Justice Department Announces Second Swiss Bank Resolution

On May 8, 2015, the Justice Department announced publicly that it had reached resolution with Vadian Bank AG, of St. Gallen, Switzerland.  This announcement marks only the second such resolution that the government has reached with a Swiss bank under the terms of the “Swiss Bank Program.”  The first resolution, with BSI AG, was announced on March 30 of this year.

According to the DOJ press release, Vadian Bank is a small Swiss institution that took advantage of the opportunity created when it became public that UBS was under investigation, and many larger Swiss banks were closing U.S. accounts.  Vadian thereafter increased its inventory of U.S. accounts from two to more than 70.  According to the non-prosecution agreement signed by Vadian, the bank agreed to cooperate with ongoing U.S. investigations, implement appropriate internal controls, and pay a penalty of approximately $4.2 million.  The announcement of this resolution also increases the penalty for Vadian accountholders who enroll in the Offshore Voluntary Disclosure Program to 50 percent of the highest aggregate balance of their offshore accounts.

The Justice Department’s press release is shown below.

 The Department of Justice announced today that Vadian Bank AG (Vadian), located in St. Gallen, Switzerland, reached a resolution under the Department of Justice’s (DOJ) Swiss Bank Program.

“The department continues to work with Swiss banks to reach final resolutions in accordance with the terms of the program, and is focused on its goal of completing this process expeditiously,” said Acting Assistant Attorney General Caroline D. Ciraolo, of the Department of Justice’s Tax Division.  “Simultaneously, the department has opened investigations of culpable individuals and entities based on information obtained from the Swiss banks in the program, and will pursue and prosecute those engaged or assisting others in evading U.S. tax obligations.”

The Swiss Bank Program, which was announced on Aug. 29, 2013, provides 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 department by Dec. 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, banks are 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 account holders who fail to come into compliance with U.S. reporting obligations; and

– Pay appropriate penalties.

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

According to the terms of the non-prosecution agreement signed today, Vadian 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 a $4.253 million penalty in return for the department’s agreement not to prosecute Vadian for tax-related criminal offenses.

Vadian has one office and 26 employees.  Prior to 2008, Vadian’s business predominantly consisted of savings accounts, residential mortgage lending and small business loans.  In 2007, Vadian hired a marketing firm to assist with its planned growth into private banking, and focused its efforts on attracting external asset managers.  In 2008, after it became publicly known that UBS was a target of a criminal investigation, Vadian accepted accounts from U.S. persons who were forced out of other Swiss banks.  At this time, Vadian’s management was aware that the U.S. authorities were pursuing Swiss banks that facilitated tax evasion for U.S. accountholders in Switzerland, but was not deterred because Vadian had no U.S. presence.  As a result of its efforts, after August 2008, Vadian attracted cross-border private banking business and increased its U.S. related accounts from two to more than 70, with $76 million in assets under management.

Through its managers, employees and/or other individuals, Vadian knew or believed that many of its U.S. accountholders were not complying with their U.S. tax obligations, and Vadian would and did assist those clients to conceal assets and income from the IRS.  Vadian’s services included: “hold mail” services; numbered accounts, where the client was known to most bank employees only by a number or code name; opening and maintaining accounts for U.S. taxpayers through non-U.S. entities such as corporations, trusts or foundations; and accepting instructions from U.S.-based accountholders to prevent investments from being made in U.S.-based securities that would require disclosure to U.S. tax authorities.

In resolving its criminal liabilities under the program, Vadian provided extensive cooperation and encouraged U.S. accountholders to come into compliance.

While Vadian’s U.S. accountholders who have not yet declared their accounts to the IRS may still be eligible to participate in the IRS’s offshore voluntary disclosure programs, the price of such disclosure has increased.

Most U.S. taxpayers who enter the IRS offshore voluntary disclosure program to resolve undeclared offshore accounts will pay a penalty equal to 27.5 percent of the high value of the accounts.  On Aug. 4, 2014, the IRS increased the penalty to 50 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.  With today’s announcement of Vadian’s non-prosecution agreement, its noncompliant U.S. accountholders must now pay that 50 percent penalty to the IRS if they wish to enter the IRS’ program.

“Today’s action is another warning for those who are still considering hiding money offshore to evade U.S. tax laws,” said Chief Richard Weber of IRS-Criminal Investigation (CI).  “The IRS and DOJ continue to aggressively work together to put an end to this abuse.  When individuals and institutions allow this to happen, they are not only cheating the U.S. government, they are cheating the honest taxpaying citizens who are obeying the law and doing the right thing.”

