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Julius Baer's American clients face increased penalties for voluntary disclosures

Wednesday, 17 February, 2016

The Swiss bank Julius Baer (Bank JB) has admitted assisting its American clients evade tax. In return for the admission and associated financial penalties, the US Department of Justice has agreed not to prosecute the bank.

The deal means that Bank JB has been added to the US Internal Revenue Service's list of foreign financial institutions or facilitators. US taxpayers who hold an account at JB will now be subject to a 50 percent "miscellaneous offshore penalty" if they elect to join the IRS' offshore voluntary disclosure program (OVDP) after the bank was added to the list.

Moreover, the 50 percent penalty applies to all of the taxpayer's undeclared offshore assets, even accounts at other financial institutions where wrongdoing has not been revealed or admitted. Thus exposed JB clients will now find it much more expensive to regularize their offshore tax liabilities, unless they have already applied for the OVDP.

Most of the charges against JB related to the period from the 1990s to 2009, when the bank maintained undeclared accounts for many US clients. It considered itself safe from the US authorities because it no longer had any offices in the US.

At the height of its US business in 2007, Julius Baer had USD4.7 billion in assets under management for more than 2,500 undeclared US-owned accounts. The USDoJ calculates that the bank earned USD87 million in profit on gross revenues of USD219 million from these accounts in the 2001-2011 period. This includes accounts held through structures such as offshore corporations, foundations and trusts, or held through third-party asset managers.

In its correspondence, JB staff referred to the beneficial owners of these accounts only by codenames or numbers. Undeclared accounts held by US taxpayers were at times referred to as "black money", "non W-9", "tax neutral", "unofficial", or "sensitive" accounts. During the period, the bank also advised its client advisors to take special precautions when travelling in the US. For example, they were told to use a mobile phone registered in and operating from Switzerland, and to buy landline phone cards for cash so that they could not be traced.

The bank has agreed to pay a USD247 million restitution payment, which represents the tax lost to the IRS as a result of its practices. It must also pay a forfeiture of USD219.25 million, plus a USD81 million penalty.