Three More Swiss Banks Have Secured Non-Prosecution Agreements with the DOJ

Since our last update, three more Swiss banks have reached resolutions with the Justice Department under its Swiss Bank Program –Valiant Bank AG, Schroder & Co. Bank AG, and Hypothekarbank Lenzburg AG. To resolve their respective tax-related criminal offenses, Valiant Bank agreed to pay a penalty of $3.3 million, Schroder Bank agreed to pay a penalty of $10.3 million, and HBL agreed to pay a penalty of $560,000.

In press releases, the DOJ described the relevant conduct of each of the banks in relation to their U.S. accountholders as follows:

Valiant Bank (announced yesterday)

Valiant traces its origins to 1824 and is headquartered in Bern, the capital of Switzerland.  Today, Valiant is the successor of 40 banks.

Valiant offered hold mail services and numbered accounts to its U.S. clients, including some U.S. clients who had not provided Valiant with an Internal Revenue Service (IRS) Form W-9.  Valiant also accepted funds from 19 UBS accountholders who exited UBS.  Eleven of these 19 U.S. persons provided a signed Form W-9.  The remaining eight U.S. persons who did not were later forced to close their Valiant accounts.

For 26 accountholders who refused to sign a Form W-9, Valiant cashed out or converted into gold hundreds of thousands (and even millions) of dollars in account balances.  In late November 2011, one accountholder withdrew more than one million Swiss francs in various currencies and 114,000 Swiss francs in gold coins, gold bars and precious metal.  Another accountholder withdrew $2 million in cash and wired 400,000 Swiss francs to a U.S. bank.  In both instances, the accountholders refused to sign a Form W-9.  Other accountholders withdrew only amounts under $10,000 either by U.S. dollar cash withdrawals or by check or wire transfer to the United States, or transferred large sums to non-U.S. institutions.  For example, one accountholder transferred over 435,000 euros to France and $350,000 to Luxembourg.  Two other accountholders each transferred 75,000 Swiss francs to Dubai and closed their accounts with cash withdrawals of over 300,000 Swiss francs.

In 2009, an accountholder refused to sign a Form W-9 and requested that Valiant ignore the accountholder’s U.S. status.  The accountholder’s non-U.S. spouse later opened a separate account at Valiant, and the accountholder transferred more than $1 million into that account.  According to an “Agreement of Donation” between the accountholder and the accountholder’s non-U.S. spouse, the purpose of the transfer was “to make a donation” and “without any consideration.”  The agreement provided that the donation was “irrevocable.”  The non-U.S. spouse then transferred the funds to UBS and instructed Valiant to close the account.

Some U.S.-related accounts at Valiant were held in the name of non-U.S. entities with one or more U.S. beneficial owners.  In one case, a British Virgin Islands entity opened an account at Valiant through a third-party Swiss entity assigned to manage the account.  The entity holding the account designated four U.S. persons as beneficial owners, but signed a Valiant form declaring that the account was for the benefit of non-U.S. persons.

Since Aug. 1, 2008, Valiant had 330 U.S.-related accounts, out of a total of 600,000 accounts.  The maximum aggregate dollar value of the U.S.-related accounts was $147.4 million.  Valiant will pay a penalty of $3.304 million.

Schroder Bank (announced 9/3/2015)

Schroder Bank was founded in 1967 and received its Swiss banking license in 1970.  Since 1984, Schroder Bank has had a branch in Geneva.  The bank has two wholly owned subsidiaries, Schroder Trust AG (domiciled in Geneva) and Schroder Cayman Bank & Trust Company Ltd. (domiciled in George Town, Grand Cayman).  Schroder Cayman Bank & Trust Company Ltd. provides services to clients such as the creation and support of trusts, foundations and other corporate bodies.  Both subsidiaries also acted in some cases as an account signatory for entities holding an account with the bank.  Schroder Bank is in the process of closing the operations of Schroder Trust AG and Schroder Cayman Bank & Trust Company Ltd.

Schroder Bank opened accounts for trusts and companies owned by trusts, foundations and other corporate bodies established and incorporated under the laws of the British Virgin Islands, the Cayman Islands, Panama, Liechtenstein and other non-U.S. jurisdictions, where the beneficiary or beneficial owner named on the Form A was a U.S. citizen or resident.  In addition, a small number of accounts were opened for U.S. limited liability companies (LLCs) with U.S. citizens or residents as members, as well as for U.S. LLCs with non-U.S. persons as members.  Schroder Bank communicated directly with the beneficial owners of some accounts of trusts, foundations or corporate bodies, and it arranged for the issuance of credit cards to the beneficial owners of some such accounts that appear in some cases to have been used for personal expenses.

Schroder Bank also processed cash withdrawals in amounts exceeding $100,000 or the Swiss franc equivalent.  For at least three U.S.-related accounts, a series of withdrawals that in aggregate exceeded $1 million were made.  In addition, at least 26 U.S.-related accountholders received cash or checks in amounts exceeding $100,000 on closure of their accounts, including in at least three cases cash or checks in excess of $1 million.