IRS ANNOUNCES THAT MORE THAN 50,000 HAVE ENROLLED IN OVDP; AMNESTY PROGRAM TO REMAIN OPEN INDEFINITELY

Yesterday, the Internal Revenue Service unveiled its latest statistics on participation in its Offshore Voluntary Disclosure Program (OVDP), an amnesty program for taxpayers with undisclosed foreign bank accounts that has existed in various forms since 2009.  To date, more than 50,000 taxpayers have made voluntary disclosures regarding offshore bank accounts, and the Treasury has collected more than $7 billion in additional taxes, interest, and penalties from OVDP participants.  These numbers confirm that the OVDP is far and away the most successful voluntary disclosure initiative ever offered by the IRS.  As a measure of the program’s success, the IRS announced that the OVDP would remain open indefinitely.

The IRS announced the latest OVDP milestones as part of its daily list of “Dirty Dozen” tax scams for the 2015 filing season. In an announcement entitled “Hiding Money or Income Offshore Among the ‘Dirty Dozen’ List of Tax Scams for the 2015 Filing Season,” the IRS stated thatavoiding taxes by hiding money or assets in unreported offshore accounts remains on its annual list of tax scams known as the ‘Dirty Dozen’ for the 2015 filing season.” “The recent string of successful enforcement actions against offshore tax cheats and the financial organizations that help them shows that it’s a bad bet to hide money and income offshore,” said IRS Commissioner John Koskinen. “Taxpayers are best served by coming in voluntarily and getting their taxes and filing requirements in order.”

The IRS stated that is had conducted “thousands of offshore-related civil audits that have produced tens of millions of dollars.” In addition, the IRS and Justice Department have also pursued criminal charges leading to billions of dollars in criminal fines and restitution. (The Justice Department’s Tax Division Offshore Compliance Initiative maintains a “scorecard” of its successes here.) The announcement further stated:

The IRS remains committed to our priority efforts to stop offshore tax evasion wherever it occurs.  Even though the IRS has faced several years of budget reductions, the IRS continues to pursue cases in all parts of the world, regardless of whether the person hiding money overseas chooses a bank with no offices on U.S. soil.

Over the years, numerous individuals have been identified as evading U.S. taxes by hiding income in offshore banks, brokerage accounts or nominee entities and then using debit cards, credit cards or wire transfers to access the funds. Others have employed foreign trusts, employee-leasing schemes, private annuities or insurance plans for the same purpose.

The IRS further warned that it is obtaining a significant amount of information regarding offshore tax evasion from its enforcement efforts as well as the Foreign Account Tax Compliance Act (FATCA), which will require foreign financial institutions to start disclosing the identities of U.S. accountholders as early as March 2015 in some cases:

The IRS uses information gained from its investigations to pursue taxpayers with undeclared accounts, as well as the banks and bankers suspected of helping clients hide their assets overseas. The IRS works closely with the Department of Justice (DOJ) to prosecute tax evasion cases.

While there are legitimate reasons for maintaining financial accounts abroad, there are reporting requirements that need to be fulfilled. U.S. taxpayers who maintain such accounts and who do not comply with reporting requirements are breaking the law and risk significant penalties and fines, as well as the possibility of criminal prosecution.

Since 2009, tens of thousands of individuals have come forward voluntarily to disclose their foreign financial accounts, taking advantage of special opportunities to comply with the U.S. tax system and resolve their tax obligations. And, with new foreign account reporting requirements being phased in over the next few years, hiding income offshore is increasingly more difficult.

In addition to OVDP, other voluntary compliance options exist for taxpayers with undisclosed foreign bank accounts or financial assets, such as the Streamlined Compliance Filing Procedures (details here). Please contact a member of Blank Rome’s Tax Controversy Team should you have any questions about OVDP, FATCA, or foreign asset reporting.

IRS Clarifies Requirements for Streamlined Filing Procedures

On October 9, 2014, the Internal Revenue Service published additional guidance clarifying the requirements for participation in the Streamlined Filing Compliance Procedures.  (See prior coverage of the new procedures announced in June 2014 here.)  Here are links to the new guidance published on the IRS website:

  • Updated general description of Streamlined Filing Compliance Procedures here;
  • Updated instructions for taxpayers residing in the United States here;
  • Frequently asked questions for domestic taxpayers here;
  • Updated instructions for taxpayers residing outside the United States here;
  • Frequently asked questions for taxpayers residing outside the United States here.

