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 should the U.S. 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 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.