2000px-Seal_of_the_United_States_Department_of_Justice_svgOriginally published by the International Enforcement Law Reporter (Feb. 10, 2017)

By Matthew D. Lee[1]

On December 29, 2016, the Justice Department’s Tax Division announced that it had reached final resolutions with the remaining “Category 3 and 4” Swiss banks that had enrolled in the Swiss Bank Program.[2] Originally unveiled in August 2013, the Swiss Bank Program provided a path for Swiss banks to resolve their potential criminal exposure under U.S. tax laws, and to cooperate in the Justice Department’s ongoing investigations of the use of foreign bank accounts by U.S. taxpayers to commit tax evasion. The Swiss Bank Program also provided a mechanism for those Swiss banks that were not engaged in wrongful acts but nonetheless wanted a resolution of their status. Originally viewed with skepticism by some critics, the Swiss Bank Program ultimately proved to be an overwhelming success, with 80 “Category 2” banks resolving their potential liability under U.S. law and paying nearly $1.4 billion in penalties. As the program now enters its “legacy” phase, Justice Department prosecutors and Internal Revenue Agents are working closely with all banks in the program to pursue leads around the globe to further additional investigations of foreign financial institutions, professionals, and individual U.S. taxpayers for offshore tax evasion.

Background Regarding the Swiss Bank Program

The Swiss Bank Program, unveiled on August 29, 2013, provided a path for Swiss banks to resolve potential criminal liabilities in the United States. Swiss banks eligible to enter the program were required to advise the Justice Department no later than December 31, 2013, that they had reason to believe that they had committed tax-related criminal offenses in connection with undeclared U.S.-related accounts. Banks already under criminal investigation related to their Swiss-banking activities and all individuals were expressly excluded from the program.

Under the program’s terms, participating banks were required to: make a complete disclosure of their cross-border activities; provide detailed information on an account-by-account basis for accounts in which U.S. taxpayers have a direct or indirect interest; cooperate in treaty requests for account information; provide detailed information as to other banks that transferred funds into secret accounts or that accepted funds when secret accounts were closed; agree to close accounts of accountholders who fail to come into compliance with U.S. reporting obligations; and pay appropriate penalties.

Any Swiss bank meeting all of the above requirements was eligible for a non-prosecution agreement, ensuring that it would not be subject to criminal prosecution in the United States.

Categories of Swiss Banks

The Swiss Bank Program established four categories of Swiss financial institutions based upon their perceived liability for potential violations of U.S. laws. “Category 1” included Swiss banks already under investigation when the program was announced; such institutions were not eligible to participate in the program. Banks in this category included UBS AG, Credit Suisse AG, Wegelin & Co., and Zurcher Kantonalbank, among others.

“Category 2” was reserved for banks that advised the Justice Department by December 31, 2013, that they had reason to believe that they had committed tax-related criminal offenses in connection with undeclared U.S. related accounts. To obtain a non-prosecution agreement, Category 2 banks were required to make a complete disclosure of their cross-border activities, provide detailed information on accounts in which U.S. taxpayers have a direct or indirect interest, cooperate in treaty requests for account information, provide detailed information as to other banks that transferred funds into hidden accounts or that accepted funds when those secret accounts were closed, and cooperate in any related criminal and civil proceedings for the life of those proceedings. Category 2 banks were also required to pay financial penalties based upon the number of U.S.-related accounts they serviced.

“Category 3” was designed for banks that established, with the assistance of an independent internal investigation of their cross-border business, that they did not commit tax or monetary transaction-related offenses and had an effective compliance program in place. Category 3 banks were required to provide the Justice Department with an independent written report that identified witnesses interviewed and a summary of each witness’s statements, files reviewed, and factual findings and conclusions. In addition, Category 3 banks were required to appear before the Justice Department and respond to any questions related to the report or their cross-border business, and to close accounts of accountholders who failed to come into compliance with U.S. reporting obligations. Upon satisfying these requirements, Category 3 banks were entitled to receive a non-target letter.

“Category 4” was reserved for Swiss banks that were able to demonstrate that they met certain criteria for deemed-compliance under the Foreign Account Tax Compliance Act (FATCA), a U.S. anti-tax evasion law enacted in 2010. Category 4 banks also were eligible for a non-target letter.

