Swiss Bank Settlement Dilemma

On August 29, 2013, the United States Department of Justice ("DOJ") and the Swiss Federal Department of Finance, following nearly two years of negotiations, jointly announced a settlement program that offers amnesty to Swiss banks and resolution regarding involvement with individuals and entities that used Swiss accounts to evade US taxes and reporting requirements.1 The new program is similar to the IRS Offshore Voluntary Disclosure Program ("OVDP"), which incentivized US taxpayers to report undisclosed foreign accounts to the IRS to reduce substantial civil penalties and eliminate the risk of criminal prosecution. The settlement program provides a unique administrative solution to avoid legal challenge to Swiss bank secrecy law. In addition to the joint announcement, the DOJ issued a document captioned "Program for Non-Prosecution Agreements or Non-Target Letters for Swiss Banks", which explains the settlement program in greater detail.

The settlement program entails a four-tiered ranking system which is based on respective degrees of culpability and categorizes each Swiss bank's exposure to illegal activity. Any Swiss bank that has reason to believe it may have committed tax-related offenses and is willing to participate in the program must disclose its activity in a letter to the DOJ no later than December 31, 2013. As of January 1, 2014, the DOJ may authorize new criminal investigations of Swiss banks who fail to notify the DOJ of their intent to enter into the settlement program.

Under the ranking system, Category 1 banks consist of the fifteen Swiss banks currently under criminal investigation. Recently, Swiss bank Rahn & Bodmer Co., one of the oldest private banks in Zurich, announced that it was under US criminal investigation. Credit Suisse and Jules Baer Group have also been reported to be under criminal investigation.2 These banks are excluded from the program. Others who are excluded from the program include insurance companies, financial advisors, lawyers, asset managers, and fiduciaries.

Category 2 banks are those that "have a reason to believe" that they have committed tax or related criminal offenses under US tax law in connection with undeclared US taxpayer accounts. Category 2 banks are the only Swiss banks eligible for a non-prosecution agreement ("NPA"). Any Category 2 bank that wishes to obtain an NPA must submit a letter of intent to the DOJ Tax Division containing certain disclosures. The letter must include a plan for complying with the program requirements; provide the identity and qualifications of an independent examiner (a qualified attorney or accountant who will certify the information); represent that the bank will maintain all records required for compliance with the terms of an NPA, including all...