The IRS also released frequently asked questions for the Delinquent International Information Return Submission Procedures (available here).  In a notable change, the IRS now states that these procedures are available to taxpayers even if they have unreported income:

The Delinquent International Information Return Submission Procedures clarify how taxpayers may file delinquent international information returns in cases where there was reasonable cause for the delinquency. Taxpayers who have unreported income or unpaid tax are not precluded from filing delinquent international information returns. Unlike the procedures described in OVDP FAQ 18, penalties may be imposed under the Delinquent International Information Return Submission Procedures if the Service does not accept the explanation of reasonable cause. The longstanding authorities regarding what constitutes reasonable cause continue to apply, and existing procedures concerning establishing reasonable cause, including requirements to provide a statement of facts made under the penalties of perjury, continue to apply. See, for example, Treas. Reg. § 1.6038-2(k)(3), Treas. Reg. § 1.6038A-4(b), and Treas. Reg. § 301.6679-1(a)(3).

We will analyze this guidance and provide further analysis in future posts.

IRS Commissioner Hints That OVDP Modifications Are in the Works

Since 2009, the Internal Revenue Service has offered three different amnesty programs for taxpayers with undeclared foreign bank accounts. These programs, the current version of which is entitled the Offshore Voluntary Disclosure Program (OVDP), have been subject to harsh criticism because they adopt a “one size fits all” penalty structure which fails to take account of the facts and circumstances of each case and, in particular, the reality that not every U.S. taxpayer with an offshore bank account is intending to evade his/her U.S. tax obligations. This is particularly true in the case of U.S. taxpayers who reside abroad, and may not be fully informed of their U.S. tax obligations (including the necessity to report non-U.S. bank accounts on the FBAR form).

The Taxpayer Advocate has been particularly critical of the IRS and its administration of the offshore voluntary disclosure programs. In her most recent report to Congress, the Taxpayer Advocate found that the “The IRS Offshore Voluntary Disclosure Program Disproportionately Burdens Those Who Made Honest Mistakes” and offered the following commentary:

Many people fail to report offshore income and file related information returns for a wide variety of reasons. With few exceptions, the IRS requires them to “opt into” a punishing offshore voluntary disclosure settlement program. The combination of the reporting statute and the way the IRS administers it creates the potential for such harsh penalties that some taxpayers agree to pay unwarranted amounts to avoid the penalties.

The median penalty paid under the 2009 program by taxpayers who had the smallest accounts, and did not have legal representation, was nearly eight times the unpaid tax. It was also disproportionately greater than what the IRS extracted from those with the largest accounts; they paid a median of about three times the unpaid tax. Thus, the IRS has extracted the most extreme penalties from unrepresented taxpayers with small accounts who were voluntarily trying to correct a mistake.  By contrast, IRS data suggests that those who don’t try to comply often remain undetected. Yet the IRS’s audit rate with respect to foreign financial account reporting is less than 0.25%.

In 2012, in response to this criticism, the IRS announced a new compliance program for non-resident U.S. taxpayers who were not compliant with their tax and FBAR reporting obligations. This program, referred to as “Streamlined Filing Compliance Procedures for Non-Resident Non-Filer U.S. Taxpayers,” was described by then-IRS Commissioner Douglas Shulman as “a series of common-sense steps to help U.S. citizens abroad get current with their tax obligations and resolve pension issues.” The IRS formulated this procedure in response to revelations that many U.S. taxpayers living abroad only recently became aware of their U.S. tax and FBAR obligations. Taxpayers who wish to take advantage of the new procedure are required to file delinquent tax returns for the past three years and delinquent FBARs for the past six years, but the program is only available to taxpayers who have not filed U.S. returns. Penalty relief is available to taxpayers who present “low compliance risk.” While this new program appeared to be a step in the right direction, it still was subject to criticism by the Taxpayer Advocate (see here) and others because of its burdensome nature and the fact that penalty relief was uncertain and depended upon the IRS’ analysis of each individual taxpayer’s “compliance risk.”

On June 3, 2014, in remarks at the OECD International Tax Conference (available here), IRS Commissioner John A. Koskinen revealed that the IRS was considering modifications to the terms of the current OVDP in order to make them more fair and equitable. In particular, Commissioner Koskinen stated as follows:

Now, while the 2012 OVDP and its predecessors have operated successfully, we are currently considering making further program modifications to accomplish even more. We are considering whether our voluntary programs have been too focused on those willfully evading their tax obligations and are not accommodating enough to others who don’t necessarily need protection from criminal prosecution because their compliance failures have been of the non-willful variety. For example, we are well aware that there are many U.S. citizens who have resided abroad for many years, perhaps even the vast majority of their lives. We have been considering whether these individuals should have an opportunity to come into compliance that doesn’t involve the type of penalties that are appropriate for U.S.-resident taxpayers who were willfully hiding their investments overseas. We are also aware that there may be U.S.-resident taxpayers with unreported offshore accounts whose prior non-compliance clearly did not constitute willful tax evasion but who, to date, have not had a clear way of coming into compliance that doesn’t involve the threat of substantial penalties.

