US Banks to Hand Over Evidence in Tax Probe

By Dow Jones Business News, 
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U.S. Banks to Hand Over Evidence in Tax Probe


ZURICH--The Swiss units of Goldman Sachs Group Inc. and Morgan Stanley have agreed with U.S. authorities to hand over potentially incriminating details about how they might have helped Americans evade taxes, according to people familiar with the situation.

In return, the two banks won't face prosecution in the U.S., though they could be hit with financial penalties equal to as much as 50% of the value of the undeclared U.S. accounts they've handled.

Banks in this part of the program, dubbed category 2, agree to comb through their books and compile information about how they set up Swiss accounts for U.S. clients. That information, including how much was contained in the accounts, must be reviewed by an independent examiner.

The Justice Department has said that 106 Swiss banks, or more than a third of the country's total, have already committed to category 2. Attorneys and other experts say many banks have opted for category 2 as a precautionary move, because discovering all client ties to the U.S.--including through a second passport or U.S. residence permit, for example--can be difficult. The same logic was used by the Swiss operations of Goldman and Morgan Stanley, people familiar with the matter say.

"It is a tricky thing to just say, I'm sure we had nothing," said Martin Naville, chief executive of the Swiss American Chamber of Commerce in Zurich. Banks are therefore opting for a "better safe than sorry" approach, Mr. Naville said.

Banks initially entering category 2 can be downgraded to category 3 of the program, which doesn't involve penalties, if it turns out they haven't aided American tax evasion.

Goldman's Swiss private bank had about $12 billion in assets under supervision as of the end of last year, according to a person familiar with the matter. Morgan Stanley's Swiss private bank had $50.7 billion in assets under management as of last year, though the bulk of that stemmed from branches in Hong Kong and Singapore.

The banks weren't required by U.S. regulators to disclose their participation in the program, even though it could result in fines, according to the people familiar with the matter.

Banks that have drawn criminal probes are deemed category 1 lenders by the Justice Department. These banks, including Credit Suisse Group AG and Julius Baer Group AG, are unable to participate in the department's self-reporting program. Credit Suisse has booked more than 700 million Swiss francs ($795 million) in related legal charges as it prepares for a settlement.

Citigroup Inc. and J.P. Morgan Chase & Co. also have Swiss operations. Citibank Switzerland AG has compiled data in line with the Justice Department program's requirements but hasn't entered into category 2, according to a person familiar with the matter. Citi's Swiss private bank had about 21.6 billion Swiss francs ($24.5 billion) in assets under management as of last year, according to the person familiar with the matter.

The status of J.P. Morgan's private bank in Switzerland is unclear. J.P. Morgan spokeswoman Alia Nawaz declined to comment.

Bankers and attorneys here have complained mostly in private about the rigor of the program, and say they wonder how the DOJ will make use of the resulting data--which, thanks to Switzerland's bank secrecy laws, doesn't include the identities of clients.

However, banks that opt not to join the program risk drawing unwanted attention from the Justice Department, attorneys say.

"Through the program, as well as through ongoing investigations and other law enforcement tools, we are confident that we will obtain information that will lead us to account holders who have thought for too long that they can keep hiding," said Dena Iverson, a Justice Department spokeswoman.

The Justice Department is expected to have mostly completed processing banks in category 2 by the end of June.

The Swiss operations of U.S. banks have a relatively small share of the local market for wealth management services, which is dominated by local players UBS and Credit Suisse.

Write to John Letzing at john.letzing@wsj.com

Subscribe to WSJ: http://online.wsj.com?mod=djnwires


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