September 08, 2021

Switzerland Insurance Companies Admit to Conspiring With U.S. Taxpayers, Hiding Assets In Deferred Prosecution Agreement

In May, the U.S. Attorneys’ Office for the Southern District of New York announced that it had reached a deferred prosecution agreement (the Agreement) with Swiss Life Holding AG (Swiss Life), Swiss Life (Liechtenstein) AG, Swiss Life (Singapore) Pte. Ltd. and Swiss Life (Luxembourg) S.A. The case involved Swiss Life and its subsidiaries offering their services to U.S. taxpayers to use life insurance policies and related policy investment accounts to conceal assets from the Internal Revenue Service. The resolution included the Swiss Life entities agreeing to pay approximately $77.3 million to the U.S. Treasury, a combination of restitution, disgorgement of fees and penalties. Swiss Life also agreed to cooperate in identifying “U.S. tax evaders.”

Swiss Life accepted responsibility by stipulating to the accuracy of a Statement of Facts. The time period involved was 2005 to 2014; however, the questionable activity took place beginning in 2008, when Swiss Life and its subsidiaries became aware that UBS and other Swiss banks were subjected to increased enforcement review by U.S. authorities and were terminating or reevaluating their U.S. business relationships. Swiss Life viewed this as a business opportunity and began marketing to these U.S. high net worth and ultra-high net worth clients through its Liechtenstein subsidiary.

Swiss Life structured the products as Private Placement Life Insurance (PPLI). Rather than run its PPLI business in accordance with well-established U.S. tax principles, Swiss Life instead used this well developed and accepted product to evade U.S. tax reporting requirements and conceal the ownership of U.S. assets.

Importantly, this Agreement is not a condemnation of PPLI. To the contrary, the Statement of Facts specifically stated that “[PPLI] can provide legitimate tax-deferral benefits but only when properly structured, funded with declared assets, and reported to the IRS to the extent required by relevant U.S. tax regulations…”  Swiss Life, according to the Statement of Facts, had a U.S. tax-compliant PPLI product that was marketed to U.S. persons for legitimate wealth and succession planning purposes. In fact, the PPLI market, with those legitimate products, has grown significantly over the last several years and should continue to do so in reaction to increased income tax rates — but the policies must be structured (and reported, if applicable) properly.

So while the Swiss Life group marketed various tax compliant products — Frozen Cash Value, Deferred Variable Annuity, Variable Universal Life and PPLI — it also marketed non-compliant products:

  • Policies were funded with undeclared assets, and certain U.S. clients failed to report policies on Report of Foreign Bank and Financial Accounts, FinCEN Form 114 (“FBAR”) and/or Form 8938.
  • Swiss Life offered a Life Asset Portfolio Universal product that was not designed or structured to meet the investor control doctrine and other Internal Revenue Code requirements.
  • In addition to accepting undeclared assets, Swiss Life cleansed these undeclared assets and turned them into declared assets shielded by a PPLI policy until the statute of limitations expired.
  • Similarly, U.S.-related PPLI policies involved transfers of physical gold, other precious metals and gemstones into and out of investment accounts, presumably for the purpose of avoiding detection by U.S. authorities.
  • Swiss Life aided U.S. taxpayers in avoiding the one-time excise tax of 1% on contributions to foreign insurance policies.

Swiss Life began cooperating with the Justice Department in September 2018 after Justice initiated contact. What followed was a thorough investigation of the practices that led to the above-described and other violations. The Agreement and the acknowledged Statement of Facts were the culmination of the investigation and Swiss Life’s cooperation.

While the attention paid to the Swiss Life announcement is not positive, what should not be lost is that the various insurance products, including PPLI, have a place in tax and financial planning strategies. The message, however, is that these products must conform to all substantive and reporting requirements.

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