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Friday, September 25, 2015

Justice Department Announces Two Banks Reach Resolutions under Swiss Bank Program

The Department of Justice announced today that Migros Bank AG (Migros) and Graubündner Kantonalbank (Graubündner) have reached resolutions under the department’s Swiss Bank Program.  These banks will collectively pay penalties totaling more than $18 million.

“It is abundantly clear from the agreements reached to date that for decades, many foreign financial institutions engaged in a pattern of conduct designed to facilitate the concealment of accounts owned by U.S. taxpayers, and to profit from these relationships,” said Acting Assistant Attorney General Caroline D. Ciraolo of the Justice Department’s Tax Division.  “With each agreement reached under the Swiss Bank Program, and each U.S. accountholder who initiates and completes a voluntary disclosure to the Internal Revenue Service, we move a step closer to eliminating secret undisclosed accounts.”

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 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 the non-prosecution agreements signed today, 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 department’s agreement not to prosecute these banks for tax-related criminal offenses.

Migros was founded in 1957 and is headquartered in Zurich.  As of Dec. 31, 2014, Migros Bank had 66 offices (all in Switzerland) and more than 1,300 employees.  In January 2001, Migros Bank entered into a Qualified Intermediary (QI) Agreement with the Internal Revenue Service (IRS).  The QI regime provided a comprehensive framework for U.S. information reporting and tax withholding by a non-U.S. financial institution regarding U.S. securities.  Migros Bank issued several directives to its employees concerning the QI Agreement.  An October 2000 directive stated that persons subject to U.S. taxes who did not want to be disclosed to the “U.S. tax authority” would not be authorized to hold or purchase U.S. securities in their accounts beginning on Jan. 1, 2001.  The directive further stated that persons subject to U.S. taxes who disclosed their identities to the U.S. tax authority via an IRS Form W-9 could purchase and sell U.S. securities without restriction.

Migros Bank also created a handbook regarding the QI Agreement, which was first issued to its employees in 2003.  The handbook recognized that “the U.S. retains the right to full taxation of its citizens,” but also that a “U.S. person has the option not to disclose to U.S. tax authorities.”  The handbook instructed Migros Bank employees that “[i]f a U.S. person does not wish to disclose to U.S. tax authorities, it is sufficient if the W-9 form is not filled out for Migros Bank,” and that the customer could sign a waiver to forego investing in U.S. securities.  The handbook further instructed Migros Bank employees that clients residing in the United States “who would like to refrain from disclosure” could be “tended to” by, among other things, retaining their mail in Switzerland through hold-mail agreements, not making regular fund transfers  to the United States and not sending payment orders from the United States.

From 2001 until 2005, Migros Bank accepted referrals of U.S. persons as new clients from an external asset manager based in Switzerland.  The external asset manager brought a total of 165 U.S.-related accounts to Migros Bank during that period, and most of those accountholders were U.S. residents.  The maximum value of these accounts during that period was approximately $62 million.  The external asset manager had full control of his clients’ accounts, and Migros Bank’s relationship managers usually interacted with him rather than with his clients.  In 2005, Migros Bank decided to terminate its relationship with the external asset manager, but it did not end the relationship until the end of 2006 in order to provide the external relationship manager with additional time to contact his clients and possibly move their funds to other depositary banks.  Alternatively, his clients could elect to stay at Migros Bank and give the external asset manager powers of attorney to continue managing their accounts.

In December 2008, Migros Bank’s executive board established a working group of bank officials to study the situation of U.S.-domiciled clients, whom Migros Bank considered to be the riskiest U.S. persons from a U.S. tax-enforcement perspective, identify any related risks to Migros Bank and propose measures to limit such risks.  The working group assessed the risk of U.S. tax authorities taking actions against additional Swiss banks as moderate and the risk of Migros Bank’s website and e-banking services causing it to fall under U.S. bank supervision as low.  They also assessed the risk of relationship managers’ insufficient legal and linguistic knowledge causing erroneous advice to U.S.-domiciled clients as moderate.

The working group considered discontinuing business with all U.S.-domiciled clients to be a “low priority” because that business generated earnings with hardly any additional expenditure and had “further potential as various banks are discontinuing the provision of advisory services.”  Instead, the working group considered the creation of a U.S. desk to be a top priority.  The working group presented a business case for this option that envisioned obtaining an additional one percent share of the total U.S.-domiciled clients with more than 1 million Swiss francs in assets then being served by all Swiss banks.  The working group estimated that there were more than 2,500 UBS clients alone in that category.  The business case also envisioned potentially obtaining an additional two percent share of all other U.S.-domiciled clients, “depending on the strategy.”  The working group estimated that this course of action would result in Migros Bank having 250 million Swiss francs under management from U.S.-domiciled clients.

The executive board ultimately decided, starting in 2009, to create a U.S. desk by re-assigning all U.S.-domiciled clients, whether in premium or retail banking, to a group of premium-banking relationship managers who spoke English and had received specialized regulatory training.  The head of the premium-banking department had ultimate responsibility over this team, which eventually included nine relationship managers.  In May 2009, Migros Bank issued a directive requiring that the head of the premium-banking department approve all new U.S.-domiciled clients, prohibiting Migros Bank employees from sending correspondence to the United States or accepting orders received by telephone, fax or mail from the United States, and prohibiting U.S.-domiciled clients from initiating transactions through the e-banking system.  After issuing the directive, Migros Bank accepted 37 new U.S.-related accounts in the remainder of 2009.  Of these, 17 were funded by transfers from banks with operations already under investigation by the department, or Category 1 banks.

