May 19, 2024

Overseas Banks Could Face Novel Penalty From U.S.

The penalty stems from the violation of a rule known as Foreign Bank and Financial Accounts, or Fbar(pronounced EF-bar), that requires American taxpayers with overseas bank accounts and foreign assets to file a special disclosure with the Treasury Department each year. The top penalty for failing to file the disclosure is 50 percent of the account balance for each year of violation, a level that can leave tax evaders owing multiples of what their accounts hold.

Now the Justice Department, which is conducting a broadening inquiry into Swiss and Swiss-style banks, including Credit Suisse and HSBC, according to court papers and statements by the banks, is exploring how and whether it could apply the penalty to the banks, should it find that they violated American tax laws, according to two persons briefed on the matter. The persons, one in government and the other in private legal practice, spoke only on the condition of anonymity.

Under the Fbar filing requirement, which is intended to help tax authorities unearth undeclared assets held abroad, American citizens and residents with foreign accounts that collectively hold more than $10,000 are required to file the disclosure form to the Treasury Department by June 30. Tax lawyers have generally read the requirement as applying to American citizens and residents — not to American banks or to foreigners of any kind.

But buried in the language of the requirement are provisions that a few criminal defense and tax lawyers say cover foreign financial institutions and their foreign bankers.

Jeffrey Neiman, a former federal prosecutor now in private practice in Fort Lauderdale, said that “under my reading of the Fbar rules, if the government can prove that a financial institution willfully caused an Fbar violation, the government could seek a penalty on the financial institution, no matter where in the world it is based, for up to 50 percent of the balance of all accounts in question.” Recent government cases against four Credit Suisse private bankers, among others, cite efforts by the bankers to dissuade American clients from filing the disclosures.

Mr. Neiman was a federal prosecutor in Fort Lauderdale until April 4 and oversaw many government filings against clients and employees of UBS, the big Swiss bank, over private banking services that enabled offshore tax evasion.

In 2009, UBS paid a $780 million fine and admitted to criminal wrongdoing over its sale of offshore private banking services to scores of wealthy Americans.

The new approach by the Justice Department, which last week gained approval by a California federal judge to serve a broad summons on HSBC for details of offshore accounts held by wealthy Indian-Americans, is a fresh potential headache for Swiss and Swiss-style banks. No Fbar penalties were included in the $780 million that UBS paid.

The new approach “ratchets up the stakes, because it potentially puts the financial resources of the financial institution at risk,” said Niles Elber, a tax lawyer at Caplin Drysdale, in Washington, who specializes in Fbar regulations.

The Justice Department gave a little-noticed glimpse into part of its new strategy in recent court papers about a senior Credit Suisse private banker, Christos Bagios.

In papers filed March 15, federal prosecutors wrote that Mr. Bagios “could be forced to pay a Fbar penalty for as much as $19 million for just one tax year, and therefore face financial ruin.” The papers explained in a footnote that Mr. Bagios had serviced clients that had at least $38 million in their undeclared accounts. “On the theory that he aided and abetted their failure to disclose their accounts, the 50 percent penalty could apply,” they said.

While Mr. Neiman represented the government in some of the initial filings against Mr. Bagios, he was not involved in the March 15 motion. Mr. Neiman was not one of the two people who described the new strategy when asked about the motion.

Four tax lawyers with knowledge of the Fbar regulations said that they were generally unaware of their applicability to foreign banks and their bankers.

But Edward Tanenbaum, a tax lawyer at Alston Bird in New York, said that it was possible to read the Fbar regulations and accompanying penalties as applying in some cases to foreign persons who live and work in the United States.

In recent years, the I.R.S. has twice granted American tax evaders who came forward to declare their hidden assets a break on the Fbar penalty.

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