Banks agonise over US tax evasion ‘guilt’

US Attorney General Eric Holder will let banks weigh up their presumed guilt Keystone

Swiss banks are engaging in a game of cat-and-mouse by positioning themselves to the best advantage in a United States tax evasion scheme that promises non-prosecution in exchange for owning up to past offences.

While some banks have formed a clear picture of where they stand in the so-called ‘non-target letter’ programme, others are still weighing up the cost of registering versus the risk of being caught by the Department of JusticeExternal link (DoJ) with their trousers down.

Liechtenstein’s VP Bank last week became the latest institution to pull out of the scheme having initially subscribed itself in “category 2” – effectively pointing the finger of suspicion at itself for potentially helping US clients evade taxes.

The NZZ am Sonntag newspaper claims that at least ten banks have also performed such a u-turn but it did not name names. Britain’s Barclays, which has a Swiss-based wealth management business, exited the scheme this summer while Fribourg Cantonal Bank has withdrawn from category 2 but has not yet decided whether to move to another less onerous category (see box).

Research by swissinfo.ch into 30 institutions found that two other Swiss private banks currently registered as category 2 (which did not want to be named) do not know if they will ultimately stick or twist. Three gave no comment and the others said they had no plans to change.

Casualties

So why should a bank virtually accuse itself of aiding tax cheats one day and the next walk away from a treaty that protects it from potentially ruinous criminal indictment?

Part of the reason can be traced back to the birth of the Swiss-US non-target letter deal in August 2013, a period of intense uncertainty and danger for the whole Swiss banking sector.

In January 2013, Wegelin was found guilty of aiding tax cheats by a US court and ended its 273-year existence. In the summer, the Swiss parliament rejected a government proposal to end the long-running tax evasion dispute by handing over client details to the US.

The scene looked set for more Wegelin-style casualties, a dire outlook that was brought into sharper focus when Bank Frey ceased operations in October because it could not afford to fight the US authorities.

The country’s regulator, the Swiss Financial Market Supervisory AuthorityExternal link (FINMA), urged banks to swiftly join the non-target letter programme despite protests that the details were too vague and that banks needed time to comb through their accounts for US tax cheats.

The DoJ said 106 banks had signed up by the end 2013 and more have been added since. PricewaterhouseCoopers (PwC) calculates that more than 100 banks are currently enrolled in category 2 alone, and the deadline for categories 3 and 4 lasts until the end of the year.

Dangerous game

Roll on to the present and some banks which registered under category 2 to be on the safe side are still completing the time-consuming and expensive review process. A handful have completed their due diligence and believe they are not so culpable after all.

“I have heard that certain banks which registered as category 2 at the end of last year have now come to the conclusion, having consulted with Swiss and US advisors, that they have no reason to believe they may have committed US tax-related offences,” Alexander Troller, a lawyer at the LALIVE practice which consults banks in the US programme, told swissinfo.ch.

“Withdrawing from category 2 after conducting such analysis is a logical step. There is a theoretical risk that the US authorities will not agree and could still prosecute them, unless of course they move to category 3 and obtained a non-target letter [exempting them from criminal prosecution],” he added.

“But they must be confident of their decision, having flagged themselves up to the DoJ in the first place.”

However, the suspicion remains that other banks are playing a far more dangerous game by never entering the scheme in the first place.

“Certain banks may have decided not to register in the programme on the basis of a cost-versus-risk assessment,” said Troller. “Their rationale being that if they should ever get prosecuted, then the fines or other consequences would be more manageable than the cost of entering the system in the first place.”

The DoJ made it very clear on brokering the non-target letter deal that non-compliant banks could face serious sanctions if they do not admit the error of their ways and are caught.

Pressure

The US authorities ramped up the pressure on Swiss banks by fining Credit Suisse $2.6 billion (CHF2.3 billion) in May, more than tripling the $780 million levy imposed on UBS in 2009 for the same offences.

On the other hand, the cost of engaging lawyers and accountants on both sides of the Atlantic to comb through their books in search of US tax cheats could easily cost multiple millions of francs.

“It entails a lot of administrative work, so each bank has to work out its own best strategy,” Martin Schilling, head of corporate finance and financial services at PwC Switzerland, told swissinfo.ch.

“Bank representatives are travelling quite a lot to the US to discuss this issue, which takes up a lot of their time.”

The game of smoke and mirrors does not end there, according to a recent PwC reportExternal link that found that many banks had put aside a surprisingly small amount of money (provisions) to cover potential fines.

“Swiss private banks have likely been conservative in forming their provisions in order to avoid an implicit admission of guilt,” the report states. In other words, announcing bigger provisions signals a bigger guilty conscience.

Caught in the crossfire of these strategies, however, are thousands of bank clients who are either innocent of tax evasion offences or were unaware of their reporting responsibilities.

These include US citizens living and working in Switzerland who cannot open bank accounts or take out mortgage loans. In some cases they have been expelled by their banks as involving too much unwanted paperwork and risk.

A number of dual Swiss/US citizens have also complained at being unnecessarily dragged into the row and have been saddled with competing a time-consuming and expensive paper trail proving that they have never worked – or indeed in some cases never lived – in the US.

Degrees of sin

Banks that take part in the ‘non-target letter’ deal, agreed between the Swiss and US in August 2013, will be arranged into four categories of potential guilt. 

Category 1: The 14 banks already under active investigation for suspected tax evasion offences. These include Julius Bär, Pictet and the Zurich and Basel cantonal banks and some Swiss subsidiaries of foreign banks. 

These banks have already received a target letter from the DoJ and must reach their own settlements individually outside of the programme. 

Category 2: Those banks that know or suspect that they have committed tax evasion offences in the US. These banks face fines of 20%-50% of accumulated non-declared assets depending on how long they have sat in the banks’ vaults. 

The deadline for registering in category 2 was extended from June 30 this year to the end of July. But banks have until September 15 to deliver their final mitigating paperwork showing which clients have already owned up to their wrong-doing under voluntary disclosure schemes in the US. 

Group 3: Banks that have US customers but believe that they, and their clients, have complied fully with US tax regulations. 

Group 4: Banks with very limited exposure to foreign clients – no more than 2% of total client base are non-local. 

The deadline for registering under categories 3 and 4 is December 31, 2014.