May 26, 2015 | Rome, Italy | Sunny 14°C

The Lamborghini, V

By Don Carroll
Published: 2015-04-29

The IRS and the U.S. Justice Department are effectively pressuring Swiss banks to turn over details

ell nervously stole into my office like a wounded cheetah ready to lunge. Her arrival took me by surprise. I hadn't heard her new-model Lamborghini pull in.

Keeping an eye on her catlike presence I glanced out the window and sure enough, under the oak tree, was a new cherry red Huracán LP. Even the Lamborghini seemed ready to pounce.

I decided to defuse the tension by complimenting Nell on her choice of cars. She was having none of it. She sat down and edgily tapped her manicured fingers against her Prada satchel. She glared at me with steely eyes and hissed, "You never told me they'd freeze my accounts."

I leaned in toward her and suggested we back up. Who, I asked, were "they," and what accounts.

"My bank in Switzerland, they've frozen my checking and investment accounts."

I asked why.

"I never replied to their letter asking me to waive my right to keep them secret."

I asked her if that was all, imagining it wasn't.

Nell hesitated, her Cartier Panthère bracelets glittering. "Well, I never did that stupid offshore voluntary whatever it was you told me to do the last time I was here."

The shoe had dropped. I leaned in further. "So, you actually came here to make a confession?"

Nell bolted upright and let me have it. "Why didn't you warn me?" she snarled. "I've been cut off from my funds. What's going on with these banks? I could lose my Huracán!"

I asked Nell if she had finished and, if so, to sit down and listen, since given what she'd told me time wasn't on her side. She wavered at first but then angrily sat back down.

Swiss banks, I explained, were now throwing their American clients under the bus to save their own skins. Since the 2010 passage of the Foreign Account Tax Compliance Act (FACTA), the IRS has been steadfastly going after financial institutions that encourage the use of foreign accounts to evade U.S. taxes and reporting requirements.

The U.S. Justice Department has criminal investigations ongoing against a dozen or so Swiss banks, and the pressure has already yielded excellent results.

In 2009, UBS, Switzerland's largest bank, avoided prosecution by paying $780 million and turning over client data. Wegelin & Co. closed in 2013 after being indicted and Credit Suisse Group AG was fined $2.6 billion in 2014. Julius Baer has also been under investigation, and it too claims to be close to a settlement.

"But what does this have to do with freezing my accounts?" asked Nell.

Freezing accounts, I replied, was just one of many tactics Swiss banks were now using against U.S. clients. Some banks were withholding client funds to compensate for potential fines.

"That's robbery!" Nell howled.

UBS and others have felt the pinch.

With its country's biggest banks under siege, I continued, the Swiss government, knowing there was more dirt hidden beneath the floorboards of many of its private banks, had reached a deal with the Justice Department in August 2013 (the so-called Program for Non-Prosecution Agreements or Non-Target Letters for Swiss Banks).

Under its terms, any bank not facing U.S. criminal investigation as of that date could avoid prosecution by entering the "Program," but it had to comply with certain obligations.

For instance, each bank was forced to explain how it operated and provide names and specific job descriptions of all the individuals in the bank who structured, operated or supervised U.S. accounts.

Most importantly, each bank had to pay penalties based on the aggregate value of its U.S. related accounts: 20 percent on those that existed on Aug. 1, 2008, 30 percent on accounts opened between Aug. 1, 2008 and Feb. 28, 2009 and 50 percent on those opened after Feb. 28, 2009.

"I still don't see where I come in," said Nell.

Her Swiss bank, I told her, likely wanted to reveal her name to the IRS, to comply with the Program. But Swiss law forbids them from doing so without client consent. As a result, banks in the Program are pressing their U.S. clients to waive their rights to secrecy.

As an incentive, the penalties assessed to each bank are being reduced by the value of each account the bank shows was "not an undeclared account, was disclosed by the Swiss Bank to the IRS, or was disclosed to the IRS through a Voluntary Disclosure Program (OVDP) or initiative." Name names and the bank could cut its losses.

I paused to let my words sink in.

"The bank froze your accounts because you're costing them money," I told her. "By not waiving your right to secrecy, not entering the OVDP initiative and not letting your bank know about it, your bank can't cut its penalties on the value of your accounts."

"So Swiss bank secrecy for Americans is finished?"

"That fortress has been breached," I replied.

"And the IRS is winning," she said.

That, I told her, might depend on what she decides to do.

She looked back at me without blinking. The IRS isn't either.

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