Between 2004 and 2008, four Schroder Bank employees traveled to the U.S. in connection with the bank’s business with respect to U.S.-related accounts.  In 2008, Swiss bank UBS AG publicly announced that it was the target of a criminal investigation by the Internal Revenue Service (IRS) and the department, and that it would be exiting and no longer accepting certain U.S. clients.  In a later deferred prosecution agreement, UBS admitted that its cross-border banking business used Swiss privacy law to aid and assist U.S. clients in opening accounts and maintaining undeclared assets and income from the IRS.  Between Aug. 1, 2008, and June 30, 2009, Schroder Bank opened eight U.S.-related accounts with funds received from UBS, which was then under investigation by the U.S. government.

Since Aug. 1, 2008, Schroder Bank had 243 U.S.-related accounts with approximately $506 million in assets under management.  Schroder Bank will pay a $10.354 million penalty.

Hypothekarbank Lenzburg AG (announced 8/27/2015)

HBL offered a variety of traditional Swiss banking services that it knew could assist, and that did assist, U.S. clients in the concealment of assets and income from the Internal Revenue Service (IRS).  For example, HBL, upon client request, did not send mail associated with some U.S.-related accounts to the United States.  In addition, HBL offered numbered accounts to its clients, a service by which access to information about an account, including the identity of the accountholder, was limited to only certain employees of HBL.  In a handful of instances, the accountholders of U.S.-related accounts who refused to provide a Form W-9 or who admitted that they were not tax compliant withdrew significant amounts of cash or physical assets when HBL forced these accounts to be closed.

In or about 2008, Swiss bank UBS AG publicly announced that it was the target of a criminal investigation by the IRS and the department, and that it would be exiting and no longer accepting certain U.S. clients.  In a later deferred prosecution agreement, UBS admitted that its cross-border banking business used Swiss privacy law to aid and assist U.S. clients in opening accounts and maintaining undeclared assets and income from the IRS.  HBL opened one account for a U.S. person who exited UBS.  For another long-standing holder of a U.S.-related account, HBL received a transfer of funds from an account held at UBS into a pre-existing account at HBL.

Another accountholder who resided in the United States for many years had two accounts, one of which was a numbered account.  In 2012, the accountholder’s relationship manager requested a Form W-9 for the numbered account and the accountholder refused to provide one.  As a result, the relationship manager directed the accountholder to close the numbered account.  Thereafter, the accountholder came to Lenzburg to close the numbered account.  The accountholder withdrew 240,000 Swiss francs and 12,000 euros and purchased precious metals in the amount of 318,000 Swiss francs.

Since Aug. 1, 2008, HBL had 96 U.S.-related accounts with an aggregate value of $69.8 million.  HBL’s average annual revenue attributable to U.S.-related accounts in the form of fees, commissions and earnings on client funds that were loaned out by HBL was $198,000, or a total of $1.2 million since Aug. 1, 2008.  HBL will pay a penalty of $560,000.

Under the Swiss Bank Program, eligible Swiss banks that had notified the DOJ by December 31, 2013 of an intent to participate in the Program were eligible to resolve any potential criminal liabilities in the U.S. by completing the following:

  • 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

Swiss banks meeting all of the above requirements are eligible for a non-prosecution agreement.

According to the terms of these non-prosecution agreements, each bank agrees 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 DOJ’s agreement not to prosecute these banks for tax-related criminal offenses.

The Justice Department released the following documents with each of these announcements:

  • The Valiant Bank non-prosecution agreement and statement of facts (available here).
  • The Schroder Bank non-prosecution agreement and statement of facts (available here).
  • The HBL non-prosecution agreement and statement of facts (available here).

Ninth Circuit Reverses Tax Fraud Conviction Where Returns Were Not “Filed” With Internal Revenue Service

Yesterday the Ninth Circuit addressed the question of whether an individual can be convicted of filing false tax returns pursuant to 26 U.S.C. 7206(1) where the tax returns in question were tendered to an IRS agent during an audit, and were not filed with an IRS Service Center in the normal course. See United States v. Boitano, No. 14-10139 (slip opinion available here). The defendant (who was also an accountant) had been convicted following a jury trial of making a false statement under penalty of perjury on personal income tax returns, and he appealed his conviction to the Ninth Circuit.

The Ninth Circuit’s opinion summarizes the pertinent facts as follows:

During the period relevant to this appeal, Boitano was a partner in Boitano, Sargent & Lilly, an accounting firm. His responsibilities included preparing tax returns and representing clients during IRS audits, but Boitano did not file his own income tax returns for the years 1991 to 2007.

The IRS undertook an examination in 1992/1993 and in 2004. Boitano still did not file any returns, and his case was referred to the IRS’s Special Enforcement Program.

In June 2009, Special Enforcement Program Agent Nick Connors requested a meeting with Boitano regarding his failure to file returns for 2001 through 2007. Connors and Boitano ultimately met three times. During the third meeting, Boitano handed Connors income tax returns for 2001, 2002, and 2003. The returns were signed under penalty of perjury by Boitano and his wife. Connors stamped the first page of the returns “Internal Revenue Service, SB/SE – Compliance Field, Sep 04, 2009, Area 7, San Francisco, CA,” and hand wrote “delinquent return secured by exam” on the first page of each. Per Boitano’s request, Connors copied the first page of the returns and gave the copies to Boitano as receipts.

