Beware Of Swiss Banks Urging OVDP
By Stephen J. Dunn
A client recently received a letter from a Swiss bank “strongly encouraging” the client to enter the Internal Revenue Service (“IRS”) Offshore Voluntary Disclosure Program (“OVDP”). The letter said that OVDP “affords US taxpayers an opportunity to become compliant with their US tax obligations by voluntarily disclosing their undisclosed offshore account to the IRS.” The letter continues–
“[By participating in OVDP,] US taxpayers 1) avoid the risk of criminal prosecution by the US government, and 2) receive substantially reduced civil penalties. Although the IRS has not specified an end date for [OVDP], the IRS may limit eligibility, make the terms substantially less attractive, or end the program at any time.”
The letter fails to mention that the bank is urging its U.S. depositors into OVDP to serve the bank’s self-interests. For years Swiss banks facilitated U.S. depositors’ use of Swiss banking secrecy laws to evade U.S. income tax on income generated by their Swiss accounts. The U.S. Department of Justice (“DOJ”) has been prosecuting such banks for criminal conspiracy, winning convictions and recovering substantial sums. Under the August 29, 2013 Joint Statement between DOJ and the Swiss Federal Department of Finance. DOJ has been offering non-prosecution agreements to Swiss banks for, among other things, urging their U.S. depositors into OVDP. The bank’s letter fails to mention that by urging U.S. depositors into OVDP, the bank hopes to win a non-prosecution agreement from DOJ.
The bank’s assertion in the letter that the IRS may limit eligibility for OVDP, make it substantially less attractive, or terminate it, is false. There is no suggestion that IRS will disturb OVDP in its present form. If IRS were to alter OVDP, surely it would give notice of its intent to do so.
The bank’s letter concluded by “kindly ask[ing]” the client to sign an enclosed Declaration. The client obliged, signing the Declaration in two places. He signed it under the statement, “I would like to receive assistance in order to gather the documentation in possession of the bank necessary for taking part in the Offshore Voluntary Disclosure Program.”
The client also signed the Declaration under this statement: “By signing this declaration, I expressly and irrevocably authorize the bank to provide all relevant information about my past and present accounts to any US authority, including the IRS and the Department of Justice and, in the context of providing such information I hereby expressly release [the bank] from any obligations resulting from Swiss banking secrecy data protection regulations, and any other applicable laws which might otherwise preclude such disclosure, in case the bank is not already in possession of a respective authorization or release.”
Obviously the client did not understand what he was signing. The client returned the signed Declaration to the Bank shortly before consulting me. Entering OVDP is not in the client’s best interests.
I explained to the client that OVDP would require the client to pay Bank Secrecy Act penalty equal to 27.5 percent of the highest balance in the Swiss account over the preceding eight years. I further explained that OVDP would require the client to amend his income tax returns over the preceding eight years to report income generated by the Swiss account, and pay income tax on the additional income, a 20 percent accuracy penalty, and interest. The tax, penalties, and interest, as well as the legal and accounting fees, the client would incur in OVDP would financially devastate the client.
The client received no consideration for signing the Declaration. Moreover, the client was induced to sign the Declaration upon the bank’s false pretenses, and in breach of the bank’s fiduciary duties to the client.
I wrote to the bank on the client’s behalf revoking the Declaration. The bank responded, saying that if by June 30, 2014 the client does not provide the bank with proof that the client has entered OVDP, the account will be among Non-Consenting U.S. Accounts about which the bank will disclose certain “aggregate information”—the aggregate number and the aggregate balance of such accounts—to the IRS pursuant to the Agreement between the United States of America and Switzerland for Cooperation to Facilitate the Implementation of FATCA, dated February 14, 2013, (the “Agreement”). The bank added that the U.S. government may then, under the Agreement, request from the Swiss government the identities of U.S. holders of such accounts, and the balances of accounts, and that the Swiss government would be obliged to provide such information to the U.S. government.
Actually, Article 5, Section 3 of the Agreement provides that when the Swiss Competent Authority receives from the U.S. Competent Authority an aggregate request with respect to Non-Consenting U.S. Accounts, the Swiss Federal Tax Administration (“FTA”) shall request the bank holding the information to provide the information to the FTA within 10 days. The FTA shall then issue a final decision on the U.S. Competent Authority’s request, ant notify all persons concerned of it, and publish notice of the final decision in the Swiss Federal Gazette and on the FTA’s website. The FTA’s final decision may be appealed within 30 days. Within 8 months after receipt of an aggregate request form the U.S. Competent Authority, the FTA shall exchange with the U.S. Competent Authority the information requested by it concerning Non-Consenting U.S. Accounts.
The foregoing applies only to Non-Consenting U.S. Accounts. A “Non-Consenting U.S. Account” is, among other things, a Preexisting Account. Significantly, a Preexisting Account “means a Financial Account maintained by a Reporting Swiss Financial Institution as of December 31, 2013.” Agreement Article 2, Section 1(18). The client closed his Swiss account in 2009. Accordingly, the client’s former Swiss account is not a Preexisting Account, and the foregoing disclosure scheme does not apply to it.
I am writing back to the bank and demanding that it not carry out its threat to identify the client and disclose the client’s former account to the U.S. government, as doing so would violate Article 271 of the Swiss Criminal Code and the bank’s fiduciary duty of confidentiality to the client, causing the client to suffer damages.
U.S. persons should not assume that Swiss banks well understand the pertinent law, and are acting in U.S. persons’ best interests.