U.S. Outlines Penalties for Swiss Banks in Tax Probe

Swiss banks that seek to avoid prosecution for fostering tax evasion through secret accounts held by U.S. clients face penalties of as much as 50 percent of the value of those assets, the U.S. government said.

Hundreds of Swiss banks could be covered by a U.S.- Switzerland accord over how to punish financial institutions that used secret accounts to help American clients hide assets from U.S. tax authorities. The U.S. said yesterday it will continue criminal probes of 14 banks while allowing others to avoid prosecution by paying penalties and disclosing accounts.

“This program will significantly enhance the Justice Department’s ongoing efforts to aggressively pursue those who attempt to evade the law,” Attorney General Eric Holder said in a statement. “The program’s requirement that Swiss banks provide detailed account information will improve our ability to bring tax dollars back to the U.S. Treasury.”

The accord lets Switzerland, the world’s largest offshore financial center with about $2.2 trillion of assets, resolve talks spanning two years after U.S. criminal prosecutions eroded Swiss bank secrecy. Those under investigation include Credit Suisse Group AG, the second-largest Swiss bank; HSBC Holdings Plc, the largest European bank; and Julius Baer Group Ltd.

Reputational Damage

“This is a result we can live with,” Swiss Finance Minister Eveline Widmer-Schlumpf told reporters in Bern today. “Without the deal we’d have had years of hard-to-calculate risks, instability in the financial sector. Our reputation would have suffered,” she said. “It gives banks the chance to close the issue and avoid lawsuits.”

UBS AG, Switzerland’s largest bank, avoided prosecution by paying $780 million in 2009, admitting it aided U.S. tax evasion and handing over data on 4,500 accounts. Wegelin & Co., the oldest Swiss private bank, pleaded guilty in January and paid $74 million. Since 2009, the U.S. has prosecuted 68 account holders and more than 30 banking professionals for offshore tax crimes.

Under the accord, banks that seek to avoid prosecution must pay penalties, disclose their cross-border activities, give detailed account information for U.S. clients, describe other banks that received secret accounts, and cooperate in requests for information under a U.S.-Swiss tax treaty.

The Justice Department and Internal Revenue Service have pursued taxpayers and bankers that set up secret accounts after the UBS deferred-prosecution deal was announced in February 2009. The accord reflects increasing penalties after that time for banks that seek to avoid prosecution.

Increasing Penalties

Those banks must pay 20 percent of the value of accounts not disclosed to the IRS on Aug. 1, 2008; 30 percent for such accounts opened between then and February 2009; and 50 percent for accounts opened after February 2009.

Total penalties by banks seeking voluntary disclosures -- not the 14 institutions under criminal investigation -- may exceed $1 billion, according to a senior Justice Department official not authorized to discuss the matter publicly and who asked not to be named.

Widmer-Schlumpf said there was no way to predict the total amount of fines. She called the progressive system a success, and said an agreement on fines has been in place since May.

Banks wanting to participate in the program will need to apply for individual authorization, the Swiss government said in a statement today. Banks that believe they have violated U.S. tax law must request non-prosecution agreements by Dec. 31.

‘Painful Consequences’

“The program brings with it painful consequences for the banks in Switzerland,” the Swiss Bankers Association, which represents more than 300 banks, said in a statement. “The fines in particular are at the upper end of legally acceptable and economically bearable levels. It is, however, the sole remaining solution for enabling the banks to resolve the legal problems with the U.S. conclusively, and for creating legal certainty.”

U.S. law requires taxpayers to tell the IRS about accounts they hold anywhere in the world and pay taxes on income earned. Swiss banks and bankers took elaborate steps to help U.S. clients hide their assets from the IRS, court records show.

Since 2009, 38,000 U.S. taxpayers avoided prosecution by voluntarily disclosing offshore accounts to the IRS and detailing the bankers, lawyers and advisers who helped them. The new accord provides a pathway for the U.S. to acquire vast new troves of data about hidden accounts, their U.S. owners, and the offshore enablers who established and managed them.

‘Significant Risks’

“The program will give us yet more information to pursue U.S. taxpayers who are continuing to hide their assets in offshore accounts, and creates significant risks for those Swiss banks that fail to come forward,” Kathryn Keneally, assistant attorney general in the Justice Department’s tax division, said in the U.S.’s statement.

Those taxpayers and bankers or advisers already under investigation or indictment will get no relief from the accord. Their cases must play out in the U.S. courts. Many other taxpayers could faces charges.

The new data “will provide us with additional information to prosecute those who used secret offshore bank accounts,” Deputy Attorney General James M. Cole said in the statement.

“We welcome the agreement, even though Credit Suisse is not directly impacted, as a step toward the resolution of the issue as a whole,” the Zurich-based company said in an e-mail today. “Credit Suisse began to exit the U.S. cross-border business in 2008.”

The announcement doesn’t affect HSBC because it has been under investigation, according to David Bruegger, a Zurich-based spokesman for the bank.

Bill Rejected

“We are continuing our discussions,” he said. “We are in close contact with the authorities and will stay in touch until a solution is found.”

Julius Baer declined to comment.

In June, the Swiss Parliament rejected a bill that would have given banks a yearlong legal reprieve and allowed them to settle with the U.S. by handing over information on employees and third parties who worked with American clients. It would also have established legal protection for bank employees.

“The Swiss have finally decided to deal with the issue of creating an exception to Swiss bank secrecy by employing an administrative procedure to avoid legal challenges and a public referendum, which could otherwise defeat any settlement,” said Milan Patel, a former IRS trial attorney who is now a partner at Zurich-based law firm Anaford AG. “It also avoids the long diplomatic procedures.”

1996 Agreement

The banks under investigation by the Justice Department can use a 1996 tax agreement to respond to requests for names of American clients, the Swiss government said on May 29. That depends on the U.S. authorities providing a sufficiently detailed description of the matter to establish suspicion of fraud or similar offenses.

The U.S. Senate has yet to ratify a 2009 protocol revising the 1996 accord to make it easier for Swiss banks to hand over data on clients suspected of tax evasion to the IRS.

Banks that aren’t currently under investigation that may have breached U.S. laws with undeclared assets would have to pay fines on accounts exceeding 50,000 francs ($54,407) under the proposal, Tages-Anzeiger reported on Aug. 28.

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