Swiss Banks Strong-Arm Clients in U.S. Tax-Evasion Endgame

Swiss banks, for decades the bastions of secrecy, are preaching the virtue of transparency to their U.S. clients as they try to head off billions of dollars in potential fines for helping Americans evade taxes.

Faced with the threat of penalties that could bankrupt some of them, almost 100 of the country’s banks are calling thousands of U.S. clients in an 11th-hour push to get them to disclose any offshore accounts they may be hiding. Customers are being asked to prove they have paid any taxes due, according to a dozen lawyers for banks or their customers. Some have even had their accounts partially blocked to force them to comply, according to the Swiss banking ombudsman.

As the U.S. government’s largest crackdown on offshore tax evasion enters its final stretch, the banks are trying to reduce any fines they face. Under the amnesty program, if banks can’t show clients paid any taxes owed, the government will assume they didn’t — and fines will be larger. U.S. prosecutors have already put one bank out of business over tax evasion: Wegelin & Co., Switzerland’s oldest private bank, closed in 2013 after being indicted.

“Until they have a signed and sealed deal, they’re doing whatever they can to minimize the penalty,” said Jim Mastracchio, a Washington-based lawyer at BakerHostetler serving as an independent examiner to a bank in the program. “Some of the larger banks underestimated the time and energy required to identify and notify clients.”

Fake Identities

On March 30, BSI SA became the first Swiss bank to reach a deal with the U.S. government, agreeing to pay $211 million for 3,500 accounts that held $2.8 billion in 2008. As part of the agreement, BSI, based on the shores of Lake Lugano, admitted to using coded language and fake identities to help customers duck taxes.

The U.S. wants to conclude all cases this year, Acting Assistant U.S. Attorney General Caroline Ciraolo said when she announced the BSI deal. The program, introduced in 2013, has dragged on longer than expected. Investigators had set a September 2014 deadline for banks to give client lists to the Justice Department as they argued for lower penalties.

The U.S. assault on offshore tax evasion has dealt a heavy blow to the bank secrecy that has helped Switzerland become the world’s largest center for offshore deposits. The country manages about $2.3 trillion for clients who don’t reside there, according to estimates from the Boston Consulting Group.

As they prepare to reach a settlement, some banks are pressing American clients to forgo their rights to secrecy under Swiss law, according to draft letters and agreements prepared by the firms and seen by Bloomberg. One such agreement, drawn up by the Royal Bank of Canada’s unit in Geneva, is available online.

Strong-Arming

Swiss law bars banks from revealing client names without their consent. While U.S. authorities can request names through a tax treaty with Switzerland, the Swiss government is obliged to comply only with very targeted requests under terms agreed on by the two governments. The Justice Department program helps the U.S. gather more information to make such demands from the Swiss authorities.

Several banks are using tactics clients consider as strong-arming, such as blocking funds or threatening to reveal names, said Thierry Boitelle, a lawyer with Bonnard Lawson in Geneva. He has advised U.S. taxpayers and Swiss private banks involved in the program.

“We have seen banks making withholdings on U.S. client accounts,” he said. “They’re holding back 25 to 30 percent of the funds to compensate for potential fines.”

Switzerland’s banking ombudsman said it received a “handful” of complaints of accounts being frozen. Banks ascribe such actions to uncertainty over whether a client controlled an account or because he tried to withdraw all holdings in cash instead of making wire transfers, said deputy ombudsman Rolf Wuest.

Still Resisting

As clients aren’t legally required to help, many banks have agreed to pay legal costs that sometimes reach tens of thousands of dollars, lawyers say.

In some cases, customers are still resisting, saying they paid banks high fees for holding money in confidence.

“Some clients felt that they were misled by the bank as far as secrecy was concerned, and that’s left them with no reason to cooperate,” said Leigh Kessler, a former tax prosecutor now at Rosenberg Martin Greenberg LLP, a Baltimore firm advising some Americans who received calls.

Customers who are tax compliant can also be uncooperative, said Larry Campagna, tax attorney for Chamberlain, Hrdlicka, White, Williams & Aughtry. The Houston-based firm has represented about 100 clients in connection with the program.

“They would say, ‘I’m finished with this bank,’” he said. “‘I’m right with my government, I don’t care what happens to the bank. Go jump in the lake and don’t call me again.’”

Fake Identities

Firms in the program, which constitute about one-third of the 280 Swiss banks, include Cie. Lombard, Odier SCA, Geneva’s oldest bank, Rothschild Bank AG of Zurich, and Union Bancaire Privee, which acquired the international arm of U.K. private bank Coutts from Royal Bank of Scotland Group Plc in March.

Deutsche Bank AG and EFG International AG, controlled by Greek billionaire Spiro Latsis and his family, are also included.

Kilian Borter, a spokesman for Rothschild Bank, said the firm has contacted clients urging them to be tax compliant. Officials for Deutsche Bank, EFG, UBP and Lombard Odier declined to comment on specific measures they are taking.

Client 6

The program requires banks to pay 20 percent of the value of undeclared accounts on Aug. 1, 2008, 30 percent for accounts opened between then and February 2009 and 50 percent for those opened later. Banks are not necessarily aware of an account’s tax status, forcing them to contact clients to find out.

UBS Group AG, Switzerland’s largest lender, avoided prosecution in 2009 by paying $780 million and turning over account data. The main banking subsidiary of Credit Suisse Group AG, the country’s No. 2 bank, pleaded guilty last year, paying $2.6 billion. Another dozen or so banks are under criminal investigation and aren’t eligible for the amnesty.

Client lists are confidential and lawyers declined to reveal names. They include doctors, jewelers, widows and billionaires, court records of more than 100 people convicted of tax crimes in the U.S. since 2008 showed. One client referred to as “Client 6” had nearly $300 million in assets, a November indictment of Swiss banker Martin Dunki said.

After BSI, more settlements could be concluded in the next few weeks, and then recur weekly, allowing companies to put the issue behind them, said Tomasz Grzelak, analyst at MainFirst Bank AG in Zurich.

“They’re ready to sign an agreement so the final big issue is tackling the size of the fine,” said Milan Patel, a lawyer with Anaford AG in Zurich. “The larger banks are going to take a long time to resolve matters as the penalties are going to be huge.”