Category 1 Bank Resolutions

To date, a number of “Category 1” banks have reached resolutions of their potential criminal exposure under the U.S. tax laws with the Justice Department. The largest Swiss bank, UBS AG, entered into what was then considered a landmark deferred prosecution agreement in February 2009, agreeing to pay nearly $800 million, revamp its cross-border business, and hand over the identities of certain U.S. clients. The second largest Swiss bank, Credit Suisse, pleaded guilty in federal court to conspiracy to defraud the United States and paid $2.6 billion, the largest fine ever imposed in a criminal tax case. Other notable Category 1 banks which have reached resolutions with the U.S. include Wegelin Bank (Switzerland), Bank Leumi (Israel), and Bank Julius Baer (Switzerland). To date, a total of eight Category 1 financial institutions have resolved their criminal exposure under U.S. law, and several others remain under criminal investigation at this time.

Category 2 Resolutions

Between March 2015 and January 2016, the Justice Department executed non-prosecution agreements with 80 Category 2 banks and collected more than $1.36 billion in penalties. The Justice Department also signed a non-prosecution agreement with Finacor, a Swiss asset management firm, reflecting what the Justice Department described in a press release as its “willingness to reach fair and appropriate resolutions with entities that come forward in a timely manner, disclose all relevant information regarding their illegal activities and cooperate fully and completely, including naming the individuals engaged in criminal conduct.”[3]

Category 3 and 4 Resolutions

The Justice Department’s announcement in late December revealed that between July and December 2016, four banks and one bank cooperative satisfied the requirements of Category 3, making them eligible for non-target letters. No banks qualified under Category 4 of the program. The Justice Department did not announce the names of any of the qualifying Category 3 banks, nor did it release the names of the banks which failed to qualify as Category 4 institutions. Earlier this year Swiss bank Thurgauer Kantonalbank announced that it had received a non-target letter from the Justice Department, thus qualifying as a Category 3 institution.[4] The identities of the remaining Category 3 banks have not yet been made public.

Reflections on the Swiss Bank Program as it Enters “Legacy” Phase

The Swiss Bank Program has been an unqualified success for the U.S. government’s aggressive campaign to crack down on offshore tax evasion. Never before had the Justice Department offered what is essentially a tax evasion “amnesty” program to an entire country’s financial industry, leading some critics to initially question whether any Swiss banks would come forward given the historical secrecy that enveloped that sector. Those critics have been resoundingly proven wrong, given the overwhelming demonstration of interest in the program by Swiss banks and the significant amount of information that the program has generated for the Justice Department and Internal Revenue Service.

The Justice Department’s announcement of final resolutions with Category 3 and 4 banks does not, however, mark the conclusion of the Swiss Bank Program. Instead, the program is now enters what Justice Department calls its “legacy phase,” pursuant to which all participating Swiss banks are cooperating with ongoing civil and criminal investigations in the United States. The Swiss Bank Program is undoubtedly affording U.S. prosecutors and IRS agents a wealth of leads that they will use to “follow the money” around the globe in a continued effort to hold financial institutions, advisors, and account holders liable if they engage in evasion of U.S. tax laws. At the same time, the resolution of the Swiss Bank Program further ratchets up the pressure on non-compliant taxpayers, as the price of admission to the Offshore Voluntary Disclosure Program (OVDP) has dramatically increased for those who maintained secret accounts at any of the Swiss banks that have now resolved their potential liabilities with the U.S.

Given the tremendous success of the Swiss Bank Program, it remains to be seen whether the Justice Department will offer a similar program to banks in other countries or regions. Regardless of whether a formal program akin to the Swiss Bank Program is announced, financial institutions around the globe would be well-advised to take affirmative steps to attempt to resolve any potential exposure they may have under U.S. criminal laws. The Justice Department has long said that it would entertain voluntary disclosures of potential criminal activity from any bank, and that such self-corrective action – assuming it is timely and constitutes a full and complete disclosure – would be viewed favorably by the government officials in determining whether criminal prosecution is warranted.

[1]      Matthew D. Lee is a partner at Fox Rothschild LLP in Philadelphia and a member of his firm’s White-Collar Compliance and Defense practice group. A former U.S. Department of Justice trial attorney, Mr. Lee is the author of The Foreign Account Tax Compliance Act Answer Book 2016 (Practising Law Institute).

[2]     See Department of Justice Press Release, “Justice Department Reaches Final Resolutions Under Swiss Bank Program” (Dec. 29, 2016).

[3]     See Department of Justice Press Release, “Swiss Asset Management Firm Finacor SA Reaches Resolution with Justice Department” (Oct. 6, 2015).

[4]     See https://www.tkb.ch/tkb/medien/medienmitteilungen.htm?go1CDIccbRxIYVr4qeDJyxIIAoxlk7CxJxlD (last visited Feb. 1, 2017).