(Update with comments from Finma in 14th paragraph.)
Dec. 23 (Bloomberg) -- Switzerland’s 300 banks have enlisted an army of auditors, lawyers and in-house workers as they race to meet a Dec. 31 deadline on whether to seek U.S. amnesty for helping American clients evade taxes.
Banks in Switzerland, the largest cross-border financial center with $2.2 trillion of assets, are closely examining accounts before joining a disclosure program that’s the broadest assault in a five-year U.S. crackdown on offshore tax evasion.
“The hard work is getting to the right data and cutting through complex systems to get all the facts on the table,” said David Fidan, a partner in Deloitte LLP’s forensic services practice in Switzerland. “That’s very expensive and involves lawyers, forensic accountants and bank employees. It can take 20, 30 or 40 people over four or five months for bigger banks.”
Banks with “reason to believe” they violated tax laws can ask the Justice Department to forgo prosecution. In turn, banks must disclose how they helped Americans hide assets, hand over data on undeclared accounts and pay penalties. Those that don’t apply could face criminal probes like those against 14 banks, including Credit Suisse Group AG, HSBC Holdings Plc and Basler Kantonalbank.
The Swiss government encourages banks to join the program, announced Aug. 29. Yet the Swiss Bankers Association criticizes the program’s cost and vexing questions, such as who qualifies as a U.S. client and what assets are considered untaxed. The answers could determine how much a bank pays in penalties.
“It’s necessary for the banks to do a deep analysis of their clients and the history of those relationships,” said SBA spokeswoman Sindy Schmiegel. “That’s really expensive, and that’s why the program is at the limit of tolerability for the banks. It’s really a painful program.”
At least 33 have announced they will join some form of the program, including 19 cantonal banks, or regional lenders typically owned by regional governments. They include Union Bancaire Privee, the Geneva-based bank founded by Edgar de Picciotto in 1969; Edmond de Rothschild Group, the Geneva-based wealth manager owned by Baron Benjamin de Rothschild; EFG International AG, controlled by Greek billionaire Spiro Latsis and his family; and Bern-based Valiant Holding AG.
Banks expressed confusion over how the Justice Department will calculate penalties and treat lenders that are less culpable in hiding assets from the Internal Revenue Service, said Joshua Milgrim, an attorney at Dechert LLP.
To gain non-prosecution deals, banks must pay 20 percent of the value of accounts not disclosed to the IRS on Aug. 1, 2008, 30 percent for such accounts opened between then and February 2009 and 50 percent for accounts opened afterward.
“The view seems to be that the penalty rates for this program came out way too high,” said Milgrim, who is advising a Swiss bank. “A lot of banks are having difficulty deciding whether to go into a program which doesn’t take into account the level of culpability and instead treats all banks the same.”
Banks are also waiting to find out whether Switzerland’s financial supervisory authority Finma will encourage them to make provisions for costs related to the program and potential fines in this year’s accounts.
Basler Kantonalbank announced a 100 million Swiss franc ($112 million) provision on Dec. 19, while Credit Suisse has set aside 295 million francs for U.S. tax matters.
Finma said it was generally in favor of banks making a provision this year, according to a letter dated Nov. 22 that was published yesterday on the website of SonntagsZeitung newspaper. While that letter was non-binding, the regulator may issue further guidance.
“We cannot exclude that we will put out such a recommendation in the future,” Vinzenz Mathys, a spokesman for Bern, Switzerland-based Finma, said today.
The program has provoked Swiss debate on whether the U.S. went too far in trying to pierce banking secrecy that protected American tax cheats for decades. The crackdown escalated after 2009, when the U.S. charged UBS AG, the biggest Swiss bank, with helping Americans hide $20 billion in assets.
UBS avoided prosecution by admitting it fostered tax evasion and paying $780 million. It handed over 4,700 accounts. The U.S. prosecuted 100 taxpayers, bankers, lawyers and advisers for offshore tax crimes. At least 38,000 taxpayers avoided prosecution by paying back taxes and penalties and disclosing which offshore banks and advisers helped them hide assets.
