As this latest case proves, FINMA is tangentially – but not directly – involved in the American Department of Justice's campaign to settle its tax disputes with Swiss banks that have been harbouring US tax-evaders.

Now that BSI SA, one of the ten largest private banks in Switzerland which is based in Lugano, has signed a non-prosecution agreement with the DoJ, FINMA has concluded the 'enforcement proceedings' against it that it originally took when it realised how exposed the bank was to US prosecution.

FINMA did not take this enforcement action against the bank for crossing the American Government per se. It was involved instead as a risk management regulator. Swiss law does not explicitly require financial institutions supervised by FINMA to comply with foreign law, nor does it prohibit banks from receiving untaxed money, but FINMA has long required its firms to discover, limit and monitor their legal and reputational risks and to have effective internal control systems. This obligation extends to the risks arising from cross-border financial services, including the issue of taxation.

The US 'programme'

A FINMA spokesman explained: “The US authorities started to investigate Swiss banks 'way back, starting with UBS around 2009. Then there was Credit Suisse and later on they proposed a 'programme' – a framework in which the industry's banks can make their peace with the Americans. FINMA was not involved in negotiating the 'US programme', as it's called in Switzerland.

A DoJ press release lays out the issues in this particular case: “BSI helped its US clients create sham corporations and trusts that masked the true identity of its US account-holders. Many of its US clients also opened “numbered” Swiss bank accounts that shielded their identities, even from employees within the Swiss bank. BSI acknowledged that in order to help keep identities secret, it issued credit or debit cards to many US account-holders without names visible on the card itself.

“BSI not only helped US clients shield their identity from the Internal Revenue Service but helped them repatriate cash as well. BSI admitted that its relationship managers and their US clients used code words in emails to gain access to funds. BSI disclosed instances where its US clients would use coded language, such as asking their private bankers, “can you download some tunes for us?” or note that their “gas tank is running empty” when they required additional cash to be loaded to their cards.”

FINMA the risk regulator

“FINMA started investigating BSI before the launch [August 2013] of the US programme, observing closely how Swiss banks were doing cross-border business. Helping to evade untaxed money is not a legal offence in Switzerland, so we were not enforcing that. But we asked banks to maintain a risk management that is adequate. Now, up until a certain point this [US untaxed money] was not a big issue, but in 2009 and afterwards, these risks [i.e. the ones that related to US untaxed money] dramatically changed. When a bank is not able to manage its risks adequately, it becomes a regulatory matter.”

In other words, FINMA has always exhorted banks to mitigate their risks, which include legal risks. If legal risks become significant at a bank, FINMA is likely to step in to make sure that it can cover itself. This is what happened across the board in 2009, as the spokesman explained: “2009 was the turning point in Swiss cross-border matters. That is when the risk materialised.”

The bank has served plenty of US clients with undeclared assets in the past. Even after 2009, BSI SA still accepted US clients with untaxed assets from other Swiss banks, thus exposing itself and its employees to unduly high legal and reputational risks and breaching FINMA's requirements for organisation and proper business conduct. FINMA reprimanded the bank and ordered it to take corrective steps. The bank's misdeeds therefore occurred before any deadline laid down by FATCA, the US extraterritorial tax law that eventually prompted Switzerland to sign an 'inter-governmental agreement' of dubious legality.

Questions and answers

Compliance Matters asked FINMA how BSI could have known that it was accepting American clients with untaxed assets from other Swiss banks if those clients were being less than honest about whether they had paid their taxes. The spokesman said that this was a question of 'due diligence.'

If FINMA looks at the likelihood of a bank being sued by someone and demands it to take evasive action, then surely it could simply ask the bank to remove all assets from America, where the DoJ can freeze them. That, after all, is the only weapon that the American DoJ has against Swiss banks. When asked about this, the FINMA spokesman said that the bank could always offset its risk by doing what the DoJ wanted instead of cutting its losses in America, and went on: “It's the bank's responsibility to manage its risk. If FINMA is aware of risk management at a bank that's not adequate, FINMA will look at it, but how a bank mitigates its risk is its own responsibility and it has to prove it's got the right policy to mitigate it well.”

More about the 'programme'

This is the first non-prosecution agreement that the Americans have reached with a Swiss bank as part of their programme. That programme obliges banks to do the following.

• Make a complete disclosure of their cross-border activities.

• Provide detailed information on an account-by-account basis for accounts in which US taxpayers have a direct or indirect interest.

• Co-operate in 'treaty requests' [perhaps this refers to the IGA] for account information.

• Provide detailed information 'as to' [this is the wording] other banks that transferred funds into secret accounts or that accepted funds when secret accounts were closed.

• Agree to close the accounts of people who fail to come into compliance with US reporting obligations.

• Pay appropriate penalties.

Banks that meet all these requirements are eligible for non-prosecution agreements. BSI has agreed to co-operate in any related criminal or civil proceedings, demonstrate its implementation of controlsto stop misconduct involving undeclared US accounts, and pay a $211 million penalty in return for the department’s agreement not to prosecute it for tax-related criminal offences.