Swiss Bank Attempts to Reduce DOJ Penalty

The Wall Street Journal has an interesting article on Swiss banks' smart attempts to reduce the DOJ penalties for assisting US tax cheats.
John Letzing, Swiss Banks Use Carrot and Stick in Addressing Hidden Accounts (WSJ Markets 7/18/14), here.  The Journal reports that banks offering assistance include Coutts (a division of the Royal Bank of Scotland), Union Bancaire Privee, Bank Coop and Zuger Kantonalbank.
Key excerpts:

Swiss banks are seeking to chip away at potential penalties from the U.S. Justice Department by offering to compensate American clients who disclose their hidden accounts, according to people familiar with the matter. 

More than 100 Swiss banks have signed up for a self-reporting program offered last year by the Justice Department, which can result in penalties for harboring undeclared American accounts. Banks can mitigate penalties by encouraging clients to pre-emptively disclose those accounts to the U.S. Internal Revenue Service. 

Some banks have dangled financial incentives in front of current and former clients to entice them to divulge accounts to the IRS. In some instances token amounts of around $5,000 are being offered, attorneys and financial advisers say. In other cases significantly larger offers are selectively being made to share the legal and accounting costs that accompany the voluntary disclosure process. 

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The Justice Department is aware of such transactions, but hasn't offered guidance on whether or not they may ultimately be objectionable. "We are currently looking at all the factors that contribute to a bank's compliance with the program," a Justice Department spokeswoman said. 

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Category 2 banks have until mid-September to provide proof that they encouraged clients to enter the IRS's disclosure regime. Hidden funds disclosed by those clients could then be subtracted from a bank's penalty amounts, which may be severe. A single, undeclared account containing $2 million opened after early 2009 could result in a penalty of $1 million, for example. 

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Switzerland's financial regulator, Finma, says banks in the program are free to mitigate penalties as they choose.

The penalty is 20, 30 or 50% and applies to the maximum aggregated dollar value during the period.  The ability to obtain a penalty reduction is set forth in the DOJ announcement as follows:

The determination of the maximum dollar value of the aggregated U.S. Related Accounts may be reduced by the dollar value of each account as to which the Swiss Bank demonstrates, to the satisfaction of the Tax Division, was not an undeclared account, was disclosed by the Swiss Bank to the U.S. Internal Revenue Service, or was disclosed to the U.S. Internal Revenue Service through an announced Offshore Voluntary Disclosure Program or Initiative following notification by the Swiss Bank of such a program or initiative and prior to the execution of the NPA.

Since the bulk of the accounts in issue are undeclared accounts, the two ways to achieve the penalty reduction are:

1. for the bank to disclose the account to the IRS.
2. for the U.S. person to disclose the account through OVDI/P (presumably including Streamlined) after the bank's notice to the U.S. person of the U.S. programs.

For the second alternative to work, the bank will need some proof from the U.S. person.   Some banks are in essence paying for that proof.  But some of the banks' positions seems equivocal in terms of proving U.S. tax compliance. What kind of pressure does this put on banks to disclose the account to the IRS.