Wednesday, 6 March 2013

US court orders oldest Swiss bank to pay up

Wegelin & Co., founded in 1741 in St. Gallen, is shutting its doors after the resolution of a US court case over aiding tax evaders
Wegelin & Co., founded in 1741 in St. Gallen, is shutting its doors after the resolution of a US court case over aiding tax evaders (Wikimedia Commons)

by Rita Emch in New York,

A United States court has sentenced Switzerland’s oldest private bank, Wegelin, to pay $74 million (CHF69.5 million) for aiding tax evasion. This is the first such US indictment of a foreign bank.

Judge Jed S. Rakoff handed down the sentence on Monday afternoon in a Manhattan courtroom, taking into account the requests of both the prosecutor and the bank in setting the amount to be paid.

"Wegelin has now paid a steep price for aiding and abetting tax fraud that should be heeded by other banks, bankers, and advisers who engage in the same conduct," Manhattan US Attorney Preet Bharara said in a statement. “US taxpayers with undeclared accounts - wherever those accounts may be - should know that their bank may be next, and they should pay what they owe the IRS [US Internal Revenue Service] before we come find them.”

US tax probe

Wegelin private bank pleads guilty

The name of the traditional bank is set to disappear once the case is settled in the US Switzerland’s oldest private bank, Wegelin, has pleaded guilty to helping wealthy United States taxpayers dodge taxes through offshore accounts. The bank was indicted last February on charges of conspiracy and fraud.  [...]
Wegelin’s case marks the first time a foreign bank has been convicted in such a case in the US. The US government filed conspiracy and fraud charges against Wegelin in February 2012 in connection with having helped Americans hide at least $1.2 billion from the IRS.

Federal authorities said Wegelin bankers began pursuing US clients of UBS once the Justice Department's probe of that bank became public in 2008.

At the end of 2012, Wegelin sold a large part of its business to the Raffeisen Group. On January 3, Wegelin pled guilty to the charges and agreed to a multi-million dollar fine. In return, the criminal case was dropped and both sides waived the possibility of appeal.

The sentence handed down to Wegelin on Monday requires the bank to pay reparations for allegedly untaxed income of $20 million and $15.8 million in profits the bank made from US tax evaders.

In addition, the sum included a fine of $22.05 million and $16.3 million related to a correspondent Wegelin account found at UBS and confiscated by the US Justice Department.

The bank must pay its entire fine within three days. To ensure payments are made, the judge issued a probationary period of one month.

Longstanding tax fight

UBS was the first bank to come under observation from the US Internal Revenue Service (IRS). In 2009, UBS had to pay a $780 million fine for aiding tax evasion.

In 2010, the Swiss government came to an agreement with the US which involved sending the names of 4,500 American UBS clients to the IRS. The agreement was ratified by parliament in 2010.

Tax amnesty legislation in the US has led around 30,000 tax evaders to declare assets hidden in overseas banks. The US Justice Department has gathered significant evidence against Swiss banks which helped hide such assets.

In 2011, US officials opened investigations into ten Swiss banks regarding tax evasion, including Credit Suisse.

Several lawyers and bank workers have since been arrested or charged in the US with aiding tax evasion. Three managers from Wegelin were among them.

At the end of 2012, Wegelin sold a large part of its business to the Raffeisen Group. A few days later, the US Justice Department charged Wegelin with aiding and abetting tax evasion.

It was the first time that such charges were brought against a foreign bank in the US and the first time such a case went to court.

At the end of 2011, the US Justice Department demanded bank client data relevant to American business from all Swiss banks, including the names of bank employees and of tens of thousands of clients.

After having first spoken out against giving up the data, the Swiss government gave the green light for its transfer in April 2012, unleashing a massive controversy across the country.

Switzerland and the US have long been searching for a negotiated global solution to their tax evasion issue.

Legal jurisdiction?

“To me, what justifies this deal - which is what it is - is the practical reality that it would have been difficult for the government to have obtained jurisdiction over the bank,” Rakoff said before he handed down the sentence. “Some credit has to be given to the bank for coming forward in those circumstances.”

Prior to announcing his decision, Rakoff had negotiated the sentence with both sides. The judge nonetheless expressed his surprise that while the Justice Department had accused the bank of being “extremely intentional” in its aiding of tax evaders, prosecutors did not insist on the maximum fine.
Wegelin’s $74 million fine represented about 12 per cent of the CHF560 million it earned when it sold the largest part of its holdings to Raffeisenbank. “Not much pain there, is there?" the judge remarked.