Since Aug. 1, 2008, Migros Bank provided banking services for 898 U.S.-related accounts, with more than $273 million in assets.  Migros Bank will pay a penalty of $15.037 million.

Graubündner was founded in 1870.  It is headquartered in Chur, Switzerland, and has 63 branches, all located within the Canton of Graubünden.

With respect to its U.S.-related accounts, Graubündner offered a variety of traditional Swiss banking services that, though available to all of its clients, were used by some U.S. taxpayers to conceal their undeclared assets and income.  These services included code word or numbered accounts and assisting U.S. clients in executing forms that directed Graubündner not to disclose their names to the IRS.  For approximately 76 U.S-related accounts, Graubündner provided hold mail services, through which Graubündner held bank statements and other mail in Switzerland rather than sending the documents to the United States.  In a few cases, Graubündner processed substantial cash withdrawals in connection with U.S. clients’ closure of their accounts.  For example, at an account closing in December 2009, the bank permitted a U.S. taxpayer to withdraw approximately $112,000 in cash.  Graubündner also closed a U.S.-related account held by a U.S. citizen and resident by transferring the account funds to another Graubündner account held in the name of the U.S. client’s parents, who lived in Switzerland.

Graubündner opened and maintained accounts for seven U.S. taxpayers in the names of offshore structures where the U.S taxpayer’s interest in the account was not reported to the IRS.  Five U.S. citizens were the beneficial owners of accounts held in the names of nominee entities, including four Liechtenstein foundations and a British Virgin Islands company.  Two of these accounts had traded in U.S. securities, but Graubündner did not report account earnings or transmit withholding taxes to the IRS as required.  Graubündner also opened and maintained two accounts in the names of Swiss companies, one for a Swiss citizen and one for a German citizen, both of whom resided in the United States.

In December 2008, Graubündner required that all new and existing U.S. clients, irrespective of domicile, submit a handwritten declaration of compliance with their U.S. tax obligations, waive Swiss banking secrecy and provide a Form W-9.  Graubündner also prohibited the opening of new accounts for entities with a U.S. beneficial owner, even with a Form W-9 and confirmation of tax compliance.  New U.S. clients who failed to submit the requested documents were not supposed to be accepted, though initially some relationship managers continued to accept U.S. customers without securing a Form W-9.  Existing clients who failed to meet these requirements were to be exited by June 2010.  In July 2009, Graubündner stopped accepting any new U.S. clients, with the exception of U.S. nationals residing in Switzerland or Swiss nationals temporarily residing in the United States.

Graubündner has fully cooperated with the department, providing all relevant and requested information and documents as part of its participation in the Swiss Bank Program.  Further evidencing Graubündner’s cooperation is the fact that its employees and members of the board of directors have not objected to the disclosure of their names and functions at Graubündner to the department.  In compliance with Swiss privacy laws, Graubündner has sought and obtained bank secrecy waivers from many of its U.S. customers, whose names were then provided to the U.S. government.

Since Aug. 1, 2008, Graubündner had 364 U.S.-related accounts with an aggregate maximum balance of approximately $105.5 million.  Graubündner will pay a penalty of $3.616 million.

In accordance with the terms of the Swiss Bank Program, each bank mitigated its penalty by encouraging U.S. accountholders to come into compliance with their U.S. tax and disclosure obligations.  While U.S. accountholders at these banks who have not yet declared their accounts to the IRS may still be eligible to participate in the IRS Offshore Voluntary Disclosure Program, 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 these non-prosecution agreements, noncompliant U.S. accountholders at these banks must now pay that 50 percent penalty to the IRS if they wish to enter the IRS Offshore Voluntary Disclosure Program.

“Today’s resolution with Migros Bank AG and Graubündner Kantonalbank continues the progress of DOJ’s Swiss Bank Program,” said acting Deputy Commissioner International David Horton of the IRS Large Business & International Division.  “This settlement aids our efforts to make sure U.S. taxpayers report their foreign accounts and pay taxes on the income earned on those accounts.  Working with DOJ, we continue to make progress fighting offshore tax evasion and those who aid such illegal activity.” 

“The Swiss Bank Program continues to pay dividends due to the strength of our partnership with the Department of Justice,” said Chief Richard Weber of IRS-Criminal Investigation (CI).  “A significant element of this program has been the influx of highly-detailed account data along with information about the variety of schemes used to hide assets overseas.  This information will continue to be used on both an individual and global basis to combat international tax evasion.”

Acting Assistant Attorney General Ciraolo thanked the IRS, and in particular, IRS-CI and the IRS Large Business & International Division for their substantial assistance.  Ciraolo also thanked Gregory E. Van Hoey, Michael R. Pahl, John E. Sullivan and Thomas G. Voracek, who served as counsel on these matters, as well as Senior Counsel for International Tax Matters and Coordinator of the Swiss Bank Program Thomas J. Sawyer and Senior Litigation Counsel Nanette L. Davis of the Tax Division.

Additional information about the Tax Division and its enforcement efforts may be found on the division’s website.

Updated September 25, 2015