A recent Senate Finance Committee report, following a multiyear investigation by Democratic staff, has resurrected the issues that led to the Swiss Bank Program enforcement era, refocused authorities on U.S. tax evasion through offshore holdings, and increased investigation risk for the trust and family office industries that service U.S. high-net-worth individuals or those with dual U.S. and non-U.S. citizenship.

In May 2014, Credit Suisse pled guilty to a conspiracy to aid U.S. taxpayers in filing false returns and hide offshore accounts from the Internal Revenue Service (IRS).

The plea agreement, which resulted in $1.8 billion in penalties and indictments of eight bank executives, required the bank to provide the U.S. Department of Justice (DOJ) with significant information about its account holders under the Swiss Bank Program, including a complete disclosure of cross-border activities, cooperation with DOJ requests and disclosure of all undisclosed amounts transferred out of the bank during the relevant time period.

Over the next few years, nearly 80 other Swiss banks would participate in the program and agree to non-prosecution agreements (NPAs) with the DOJ. Now, nearly a decade after the Swiss Bank Program was first announced, a March 29 report by the Democratic staff of the Senate Finance Committee takes the position that Credit Suisse violated key terms of its plea agreement and that the DOJ should investigate not only Credit Suisse but also other banks that participated in the program.

The report, titled Credit Suisse's Role in U.S. Tax Evasion Schemes, also known as the Wyden report, along with pressure from the Senate and the Biden administration's focus on hidden wealth, are likely to result in increased attention not only on Swiss banks that may have violated their plea agreements and NPAs, but also on wealthy U.S. individuals who have funds offshore and the trusts, trustees and family offices that interact with those persons.

Background on the Wyden Report

The Senate Finance Committee began its investigation into whether Credit Suisse violated its plea agreement in April 2021, prompted by the prosecution of U.S. businessman Dan Horsky. Just before the bank signed its plea agreement — and after Credit Suisse testified before Congress — a whistleblower informed the DOJ that the bank was still hiding large accounts for Horsky. Horsky used family members acting as nominees and shell companies in St. Kitts and Nevis to hide the ownership of accounts that ultimately held up to $220 million. Following a DOJ investigation, Horsky was prosecuted and sentenced to seven months in prison in 2017, agreeing to pay a $100 million foreign bank and financial accounts penalty, the largest to date.

After the Horsky prosecution, the committee opened its investigation and attempted to determine whether the failure to disclose the Horsky accounts was indicative of a larger problem with U.S. law compliance. After the committee announced its investigation in 2021, multiple whistleblowers approached the committee with information. The report states that Credit Suisse cooperated with the investigation "particularly following management changes in 2022," though, contrary to the Swiss Bank Program, Swiss blocking statutes prevented disclosure of client information.

The report concluded that "[m]any of the largest individual tax evasion schemes in U.S. history involve Swiss banks. DOJ and the IRS must step up investigations into the role of these banks and their employees in carrying out these schemes." To support the position that the DOJ should increase monitoring and enforcement of non-U.S. banks, the report reached the following key conclusions.

Involvement of Bank Employees

The Wyden report concluded that Credit Suisse employees were not only complicit but also actively involved in helping Horsky to evade reporting requirements. The report states that senior bankers in the private banking division were aware of Horsky's status as a U.S. person and took steps to alter the accounts in a manner that removed Horsky's connections to the U.S. or concealed his connection to the accounts.

According to the report, though Horsky had an account that was opened using his U.S. passport and residence, he had other accounts that used Horsky's Israeli passport and intentionally omitted any indication of U.S. citizenship. The report states that the committee staff reviewed internal bank correspondence that demonstrated that bank employees knew that Horsky controlled the funds in the account and was a U.S. citizen.

Additional Undeclared Accounts

The committee investigation uncovered accounts of a dual U.S.-Latin American family worth nearly $100 million. The accounts were at Credit Suisse until 2013, when the family closed the accounts and transferred the assets to other banks in Switzerland, Israel, and Andorra. Credit Suisse apparently did not disclose the information about the transfers to the DOJ as required by the plea agreement and, due to the Swiss blocking statute, refused to provide the committee the identity of the banks that received the funds from Credit Suisse.

In addition, immediately before the publication of the committee's report, Credit Suisse disclosed that there may be dozens of additional large, undeclared accounts belonging to U.S. taxpayers. In response to the committee's investigation, Credit Suisse examined 105 client relationships and determined that 23 of those relationships involved U.S. persons with large potentially undeclared accounts in excess of $20 million. Credit Suisse has apparently engaged with the DOJ on at least some of those accounts.

