntary disclosure issues. We are a team of highly experienced team of international tax professionals who are dedicated to helping our clients. Our ethical creative balanced solutions have helped people throughout the world to properly disclose their foreign financial accounts to the IRS while avoiding the numerous voluntary disclosure pitfalls.

Contact Sherayzen Law Office NOW!

2014 Foreign Earned Income Exclusion

On November 18, 2013, the IRS announced that the foreign earned income exclusion amount under §911(b)(2)(D)(i) is going to be $99,200 for tax year 2014. This up from $97,600 in 2013 and $95,100 in 2012.

Generally, if a qualified individual meets certain requirements of I.R.C. §911, he may exclude part or all of his foreign earned income from taxable gross income for the U.S. income tax purposes. This income may still be subject to U.S. Social Security taxes.

Remember, if your overseas earnings are above $99,200 for the tax year 2013, then you may be subject to U.S. income taxation on the excess amount (i.e. amount exceeding the 2014 foreign earned income exclusion).

It is also important to note, despite the income tax exclusion, your tax bracket will still be the same as if you were taxed on the whole amount (i.e. as if you had not claimed the foreign earned income exclusion). For most U.S. expatriates, this means that the tax bracket is likely to start at 25% or higher. If you are self-employed, however, your situation may differ from this description.

Furthermore, it is worth noting that additional amount of earnings may also be excluded under the foreign housing exclusion.

Contact Sherayzen Law Office For Foreign Earned Income Exclusion Legal Help

If you are a U.S. taxpayer living abroad or you are planning to accept a job overseas, contact us to discuss your tax situation. Our experienced tax law office will guide you through the complex maze of U.S. tax reporting requirements, help you make sure that you are in full compliance with U.S. tax laws, and help you take advantage of the relevant provisions of the Internal Revenue Code to make sure that you do not over-pay your taxes in the United States.

Undisclosed Bank Accounts in Switzerland: Category 2 Swiss Banks

As the voluntary disclosure program for Swiss Banks proceeds at a rapid pace, the question number one among U.S. international tax attorneys is what will happen to the undisclosed bank accounts in Switzerland. In order to understand the impact of the US Department of Justice (“DOJ”) the Program for Non-Prosecution Agreements or Non-Target Letters for Swiss Banks (the “Program”) on the undisclosed bank accounts in Switzerland, one needs to understand the basic operation of this Program. In an earlier article, I outlined the eligibility requirements for the Swiss Banks. In this article, I want to define the Category 2 banks and what implications this classification will have on the Swiss banks in this category and, ultimately, what type of disclosure US taxpayers with undisclosed bank accounts in Switzerland should expect.

Category 2 Banks Defined

Category 2 banks are those that “have a reason to believe” that they have committed tax offenses under Titles 18 or 26 of the US Code or monetary transactions offenses under Sections 5314 or 5322 of Title 31 of the US Code, in connection with undeclared U.S. Related Accounts held by the Swiss Bank during the Applicable Period (obviously undisclosed bank accounts in Switzerland is among these offenses).

This definition is based on several other definitions that need to be laid out here in order to understand the scope of the Category 2. An important point here is that this definition of Category 2 Swiss banks is very closely intertwined with the FATCA Treaty signed by Switzerland.

First, Titles 18, 26 and 31 are related to criminal prosecution. Obviously, they are broader than solely criminal prosecution, but the important point here is that a Swiss bank should have a reason to believe that it has committed a potentially criminal offense in order to fit in the category 2 (obviously, most U.S. international tax forms may potentially have criminal penalties; so the scope here is fairly broad).

Second, “U.S. Related Accounts” is defined separately by the DOJ. From the outset, one should notice that there is a crucial monetary value limitation; U.S. Related Accounts applies only to accounts that exceed $50,000 at any time during the Applicable Period (see below for the definition) based on the account balance on the last day of each month.

U.S. Related Accounts apply to all accounts “as to which indicia exist” that a U.S. Person or Entity (both terms are defined in the FATCA treaty) has financial or beneficial interest in, ownership of, or signatory and other authority. Other authority includes such powers as: authority to withdraw funds, make investment decisions, receive account statements, receive trade confirmations, receive other account information; or receive advise or solicitations.

How should the Swiss banks find out if such “indicia” exists? The procedures are set forth in the FATCA Agreement, Annext I, Part II due diligence procedures. Some procedures would apply to “Lower Value Accounts” with $250,000 or less in value at all times during the Applicable Period (again see below). Other procedures would be applicable to “High-Value Accounts” with more than $250,00 in value at any time during the Applicable Period (see below).

Finally, what is this “Applicable Period”? DOJ defines the term in a very precise manner: at any time between August 1, 2008 and either (a) the later of December 31, 2014 or the effective date of an FFI Agreement; OR (b) the date of the Non-Prosecution Agreement or (in case of a Category 3 and 4 bank) Non-Target Letter, if that date is earlier than December 31, 2014.

