Deputy Attorney General James M. Cole Testifies Before the U.S. Senate Committee on Homeland Security and Government Affairs

Chairman Levin, Ranking Member McCain, and members of the Subcommittee, thank you for inviting us here to testify on the Department of Justice’s efforts to address Swiss bank facilitation of U.S. tax evasion.  With me this morning is Kathryn Keneally, the Assistant Attorney General for the Tax Division, who oversees the Department’s tax enforcement program.  The Department of Justice is committed to global enforcement against financial institutions that facilitate cross-border tax evasion - as well as against the individuals who evade their tax and reporting obligations, and the bankers, accountants, lawyers, and other professionals who help them do it.  And while the Department’s initial efforts and this hearing have focused on Switzerland, we have expanded our investigations to go after tax cheats and the banks assisting them in India, Israel, Liechtenstein, Luxembourg, and several Caribbean countries.

Since 2009, the Department has publicly charged 73 account holders and 35 professionals with violations arising from their offshore banking activities, and 72 individuals have pled guilty or were convicted at trial.  Just as importantly our enforcement efforts have driven over 43,000 taxpayers with secret offshore accounts to identify themselves to the IRS, disclose their offshore accounts, and to pay a total of over $6 billion in back taxes, penalties and interest.  And that number is growing.

As this Subcommittee well knows, investigating offshore banks and U.S. taxpayers with secret foreign accounts is difficult and time consuming.  It requires us to use virtually all the tools we have at our disposal, and to be creative and innovative.  We must pursue not just legal avenues such as grand jury subpoenas and John Doe Summons, but also discussions with the Swiss government to obtain the information we need.  And we need to make full use of cooperators and whistleblowers – and I can tell you that we are receiving information from such individuals in the offshore cases we are working right now.

In appropriate circumstances, the Department may seek enforcement of a Bank of Nova Scotia grand jury subpoena or a John Doe summons for Swiss bank records.   But these tools cannot always be effectively employed.  First, they can only be used against a foreign bank that has a U.S. presence – and the majority of the Swiss financial institutions that we are currently investigating do not.  Second, the use of a BNS grand jury subpoena or a John Doe summons for extraterritorial records may result in protracted litigation.  Absent acquiescence by the Swiss government, a bank may be caught between facing contempt sanctions in the U.S. or violating Swiss law or a Swiss blocking order. 

Because we are involved in active ongoing criminal investigations, we are quite limited in what we can disclose publically.  But just because we can’t disclose what we are doing, doesn’t mean we are not actively pursuing these cases.  I do, however, want to quickly discuss a number of public actions we have recently taken.  We fully expect additional public developments over the course of the coming months.

By way of example, in 2013, the Department obtained four separate orders authorizing the IRS to issue John Doe summonses seeking records from banks in the United States for the U.S. correspondent accounts of banks located in the Caribbean, Switzerland, and other European countries and we have successfully compelled account holders to provide us with their personal records of their foreign banking activities.

Since the UBS deferred prosecution agreement in February 2009, the Department has taken public action against two other banks.  In January 2013, Wegelin Bank, one of the oldest financial institutions in Switzerland, pled guilty to conspiracy to defraud the United States and was ordered to pay substantial fines and to forfeit funds.  As a result of its criminal conviction, Wegelin was forced to close its doors, which sent a shockwave through the community of banks and bankers in Switzerland that had been engaged in facilitating U.S. tax evasion.  In July 2013, Liechtensteinische Landesbank AG entered into a non-prosecution agreement, and paid substantial fines. What is particularly notable about this case, is that we were able to take an innovative approach, and with the bank’s cooperation, have Liechtenstein actually change its bank secrecy laws retroactively.  This enabled the Department to obtain files relating to non-compliant U.S. account holders.  

In August 2013, the Department publicly stated that fourteen banks have been authorized for investigation concerning the use of Swiss bank accounts.  This is in addition to on-going investigations concerning cross-border activities by banks in India, Israel, Liechtenstein, Luxembourg, and several Caribbean countries.

A fundamental issue with respect to obtaining cooperation from Swiss banks has been the degree to which Swiss law blocks disclosure of banking information, including the identity of accountholders, and for this reason, the Department and the IRS engaged in a series of discussions with representatives of the Swiss government.  On August 29, 2013, the Department announced the Program for Non-Prosecution Agreements or Non-Target Letters for Swiss Banks.  This Program is designed to encourage Swiss banks not currently under investigation to cooperate with our law enforcement efforts in return for the possibility of a non-prosecution agreement or deferred prosecution agreement.

I want to emphasize that the Program expressly does not include the fourteen Swiss banks we have targeted and are actively investigating.  Each of those bank will need to negotiate a separate resolution with the Department that reflects the severity and magnitude of its conduct.  Nor does the Program offer or provide protection or immunity to any U.S. account holders or foreign bankers or other advisors. 

What the program does do is provide an opportunity to banks that we currently have little or no information on, to self-report to the Department that they have committed or facilitated U.S. tax evasion.  By the Program’s December 31, 2013 deadline, the Department received letters from 106 Swiss financial institutions of their intent to participate.  The Program requires extensive cooperation by each participating bank, including full disclosure of its illegal activities, the names of each of its culpable employees and third party advisors, and the number and values of each of its U.S. accounts.  For the accounts that closed after the Department’s investigations became public, the banks are required to provide information that will allow the Department to ‘follow the money” – that is, we will be given detailed information to enable us to go after Swiss banks and banks around the globe to which these secret accounts were transferred.  In addition to this required cooperation, each of the banks must also pay steep penalties calibrated to reflect both the magnitude and severity of a bank’s conduct and agree to get out of the business of facilitating U.S. tax evasion. 

Every Swiss bank that comes forward to cooperate under the Program represents an opportunity to obtain valuable law enforcement information from a source that is new to the Department. While the program does not expressly require that the banks provide the identity of accountholders, which is barred under Swiss law, we will be able to use the information the banks are obligated to provide under the Program to formulate more effective treaty requests to obtain that very information.  And as one of the requirements for obtaining an NPA or DPA, the banks are obligated to assist the Department in preparing such treaty requests – requests that the Swiss have committed to process on an expedited basis.

The treaty process is working, and we are receiving information.  We cannot disclose the details publicly.  But our success has not escaped notice.  Since the announcement of the Program, the IRS has advised us that they have seen an increase in the number of U.S. taxpayers participating in their offshore voluntary disclosure program.  But we believe we could obtain substantially more account information if the Senate were to ratify the new treaty, known as the Protocol amending the Convention between the United States of America and the Swiss Confederation for the Avoidance of Double Taxation with Respect to Taxes on Income, which was ratified by Switzerland in September 2009.  In fact, I understand there is a hearing on this treaty this morning before the Senate Foreign Relations Committee.

As I noted earlier, as a result of our enforcement efforts, over 43,000  individuals have self-reported that they have held secret Swiss bank accounts, and have paid over 6 billion dollars in back taxes, interest, and penalties.  In contrast, before 2009 and our law enforcement efforts in this area, the average number of voluntary disclosures submitted to the IRS ranged from approximately 50 to slightly over 100 per year.  Because the Swiss banks that cooperate under the Program will provide information about bank accounts globally, anyone who has not yet come forward to disclose a secret bank account anywhere in the world is on notice that time is running out.

The Department is engaged in and committed to robust enforcement globally using all available law enforcement tools at our disposal.  Thank you again, Mr. Chairman, for the opportunity to appear this morning to discuss our law enforcement efforts and for your strong support of this vital law enforcement matter.  We are happy to answer any questions that you or the other Members of the Subcommittee may have.