Zurich Life, Zurich Int'l Life to pay US$5.1m to U.S. gov't in 'undeclared accounts' agreement

Also under the terms of the non-prosecution agreement, Zurich has agreed "to cooperate in any related criminal or civil proceedings" as well as to "implement controls to stop misconduct involving undeclared U.S. accounts," according to a statement on the Justice Department's website  last week.

The matter involved what the Justice Department said was the use of "offshore" insurance products to enable "tax evasion."

According to last week's statement, the policies provided to the U.S. customers whose accounts were at issue had failed to meet certain minimum requirements that would have been necessary for them to qualify for favorable tax treatment under the U.S. tax code.

Asked for a comment, a Zurich spokesperson noted that the company's cross-border business with "U.S. persons" had been "of a limited and legacy nature," and that Zurich’s business model outside of the U.S. "was not based on marketing products to U.S. persons."

"We also had restrictions on cross-border sales to U.S. persons in place for many years,” he added.

“In order to qualify for favorable US tax treatment, life insurance contracts and annuity contracts must meet certain requirements set forth in the U.S. Internal Revenue Code and Treasury regulations. The rules for determining whether life insurance contracts or annuity contracts qualify for beneficial U.S. tax treatment are extremely complex.

"Here, Zurich Life Insurance Co. and Zurich International Life Ltd. designed life insurance contracts and annuity contracts that were compliant with the jurisdictions outside the United States in which they were sold."

American expat accounts thought involved

Although last week's Justice Department statement didn't say where the "U.S. tax-paying clients" whose Zurich accounts had been involved in the matter lived, some expat industry experts said it was likely that at least some of them belonged to Americans living abroad, since the life insurance options available to such American expats have traditionally been, and to a certain extent still are, fairly limited.

Some overseas insurance brokers have also been known to sell products to Americans that weren't meant for them, particularly years ago, when the problems Americans have with products not designed to accommodate the U.S.'s complex regulations weren't as well known as they are now.

"While there are numerous choices available for purchasing life insurance in the United States for individuals who are residents of the U.S., the situation is not quite as clear for those who are U.S. citizens living abroad," Dubai-based American tax expert Virginia La Torre Jeker, pictured left, noted, in a comment piece on her website about the Zurich matter.

"In fact, in many cases, the policy that is in force in the United States may not provide the individual with the same protection that he or she had when residing state-side. This is another reason that Americans abroad turn to foreign insurance provider[s]."

But owing to "complex U.S. tax rules that may apply to these policies," as well as to non-U.S. sickness or accident insurance or annuities, Americans abroad can inadvertently find themselves caught out by exposure to “passive foreign investment company” (PFIC) rules, Foreign Bank Account Reports and other foreign asset information reporting requirements, as well as a little-known 1% excise tax that the U.S. imposes on premiums paid with respect to certain foreign-insurance policies, La Torre Jeker said. 

'Steadfast in goal of ending use
of offshore products for tax evasion'

The Justice Department's Tax Division "remains steadfast in its goal of ending the use of offshore banking and insurance products when used to commit tax evasion,” principal deputy assistant attorney general Richard E. Zuckerman is quoted as saying in last week's statement.

“This resolution with Zurich should serve as a strong message to those who use offshore bank accounts and insurance products to evade taxation that the Department of Justice is committed to stopping such fraud.”

According to the the Justice Department statement, the situation which led to the agreement announced last week concerned events that took place between Jan. 1, 2008 and June 30, 2014.

During this time, "Zurich issued or had certain insurance policies and accounts of U.S. taxpayer customers, who used their policies to evade U.S. taxes and reporting requirements," the statement went on.

At issue in the matter were some 420 U.S.-related policies – of which127 had been with Zurich Life and 293 with Zurich International Life – which had an aggregate maximum value of approximately US$102m. According to the Justice Department, the U.S. taxpayer customers whose accounts these were "did not provide evidence that they had declared their policies to U.S. tax authorities."

It continued: "To qualify for favorable tax treatment under the U.S. tax code, insurance must meet certain minimal requirements. The policies offered by Zurich Life and Zurich International Life did not meet these requirements.

"The increase of the principal in these policies was therefore subject to taxation, and the policies were required to be disclosed to the Internal Revenue Service (IRS) on FinCEN Form 114 Foreign Bank Account Report, commonly referred to as an FBAR.

"In issuing or having undeclared U.S. related policies, Zurich knew or should have known that they were helping U.S. taxpayers conceal from the IRS ownership of undeclared assets, maintained as insurance policies or accounts.

"Zurich International Life, in particular, sold insurance products to U.S. taxpayers that were 'unit linked,' meaning the cash surrender value and death benefit amount were linked to the value of specified investments. With such policies, the U.S. taxpayer had a suite of specialized investment options, allowing them to access potentially higher returns by taking on the market risk associated with the policies.

"Some of these unit-linked policies offered a base death benefit that was nearly equivalent to the cost of the policy itself, and in some instances was fully funded by transfers from offshore bank accounts.

"Upon redemption, the U.S. taxpayer would receive the premium amount plus any investment earnings on the policy, less a very small percentage for putative risk and fees.

Despite knowing that some of these policies, which had minimal-to-no risk mitigation function and specialized investment options, were held by U.S. taxpayers, Zurich International Life failed to act appropriately to ensure timely compliance by the policyholders with U.S. tax laws."

The Justice Department statement then goes on to give an example of one case in particular involving a "former U.S. citizen" who had pled guilty to a federal fraud offense after purchasing a Zurich International Life policy, and had used that insurance policy "to hide substantial assets, despite owing approximately US$900,000 in restitution to his [fraud] victims."

To Zurich's credit, the statement adds, "following the commencement of the [Justice] Department’s Swiss Bank Program, the Zurich Group initiated a global review of the life insurance, savings and pension business sold by all of its non-U.S. operating companies to identify policies or accounts with U.S. indicia. This review prompted an extensive customer outreach to current and former customers with a possible nexus to the United States to confirm the customers’ status as U.S. taxpayers, assess their compliance with applicable U.S. tax and reporting rules, and encourage participation in an IRS voluntary disclosure program.

"In July 2015, Zurich contacted the [Justice] Department to inform it of the initial findings of the self-review."

Prior to the self-reporting, Zurich had been neither a subject nor a target of any investigation being conducted by the Tax Division, the Justice Department noted, and in the wake of the self-disclosure, Zurich had gone on to conduct "a thorough investigation" of its operations, and subsequently reported "substantial findings to the Tax Division, including dozens of detailed summaries of account information and comprehensive reports for [its] U.S. related policies."

Zurich Life was founded in 1922 and operates in Switzerland as an insurance carrier offering life insurance and investment products. Zurich Life and Zurich International Life are indirectly-owned subsidiaries of Zurich Insurance Group Ltd, a Swiss holding company headquartered in Zurich.