Global Tax Enforcement in 2016: What You Need To Know

The investigation and prosecution of tax evasion has, in the last decade, grown from a specialized subcategory of law enforcement into a first-tier policy concern for the global community. Starting with the U.S. government's crackdown on Swiss bank UBS in 2008, there has been a steady drumbeat of news about prosecutions of financial institutions, bankers, and taxpayers. This drumbeat has coincided with the public's frustration with the slow growth of most of the world's economies over the last decade and the related problem of governments' budgetary troubles. Cracking down on offshore tax evasion is a relatively uncontroversial source of new revenue.

What You Need to Know

Financial institutions, bankers, professional advisers, and taxpayers need to understand that stepped-up global tax enforcement has made the financial world smaller and more transparent. To deal with this new environment, actors must prepare themselves before enforcement authorities arrive at their doorsteps. With worldwide financial institutions having begun to report U.S. account information to the IRS in March 2015, the time to seek professional advice and to take action is now.

Banks in the Crosshairs

The U.S. government's pursuit of financial institutions continues, with no signs of abating. Financial institutions need to prepare themselves for U.S. enforcement activity by evaluating their policies and procedures, bringing them up to current standards, and drawing a clear temporal line between present compliance and any possibly inappropriate past practices.

The current era of tax enforcement against banks began when the U.S. government's investigation of UBS became public in 2008. In February 2009, UBS entered into a deferred prosecution agreement with the U.S. Department of Justice (DOJ) and agreed to cease its U.S. cross-border business and pay a fine of $780 million. While this ended UBS's troubles with the U.S. authorities over assisting U.S. taxpayers in evading taxes (leaving aside the widely reported 2015 tax evasion investigation of UBS over bearer securities), it signaled the beginning of the U.S. government's attack on financial institutions that may have assisted their clients in violating U.S. tax laws. After UBS, the U.S. government turned its attention to Wegelin & Co., Pictet & Cie, Neue Zuercher Bank, Credit Suisse Group AG, Basler Kantonalbank, Bank Julius Baer, Bank Frey, Bank Hapoalim, Bank Leumi, Bank Mizrahi-Tefahot, Liechtensteinische Landesbank AG, swisspartners, CIBC FirstCaribbean, HSBC India, and Bank of Butterfield.

Of these banks, Wegelin pleaded guilty to a felony, paid a fine of $58 million, agreed to a civil forfeiture of $16 million, and ceased operations in 2013. Before even being charged, Bank Frey announced in 2013 that it would cease operations. Credit Suisse was convicted in federal court in 2014 of a felony and paid a fine of $2.6 billion, dwarfing UBS's then-astonishing $780 million fine. Instead of seeking felony convictions, the DOJ has typically entered into deferred prosecution agreements, and rarely non-prosecution agreements, with foreign financial institutions that it has prosecuted criminally.

Since the demise of Arthur Andersen after the Enron scandal, the DOJ's policy has been to take into account the collateral harm to innocent employees and shareholders when deciding whether to indict business entities. The DOJ made exceptions for Wegelin and Credit Suisse on the ground that their behavior was especially culpable.

In a twist on the DOJ's use of deferred prosecution and non-prosecution agreements, on August 29, 2013, the DOJ Tax Division announced a voluntary disclosure program for Swiss banks. The Program for Swiss Banks, as it is called, was the product of an agreement between the U.S. and Swiss governments to encourage all Swiss banks to admit their role in U.S. tax evasion. In exchange, the participating banks would receive non-prosecution agreements and pay substantial monetary penalties. Only Swiss banks that were not then under DOJ criminal investigation were eligible. To participate, Swiss banks had to fully disclose their cross-border activities; provide detailed information on U.S. taxpayers' accounts; and pay a penalty of 20, 30, or 50 percent of the maximum value of all non-disclosed U.S. accounts that were held by the banks, depending on when the accounts were opened. According to the DOJ, 106 of the approximately 300 Swiss banks chose...