The program divides banks into four categories. The 14 in category 1 are excluded because of their criminal probes. They include Credit Suisse, the second-biggest Swiss bank; the Swiss unit of HSBC, Europe’s biggest bank; Julius Baer Group Ltd., Switzerland’s third-largest wealth manager; and Zuercher Kantonalbank, the largest state-owned regional bank.
Banks must opt by Dec. 31 for entry into category 2, which could bring them non-prosecution agreements. They must disclose the total number of U.S. accounts since 2008, their highest dollar value, and the employees who managed them. The banks also must use independent examiners to certify findings.
Category 3 banks seek Justice Department letters saying they’re not a target of a criminal probe. In return, an independent examiner must confirm the bank broke no laws. Banks must apply from July 1 to Oct. 31. Banks seeking category 4 are those with almost all Swiss clients.
“Most of the banks are going to category 2,” said Fidan. “The DOJ has already stated numerous times that if you’re unsure, you should file for a category 2. Clearly, if you file as a category 2 and cooperate with the U.S., from a governance perspective, your risk is much lower.”
The advisers scouring electronic records seek to find which accounts among thousands were held by U.S. clients who didn’t declare assets. They search for U.S. citizens or residents. They sift for those born in the U.S. or have U.S. addresses, phone numbers, or instructions to transfer funds there. The bank may also try to reach customers to clarify their status.
“Most of these accounts are closed,” Fidan said. “You need to reach out to a customer with whom you don’t have a relationship anymore. Everything can be handled. It’s just a matter of resources and time. The problem is resources are scarce and you don’t have that much time.”
After evaluating their accounts, banks must weigh whether to enter the program or risk detection by the U.S. if they don’t, said attorney Lawrence Hill of Shearman & Sterling LLP. His firm advises some Swiss banks and is seeking to work as an independent examiner for others.
“If they’ve done adequate due diligence and evaluation, they may decide they have no risk or minimal risk,” Hill said. “If they feel they have some risk, they may decide to go into the program. It’s a complicated equation.”
One unknown variable for banks is the 38,000 clients who told the IRS all about their offshore accounts.
“The DOJ is basically saying to the banks that if you don’t come into this program and you have customers that went into the voluntary disclosure program, you could be in our sights,” Hill said. “That’s part of what the banks have to evaluate when they decide whether to participate.”
Banks have offered various explanations on their decision.
UBP, which reported 81.1 billion francs of assets under management at the end of June, is “reserving the right to switch to category 3” after initially entering the program in category 2, the bank said in an e-mailed statement today.
EFG, which oversaw 76 billion francs at the end of June, said it “always maintained a policy that U.S. clients aren’t a target market.” It followed recommendations of Swiss authorities in joining the program, according to an e-mailed statement on Dec. 20.
Banque Cantonale de Geneve, a regional lender that takes deposits from local Swiss and foreigners domiciled and working in Geneva, has no policy to target U.S. residents. It can’t guarantee all American clients fulfilled their tax obligations, the bank said on Dec. 16. Multinationals including Procter & Gamble Co. and Caterpillar Inc. have offices in Geneva, while the United Nations employs about 1,600 in the city.
Migros Bank AG, with 825,000 customers, said it opted for category 2, even though more than 98 percent of clients are from Switzerland or the European Union. It said it may opt to change categories later, according to a Dec. 11 statement. Bank Coop AG said it was making a 9 million franc provision as it chose category 2.
Making provisions is “influenced by various factors and we don’t know how these will pan out,” Keith Gapp, a spokesman for EFG, said in an e-mail. UBP declined to comment on whether it would make a provision. Edmond de Rothschild said it “took all necessary measures,” without being more specific.
Some of Switzerland’s oldest and most secretive wealth managers are keeping mum on their decisions to participate. Lombard Odier & Cie., Geneva’s oldest bank that was founded in 1796, and J. Safra Sarasin Holding Ltd., declined to comment.
La Roche & Co., established in 1787, will tell clients of its decision in January before making any public statement, Christoph Gloor, a managing partner, said Dec. 19 in an e-mail. The Swiss private banks of Deutsche Bank AG and Barclays Plc declined to comment.
--Editors: Patrick Oster, Michael Hytha