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Article: November 2014 White Collar Litigation Update

Business Litigation Reports

The Future of the Department of Justice’s High Visibility Offshore Tax Evasion Initiative. On August 29, 2013, the U.S. Department of Justice (“DOJ”) Tax Division announced the Program for Non-Prosecution Agreements and Non-Target Letters for Swiss Banks (the “Program”). The announcement of this unprecedented program was the culmination of the U.S. government’s multi-year initiative to investigate and prosecute Swiss banks, bankers and third-party service providers, such as asset managers, lawyers and accountants, for aiding and abetting offshore tax evasion by U.S. taxpayers. This initiative started with the investigation of UBS AG, Switzerland’s largest bank, which resulted in UBS entering into a Deferred Prosecution Agreement on February 23, 2009 and paying $780 million in fines and restitution to the DOJ and U.S. Securities and Exchange Commission (“SEC”).

The investigation of UBS, enabled by the disclosures of a former UBS banker and whistleblower, marked the first time DOJ was able to penetrate the world’s largest offshore banking jurisdiction’s vaunted bank secrecy laws and obtain the names of undeclared U.S. taxpayers. To broaden its initiative beyond UBS, DOJ successfully used two principal avenues: (1) together with the U.S. Internal Revenue Service (“IRS”), it implemented the first of three Offshore Voluntary Disclosure Programs (“OVDP”) for undeclared U.S. taxpayers. As of year-end 2013, over 40,000 U.S. taxpayers entered into the OVDP, providing detailed information about the banks and advisors who serviced and assisted them with keeping their undeclared assets hidden offshore. Through the OVDP, the U.S. government has recovered over $6 billion in unpaid taxes, interest, and penalties to date. (2) The DOJ obtained from UBS the names of banks to which thousands of its undeclared U.S. clients transferred their assets.

The wealth of information developed from these sources led to additional investigations of 14 banks in Switzerland since 2009. The most prominent example being Credit Suisse AG, Switzerland’s second largest bank, which recently pleaded guilty and paid $2.8 billion in penalties and restitution to the DOJ, SEC, and New York Department of Financial Services. The U.S. Attorney’s Office for the Southern District of New York also successfully prosecuted Switzerland’s oldest private bank, Wegelin & Co., which led to the Bank’s demise before it pleaded guilty and paid $74 million in fines and restitution in 2013. In addition, DOJ has prosecuted over 30 individual Swiss bankers, asset managers, lawyers, and other third-party service providers over the past six years.

The Program constitutes an effort by DOJ and the Swiss government to structure investigations of additional Swiss banks under a streamlined framework that provides for penalty payments and information regarding employees, third party service providers and, ultimately, client information from participating banks in exchange for Non-Prosecution Agreements. 106 Swiss banks joined the Program by December 31, 2013. The Program excludes individual bank employees and third parties, who remain at risk of prosecution.

Despite DOJ’s efforts, it remains under substantial political pressure to deliver convincing results. Spearheaded by the U.S. Senate Subcommittee on Permanent Investigations, there has been heavy bipartisan criticism of DOJ’s failure to identify more U.S. taxpayers hiding their assets offshore. In a report released February 26, 2014, the Subcommittee faulted DOJ for its lax enforcement efforts and failure “to utilize available U.S. legal means to obtain the names of tens of thousands of additional U.S. persons whose identities are still being concealed by the Swiss.”

DOJ responded by indicating that it is using the Program as a pilot model for other jurisdictions that DOJ aims to target after Switzerland, including Singapore, Hong Kong, the Caribbean, and Luxembourg, all offshore jurisdictions with bank secrecy protections. The extensive information the Program and OVDP participants are providing will substantially aid DOJ in identifying and prosecuting additional banks and bankers in other jurisdictions and the U.S. taxpayers they serviced.