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Tax Notes Today Quotes Scott Michel: Swiss Bankers Voice Concerns Over DOJ Compliance Program

October 11, 2013, Tax Notes Today

Tax Notes Today spoke with  Scott D. Michel regarding the concerns of Swiss bankers and practitioners over the Justice Department's newly launched bank disclosure program. The program will be open to hundreds of banks in Switzerland and outlines four categories in which banks will be grouped. The banks must first identify if they should participate in the program and, if so, what category to apply for. For the complete article, please visit Tax Notes Today's website (subscription required).

Excerpt taken from the article "Swiss Bankers Voice Concerns Over DOJ Compliance Program" by Kristen A. Parillo for Tax Notes Today.

Scott D. Michel of Caplin & Drysdale, who gave a presentation on the program, told Tax Analysts that the meeting provided a window into the uncertainty and turmoil that the Swiss banking community is experiencing. "You have the DOJ opening this program to a couple hundred banks in Switzerland," he said. "So there's going to be a lot of uncertainties about how this will work."

The most immediate issues that must be addressed by Swiss banks, Michel said, are whether they should even participate in the program -- and, if so, what category they should apply for -- and how they should structure their professional team. "Banks also have to think about conflicts between Swiss and U.S. law and cross-regulatory issues in terms of how the Swiss regulator will consider a bank if it goes into the program," he said. "There are also ambiguities regarding how penalties will be calculated, collateral pressures in terms of capital requirements and how penalties will affect that, and issues about bank employees."

"The program is an elaborate and sophisticated exercise in game theory," said Michel. "Because if you are a bank that dabbled in the world of private, undeclared accounts for Americans, maybe you weren't as explicit as laid out in the Wegelin indictment, in terms of chasing customers that left UBS, but if you've got clients with hold-mail agreements, accounts that you helped put in foundations, and coded communications or e-mails, you've got to think of your exposure." (Prior coverage of the DOJ case against Wegelin & Co. .)

The DOJ has upped the ante by declaring a moratorium on identifying new bank targets until the end of 2013, Michel said. "So that means as of January 1, the DOJ could instantly render a bank ineligible for this program by sending it a letter that it's the target of an investigation," he said. "Any bank that sits on its heels and doesn't go in under Category 2 has some unquantifiable risk that it will be ineligible to apply as Category 3 because it's been identified as a target."

Another factor that must be considered is that evidence of wrongdoing by a bank and its employees may have been provided by account holders who participated in the IRS's offshore voluntary disclosure initiatives. "A bank is making this decision in a vacuum without knowing what evidence the DOJ has already potentially accumulated against it," Michel said.

A bank also faces the risk that it will be revealed in a "leaver list" as a bank to which a U.S. account holder transferred his funds from another Swiss bank, Michel said. A leaver list refers to the information that Category 2 banks must provide to the DOJ regarding the transfer of funds into and out of the accounts at issue from August 1, 2008, including whether funds were deposited or withdrawn in cash, whether funds were transferred through an intermediary, and the identification of a financial institution that transferred funds into or received funds from the account in Switzerland or abroad. Michel noted that the transfer of an account from one Swiss bank to another could raise the inference that the account holder was a "leaver" looking for a more secure, confidential bank, and that the latter bank should've been suspicious and exercised more due diligence.

Given all of those risks, many banks -- especially those on the bubble -- will likely apply as a Category 2 as a precautionary measure, Michel said. However, doing so can create another set of problems. "Going in as a Category 2 means a bank will incur large transaction costs and is setting itself up for a fight over penalties," he said.

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