United States Tax Program for Swiss Banks - Ending Safe Haven Status

In 1934, Switzerland passed the Federal Act on Banks and Savings.  Though the act provided vast regulations for the Swiss banking industry, the most important part of the legislation involved mandating secrecy.  Swiss banks were subject to local criminal charges if they disclosed the names of their customers or other account information.  The Federal Act created a privileged flow of information between the banks and their customers regardless of the customer’s nationality or citizenship.

The secrecy provision provided the starting point for the use of Swiss accounts to hide assets from foreign governments.  In the United States, Swiss accounts were largely used to hide assets for the purposes of tax evasion and tax fraud. Further, US citizens could circumvent the FBAR requirement under US federal law (requiring US citizens to disclose all foreign accounts) without fear of disclosure from the bank itself.

The secrecy of Swiss banks, and their willingness to accept US citizen deposits, created a conflict between the United States and Switzerland governments.  In the early 2000s, the United States Department of Justice (“DOJ”) opened a criminal investigation into one of the largest banks in Switzerland, Union Bank of Switzerland (“UBS”).

In 2009, UBS reached a settlement with the US government.  The settlement included providing names and account information for US customers, assisting DOJ in criminal investigations, and paying a penalty of $780 million.  Many other banks under investigation were not positioned to meet such settlement terms.  At the time of UBS’s settlement, multiple large and small banks were under DOJ investigation.

Amidst pressure from DOJ, the EU, and other international organizations, many Swiss banks leaned towards compromising their secrecy rules in exchange for settlement with the US.  In 2013, DOJ and the Swiss Department of Finance released a joint statement adopting the US Tax Program for Swiss banks.  The DOJ website detailing the program can be found here.  The goal of the program was to entice Swiss banks to remove their secrecy rules in exchange for settlement agreements.  The agreement with UBS served as a blueprint for all future settlements – the Swiss banks could sidestep criminal charges, manage penalties levied by the United States, and ensure the end of DOJ’s presence in their business.  The United States government, in turn, would receive important information on US bank accounts relevant to criminal tax investigations.

The US Tax Program for Swiss Banks

The tax program provided a vehicle for Swiss banks to come forward and settle with the United States.  The Swiss banks could apply for the tax program through a written application.  The tax program separated the applicants into four categories:

Category 1: banks that were already under investigation by DOJ

Category 2: banks that have reason to believe they may have assisted in a tax offense

Category 3: banks that have a foreign customer base, but do not believe they have assisted in committing a tax offense

Category 4: banks that have local customers and are compliant

The banks were responsible for delineating the applicable category within the application.  These applications were reviewed and a final categorization was approved by the US government.  If the review determined the bank fell into category 3 or 4, DOJ would send a non-target letter to the bank. This confirmed there was no active investigation.

If the review determined the bank was in category 1, the bank was barred from the program.  The active criminal investigations continued into the category 1 banks, though these banks would later reach settlement terms with the US government.

The program was really built to bring forward those banks in category 2 – the banks that believed they may have assisted in a criminal tax offense but were not currently under investigation by DOJ.  It was these banks that had to make the tough decision on whether they should incriminate themselves outside of a DOJ investigation.  For the self-disclosed category 2 banks, DOJ would issue non-prosecution agreements in exchange for a penalty and full disclosure of relevant US customers.

The DOJ program was highly successful.  To date, every Swiss bank that was under investigation, or located in category 2, has reached a settlement with the United States.  The settlements resulted in the US recovering $42.4 billion from category 1 settlements and $51.37 billion from category 2.  Further, DOJ has opened the door to continued assistance from various Swiss banks.

The Foreign Account and Tax Compliance Act and New Safe-Havens

In 2014, Switzerland was regulated by the Foreign Account and Tax Compliance Act (FATCA).  The Act lifted the curtains of secrecy established in 1934 for US customers.  In Switzerland today, a bank is permitted to release the account information to the US government with or without the consent of the account holder.  This Act has eliminated the secrecy prevalent in Swiss accounts for decades.

Many Swiss banks have responded to the special rules for US customers by barring US customers from opening Swiss accounts.  For many banks, it is not worth the regulatory issues to accept deposits from US citizens.  The FCTA, and individual bank policies, have effectively removed the safe-haven status enjoyed by US customers for many years.

The realities in Switzerland have not stopped the concealment of assets for US taxpayers.  It has merely forced taxpayers to find new nations that can more effectively resist disclosure to the US government.

The New Tax Havens and Tax Evasion

The EU, and other international organizations, compile statistics to determine which countries are serving as tax havens for the wealthy. In large part, these countries are identified by noting a bank deposit volume that is not supported by the local economy.  If a country has a very small economy, but has a large bank savings, it is clear foreign persons are seeking out the country’s financial institutions for asset placement.  These foreign persons are often utilizing these banks because they provide a useful tool for concealing assets from their local governments.

The top suspected tax havens today include many small countries with extremely large asset control.  These countries include the British Virgin Islands, Seychelles, Luxembourg, Liechtenstein, and the Cayman Islands.  Asset control is a huge boon to the local economy, especially for a small country.  There is an incentive for these countries to attract large deposits into their local banks.  On the other side, there is always a huge incentive for the wealthy to transfer assets to foreign accounts.

As these new countries are identified, the international community has attempted to pressure the local governments into increased transparency.  And this pressure can result in regulations which lower the attractiveness of the local banks.  For example, the Seychelles islands has made agreements to further regulate their banking system following insistence from the international community.  It will be interesting to see how the deposit volume responds to the regulatory changes.

The demand for safe-haven banking creates discord between US citizens, the US government, and foreign banks.  This conflict will continue as the US government attempts to locate 100’s of billions of dollars that are lost each year in offshore accounts.  Though the most well-known safe haven, Switzerland, has been largely curtailed, the game of whack-a-mole continues.  When one tax haven is limited, another country’s banks fill the void in supply.  This creates an endless cycle of high volume deposits, international scrutiny, regulatory changes, and the appearance of new safe havens.