Dual Citizenship Creates Unique Opportunities for Evasion

The committee concluded that individuals with dual citizenship in the U.S. and another jurisdiction — like both Horsky and the U.S.-Latin American family discussed above — create "unique opportunities for cross-border tax evasion." The committee found that Credit Suisse bankers were able to code accounts using only non-U.S. based passports and residences to hide U.S. connections and evade automated surveillance and detection systems that the bank had in place.

The risk associated with dual-citizen accounts was confirmed by Credit Suisse's post-plea Monitor. Though the bank noted that it is difficult for the bank to determine how many days an individual spends in the U.S., many of the issues of concern were improperly coded without using U.S.-based information at all.

Implications of the Report

The Wyden report does not pull punches and makes clear that the DOJ should not only investigate whether Credit Suisse is in compliance with its plea agreement but also whether individual bankers should be prosecuted. The conclusions reached in the Wyden report have important compliance and enforcement ramifications for banks, trusts, trustees, and high-net-worth individuals, including the manner in which those stakeholders onboard, document, and report on transactions and customer relationships relevant to U.S. reporting requirements.

Banks

Given that more than 20 percent of the accounts reviewed by Credit Suisse may have involved U.S. persons with undisclosed accounts, banks can expect additional investigation, not only by the Senate Finance Committee but also by the DOJ.

The Wyden report found that $100 million was transferred by the U.S.-Latin America family from Credit Suisse to banks in Switzerland, Israel, and Andorra around the time when the DOJ was actively investigating Credit Suisse, which suggests, according to the committee, that other banks may also have undisclosed accounts inconsistent with their NPAs and plea agreements. The committee has pledged to conduct further investigation of Union Bancaire Privee UBP SA, PKB Privatbank AG, Bank Leumi and Andorra Banc Agricol Reig SA, which are the banks the committee believes received funds from Credit Suisse in connection with the U.S.-Latin America family. UBP and PKB both agreed to NPAs under the Swiss Bank Program, and the committee suggests that they may have violated those agreements by failing to disclose information about those accounts. Bank Leumi also signed a deferred prosecution agreement (DPA) in 2014.

The real question is whether findings of more widespread failure to disclose could result in a second round of the Swiss Bank Program. Credit Suisse produced limited documents to the committee and did not include certain client information due to the Swiss blocking statute. Whether the Swiss government participates as they did with the Swiss Bank Program could have a big effect on the breadth and depth of the investigations.

High-Net-Worth Individuals

It is likely that the committee's findings will lead to increased investigations, audits and potentially prosecutions of U.S. persons with offshore assets. The committee recommended that the IRS consider relaunching the Offshore Voluntary Disclosure Program (OVDP). The last OVDP was closed in September 2018 due to a decline in participation.

The committee suggested using the OVDP to give non-compliant taxpayers one final chance to report all their income before increasing enforcement using resources from the Inflation Reduction Act (IRA). As the committee noted, the IRS has been under-resourced and "the decline in IRS enforcement personnel and audits in recent years has emboldened wealthy taxpayers to conceal income from the IRS."

However, just a week after the Senate report, the IRS released its long-awaited plan for spending $80 billion in funding from the IRA and committed to "hiring the accountants, attorneys, and data scientists needed to pursue high-income and high-wealth individuals, complex partnerships, and large corporations that are not paying the taxes they owe." This influx of resources into key investigatory positions at the IRS is likely to lead to significant investigations.

Trusts, Trustees, and Family Offices

Trusts, trustees, and family offices can also expect increased scrutiny for many of the same reasons discussed above. Entities servicing U.S. individuals with dual citizenship are likely to be targeted in particular, and trustees — along with banks and others — need to be vigilant about properly documenting citizenship. The Wyden report also states that the DOJ and IRS criminal investigation should increase oversight and enforcement of foreign bank and financial account provisions, focusing on violations by high-net-worth individuals. Additional focus on foreign bank and financial account investigations could have an outsized effect on offshore trusts connected to U.S. persons, given the nature of those relationships.

Conclusion

As described above, the committee intends to expand its own investigation into a number of foreign banks that allegedly received funds from Credit Suisse clients, and it recommends relaunching the OVDP and expanding foreign bank and financial account and Foreign Account Tax Compliance Act (FATCA) investigations by the DOJ and IRS. It is yet to be seen what steps these agencies will take in response, but the banking, trust, and family office industries should prepare for an increase in investigations and for reexamination of prior disclosures made in connection with the Swiss Bank Program and OVDP. U.S. individuals, trusts, trustees and family offices, and non-U.S. banks should all take steps now to assure themselves that they are in compliance with U.S. disclosure requirements related to offshore accounts.

For more information, please contact:

William P. Barry, wbarry@milchev.com, 202-626-5974

Ian A. Herbert, iherbert@milchev.com, 202-626-1496

This alert was originally published in Law360.

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