We are close to completing our deliberations on these respects and expect that we will soon put forward modifications to the programs currently in place. Our goal is to ensure we have struck the right balance between emphasis on aggressive enforcement and focus on the law-abiding instincts of most U.S. citizens who, given the proper chance, will voluntarily come into compliance and willingly remedy past mistakes. We believe that re-striking this balance between enforcement and voluntary compliance is particularly important at this point in time, given that we are nearing July 1, the effective date of FATCA. We expect we will have much more to say on these program enhancements in the very near future. So stay tuned.

To date, more than 43,000 taxpayers have taken advantage of the offshore voluntary disclosure programs offered by the IRS since 2009, and have paid more than $6 billion in taxes, penalties, and interest to the U.S. Treasury. These statistics make clear that the offshore voluntary disclosure programs are by far the most successful voluntary disclosure programs ever offered by the IRS, and even more taxpayers are enrolling in OVDP now as a result of the U.S.-Swiss bank program (described here) and the upcoming July 1 effective date of FATCA. Commissioner Koskinen’s comments that modifications to the terms of the OVDP are welcome news to taxpayers and practitioners, but until the specific details are announced we can only take a wait and see approach.

DOJ Offshore Enforcement Update: In Landmark Case, Credit Suisse Pleads Guilty, Agrees to Pay $2.6 Billion Penalty; Swiss Bank Program Continues to Move Forward

Yesterday, the Department of Justice announced that Credit Suisse AG pleaded guilty to having assisted U.S. taxpayers in evading the payment of U.S. taxes and agreed to pay a penalty of $2.6 billion. Deputy Attorney General James M. Cole described this announcement as “an historic guilty plea” and “the largest monetary penalty of any criminal tax case ever.”

Attorney General Eric Holder described the conduct of Credit Suisse as follows:

The bank actively helped its account holders to deceive the IRS by concealing assets and income in illegal, undeclared bank accounts.   These secret offshore accounts were held in the names of sham entities and foundations.   This conspiracy spanned decades. In the case of at least one wholly-owned subsidiary, the practice of using sham entities to conceal funds began more than a century ago.   Credit Suisse not only knew about this illegal, cross-border banking activity; they willfully aided and abetted it.  Hundreds of Credit Suisse employees, including at the manager level, conspired to help tax cheats dodge U.S. taxes.

 In the course of these activities, Credit Suisse deceived the IRS, the Federal Reserve, the Securities and Exchange Commission, and the Department of Justice.   The bank went to elaborate lengths to shield itself, its employees, and the tax cheats it served from accountability for their criminal actions.   They subverted disclosure requirements, destroyed bank records, and concealed transactions involving undeclared accounts by limiting withdrawal amounts and using offshore credit and debit cards to repatriate funds.   They failed to take even the most basic steps to ensure compliance with tax laws.   And when the bank finally began to feel pressure to correct illegal practices and comply with the law – as a result of the Justice Department’s investigation, of which they were notified in 2010 – Credit Suisse failed to retain key documents, allowed evidence to be lost or destroyed, and conducted a shamefully inadequate internal inquiry.

The Statement of Facts can be found here; the plea agreement can be found here. Credit Suisse must now disclose all evidence and information about its U.S. accounts that is required by the Program for Non-Prosecution Agreements of Non-Target Letters for Swiss Banks (“Swiss Bank Program”). This includes, among other things, information on how its cross-border business operated; how Credit Suisse attracted and serviced its account holders; and the total number of accounts held by U.S. persons with the maximum dollar value. Credit Suisse must also supply the number of U.S. persons affiliated with each account, identify whether each account was held by an individual or entity, disclose the name of any financial advisor, attorney or other representative associated with the account, and reveal detailed information about what funds were transferred into and out of the account. The DOJ may then make treaty requests to Switzerland for actual account records that would reveal the names of those U.S. account holders. Unlike the situation with UBS where UBS agreed to pay $780 million and turned over the names of approximately 4,000 U.S. account holders after being specifically authorized to do so by the Swiss government, Switzerland has not enacted legislation that would specifically permit Credit Suisse to turn over U.S. account holder names to the DOJ without violating Swiss banking secrecy laws.

