To Be or Not to Be – A Participant in a DOJ Non-Prosecution Program?

Over three years ago, the US Department of Justice (“DOJ”) and Swiss authorities jointly announced a landmark non-prosecution program for any Swiss bank that was not a current target of US criminal investigation. On the Swiss side, the agreement with DOJ was signed by the Swiss Federal Department of Finance. The program was designed to encourage all Swiss banks to come forward and admit the role they played in assisting US persons to evade tax.  Participating banks that might have committed tax-related offenses and that met all of the demands made by DOJ were eligible for “non-prosecution agreements”.  These were referred to as “Category 2” banks.  The experience of Category 2 banks in the program is the primary subject of this blog post since it can serve as guidance to financial institutions in other countries should a similar program be instituted. 

 Looking Backward…

In order to participate in the non-prosecution program, the eligible Swiss banks had to undertake arduous internal investigations to sniff out any “US related accounts”, appoint an independent examiner to review the due diligence, make a complete disclosure about the bank’s cross-border activities; provide detailed information on all US related accounts that existed on August 1 2008; and pay a penalty of 20, 30 or 50 percent of the maximum value of all non-disclosed US accounts that were held by the bank.  The applicable penalty percentage depended on the date the accounts were opened with the bank.  The penalty increased after the date on which news became public that the US government was investigating Swiss banks for offshore tax evasion.

A 20 percent penalty was imposed on the maximum aggregate dollar value of all undisclosed US accounts that existed at the bank on August 1, 2008. The penalty increased to 30 percent for undisclosed  accounts that were opened after that date, but on or before February 28, 2009.  The penalty increased to a whopping 50 percent for undisclosed accounts opened after February 28,2009.

Full details of the non-prosecution program are set out in the signed Agreement.

Here we are, over three years later.  The US Treasury is richer by over $1.36 billion in penalties collected from participating banks.  Eighty-one non-prosecution agreements were brought to conclusion under the program.  In addition to the monetary penalty trophies, a wealth of information was gathered from the program, giving DOJ fodder to pursue culpable financial institutions in numerous other jurisdictions.  The latest DOJ release dated December 29 covering the program is here.

Looking Forward ….

Prosecution of offshore tax cheats and the financial institutions or persons that enabled them remains a top priority for the DOJ and the Internal Revenue Service (IRS).  In March, Tax Division Acting Assistant Attorney General Caroline D. Ciraolo discussed the Swiss non-prosecution program that had been instituted three years ago. She dropped hints that the DOJ is seriously “following the money” that flowed from Swiss accounts all around the globe to uncover tax evasion through use of offshore accounts and entities.  Ms. Ciraolo remarked to the Federal Bar Association Tax Law Conference in Washington DC that “investigations of both individuals and entities are well beyond Switzerland at this point, and no jurisdiction is off limits”. She further stated:  “Those who continue to fail to come forward and disclose their conduct run the very serious risk of ending up as the next criminal defendant or at the receiving end of a substantial assessment of civil penalties.  And to those individuals and entities, both in the United States and around the world, that have facilitated this criminal conduct, we encourage you to come forward before you are contacted as a target of our investigations.” (See Justice News, United States Department of Justice, (Mar. 4, 2016)).

In an interview later that month , Acting Assistant Attorney General Caroline D. Ciraolo stated that DOJ was following leads to other countries, including but not limited to, the British Virgin Islands, the Cayman Islands, the Channel Islands, Guernsey, Hong Kong, Israel, Liechtenstein, Luxembourg, Panama and Singapore.  While Ms. Ciraolo did not say that a similar non-prosecution program would be forthcoming in any other country, this possibility cannot be ruled out.

And, What if Another Program is Announced?

Now that the non-prosecution program has been concluded in Switzerland, it can be examined a bit more fully and provide guidance to financial institutions in other jurisdictions should they be faced with the question “to be, or not to be?”

Should financial institutions clamor to get on board as did the majority of frightened Swiss banks?  

