OVDP: The IRS Adds New Foreign Banks to the “Bad” Bank List

The IRS continues to add to its list of “bad” banks, having added 10 banks since June—with two new banks added just yesterday.  Taxpayers with undisclosed accounts at foreign banks on the list face a heightened 50-percent penalty under the IRS’s Offshore Voluntary Disclosure Program.  The fact that a bank graces the list also indirectly indicates that the bank is a high priority for the Department of Justice—and that means that taxpayers with undisclosed accounts at such banks face increased risk that their window of opportunity to come forward and make a voluntary disclosure is closing.

Under last year’s revisions to the Offshore Voluntary Disclosure Program, the IRS provided for a new 50-percent offshore penalty—rather than the otherwise applicable 27.5-percent penalty—where either (1) the foreign financial institution at which the taxpayer has or had an account or (2) the facilitator who helped the taxpayer establish or maintain an offshore arrangement, has been publicly identified as being under investigation or as cooperating with a government investigation. See OVDP FAQs 1.1 and 7.2.

According to the Service’s FAQ’s:

[A]ny taxpayer who has an undisclosed foreign financial account will be subject to a 50-percent miscellaneous offshore penalty if, at the time of submitting the preclearance letter to IRS Criminal Investigation:  an event has already occurred that constitutes a public disclosure that either (a) the foreign financial institution where the account is held, or another facilitator who assisted in establishing or maintaining the taxpayer’s offshore arrangement, is or has been under investigation by the IRS or the Department of Justice in connection with accounts that are beneficially owned by a U.S. person; (b) the foreign financial institution or other facilitator is cooperating with the IRS or the Department of Justice in connection with accounts that are beneficially owned by a U.S. person; or (c) the foreign financial institution or other facilitator has been identified in a court-approved issuance of a summons seeking information about U.S. taxpayers who may hold financial accounts (a “John Doe summons”) at the foreign financial institution or have accounts established or maintained by the facilitator.  Examples of a public disclosure include, without limitation:  a public filing in a judicial proceeding by any party or judicial officer; or public disclosure by the Department of Justice regarding a Deferred Prosecution Agreement or Non-Prosecution Agreement with a financial institution or other facilitator.

FAQ 7.2

The Service keeps a list of “bad” banks that trigger the 50-percent penalty, and it has recently added to that list, which as of the date of this post includes:

1. UBS AG
2. Credit Suisse AG, Credit Suisse Fides, and Clariden Leu Ltd.
3. Wegelin & Co.
4. Liechtensteinische Landesbank AG
5. Zurcher Kantonalbank
6. swisspartners Investment Network AG, swisspartners Wealth Management AG, swisspartners Insurance Company SPC Ltd., and swisspartners Versicherung AG
7. CIBC FirstCaribbean International Bank Limited, its predecessors, subsidiaries, and affiliates
8. Stanford International Bank, Ltd., Stanford Group Company, and Stanford Trust Company, Ltd.
9. The Hong Kong and Shanghai Banking Corporation Limited in India (HSBC India)
10. The Bank of N.T. Butterfield & Son Limited (also known as Butterfield Bank and Bank of Butterfield), its predecessors, subsidiaries, and affiliates
11. Sovereign Management & Legal, Ltd., its predecessors, subsidiaries, and affiliates (effective 12/19/14)
12. Bank Leumi le-Israel B.M., The Bank Leumi le-Israel Trust Company Ltd, Bank Leumi (Luxembourg) S.A., Leumi Private Bank S.A., and Bank Leumi USA (effective 12/22/14)
13. BSI SA (effective 3/30/15)
14. Vadian Bank AG (effective 5/8/15)
15. Finter Bank Zurich AG (effective 5/15/15)  
16. Societe Generale Private Banking (Lugano-Svizzera) SA (effective 5/28/15)
17. MediBank AG (effective 5/28/15)
18. LBBW (Schweiz) AG (effective 5/28/15)
19. Scobag Privatbank AG (effective 5/28/15)  
20. Rothschild Bank AG (effective 6/3/15)
21. Banca Credinvest SA (effective 6/3/15)
22. Societe Generale Private Banking (Suisse) SA (effective 6/9/15)
23. Berner Kantonalbank AG (effective 6/9/15)
24. Bank Linth LLB AG (effective 6/19/15)
25. Bank Sparhafen Zurich AG (effective 6/19/15)
26. Ersparniskasse Schaffhausen AG (effective 6/26/15)
27. Privatbank Von Graffenried AG (effective 7/2/15)
28. Banque Pasche SA (effective 7/9/15)
29. ARVEST Privatbank AG (effective 7/9/15)

One of the latest banks to make the list, Privatbank Von Graffenried AG, reached a resolution under the Department of Justice’s Swiss Bank Program, entering into a non-prosecution agreement.  According to DOJ’s press release:

According to the terms of the non-prosecution agreement . . . , Von Graffenried agree[d] to cooperate in any related criminal or civil proceedings, demonstrate its implementation of controls to stop misconduct involving undeclared U.S. accounts and pay penalties in return for the department’s agreement not to prosecute Von Graffenried for tax-related criminal offenses.  Von Graffenried also has provided certain account information related to U.S. taxpayers that will enable the government to make requests under the 1996 Convention between the United States of America and the Swiss Confederation for the Avoidance of Double Taxation with Respect to Taxes on Income for, among other things, the identities of U.S. accountholders.

(emphasis added.)  The bolded language highlights the continually increasing threat faced by taxpayers with undisclosed accounts.  Von Graffenried is/was just one of many Swiss banks actively working with the Department of Justice that may ultimately disclose U.S. accountholder information to the government. 

In accordance with the terms of the Swiss Bank Program, Von Graffenried mitigated its own penalties by encouraging U.S. accountholders to come into compliance with their U.S. tax and disclosure obligations.  According to the Department of Justice, since August 1, 2008, Von Graffenried held a total of 58 U.S.-related accounts with approximately $459 million in assets, and Von Graffenried will pay a penalty of $287,000.  A copy of the Non-Prosecution Agreement is available here. 

In addition to Von Graffenried, the other two most recent banks to join the list’s ranks through the Swiss Bank Program, Banque Pasche SA and ARVEST Privatbank, have both agreed to pay significant fines, though each bank also mitigated its penalty by encouraging U.S. accountholders to come into compliance with their U.S. tax and disclosure obligations, in accordance with the terms of the Swiss Bank Program.

According to the DOJ press release, Banque Pasche will pay a penalty of $7.229 million.  Since August 1, 2008, Banque Pasche had 186 U.S.-related accounts, as defined under the Swiss Bank Program, with an aggregate maximum balance of approximately $655 million.  Of those 186 accounts, 110 had U.S. beneficial owners and an aggregate maximum balance of approximately $111 million.  A copy of the Banque Pasche Non-Prosecution Agreement is available here.

ARVEST will pay a penalty of $1.044 million.  Since August 1, 2008, ARVEST had 52 U.S.-related accounts, with a maximum aggregate asset value of over $134 million.  A copy of the ARVEST Non-Prosecution Agreement is available here.

While U.S. accountholders at Von Graffenried, Banque Pasche, ARVEST, and any other bank on the list who have not yet declared their accounts to the IRS may still be eligible to participate in the IRS Offshore Voluntary Disclosure Program, the price of such disclosure has increased—noncompliant U.S. accountholders at such banks must now pay the 50-percent penalty to the IRS if they wish to enter the program.