Duhaime's Financial Crime & Anti-Money Laundering Law in Canada

Anti-Tax Evasion Agreement

The U.S. Department of Justice and the Swiss Federal Department of Finance have entered into an agreement that essentially ends Swiss bank secrecy and the renown of Switzerland as a tax haven.

The Agreement:

1. Applies not just to American taxpayers but also to foreigners and foreign entities who maintain Swiss bank accounts if they are U.S. tax obliged persons under FATCA;
2. Requires the disclosure of essentially every penny transferred in and out of closed Swiss bank accounts over the last five years by persons and entities who are caught by the Agreement, wherever situated. As a result, U.S. law enforcement will be able to follow the flow of funds to pursue tax evasion by learning from where, and to where, funds were transferred; and
3. Requires the disclosure of professionals affiliated with the bank accounts or who acted as intermediaries in respect of the accounts. In the last few years, 4 lawyers, 5 asset managers, 1 trust advisor and 21 bankers have been indicted by the U.S. in connection with the use of Swiss bank accounts – the disclosure of this information means more indictments of advisors are forthcoming.

The Agreement Details

The Agreement allows Swiss banks to enter into non-prosecution agreements (“NPA“) with the DOJ to avoid criminal liability for, among other things, potential money laundering and conspiracy to defraud the IRS and facilitate tax evasion, in exchange for the disclosure to the DOJ of detailed bank account information about foreign bank account holders and the payment of billions of dollars in fines to the U.S. The Agreement also allows other categories of Swiss banks to receive comfort from the DOJ in respect of prosecution by way of a Non-Target Letter provided they undertake certain reviews of their accounts and share that information with the DOJ.

The aim of the Agreement appears to be fourfold – to flush out tax evaders (and secure the payment of unpaid taxes and penalties by them to the IRS); to flush out their advisors, and where expedient, prosecute them; to bring about the end of the use of foreign banks in tax havens for tax evasion for all U.S. tax obliged persons and entities; and to secure the payment to the U.S. of billions of dollars in penalties from Swiss and other banks worldwide in settlement of non-prosecution.

By virtue of its reference to the U.S. Foreign Account Tax Compliance Act, 124 Stat. 97-117 (“FATCA“), the Agreement applies not just to American natural and legal persons but also to foreigners and foreign legal persons in the same circumstances in which FATCA applies (“U.S. Tax Obliged Persons“). Due to its breadth, FATCA impacts virtually all non-U.S. entities, directly or indirectly, receiving most types of U.S. source income, including gross proceeds from the sale or disposition of U.S. property which can produce interest or dividends.

There are several stages to the NPA portion of the Agreement – the material provisions of which are set out below.

First Stage

The first stage involves the Swiss bank requesting to enter a NPA in which it provides a letter to the U.S. Tax Division making such a request by December 31, 2013. Subsequent to the written request but before entering into a NPA, the bank must provide to the U.S., certain information in respect of U.S. bank accounts (“U.S. Related Accounts“) it maintains (or maintained) from August 1, 2008 onwards which exceed $50,000 in value if there is evidence that a U.S. Tax Obliged Person has a financial or beneficial interest in, ownership of, or some measure of authority over (such as trade confirmations), the U.S. Related Account. The bank must also provide information on how the U.S. Related Accounts were structured, operated and supervised; the name and function of the persons who managed the accounts; how the bank attracted and serviced account holders; and number of accounts and aggregate dollar value.

Second Stage

In the second stage, the Swiss bank enters into a NPA pursuant to which it agrees to pay, and pays, the U.S. a penalty ranging from 20% – 50% of the aggregate value of the U.S. Related Accounts it maintained over the relevant period of time. The range depends upon when the Swiss bank accepted funds from U.S. Tax Obliged Persons – 50% being applicable for funds accepted after February 28, 2009.

Pursuant to the terms of the NPA, Swiss banks must close U.S. Relevant Accounts of all recalcitrant account holders, namely those who do not evince an intention to comply with IRS disclosure requirements. In the future, if a participating Swiss bank opens an account for a U.S. Tax Obliged Person, it must ensure that the account is declared to the U.S.

The Swiss bank must also agree to provide expert testimony for U.S. criminal prosecutions that will arise from the disclosure of information provided to the U.S. under the Agreement for charges that may include tax evasion and money laundering.

Third Stage

In the third stage, after entering into a NPA, the bank must provide additional information on the names and details of holders of closed U.S. Related Accounts. That disclosure includes the following:

1. Dollar value of each U.S. Related Account;
2. Name of U.S. Related Account holders and whether held by legal or natural persons;
3. Beneficial interest information;
4. Whether U.S. securities were held, and details in respect thereof;
5. Names of lawyers, fiduciaries, asset managers, accountants, financial advisors, trustees, nominees, and anyone else affiliated with the U.S. Related Accounts;
6. Details on the transfer of funds into and out of the U.S. Related Accounts on a monthly basis, including where such funds were deposited to and from and whether an intermediary was involved (such as lawyers, trustees and other third parties, and if so, their names); and
7. Names of financial institutions involved in the transfers of funds, wherever situated worldwide.

The Agreement does not apply to approximately 14 Swiss banks that are currently the subject of U.S. criminal investigation in respect of bank secrecy and tax evasion.

The Wegelin Prosecution & Money Laundering 

The impetus for the Agreement was the indictment and conviction this year of Switzerland’s oldest private bank, Wegelin & Co. (“Wegelin“), and the criminal forfeiture of millions of dollars held by Wegelin at a U.S. correspondent bank as proceeds of crime (money laundering property). Wegelin did not survive the reputational sting of the money laundering criminal forfeiture and the indictment and was forced out of business after 272 years.

Wegelin provided private banking and wealth management services to, among others, U.S. Tax Obliged Persons, some of whom were evading the payment of U.S. taxes. It continued to maintain accounts when it was aware that the purpose of the accounts was to evade taxes and assisted certain taxpayers violate their duty to report to the IRS. Wegelin obtained a legal opinion (which it now knows was incorrect), that it would never be prosecuted by the U.S. for such conduct because it had no branches or offices in the U.S. However, it did have a correspondent relationship with UBS in the U.S. and its legal opinion incorrectly stated that the US does not have jurisdiction over foreign banks.

It pled guilty earlier this year to conspiracy to defraud the IRS, file false federal income tax returns, and evade federal income taxes by essentially helping U.S. Tax Obliged Persons hide more than $1.2 billion from the IRS. It accepted deposits from natural persons and legal persons, including from off-shore companies and foundations established under the laws of Panama, Hong Kong and Leichtenstein.

It ultimately paid more than $74 million to the U.S. — $20 million in restitution, a fine of $22 million, forfeiture of $15 million and the abandonment of its claim of over $16 million already forfeited to the U.S. as money laundering property.