Category 2 Banks: What Do Participating Banks Get for Their Participation in the Program?

Category 2 banks are eligible for a non-prosecution agreement (“NPA”). Basically, if the DOJ concludes that the Category 2 Swiss Bank has met all of its obligations under the NPA, the DOJ will not prosecute this Bank criminally for any of the offenses under Titles 18, 26 and 31 of the United States Code.

However, there is an important exception that may put certain participating banks at a disadvantage. If after the review of the information submitted by a Swiss bank under the NPA request, the DOJ determines that the Swiss bank’s conduct demonstrates extraordinary culpability, the DOJ may require the Swiss bank to enter a Deferred Prosecution Agreement (“DPA”) instead of an NPA.

Category 2 Swiss Banks: What Is the Price for the Participation in the Program?

The price for the Category 2 Swiss Banks who agree to request the NPA can be surprisingly high. There three types of cost: intangible reputation costs, significant penalties under the Program and waiver of the Statute of Limitations Defenses in case the DOJ decides, in its sole discretion, that NPA was violated by the Swiss Bank.

The intangible costs are high to assess and may depend on the particular fact pattern. Generally, the Swiss banks with higher exposure to US clients will suffer more than the Swiss banks who have limited exposure to U.S. capital. Nevertheless, the bank secrecy reputation of the Swiss banks has likely suffered a death blow among U.S. taxpayers, both tax-compliant and those with undisclosed bank accounts in Switzerland. It is without a doubt that the Swiss banks will suffer tremendous intangible losses as a result of the Program participation.

A much more immediate problem is astonishingly high civil penalties imposed on the Swiss banks for having US clients with undisclosed bank accounts in Switzerland, especially given the fact that it is possible that the Swiss banks may not have been aware that these accounts were not properly disclosed to the IRS on the FBARs and Forms 8938.

These civil penalties are imposed by the DOJ on the Swiss Banks upon the execution of the NPA. The exact penalties depend on the opening dates of the accounts.

1. For U.S. Related undisclosed bank accounts in Switzerland that existed on August 1, 2008, the Program would require the Swiss banks to pay a 20% penalty to the United States of the maximum aggregate dollar value of all such accounts during the Applicable Period (see above for definition).

2. For U.S. Related undisclosed bank accounts in Switzerland that were opened between August 1, 2008 and February 28, 2009, the DOJ requires the Swiss Banks to pay a 30% penalty to the United States of the maximum aggregate dollar value of all such accounts;

3. For U.S. Related undisclosed bank accounts in Switzerland that were opened after February 28, 2009, the DOJ requires the Swiss Banks to pay a 50% penalty to the United States of the maximum aggregate dollar value of all such accounts;

The maximum dollar value of the aggregate US Related bank accounts in Switzerland may be reduced by the dollar value of each account as to which the Swiss banks are able to demonstrate, to the DOJ’s satisfaction, was not an undeclared account, was disclosed by the Swiss Banks to the IRS or was disclosed to the IRS through the OVDP (Offshore Voluntary Disclosure Program) or OVDI (Offshore Voluntary Disclosure Initiative) following the notification by the Swiss Bank of the US accountholders (this is why many of US taxpayers with undisclosed bank accounts in Switzerland are now getting these notices) of this program prior to the execution of the NPA.

Of course, in addition to civil penalties, the actual expenses related to going through the program and implementing the proceduring in compliance with an NPA can be very substantial.

Finally, in cases where the DOJ determines in its discretion that the NPA is violated, by executing the NPA, the Swiss banks agree to waive all defenses based on the expiration of the statute of limitations as well as any constitutional, statutory or other claim concerning pre-indictment delay with respect to any prosecutions under Titles 18, 26 and 31 of the United States Code are not time-barred by the applicable state of limitations on the date of the announcement of the Program. Moreover, the Swiss Banks further agree that such waiver is knowing, voluntary, and in express reliance upon the advice of the Swill Bank’s counsel.

Required Reporting with Respect to Undisclosed Bank Accounts in Switzerland

Any Category 2 bank that wishes to obtain an NPA must submit a letter of intent to the DOJ Tax Division containing certain disclosures by December 31, 2013. The letter must include a plan for complying with the program requirements within reasonable time (not to exceed 120 days from the date of the letter of intent); provide the identity and qualifications of an independent examiner (a qualified attorney or accountant who will certify the information); state that the Swiss bank will maintain all records required for compliance with the terms of an NPA, including all records that may be sought by treaty; and acknowledge that the bank will waive any potential defense based on the statute of limitations for the period August 29, 2013 to the issuance of the NPA.

If the Swiss Bank cannot comply with all of the Program requirements within 120 days from the date of the letter of intent, the DOJ will grant a one-time extension of 60 days upon a showing of good cause.