Although Otto Bruderer, the Wegelin representative present at the sentencing, did not make a statement, the bank noted in a press release its “satisfaction” that the judge had stuck to the fine and compensation amounts agreed upon with the prosecutor.

“With this ends the tradition of the private bank Wegelin & Co., founded in 1741,” the release stated. It also noted that all banking operations would be discontinued and all remaining tasks would be carried out by a special entity.

More Swiss banks in the crosshairs

The case against Wegelin is part of a massive US effort against tax evasion begun in 2007 with an investigation into UBS.

However, the Wegelin sentence has not ended Swiss banks’ relationships with the US Justice Department. Investigations into 10 more banks, including Credit Suisse and the Zurich and Basel cantonal banks, are ongoing.

A case against three Wegelin account managers is also still pending, a spokesperson for the prosecutor said after Monday’s sentencing.

Recent pressure on Swiss banking secrecy has not only increased from the US but also from the European Union and international bodies like the Organisation for Economic Co-operation and Development (OECD).

Switzerland has felt compelled to respond to international pressure and negotiate over issues that were previously considered “non-negotiable”.
Rita Emch in New York,
(Translated from German by Veronica DeVore)

UBS told to give IRS data on Wegelin accounts

Wegelin, Switzerland’s oldest private bank, pleaded guilty to charges of helping wealthy Americans evade taxes
Wegelin, Switzerland’s oldest private bank, pleaded guilty to charges of helping wealthy Americans evade taxes (Keystone)

Jan 29, 2013 - 09:03

A federal judge in the United States has authorised the Internal Revenue Service (IRS) to seek records from Swiss bank UBS of US taxpayers suspected of hiding their income in accounts with Swiss bank Wegelin.

Wegelin, Switzerland’s oldest private bank, pleaded guilty in Manhattan federal court on January 3 to charges of helping wealthy Americans evade taxes through secret accounts and then announced it would close down as a result.

On Monday, US District Judge William Pauley in Manhattan granted the IRS’s request to issue a “John Doe” summons, which seeks information about possible tax fraud committed by individuals whose identities are not known, to UBS for the names of taxpayers who may have hidden income at Wegelin and other Swiss banks.

A UBS spokeswoman declined to comment on the ruling.

When the government indicted Wegelin nearly a year ago, it alleged that the bank used a US correspondent account at UBS to handle funds for American clients, a standard industry practice for foreign banks. By covertly transferring money from undeclared Swiss accounts, Wegelin allowed clients to avoid paying income taxes in the United States, the government alleged.

Guilty plea

Wegelin became the first foreign bank in recent memory to be indicted by US authorities last February, opening a new chapter in a broad probe into Swiss banking secrecy.

As part of its guilty plea, the bank agreed to pay $57.8 million (SFr53.5 million) in fines after admitting to helping US clients evade taxes for more than a decade.

It announced on the same day that it would shut its doors permanently after more than 270 years in operation.

In 2009, UBS entered into a deferred-prosecution agreement, turned over 4,450 client names and paid a $780 million fine after admitting it provided tax-evasion services to rich Americans. Since then, dozens of Swiss bankers and their clients have been indicted in a crackdown on the practice. and agencies

Banking data debate offers no easy answers

Flat tax: the responsibility lies with the banks
Flat tax: the responsibility lies with the banks (Keystone)

by Andreas Keiser,
Jan 17, 2013 - 11:00

To preserve its financial sector, should Switzerland launch a counter-attack asserting its sovereignty or take an active role in reducing the international pressure on banking secrecy? There are two main schools of thought on the matter.

So far, the answer has lain in taxing Swiss bank account holders at a fixed rate to preserve banking secrecy while ensuring they don’t evade taxes. But, Germany has officially rejected that model, and France calls it “amnesty for tax evaders”. Only Austria and Britain have signed withholding tax agreements with the Swiss.

For years, the European Union has demanded an automatic exchange of banking information with Switzerland. Such an exchange would require Swiss banks to send information about interest earned by its foreign clients to the respective countries’ tax offices.

The Organisation for Economic Co-operation and Development (OECD) hopes to implement the information exchange in the near term, and Switzerland and the United States are in the midst of implementing a similar exchange within the terms of the Foreign Account Tax Compliance Act (Fatca).