The returns Boitano handed to Connors reported “estimated tax payments” that had not been made. The 2001 return reported a $26,000 payment, the 2002 return reported a $38,000 payment, and the 2003 return reported a $57,000 payment. In fact, the government calculated that Boitano owed the IRS $52,953.80 for 2001, $72,797.00 for 2002, and $104,545.94 for 2003.

Agent Connors quickly realized that the IRS did not have record of receiving the claimed estimated tax payments. Therefore, instead of sending the returns to the IRS service center for processing, he confronted Boitano with the discrepancy. According to Connors, Boitano “physically got a little pale and said that he was not sure why there [were] differences.” Soon thereafter, Connors sent Boitano a letter asking that he substantiate the estimated tax payments, or, if those estimates were not correct, that he identify the correct estimated amounts with “a written statement dated and signed explaining in detail why you believed the estimated payments to be the amounts reported on the delinquent returns filed on 9/4/09.” Boitano never responded.

Boitano was indicted and charged with three counts of making false statements under 26 U.S.C. § 7206(1). Section 7206(1) establishes that it is a felony for any person to “[w]illfully make[] and subscribe[] any return, statement, or other document, which contains or is verified by a written declaration that it is made under the penalties of perjury, and which he does not believe to be true and correct as to every material matter.” Boitano was also charged with three misdemeanor counts of failure to file taxes under 26 U.S.C. § 7203. He pleaded guilty to the three misdemeanors, but proceeded to trial on the felony charges.

The defendant argued at trial that filing is an essential element of § 7206(1) and that his act of handing the returns to Agent Connors did not constitute “filing” within the applicable IRS statute and regulations. The government agreed that filing is an element of the charged offense, but argued the filing element was satisfied by the uncontradicted evidence showing that the defendant handed fraudulent returns to Agent Connors. The district court agreed with the government. Over objection, Connors was permitted to testify that the defendant “filed 2001, 2002, and 2003 delinquent tax returns with me.” Connors provided additional foundational testimony that the IRS “treat[ed] the[] returns as having been filed” on September 4, 2009, the day the defendant handed them to Connors.

The Ninth Circuit’s opinion notes that the defendant’s opening appellate brief reiterates the position he argued unsuccessfully in the district court – that the evidence did not show the subject returns were “filed” within the meaning of the applicable IRS statutes and regulations when he handed them to Agent Connors. The court of appeals noted, however, that the government’s response brief contained an “unusual twist”:

Reversing its prior position, the government now concedes that “there is a single definition of ‘filing’ that applies in both the civil and criminal context,” and that “the record does not support that the returns here were filed.” The government agrees with Boitano that Connors’s testimony that the returns were “filed” when Boitano handed them to him was incorrect. The government’s new argument is that filing is not an element of the charged offense because, “by its own terms, [§] 7206(1) does not require the government to prove ‘filing’ as defined by the IRS regulations to establish a violation of the statute.” The government reasons, “under a correct understanding of Section 7206(1), [Boitano’s] actions violated the statute by his completing a return, signing it, and taking actions by which he gave up any right of self-correction.” (Emphasis added.) Notably, the government concedes that if it had to prove the returns were filed within the meaning of the IRS regulations, then Boitano’s convictions must be reversed.

The Ninth Circuit quickly dispensed with the government’s new argument, concluding that binding precedent supported the defendant’s position:

Our court has long held that “filing” is an element of a § 7206(1) violation. In United States v. Hanson, we affirmed a conviction for making false statements in violation of § 7206(1) where the defendant “fil[ed] false IRS forms that reported payments [defendant] had never made and claimed a tax refund [defendant] was not due.” 2 F.3d 942, 944 (9th Cir. 1993). In so ruling, we stated that “[t]o prove a violation of § 7206(1), making false statements, the government must prove that the defendant (1) filed a return, statement, or other document that was false as to a material matter . . . .” Id. at 945.

The government cites numerous reasons for its new contention that § 7206(1) does not require filing, but it offers no intervening authority for its argument that it should only be required to show that Boitano gave up the right of selfcorrection. It argues: (1) the statute, by its own terms, does not require proof of filing; (2) the Supreme Court has not identified filing as an element of the offense; (3) interpreting the statute not to require filing makes sense because the statute is not limited in its scope to tax returns; (4) the statute’s legislative history does not establish that filing is an element of the offense; and (5) filing a document is one way, but not the only way, to satisfy the statute. We are bound, however, by Hanson’s plain and explicit identification of “filing” as an element of a § 7206(1) offense. Id. (“To prove a violation of § 7206(1) . . . the government must prove that the defendant (1) filed a return. . . .”); see also United States v. Tucker, 133 F.3d 1208, 1218 (9th Cir. 1998).

The Ninth Circuit concluded that because binding circuit precedent establishes that “filing” is an element of a conviction under § 7206(1), and the government conceded on appeal that the record does not support that the returns here were filed, the defendant’s felony convictions must be reversed.