Feb. 23, 2014 2:48 p.m. ET
ZURICH—U.S. authorities are scrutinizing Americans' use of Swiss insurance products to determine if they have been used to hide assets, signaling a potential new direction in the U.S. legal crackdown on tax evasion in the Alpine country, according to people with knowledge of the matter.
The U.S. Justice Department and the Internal Revenue Service are looking at the use of private placement life insurance, or PPLI, a product that meshes banking and insurance by linking the value of a client's policy to assets held in a Swiss bank account, these people say.
Swiss insurers offering the product, which can be used legally by Americans to defer taxes, have nonetheless sought to reduce ties to U.S. clients. At least three big insurers say they aren't accepting new U.S. clients. In December, Swiss Life Holding AG SLHN.VX +1.00% Swiss Life Holding AG Switzerland: SWX Europe CHF201.20 +2.00 +1.00% Feb. 21, 2014 5:31 pm Volume : 100,629 P/E Ratio 31.84 Market Cap CHF6.45 Billion Dividend Yield 2.24% Rev. per Employee CHF2,680,430 02/23/14 U.S. Examines Swiss Insurance ... More quote details and news » returned funds to hundreds of Americans who had invested in PPLI policies. Those policies were linked to accounts at Bank Frey & Co. AG, which is among a number of Swiss banks that have disclosed being under criminal investigation in the U.S. for allegedly aiding tax evasion, according to people familiar with the matter.
Bank Frey ceased operations last year, after one of its executives and an attorney who directed clients to the bank were indicted for allegedly helping Americans avoid taxes. The bank said in November it had "verified the tax compliance of all its U.S. clients," and has since been in the process of shutting down. Swiss Life, which like many Swiss financial firms is now eager to limit exposure to Americans, used the opportunity to scuttle the shared PPLI policies rather than locate a new bank to house the attached assets, these people say.
Swiss Life is the biggest Swiss insurer offering PPLI, though not the only one. Some of the people fami liar with the situation say U.S. authorities have collected data on the use of PPLI by Americans, though the issue has taken a back seat to the continuing probe of Swiss banks.
Just as Swiss banks have drawn legal inquiries, "the same thing could happen, certainly, with the insurance companies," said Gideon Rothschild, an attorney with Moses & Singer LLP.
A Justice Department spokeswoman declined to comment, as did a spokesman for the IRS. Nils Frowein, chief executive of Swiss Life's International unit, says the company hasn't been contacted by U.S. authorities regarding its PPLI business.
PPLI policies are generally a lawful way for clients to defer taxes on wealth as it grows. But policies can be problematic for their owners and carriers if they haven't been set up in compliance with tax laws in a client's home country, or if they are loaded with undeclared assets.
The bulk of the 19.3 billion Swiss francs ($21.7 billion) in assets under control at Swiss Life's International unit in 2012—the most recent data available, prior to the Bank Frey purge—was linked to PPLI. About 4% of that portfolio, or around 770 million francs, was attributable to Americans, according to Mr. Frowein.
Mr. Frowein said while Swiss Life has "been continuously reducing exposure to U.S. persons" where it can, it is confident there are no issues with the American PPLI accounts that remain. "There is no reason for us to re sign from the contracts," he said.
The Swiss banks that partner on PPLI once happily accommodated wealthy U.S. clients, but have more recently jettisoned Americans to avoid drawing unwanted attention from the Justice Department. Unlike banks, insurers are contractually bound to hold policies and pay out for a specific event, such as death. Only an unusual circumstance like Bank Frey's closure allows an insurer to prematurely dump a PPLI policy.
Hundreds of Swiss banks have applied to a U.S. program in which they exchange information about dealings with Americans for guarantees they won't be prosecuted. Insurers aren't able to participate in the program.
The Justice Department has said that about a dozen banks are already under investigation.
Swiss Life began offering PPLI in 2004. Assets under administration ballooned to more than 8 billion francs by 2008 from 200 million francs in 2005. In 2007, Swiss Life added a number of U.S. clients through the p urchase of insurer CapitalLeben, just as dealings with Americans were poised to become subject to greater scrutiny.
In 2009, the Justice Department fined UBS AG UBSN.VX 0.00% UBS AG Switzerland: SWX Europe CHF18.51 0.00 0.00% Feb. 21, 2014 5:31 pm Volume : 13.74M P/E Ratio 22.30 Market Cap CHF71.12 Billion Dividend Yield 1.35% Rev. per Employee CHF560,995 02/21/14 Beverly Hills Broker Team Join... 02/20/14 Morgan Stanley Wealth Team Jum... 02/19/14 Detroit Proposes New Settlemen... More quote details and news » $780 million for helping Americans evade taxes, kicking off the broader clampdown on Swiss banking.
Mr. Frowein says Swiss Life stopped taking American clients in 2012. Zurich Insurance Group AG ZURN.VX +0.53% Zurich Insurance Group AG Switzerland: SWX Europe CHF266.00 +1.40 +0.53% Feb. 21, 2014 5:31 pm Volume : 681,351 P/E Ratio 10.51 Market Cap CHF39.62 Billion Dividend Yield 6.39% Rev. per Employee CHF1,215,320 02/13/14 Zurich Insurance Profit Up as ... 01/28/14 Series of Deaths Among Financi... 12/16/13 CFO Moves: Zurich Insurance, V... More quote details and news » says it hasn't accepted Americans since its PPLI business began in 2009, while a spokesman for insurer Baloise Holding AG BALN.VX +0.09% Baloise Holding AG Switzerland: SWX Europe CHF111.60 +0.10 +0.09% Feb. 21, 2014 5:31 pm Volume : 110,716 P/E Ratio 11.48 Market Cap CHF5.58 Billion Dividend Yield 4.03% Rev. per Employee CHF1,094,100 More quote details and news » said it stopped taking American clients under a 2010 company directive. The Baloise spokesman said the firm doesn't believe it necessary to "actively wind down" U.S. policies.
Swiss Life has bulked up on compliance over the years to help it avoid undeclared assets, Mr. Frowein said, and requires clients to declare their tax status.
Still, Mr. Frowein said, "If you want to do a transaction with us, I have no possibility to check and prove your tax declaration."
Write to John Letzing at john.letzing@wsj.com
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