Swiss - More on Damage Control

The Swiss have made a lot of money over the years helping persons hide their money from tax collectors and others. Although the Swiss are not the only players in this game, they have been perceived as the most sophisticated hiders of money. It had become almost a cliche to talk about Swiss bank accounts in virtually the same breath as secrecy and tax cheating. Until recently.

Is the gig up or do they just have to be smarter?. The most recent U.S. initiative against UBS (including a deferred prosecution agreement and agreement, under compulsion, to disclose U.S. account holders) and the related offshore account voluntary disclosure initiative have put great pressure on this Swiss franchise. The best the Swiss can hope for is to mitigate the damage.

The most recent attempt to mitigate the damage discussed in several on-line web articles today. I link to some below. As noted in my previous blogs, the Swiss Government is requesting a legislative solution consistent with the agreement with the U.S. to disclose names (and ex-post facto, legalizing the disclosures already made or promised to be made). The reports are that the Swiss Parliament was balking. New reports indicate that UBS is lobbying the Parliament to approve the Government's proposal, for other Swiss banks and the whole Swiss system could be at risk if they do not.

One prong of UBS' attempt to mitigate the damage is in the form of a letter that is quite telling. I quote from the reports about the letter from the NY Times article:

In a letter sent to several Swiss lawmakers, a copy of which was obtained Friday by The International Herald Tribune, UBS said that failure to approve the treaty could encourage United States authorities to go after other Swiss banks, further undermining the country’s all-important financial sector. “In the end, the effects of not approving the deal are multiple and will not just affect a single entity like UBS,” the bank argued.

In its letter, UBS said the Internal Revenue Service had already collected information on the cross-border activities of about 20 Swiss banks. It added that it was “very possible” that the I.R.S. was seeking information about additional American clients of the banks.

“The refusal by the Swiss to fulfill its obligations under international law could send an escalating signal for these cases,” it said.

Switzerland also risked ending up on a blacklist of uncooperative tax havens if lawmakers refused to bless the deal, the bank said.

Does any reader believe that passage of the proposal would in fact cause the IRS not to pursue other Swiss banks? If the Swiss Parliament approves an amendment to the treaty, why would the U.S. not use the UBS template, then approved by the treaty amendment, to go after the other identified banks (or even the others yet to be identified)?

I suspect the UBS and the Swiss believe that this current brouhaha, while a setback and a permanent setback, it does not take away all the tricks of the hide the money gave. They will just have to hide smarter, but better than than a permanent lost of the whole franchise.

New York Times article
USA Today

Further Relief by Deferral for Signatories and Certain Owners of Commingled Funds

On February 26, 2010, by IRS Notice 2010-23, the IRS announced further relief by deferral for U.S. persons who are signatories only of foreign accounts or have interests in certain commingled accounts. The full Notice is here, but the the key provisions are fairly short, so I just cut and paste them here:

1. Signature Authority.

Persons with signature authority over, but no financial interest in, a foreign financial account for which an FBAR would otherwise have been due on June 30, 2010, will now have until June 30, 2011, to report those foreign financial accounts. The deadline of June 30, 2011, applies to FBARs reporting foreign financial accounts over which the person has signature authority, but no financial interest, for the 2010 and prior calendar years. When completing an FBAR that is subject to the extension provided in this paragraph, persons must adhere to FBAR guidance in effect at the time the FBAR is filed.

2. Certain Foreign Commingled Funds.

Persons with a financial interest in, or signature authority over, a foreign commingled fund that is a mutual fund are required to file an FBAR unless another filing exception, as provided in the FBAR instructions or other relevant guidance, applies. The IRS will not interpret the term "commingled fund" as applying to funds other than mutual funds with respect to FBARs for calendar year 2009 and prior years. Thus, the IRS has determined that it will not apply its enforcement authority adversely in the case of persons with a financial interest in, or signature authority over, any other foreign commingled fund with respect to that account for calendar year 2009 and earlier calendar years. A financial interest in, or signature authority over, a foreign hedge fund or private equity fund is included in the administrative relief provided in the preceding sentence.

3. FBAR-Related Questions on Federal Tax Forms.

Provided the taxpayer has no other reportable foreign financial accounts for the year in question, a taxpayer who qualifies for the filing relief provided in this Notice should check the "no" box in response to FBAR-related questions found on federal tax forms for 2009 and earlier years that ask about the existence of a financial interest in, or signature authority over, a foreign financial account.

Items 1 and 3 are particularly helpful to the many family members who frequently appeared as signatories but with no ownership / financial interest in the particular account or in any other offshore financial account.   I think the message here is that the FBAR form will likely change by the extended due date, so that those persons who elect to defer filing will have to use the then current form.  These signatories can file now, since the extension is just for the final date to file.  If so, they use the current form

FBAR Penalties and Excessive Fines (3/5/10)

A commenter requested further discussion as to the possibility of an excessive fines problem for the FBAR penalties. In an earlier blog here, I had advised readers of this article on the subject: Steven Toscher and Barbara Lubin, When Penalties Are Excessive -- The Excessive Fines Clause as a Limitation on the Imposition of the Willful FBAR Penalty.. The commenter said:

Could you share your thoughts in a new thread on the third article here, Steven Toscher and Barbara Lubin, When Penalties Are Excessive -- The Excessive Fines Clause as a Limitation on the Imposition of the Willful FBAR Penalty. The article seems to conclude that the 50% FBAR penalty is an unconstitutional punishment. But no one appears to have contested the constitutionality of it in the plea deals brought so far, because those individuals could face greater criminal charges if they do not accept the proposed civil punishment. Your thoughts on the legality of the 50% FBAR penalty?

