Offshore enforcement update, part 1: What is a non-prosecution agreement?

In recent years, increased U.S. enforcement of offshore account reporting requirements has not only affected individual taxpayers. Foreign financial institutions have also been deeply affected. Swiss banks, historically a haven for undisclosed accounts, have come under particular scrutiny.

And so it was no surprise that Forbes reported this week on the growing list of Swiss banks that have entered into deferred prosecution agreements with U.S. authorities to resolve allegations that the banks facilitated tax evasion by U.S. taxpayers.

In part two of this two-part post, we will update you on the status of some of these agreements. But first, in part one, let’s set the stage by asking a basic but important question. What exactly is a non-prosecution agreement?

A non-prosecution agreement (NPA) is a way for a private company that is facing criminal investigation to settle the issue without a formal indictment. A deferred prosecution agreement (DPA) serves this function as well.

These agreements are by no means unique to the offshore tax compliance context. The Department of Justice (DOJ) and the U.S. Securities and Exchange Commission (SEC) use them to enforce many other regulatory rules and confront other types of corporate misconduct besides tax evasion.

And indeed, the number of DPAs and NPAs has been on the increase in recent years. This has not only brought the federal government substantial funds through penalties paid by companies entering into the agreements. These enforcement agreements also typically require companies to make certain factual admissions and to agree to monitoring of various activities going forward.

At the beginning of this year, many Swiss banks were negotiating with the DOJ’s Tax Division regarding a specific program aimed at using non-prosecution agreements to resolve offshore tax evasion concerns. In part two of this post, we will turn to recent developments regarding banks seeking such agreements.