Regarding the Swiss Bank Program, Kathryn Keneally, Assistant Attorney General of the Department of Justice’s Tax Division, spoke at an American Bar Association Section of Taxation meeting last week and stated that Swiss banks that are participating in the program are making disclosures to the DOJ about accounts held by individual U.S. taxpayers. She urged anyone who has not yet come clean to make a disclosure through the U.S. Offshore Voluntary Disclosure Initiative (OVDI) but noted that it may be too late for some people who have already been identified as a result of the information provided via the program. She also noted that some Swiss banks in the program are offering to pay part of the penalty on behalf of its account holders who apply and are accepted to the OVDI. She also mentioned that the DOJ has expanded its efforts beyond Switzerland, with activities in Israel, India, and in the Caribbean. See Allison Bennett, Nonprosecution Program for Swiss Banks Providing Significant Amount of Information (Bloomberg BNA 5/13/2014). [Our full breakdown of the Swiss Bank Program can be found here].

IRS Reverses Decision; Readmits Bank Leumi Customers Into OVDP

When making a voluntary disclosure pursuant to the IRS Offshore Voluntary Disclosure Program (OVDP), the first step involves sending a letter requesting pre-clearance to make a voluntary disclosure.  The letter includes a taxpayer’s identifying information, including the taxpayer’s name and social security number.  The IRS then runs the taxpayer’s information through an IRS database to ensure that the IRS has not already received offshore account information with respect to the taxpayer or that the taxpayer is not already under audit or investigation.  If the taxpayer’s information is not in the IRS database, the taxpayer is ordinarily preliminarily accepted into the OVDP.  The taxpayer then must complete a questionnaire, and absent extenuating circumstances (e.g., non-compliance with the terms of the program, such as the funds in the offshore accounts being derived from criminal activity), the taxpayer’s matter is transferred from the IRS Criminal Investigation Division to the IRS Civil Division for processing.

Several dozen taxpayers who were prior customers of Bank Leumi in Israel completed this process and, in many cases, were both pre-cleared to make a voluntary disclosure and transferred from the IRS Criminal Investigation Division to the IRS Civil Division.  These taxpayers were apparently fully compliant with the terms of the OVDP.

Last March, however, the IRS abruptly kicked out these taxpayers from the OVDP.  Practitioners believe that the IRS had received information from Bank Leumi with respect to the taxpayers but had yet to update its database.  As a result, the IRS preliminarily accepted the taxpayers into the OVDP, despite the fact that the IRS was already in receipt of their offshore account information.

The IRS actions caused an uproar among (1) practitioners, who were advising their clients that they had cleared a huge hurdle in being preliminarily accepted into the OVDP, and (2) taxpayers, who were faced with the possibility of the severe civil (and perhaps criminal) penalties that the taxpayers originally sought to avoid by entering into the OVDP. 

Perhaps as a response to this uproar, the IRS last week reversed its decision, and readmitted the taxpayers into the OVDP.  The OVDP has been a huge success for the IRS, with the IRS collecting approximately $5.5 billion through the program.  However, abruptly kicking taxpayers out of the program likely jeopardized the continued success of the OVDP because taxpayers were more hesitant to enter the program knowing that the IRS may remove taxpayers from the program at any time.  The IRS actions last week should provide taxpayers with some measure of comfort that they will be treated fairly within the OVDP.

The Latest DOJ Offshore Enforcement Scorecard

As we have noted in prior posts (see here), the Justice Department’s website maintains a real time “scorecard” of its efforts to clamp down on offshore tax evasion through criminal prosecutions.  The DOJ’s Tax Division has created an “Offshore Compliance Initiative” which is tasked with leading this effort.  According to the DOJ website, here are the latest statistics:

  • Since 2009, the Justice Department has criminally charged more than 30 banking professionals and 68 U.S. accountholders with violations arising from their offshore banking activities.
  • 54 U.S. taxpayers and four bankers and financial advisors have pleaded guilty, and five taxpayers have been convicted at trial.
  • One Swiss bank (UBS) entered into a deferred prosecution agreement, and a second Swiss bank (Wegelin) was indicted and pleaded guilty.
  • The Justice Department is currently investigating the Swiss-based activities of 14 financial institutions.
  • In addition to Switzerland, the Justice Department is actively investigating banks located in India, Luxembourg, Israel and the Caribbean.

Meanwhile, the IRS continues to offer amnesty (details available here) to those taxpayers who voluntarily disclose their offshore banking activities in a timely fashion — that is, before the U.S. government obtains information regarding their non-compliance.  Since 2009, more than 38,000 taxpayers have made voluntary disclosures to the IRS regarding undisclosed foreign bank accounts, generating over $5 billion in additional revenue to the U.S. Treasury.