Now, usually, someone does not have to ask for my thoughts. I usually give them before someone asks for them (and, sometimes, before I even think them). My thoughts are not really different and certainly not better that Steve's and Barbara's. But here goes, since you asked:

1. We need to keep in mind that the framework for this discussion is the Bajakajian case discussed in the article. In that case, the 100% penalty on the amount that should have been reported in the CMIR was deemed excessive under the facts of the case (just a footfault, albeit intentional and important, as to reporting, but no other illegality involved). By contrast the fines we are talking about here are 50% fines per incident, rather than the 100% fine per incident involved in Bajakajian and other illegality (income tax misconduct) is involved. That does not mean the Eight Amendment concerns are not involved, but the facts and amounts are materially different.

2. The conduct punished in the extant criminal cases is multiple incidents (years in the case of the FBARs) with the 50% applying to a single year, albeit the highest year. The Government could have gotten to the same number by applying a lesser penalty rate to each of the years.

3. For this reason, the effective penalty rate over all incidents (years) is much less than 50% unless you assume the unlikely case that only one year was involved. Let me illustrate, assume that 6 years are involved, with the highest year being $1,000,000 and all others years having $500,000 each and that the penalty is thus 50% of the highest year or $500,000. The penalty is thus 14%, hardly an excessive penalty in my mind. (I must resist the temptation to think that the The framers of the constitution (or Bible or what have you) must have had my mind in mind when drafting the respective tome.)

4. While I have not gone through all possible iterations, my gut (perhaps the same as my mind, but in any event also not the framer's gauge) tells me that conceivable iterations where the Government would make its discretionary call to prosecute are unlikely to dramatically affect the conclusion, at least in terms of the Eighth Amendment's Excessive Fines Clause as discussed in Bajakajian. Where it would dramatically affect the percentage forfeited because one of the years (the highest year) is dramatically out of sync with the other years or only 1 or 2 years are involved, then I question whether DOJ Tax would prosecute or insist on an out of whack penalty.

5. And, beyond that, the 50% penalty for the highest year is being extracted as a plea agreement in which the Government is giving up a number of other criminal charges that even could affect sentencing in some of the cases. It is just a deal that the defendants find acceptable regardless of whether they might have some outlier argument to make against any particular term of the deal considered in isolation.

6. I cannot wholly discount the possibility that DOJ Tax would prosecute a single year. Maybe the Government believes a drug dealer is involved and can't nail the defendant for that, so it takes what it can. But, in the run of the mine tax motivated FBAR failure to file case, one year is unlikely to make the prosecutorial discretion cut. And even then, to go back to Bajakajian, the penalty is one-half (50% rather than 100%) and other illegality is involved (at least one tax offense since, as of now, the Government is not prosecuting except where there is a tax crime and the hypothesized drug dealer will have almost certainly committed a tax crime). My same gut tells me that this may not offend the sensibilities of the Supreme Court in the same way the Bajakajian facts did.

To paraphrase the saying, my gut is often wrong but never in doubt (or turmoil). There you have it for what it is worth.

Addendum 3/5/10

After preparing the foregoing discussion, I read the following article:  Courtney J. Linn, Redefining the Bank Secrecy Act, Currency Reporting and the Crime of Structuring, 50 Santa Clara L. Rev. 407 (2010).  The author at pp. 501 - 507 discusses the implications of Bajakajian to BSA reporting requirements and related criminal provisions for structuring in the context of United States v. Ahmad, 213 F.3d 805, 815 (4th Cir. 2000), a structuring case.   In Ahmad, the court determined that the $85,000 was subject to civil forfeiture and then turned to whether the forfeiture of the entire amount subject to civil forfeiture was an excessive fine under Bajakajian concepts.  The Ahmad court found Bajakajian distinguishable because it involved a single incident whereas the violations in Ahmad involved more than one incident.  Further, "Ahmad's structuring constituted part of a complicated larger scheme related to customs fraud violations."  Whereas Bajakajian involved only the loss of information to the Government, "Ahmad's deposit structuring activities not only caused the government to lose information, but also implicated an intermediary actor ... and affected its legal duty to report certain transactions [to Customs]."  In praising this aspect of Ahmad, the author reasons (footnotes omitted and emphasis supplied):

More compelling was the fact that Ahmad's structuring conduct related to a larger scheme involving the evasion of custom tax duties. In Bajakajian, the defendant did not "fit into the class of persons for whom the statute was principally designed: He is not a money launderer, a drug trafficker, or a tax evader." The funds were lawfully derived and the defendant intended to use the money to repay a legitimate debt. In contrast, Ahmad acknowledged that he transferred some of the funds from his illegally structured deposits into an account used to further a customs fraud scheme. Congress enacted the CTR requirement precisely out of concern that large unreported currency transactions enabled tax evasion and similar crimes. This fact, more than the other marshaled by the Ahmad court, distinguishes Ahmad from Bajakajian. Indeed, the handful of post-Bajakajian decisions involving forfeitures for reporting violations can largely be synthesized on this ground. Courts tend to uphold the forfeiture against excessive fines challenges when the reporting violation relates to a central purpose of the BSA and tend to mitigate it when it does not.

Hope this helps move the discussion forward.