Guilty plea by Swiss bank with no US presence sets mark in US global tax evasion attack

For 270 years, Wegelin & Co. proudly advertised that it was Switzerland’s first and oldest bank. Last week, the bank added a new milestone that it will not be so anxious to publicize.

On January 3, it became the first non-US bank to plead guilty to violating US criminal tax laws. In a Manhattan federal courtroom Wegelin confessed to conspiracy to evade US income taxes (Title 18, USC Section 371).

US federal prosecutors secured the historic plea agreement after months of legal battling, which began with the indictment of Wegelin in February 2012 on charges that it facilitated tax evasion by US clients. From 2002 to 2010, the plea agreement says, the bank conspired to hide from the Internal Revenue Service about $1.2 billion in assets belonging to some 100 US persons.
Under the agreement, Wegelin will pay a $22 million fine and $20 million in restitution to the IRS for lost tax revenues. Wegelin will also forfeit to the US Justice Department about $15.8 million in fees it reaped for managing the accounts of US tax evaders. An additional $16.2 million hit held in a correspondent account at a UBS branch in Stamford, Connecticut, will also be forfeited. This account was seized by IRS agents in April 2012.

Wegelin plea is a ‘watershed’ in global tax evasion fight, prosecutors say

Wegelin’s guilty plea and modest monetary penalties are another victory in the war on offshore tax evasion the US Justice Department and IRS have waged since 2008. A notable significant factor of the Wegelin case is that the bank had no affiliates, branches or offices in the United States.

“This case shows that the Justice Department can and will go after banks with no footprint in the US, and make life so uncomfortable for them that they decide on a settlement, rather than be a corporate fugitive,” Scott Michel, a tax attorney with Caplin & Drysdale, in Washington, DC, told ACFCS.org.

“Here you have a Swiss bank pleading guilty to a crime that doesn’t exist in Switzerland,” said Jeffrey Neiman, principal of Neiman Law in Ft. Lauderdale and a former federal prosecutor who played a leading role in the prosecution of the huge Swiss bank, UBS, for luring and harboring more than 50,000 US taxpayers in a plot to evade their US taxes.

In a statement announcing the agreement, US Attorney, Preet Bharara, called Wegelin’s guilty plea a “watershed moment in our efforts to hold to account both the individuals and the banks – wherever they may be in the world – who are engaging in unlawful conduct that deprives the US Treasury of billions of dollars of tax revenue”.

While the Justice Department will not confirm pending investigations, 13 other Swiss banks, including Credit Suisse, are reportedly being probed by federal grand juries and IRS Criminal Investigation special agents for conspiracy to evade US taxes.

Wegelin exec says enabling evasion is ‘common’ at Swiss banks

The plea is an abrupt about-face for a bank that once seemed willing to fight the charges. For months, Wegelin’s managers have refused to answer the indictment, saying it had been wrongly issued and should have come through the Swiss courts.

Several of Wegelin’s top executives were present before US District Judge Jed S. Rakoff at the plea hearing. Otto Bruderer, one of the bank’s managing partners, admitted in court that “Wegelin intentionally opened and maintained… accounts for [US] taxpayers with the knowledge that… Wegelin was assisting these taxpayers in violating their legal duties.”

Bruderer made a point that undoubtedly caused some Swiss financial institutions to squirm. He said Wegelin did not believe it would face US prosecution because the bank’s “conduct was common in the Swiss banking industry.”

Bank welcomed US tax evaders with open arms

Common practice or not, Wegelin drew the ire of the US Justice Department and IRS in part because it began courting US customers actively to join the tax evasion scheme just as the US government began cracking down on offshore tax evasion. In mid-2008, as news of the US investigation of UBS for similar crimes made international headlines, Wegelin executives saw a chance to increase their US client base.

“The bank willfully and aggressively jumped in to fill a void that was left when other Swiss banks abandoned the practice due to pressure from US law enforcement,” said Bharara in a statement.

Wegelin managers instructed employees to approach US customers that were fleeing UBS and portray the bank as a safe alternative. The employees were coached on delivering “selling points” describing the bank as “small, discreet, and, unlike UBS, not in the media.” These selling points, described in the April 2012 complaint that began a forfeiture action against Wegelin’s correspondent account, were used to solicit about 100 US customers, some directly from UBS.

The new group of bank customers brought great profits for Wegelin. In 2005, Wegelin “hid approximately $240 million in undeclared assets… (and) by 2010, this amount rose to at least $1.2 billion,” the forfeiture complaint states.

The bank’s profits were short-lived. Just days before Wegelin was indicted, its managing partners decided to sell it. The majority of the bank’s accounts and employees were transferred to the Swiss institution, Raiffeisen. The bank will cease to exist entirely once it has paid its penalty to the IRS and Justice Department.

Wegelin’s dismantling, while voluntary, may serve as a cautionary tale to other non-US institutions. “This indictment ended the bank,” says Michel. “That’s a huge sanction.”

With Swiss tax talks stalled, US pursued prosecution instead

Unlike the UBS case, the plea agreement did not require Wegelin to turn over the names and identifying information of its US accountholders. Instead, the bank consented to preserve the records of its US customers, and turn them over to the Swiss Federal Tax Administration.

“It seems reasonably certain based on the plea that the next step is a treaty request by the US to obtain these names,” Michal states. “If I were a US taxpayer that had an account at Wegelin, I would not be waiting for the IRS to come knocking before making a voluntary disclosure.”

The US and Swiss governments have reportedly been engaged in long-running negotiations over a global tax treaty that would allow Swiss banks to withhold taxes on US customers while maintaining their anonymity from the IRS. Switzerland has already reached similar accords with British and German tax authorities.

The aggressive prosecution of Swiss banks suggests the US government is not interested in a deal that does not include naming US accountholders, says Alan L. Weisberg, a former federal prosecutor and partner at Weisberg and Kainen, in Miami, who specializes in criminal tax defense.

“Uncle Sam wants to know everything,” Weisberg says. “I seriously doubt US authorities would agree to a deal that preserves anonymity.”

View the Wegelin plea agreement here

View Otto Bruderer’s statements here