Yesterday the Department of Justice (DOJ) announced that Ersparniskasse Schaffhausen AG (EKS) has agreed to cooperate in order to avoid criminal and civil fines and penalties.
What does this mean for EKS?
EKS, like Swiss banks before them who have entered into a DOJ Swiss Bank Non-Prosecution Agreement, must:
- 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 regarding other banks that transferred funds into secret accounts or that accepted funds when secret accounts were closed;
- Agree to close accounts of account holders who fail to enter into compliance with U.S. reporting obligations; and
- Pay appropriate penalties.
The deliberate steps EKS took to avoid US account owner detection
Previously we've written about the shell corporations, partnerships, and the dual-passport tricks that Swiss banks would employ to assist US persons in knowingly (or not) evade foreign reporting requirements and universal tax jurisdiction. From the DOJ announcement, it appears as if EKS's behavior is particularly interesting through its illustration of many common themes. I will copy and paste several sections of this press release, highlighting the points I deem most essential, starting with this excerpt:
From 2004 through 2011, EKS accepted referrals of U.S. persons as new clients from an external asset manager who, until 2009, resided in the United States and conducted some of his business through a corporation organized under the laws of the United States. The majority of the accounts that came to EKS as a result of these referrals were held in the names of non-U.S. entities that were beneficially owned by U.S. persons.
It would be my guess that the DOJ learned about this "external asset manger" from at least one US taxpayer who made a disclosure under the 2009 OVDI. As part of each OVDI or OVDP, taxpayers had to disclose who they dealt with; it's likely that the name of this external asset manager received quite a few hits.
Attempts to exploit UBS's downfall
UBS was the first bank to be caught red-handed; as a matter of fact, it was the initial trigger for the 2009 OVDI. So, what's a Swiss bank to do when a much larger rival is going to lose their customers? EKS saw an opportunity to swoop in and they hatched a plan:
In May 2008, with the knowledge and approval of EKS management, the external asset manager and an EKS relationship manager visited five U.S. cities to meet with U.S. clients and attorneys who had the potential to refer new clients. Topics discussed during their meetings included the “crisis” involving Swiss bank UBS AG, client satisfaction with EKS, the performance of client accounts at EKS and the “asset protection” benefits of EKS.
Attorneys? Oh boy. Now that the cat is out of the bag, those attorneys (yes, note the plural) will have a choice.
- Take the fall.
- Or perhaps, testify against their clients in exchange for leniency.
Not the most promising of options, are they? Either way, someone has to take (willingly or not is another discussion entirely) the blame. If I'm being honest, I don't like those odds for taxpayers.
Specific intent can be inferred through conduct
Seeing as we cannot take an MRI of someone's brain to determine what they were thinking at any given time, we must rely on circumstantial evidence in order to determine if someone had the specific intent of defrauding the US treasury or failing to file an FBAR form. Let's look at some of the conduct alleged:
Until 2009, EKS opened numbered accounts for U.S. persons, including code-name or pseudonym accounts, upon request. Upon opening this type of account, an EKS employee would enter the account holder’s name in a physical register rather than in the bank’s electronic records system. This action limited the number of EKS personnel who knew the client’s actual identity. Holders of these accounts could also provide documents to EKS using only their code names or numbers as their authorized signatures.
EKS provided all of its clients, including U.S. persons, with the option to request that EKS retain all mail related to a client’s financial accounts in exchange for a standard service fee. EKS understood that providing such hold-mail agreements upon request could allow U.S. persons to keep evidence of their EKS accounts outside of the United States and thus assist them in concealing assets and income from the IRS.
EKS also accepted IRS Forms W-8BEN for U.S.-related accounts held in the names of non-U.S. entities, such as foreign corporations, trusts or foundations. Because Swiss law required EKS to identify the true beneficial owners of the entities on a document called a Form A, EKS knew that these accounts were beneficially owned by U.S. persons. Nonetheless, EKS accepted Forms W-8BEN that it knew falsely stated that the entities were the beneficial owners of the accounts.
Taken together, such conduct would lead one to believe that any taxpayer banking with EKS was willfully conducting tax evasion, right? Well, not really. Let me offer you a possible rebuttal.
Swiss bankers lie. Many US persons are ignorant about universal tax jurisdiction (i.e., the IRS has power over your money anywhere in the globe) and that offshore income is not merely taxed upon repatriation, but instead with each year they are earning. Many US persons we have encountered have no idea why their original Swiss accounts were non-compliant. Instead of being told the truth and the need to use an OVDI, they were then lied to by other Swiss bankers who really wanted their money. So in some instances, but not all, Swiss bankers set up these alter-egos and came up excuses for why they had to switch bank accounts and do business under an alter-ego.
For this reason, someone who has accounts at EKS is not automatically precluded from entering into a Streamlined Voluntary Disclosure, nor is an opt-out entirely rendered useless if they are looking for protection from criminal prosecution.
Supporting our observations is this passage:
EKS was aware of the 2009 IRS Offshore Voluntary Disclosure Program for U.S. persons. Despite knowing of that program and knowing or having reason to know that some of its U.S. clients had likely not declared their EKS accounts to the IRS, EKS made no effort to encourage its U.S. clients to disclose their accounts through that program.
If those clients had disclosed, EKS would not have had their money any more! EKS thought they had a rock-solid plan to avoid detection, but that plan didn't include having all those banking with them in the know.
EKS is not a huge player; Small banks abound in Switzerland
What we have seen is that larger Swiss banks either told their clients to enter into an OVDI, or alternatively sent them to a private or other smaller bank, perhaps across the hall from their office. With or without their knowledge, the private banker took the taxpayer's money and set up the shell corporations, foundations, and nominees so that the money stayed in Switzerland. We suspect that the smaller bankers paid a referral fee to bankers at the larger banks to have new clients shuttled their way.
Since Aug. 1, 2008, EKS provided private banking services for 90 U.S.-related accounts with approximately $65 million in assets. Thirty-seven of these accounts were opened after Aug. 1, 2008. EKS will pay a penalty of $2.066 million. EKS's fine works out to $413,200 for each of the 5 years of knowingly and intentionally defrauding the US government. This represents 0.64% of an assumed $65 million portfolio per year. Seems like the deal wasn't too much of a hit.
EKS thought the risk was worth it
According to minutes of a 2009 meeting of the EKS board of directors, an EKS executive stated, among other things, that “there is practically no risk if U.S. customers travel to Switzerland and a customer account is handled locally,” and that he had been informed that Swiss bank Wegelin & Co. was going to keep its previous U.S. customers.
Again, you may not have to pay a 50% penalty if you banked with EKS
The press release implies you have one course of action:
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 this non-prosecution agreement, noncompliant U.S. accountholders at EKS must now pay that 50 percent penalty to the IRS if they wish to enter the IRS Offshore Voluntary Disclosure Program.
But again, if you were non-willful — which is certainly possible — you may qualify for the Streamlined Domestic Offshore Procedures (SDOP) or Streamlined Foreign Offshore Procedures (SFOP).
Alternatively, if you wish to opt-out, you may elect to do so. If you need assistance getting into the correct disclosure program, contact us. We can help.