The critical issue for U.S. taxpayers with undisclosed bank accounts in Switzerland is with respect to what type of disclosures constitute the aforementioned “program requirements” .

Program Requirements Prior to the Execution of an NPA

Prior to the execution of an NPA, a Category 2 Swiss bank must disclose to the DOJ the following evidence and information:

a. Explanation of how the cross-border business for US Related Accounts was structured, operated, and supervised (including internal reporting and other communications with and among management);

b. The name and function of the individuals who structured, operated or supervised the cross-border business for US Related Accounts;

c. Explanation of how the bank attracted and serviced account holders;

d. An in-person presentation and documentation, properly translated, supporting the disclosure of the above information, as well as cooperation and assistance with further explanation of information and materials so presented, upon request, or production fo additional explanatory materials as needed; AND

e. Disclosure of the total number of US Related Accounts and maximum dollar value of accounts greater than $50,000 during three separate periods (corresponding to the penalty-calculation periods listed above).

Program Requirements Upon the Execution of an NPA

Upon execution of an NPA, the Category 2 Swiss banks must provide further details about US-related accounts that were closed after August 1, 2008, including the total number of accounts, and as to each account:

a) the maximum value (in USD) of each account;
b) whether the account was held in the name of an individual or an entity;
c) the number of US persons or entities affiliated or potentially affiliated with each account;
d) the nature of the relationship to each account (e.g. a financial interest, beneficial interest, ownership, signatory authority, other authority);
e) whether the account held U.S. securities at any time during the Applicable Period;
f) the name and role of any relationship manager, client advisor, asset manager, financial advisor, trustee, fiduciary, nominee, attorney, accountant, or other individual or entity functioning in a similar capacity known to the participating Swiss Bank to be affiliated with said account at any time during the Applicable Period; AND
g) various information concerning the transfer of duns into and out of the account during the Applicable Period on a monthly basis.

Furthermore, the Swiss Bank must, at its own expense, retain an Independent Examiner who will verify all of the information submitted to the DOJ. The verification must include a statement from the Independent Examiner that FATCA due diligence standards were applied in collecting this information.

Post-Execution NPA Requirements: Assistance and Record Retention

NPA imposes continuous obligations upon the participating Swiss Banks after the NPA is executed. In the future, the Swiss bank must provide all necessary information for the United States to draft treaty requests to seek account information, and the bank must collect and maintain all records that are potentially responsive to any treaty requests to facilitate prompt responses. Extraordinarily, the NPA further requires that the Swiss bank, upon request, provides testimony of competent witness or information as needed to enable the United States to use the information and evidence obtained pursuant to the Program or separate treaty request in any criminal or other proceeding. The Swiss Bank, at its own expense, is also required to provide assistance in identification and translation of significant documents.

The recordkeeping requirement is very broad. The Swiss bank must agree to retain records of all US Related Accounts closed after August 1, 2013 for a period of 10 years from the termination date of the NPA. Same requirement applies to the records related to the Swiss Bank’s U.S. cross-border business in general.

Moreover, the Category 2 Swiss bank must also agree to close any and all accounts of recalcitrant account holders (as defined in I.R.C. Section 1471(d)(6)) and implement procedures to prevent its employees from assisting recalcitrant account holders to engage in acts of further concealment.

Finally, under the NPA, the Swiss Bank agrees not to open any US Related Accounts (irrespective of their size – i.e. this applies to account below the $50,000 threshold) except on the conditions that ensure that the account will be declared to the United States and will be subject to disclosure by the Swiss bank,

What Happens If the Swiss Banks Fails to Comply With the Reporting Requirements

If the DOJ determines, in its sole discretion, that any information or evidence provided by the Swiss Bank is materially false, incomplete or misleading, then the DOJ may decline to enter into an NPA.

If the DOJ discovers that the provided information was materially false, incomplete or misleading after entering into an NPA or that the Swiss Bank otherwise materially violated the terms of the NPA the DOJ may pursue any and all legal remedies available to it, including criminal investigation and prosecution against the violating Swiss Bank, without regard to any other provision of the NPA or the Program. As stated above, by entering into an NPA, the Swiss Bank waives various defenses to such prosecutions, including the ones based on the expiration of the Statute of Limitations.

Contact Sherayzen Law Office if You Have Undisclosed Bank Accounts in Switzerland

If you have undisclosed bank accounts in Switzerland, contact Sherayzen Law Office for professional help with your voluntary disclosure. It should be clear to U.S. taxpayers that continuing to maintain undisclosed accounts in Switzerland is likely to result in heavy civil and potentially criminal penalties.

Our experienced international tax law firm will thoroughly analyze your case, recommend the appropriate strategy for your voluntary disclosure, prepare all of the required tax forms and legal documents and rigorously represent your interests during your negotiations with the IRS.