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6 OCT 2009
The long arm of the US government: the harsh new reality for foreign banks
BANK SECRECY ALERT
Peter R. Zeidenberg
Foreign banks heaving sighs of relief that they conduct no business in the United States and therefore have no reason to fear the US government may be in for a rude awakening. The belief that they are outside the reach of the US government is likely unwarranted. Indeed, anyone who believes that the US government will simply rest on its laurels after its successful prosecution of a single prominent Swiss bank is ignoring clear signals to the contrary. By now, the facts of that prosecution are well known: bankers conspired with US taxpayers to evade the payment of taxes to the Internal Revenue Service. The bankers accomplished this by, among other things, promising US taxpayers that their bank accounts would be secret and that the account information would not be provided to the IRS. Few have expressed surprise that the US government was able to assert jurisdiction to prosecute a Swiss bank whose bankers made thousands of trips to the US, both to recruit potential clients and to meet and confer with existing clients. The government alleged that these meetings were overt acts in furtherance of the criminal conspiracy. In addition, the bank has branches located throughout the US as well as thousands of employees working in the US Given these facts, it was hardly a shock that the US government asserted criminal jurisdiction over the bank. But what about foreign banks that have no branches or employees in the US – can the US government assert jurisdiction over them? What if none of their employees ever set foot in the US, and never used the telephones, wires or mails to contact anyone in the US? Surely there could be no criminal jurisdiction? In what might come as a surprise to foreign banks, the US government is likely to assert jurisdiction even when there has been no physical contact with the US by any bank employee. Those with any doubts about how aggressive the US government can be in asserting jurisdiction need only look at recent prosecutions under the Foreign Corrupt Practices Act, pursuant to which the US government has successfully prosecuted foreign nationals for bribing government officials outside the
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US simply based on the fact that the bribe money passed through a New York bank. In contrast, gaining jurisdiction over a foreign bank – or foreign banker – in the context of an alleged conspiracy to commit US tax fraud is a far simpler matter. The US government is making its intentions very clear. In September, speaking at the American Bar Association Section of Taxation fall meeting, Department of Justice Tax Division senior trial attorney Kevin Downing is reported to have said, “We have your clients on the run. We have these banks on the run, and we’re going to keep after them.” The successful prosecution of a single Swiss bank, he went on, is “the beginning of this process, not the end.” Ultimately, the goal of the US government is to increase tax compliance among US taxpayers. In achieving this goal, if banks outside the US are assisting US taxpayers to evade their tax and filing obligations, the US government will likely direct its attention to these banks and at the minimum seek their cooperation. Cooperation may be sought through prosecution or the threat of prosecution. Using the same conspiracy theory it employed in prosecuting the Swiss bank, the US government may contend that if a foreign bank’s employees knowingly assist a US taxpayer to evade its tax and filing obligation the bank itself (as well as the individuals involved) may be held criminally liable. The US government will maintain that this is so even if the bank’s employees never set foot in the United States. The issue for the US government is a simple one: was there a conspiracy to violate US law? If the answer to this question is yes, then the fact that the conduct took place overseas will be unlikely to dissuade the US government from considering prosecution. The consequences of such a prosecution can hardly be overstated. The first bank to be prosecuted paid $780 million to dispose of the prosecution against it. Some individual bankers have been indicted and placed under arrest upon their arrival in the US Banks should be aware that, should a US indictment be issued, the resulting international arrest warrant can remain in place indefinitely, making any international travel, particularly by air, extremely perilous. Those who continue to doubt the US government’s commitment and ability to prosecute foreign banks and/or individuals should pay particular attention to the questions being asked of US taxpayers who are taking advantage of the IRS’s current Voluntary Disclosure Initiative which has a deadline of October 15th. (Read more about that initiative in our Tax Alert). Taxpayers who are participating in the Voluntary Disclosure Initiative are being asked to identify their point of contact at the foreign bank and to “[e]xplain all face to face meetings, and any other communications [] regarding the accounts …, [and to] [p]rovide the names, locations and dates of these meetings and/or communications.” It appears that the US government is seeking this information to obtain evidence for potential prosecutions against other foreign banks, bankers, lawyers, accountants and others who may be aiding US taxpayers to evade their tax and filing obligations. If the US government were interested solely in obtaining payment of formerly lost tax revenue, there would be no need for such a detailed accounting of all prior “face to face meetings” with bank employees. It is in any event a high-risk strategy for foreign banks to ignore this new reality. Banks should work with counsel to address how best to ensure that they and their depositors are tax compliant in all jurisdictions. Moreover, an appropriate internal investigation can help an institution determine if it should be concerned about current or prior conduct. The time to address any potential issues is now, with the benefit of experienced counsel, before the US government comes knocking. Foreign banks should use experienced outside counsel to determine whether the bank's past dealings with US taxpayers were handled appropriately or may have exposed
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the bank to criminal liability in the US and, if so, how best to address any issues. The use of outside counsel can help assure the integrity of the inquiry and, should the company later determine to share any information with the government, make it less likely the information will be questioned by the US government. Banks may also want to consider encouraging their depositors to participate in the Voluntary Disclosure Initiative. All decisions on how best to address past conduct are necessarily dependent upon the institution obtaining a full and complete appreciation and understanding of its prior conduct. The bottom line is clear - what banks do not know can hurt them - and a “do nothing and hope for the best” strategy is simply not appropriate in today’s world. For more information about US jurisdiction over foreign banks or about the IRS Voluntary Disclosure Initiative, please contact: Ellis Reemer Diana Erbsen Peter Zeidenberg Alan Granwell
http://www.dlapiper.com/the-long-arm-of-the-us-government:the-harsh-new-reality-for-for... 10/8/2009