Below is a summary of some observations on the realities of the Swiss program —

  • The Swiss program was unprecedented. In part, its newness meant that clear guidance was not provided to participants, eventually leading to disillusionment for many and the feeling that the DOJ had pulled a “bait-and-switch”.   A Swiss bank entering the program believed that if it undertook certain actions, the non-prosecution agreement would be forthcoming in a clear-cut and objective fashion.  Once the program got underway, however, DOJ began imposing further requirements and moving the goal post. Some banks left the program as a result, deciding it was simply easier to take their chances at being prosecuted.  Meanwhile, the hard costs for initiating participation in the program (e.g., conducting due diligence, hiring independent auditors and the like) had already eaten up significant bank resources.
  • A lot of tension resulted during administration of the program as Swiss data protection and banking secrecy laws conflicted with DOJ’s interpretation over what information could be disclosed, especially as the same related to bank employees and certain third parties.  This aspect of the program should carefully be considered with regard to other jurisdictions that have similar secrecy rules.  Local laws might prohibit banks in other countries from providing information to DOJ about their clients (for pre-FATCA time frames) or other parties, and participation in any kind of program would probably necessitate the approval of the government in which the bank is located and doing business.
  • Certain US-owned accounts could be excluded from the penalty calculation under the Swiss program, but standards were not clear as to what was required in order for a bank to prove “mitigation”, therefore excluding the account from the penalty base.  If the participating bank could not produce certain information, then other evidence could be submitted for review by a special DOJ team that  could recommend a penalty reduction to a mitigation committee. However, a lack of transparency in these proceedings was the hallmark of the day, with DOJ never disclosing details on which accounts received mitigation credit or how the final penalty amount was calculated. The banks were generally given a “take-it-or-leave-it” proposition, resulting in an inevitable bitter after-taste.  
  • The Swiss program’s penalty calculations were based on a strict formula which ignored the wide variations of conduct (culpable versus nonculpable) of the banks.  For example, banks in Category 2 exhibiting the following types of conduct would pay the same penalty: compare the “benign” bank that did not believe it had done anything wrong based on its understanding of the “qualified intermediary agreement” it had negotiated with the IRS, with the bank that permitted accounts to be closed with cash withdrawals or that closed accounts but kept the funds in a safe deposit box at the bank, or converted client accounts to precious metals.  Activities clearly designed to help US clients avoid detection by the tax authorities!  Different acts; same penalty.
  • The inflexible penalty calculations imposed by the Swiss program posed a serious problem to banks in a weakened financial situation.  If such banks remained in the program, it might not be possible for them to pay the penalties at the end of the day.  Such banks withdrew from the program, preferring to face the risk of a possible criminal prosecution over the inevitable reality of a looming bankruptcy proceeding.

Look Before You Leap

Financial institutions are well advised to carefully think about and examine their position.  If criminal conduct is clearly in the picture, voluntarily coming forward might be a more prudent move.  On the other hand, those with more benign facts may be best off sitting tight should a non-prosecution program come to town. Of the 106 “Category 2” Swiss banks that initially elected to participate in the non-prosecution program, only 80 banks (75%) remained to see it through to the end.  A 25% drop-out rate is not to be sneered at.  Once you join the program and start sending information to DOJ, however, the bell becomes difficult to unring.

Foreign governments in other jurisdictions should also carefully look at the foibles and the outcome of the Swiss non-prosecution program.  Supporting entry into the program might boil into a political issue that could become too hot to handle. In Switzerland, for example, the Swiss regulators were highly worried that the program would turn into an ugly political problem if data on a large number of individuals was to be disclosed. When it took action to mitigate this problem, it caused a lot of confusion in the program.  More significantly perhaps, once the program was announced in Switzerland, it was widely perceived that any vestige of Swiss banking secrecy went out the proverbial window, leaving strong doubts that the Swiss banking industry can ever recover from this perception.  

Interestingly enough, Oxfam still ranks Switzerland as one of the world’s worst corporate tax havens (ranking 4th worldwide in Oxfam’s December 2016 Report)!

Follow me on Twitter: @VLJeker


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