2012 Indictment a First for Foreign Bank;  2013 Plea Will Shut Down U.S. Operations.

[ by Howard Haykin ]

Switzerland's oldest private bank admitted on Thursday to helping Americans evade U.S. taxes, marking the first time a foreign financial institution has pleaded guilty to tax-law violations.  Representatives for Wegelin & Company, founded in 1741, appeared before Judge Jed Rakoff in Federal District Court in Manhattan, and acknowledged that, for nearly a decade, it had helped dozens of wealthy American customers dodge taxes by hiding more than $1.2 billion in secret accounts.  Its indictment last February shook the storied world of Swiss banking.

It's interesting to note just how far Wegelin's Swiss bankers went to assist their American clients.  The firm used an elaborate scheme when opening secret Swiss bank accounts for American clients.  The bankers used code names and set up sham entities to avoid detection in far-flung locales including Panama and Liechtenstein.

U.S. Attorney Preet Bharara's office had brought indictments last year against 3 Wegelin executives, but the executives are expected to avoid having to face the charges because the extradition treaty between Switzerland and the U.S. does not provide for extradition of Swiss individuals for tax crimes.

Under the Plea Agreement, ...   Wegelin will   pay $74 million in fines, restitution, and forfeiture proceeds to the U.S. government.  Attending the hearing before Judge Rakoff were several Wegelin executives, including one of its managing partners - Konrad Hummler, a controversial figure in the Swiss private banking industry.  Another Wegelin partner, Otto Bruderer, made the following statement in court:

"From about 2002 through 2010, Wegelin agreed with certain U.S. taxpayers to evade the tax obligations of these U.S. taxpayer clients, who filed false tax returns with the I.R.S.  Wegelin was aware the conduct was wrong."

Mr. Bruderer noted that,  Wegelin assisted the American clients because it believed that it would not be prosecuted in the United States because it had no offices here, and had acted in accordance with Swiss law. 

He further added, the conduct was common practice in the Swiss banking industry.

Impact Upon Wegelin and its Successors.   Wegelin ceased to exist when, last January, firm partners sold its non-U.S. clients' accounts to Swiss Bank Raiffeisen Group, just before its indictment in February 2012.  That move was sharply criticized by Judge Rakoff as a "fraud upon fraud."  Notwithstanding the preceding events, Thursday's guilty plea is tremendously important:

• Wegelin's admission of guilt represents a victory in its sweeping crackdown on Americans using offshore banks to evade taxes. 

• The guilty plea demonstrates the reach of the Justice Department, which was able to extract a guilty plea from a foreign company with no business operations in the United States.

• The case strikes another blow at Swiss banking secrecy, a shadowy world that U.S. authorities have penetrated in recent years after decades of looking the other way.  This secrecy has been a hallmark - and a main selling point - of Switzerland's private banks, which, alongside chocolate and watchmaking, are one of the country's iconic businesses.

UBS's Brush With Criminal Charges.   In 2009, UBS avoided criminal charges by striking a so-called deferred prosecution agreement - but the deal came at a very high price.  

• UBS paid a $780 million fine.
• UBS turned over the names of some 4,500 clandestine accounts believed to hold the assets of U.S. taxpayers.

Around that same time, the IRS initiated an amnesty program that offered immunity from criminal liability to those Americans who divulged offshore accounts.  The successful program yielded more than $2.7 billion in taxes and penalties from about 30,000 taxpayers.
 

For further details, go to:   [ Dealbook, 1/3/13 ] and  [ Reuters, 1/3/13 ].