Historic US indictment of Swiss bank for ‘aiding’ US tax evasion lays foundation for more

Switzerland’s oldest bank, Wegelin and Co., survived 270 years of war, political change and economic tumult, but could not escape indictment by the United States Department of Justice.

This February, Wegelin became the first non-United States bank ever to be indicted by the United States government for facilitating the evasion of US taxes by US persons. The bank is accused of conspiring to hide from the Internal Revenue Service about $1.2 billion in undisclosed assets belonging to about 100 US persons.

A key element of the mechanism of the tax evasion scheme, the indictment says, was a correspondent account Wegelin held at a UBS branch in Connecticut. Correspondent accounts are accounts held by banks at other banks, and are used to handle transactions of financial institutions with each other. Wegelin’s account had a less legitimate purpose, the US Justice Department alleges.
Wegelin has no office or physical presence in the United States. It used its UBS account to allow its US customers access to their secreted funds in Switzerland. The indictment alleges that during the mid-to-late 2000s, millions of dollars flowed through this account from Switzerland to the tax-evading US persons in the United States.

The February indictment was coupled with a forfeiture action against the bank by the Justice Department. On April 24, US district Judge Laura T. Swain, of the Southern District of New York, in Manhattan, entered a default judgment against Wegelin and ordered the forfeiture of $16.2 million from its UBS correspondent account.

The US Attorney in the Southern District of New York, Preet Bharara, said, “The millions that we forfeited… were used… by the bank to allow their U.S. customers to have it both ways – they could gain access to their hidden funds but still hide them from the IRS.”

Account allegedly used by several Swiss banks to secrete funds for US persons

Days before the return of the Wegelin indictment the bank was effectively dismantled by its owners. Its assets and most of its operations were sold to another Swiss bank, Raiffesein. Wegelin presently exists in name only, “to finalize the closure of all remaining US client relationships and to continue… negotiations with the US justice authorities,” according to a statement by the bank’s owners. The $16.2 million forfeited by the US is believed to be all that remained of Wegelin’s US assets.

The Wegelin correspondent account at UBS, the civil forfeiture complaint alleges, was used by at least two “other Swiss banks to launder undeclared funds [of US clients] from Switzerland to the US.” The banks are named only as “Swiss Bank C and D”. Wegelin had maintained its UBS correspondent account since the late 1990s.

As US continues tax evasion push, other Swiss banks may be in its sights

The Wegelin indictment and forfeiture of its US account break new ground in the US effort against tax evasion by US citizens using offshore institutions. That effort began in earnest with the 2009 US case against UBS for enticing and harboring some 52,000 US persons who had hidden accounts at UBS, the largest financial institution in Switzerland. The case created an uproar in the US, and ended in a Deferred Prosecution Agreement in which UBS agreed to disclose about 4,500 names to the IRS and pay $780 million in penalties.

Since the UBS case, the Justice Department has intensified the legal pressure on Swiss financial institutions that bank the hidden assets of US customers. At the same time, the US and Swiss governments have carried on long-running tax negotiations, but have been unable to reach an agreement on the level of disclosure that the secrecy haven will permit to US authorities.

US-Swiss talks going “nowhere,” more indictments possible, says tax expert

“The Swiss have been in involved in talks on a global deal [covering all Swiss banks] with the US for well over a year-and-a-half,” says Scott Michal, a tax attorney at Caplin & Drysdale, in Washington, D.C. “My feeling is that those talks are going nowhere.”

“I would not be surprised if more indictments come down against Swiss banks in the coming months,” Michal continues.

‘US taxpayer-clients fleeing UBS’ were recruited by Wegelin

In mid-2008, as news of the US investigation of UBS for tax fraud made international headlines, Wegelin executives allegedly saw a golden business opportunity.  The civil forfeiture complaint says the bank’s “managing partners… affirmatively decided to take advantage of the flight of US taxpayer-clients from UBS.”

Wegelin managers instructed employees to approach those customers and depict the bank as a safe alternative for US tax evaders. The employees were coached to deliver “selling points” describing the bank as “small, discreet, and, unlike UBS, not in the media.”

These “selling points,” as the forfeiture complaint describes them, were used by the bank’s “client advisors” to solicit about 100 US customers, many directly from UBS. The new group of bank customers was highly profitable 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 complaint also describes how an unnamed Wegelin executive said the bank “could charge high fees to its new U.S. taxpayer-clients because these clients were afraid of prosecution in the United States.”

US Offshore Voluntary Disclosure Initiative provides wealth of information on Wegelin

Wegelin stopped taking on new US customers in December 2011, but it was too late to avoid the increased scrutiny by the Justice Department. In addition to the indictment of Wegelin, three of its advisors at the bank’s Zurich branch, Michael Berlinka, Urs Frei, and Roger Keller, were also indicted on January 3 for conspiring to commit tax fraud in the US. They are at large and have not responded to the indictment.

It is believed that Wegelin’s illegal conduct surfaced partly as a result of the IRS’s Offshore Voluntary Disclosure Initiative, a post-UBS operation which allows US persons with overseas undisclosed assets to come forward and declare them. Participants are asked to complete a detailed questionnaire providing information on financial institutions, investment managers and others who assisted in hiding assets. The questionnaires have provided the IRS a “treasure trove” on potential financial crimes, says Jeffrey Neiman, a former federal prosecutor who was one of the principal leaders in the case against UBS. He now specializes in tax-related criminal defense representation as a private attorney in Fort Lauderdale.

Smaller Swiss banks still untouched by US enforcement efforts

The Wegelin account forfeiture may be an omen for other Swiss financial institutions with correspondent accounts in the US, which enable and facilitate US tax evasion by US persons. Those accounts appear to be fair game for the IRS and a source of the lost tax revenue the Swiss accounts of US persons have caused. Even small Swiss banks will note that their correspondent accounts, which nearly all banks in all countries maintain, can now be targets of US tax enforcement efforts.

“The heart and soul of Swiss banking are these cantonal banks,” which are local banks often partly owned by the Swiss government, says Neiman. “They’re on every corner, many of them are small and don’t have US operations. So there are jurisdictional issues still to be answered. Does [the Wegelin indictment] allow the US to go after these Swiss banks that don’t even have a presence in the US, that aren’t in violation of Swiss law?”

“Wegelin still hasn’t answered the indictment,” Neiman continues, “so only time will tell.”