Luxembourg - one of Switzerland’s biggest allies in the fight over banking secrecy - will soon sign Fatca. In turn, Brussels will demand the same treatment from Luxembourg as a member country, which will increase the pressure on non-EU member Switzerland to introduce automatic data exchanges with the 27-nation bloc.

Exchanging data

Under the EU’s proposed model, banks would send data about the interest earned by their clients to each affected country’s tax authority. The customer’s name, address and the amount of interest earned would be passed on.

For the past eight years, 24 of the 27 EU countries have been automatically exchanging banking data for tax purposes. However, a March 2012 report shows less-than-encouraging results.

The system struggles to accurately identifying taxpayers, since a single taxpayer identification number (TIN) hasn’t been enforced.

And most EU countries, except Denmark, don’t know whether the automatic exchange of information has led to more honesty in paying taxes.

The information exchange has worked as a scare tactic, however. The fact that tax evaders know their data is headed into the hands of the tax authorities has led to a 40% increase in honest tax declaration, according to a US study.

In the hornet’s nest

Switzerland officially continues to cling tightly to the flat tax model wherein banks leverage a withholding tax on each foreign account and transfer it to the respective country’s tax authorities.

But, when the cabinet recently appointed a group of experts to come up with possible paths to a clean banking industry, the group considered the exchange of banking information as an option.

Finance Minister Eveline Widmer-Schlumpf’s statement a few weeks ago that Switzerland must broach the discussion about exchanging banking information brought harsh reactions from several political parties. Many argued the finance minister had stabbed the government in the back with her suggestion and said that she should be removed from her responsibilities.

Advantages for banks

“The attitude assumed 40 years ago of just waiting and reacting has not worked for four or five years now,“ Peter V. Kunz, professor of business and comparative law at Bern University, told

“I think Switzerland missed the chance to alter its strategy, but it’s not too late. I think we need a proactive solution and I hope that the group of experts will make suggestions that go in that direction.”

To Kunz, going in the right direction means embracing the exchange of banking information, which he says “especially has economic advantages for the affected banks. They can easily forward the requested data and don’t have to make calculations and send the money, as the flat tax system would require.”

A flat tax system

Because of the massive pressure on banking secrecy, Switzerland wants to sign tax agreements with as many countries as possible which address the tax evasion problem with a withholding tax. Under that model, bank clients’ identities remain anonymous.

However, the OECD and the EU would like to implement the automatic exchange of bank client data.

So far, Switzerland has reached withholding tax agreements with Austria and Britain, both of which have been in effect since January 1.

A similar agreement with Berlin failed after the German parliament voted it down. A French withholding tax agreement with Switzerland also seems to be at risk of failing.

Negative experiences

But, bank expert Martin Janssen doesn’t see things quite the same way. To him, there is no compelling reason to introduce an information exchange instead of a withholding tax.

“We are ready to send the money. If other countries don’t want it, then it has nothing to do with money, but with the repression of their citizens. We don’t have to give in to that.”

A 2012 report shows that the EU’s banking information exchange system has, so far, been fraught with negative outcomes. Not all countries have implemented it as required, and in many places, the tax authorities are unable to keep up with the volume of data involved.

“Most countries already fail in the evaluation process,” says Mario Tuor, spokesman at the State Secretariat for International Financial Matters. “The biggest portion of the data affects real people, which is why it’s an enormous challenge to find all those who have evaded taxes. And, the data is sent in all sorts of different formats.”

Navigating the law

Tuor argues that a withholding tax system makes more sense because under it, “everyone is taxed, since you just take the taxes out. In contrast to the exchange of information system, not only interest but also dividends and other sources of capital are taken into account. Most of the work isn’t done by the foreign offices; instead, it’s done by Swiss banks.”

A withholding tax is also an intelligent way to address past financial indiscretions, adds Tuor. Janssen agrees and says it would also avoid complications from trying to prosecute tax evaders.

“It’s impossible to just send tax evaders back to their home countries for prosecution. That would be a breach of contract [under banking secrecy laws],” says Janssen.

Kunz calls the withholding  tax a “logical concept“ for those who have already evaded taxes, since it respects the banks’ promised confidentiality. If the withholding tax weren’t implemented, Switzerland would have to work out amnesty solutions with each affected person’s country, he points out.

Andreas Keiser,
(Translated from German by Veronica DeVore

Oldest Swiss bank to close in US tax evasion case

Oldest Swiss bank to close in US tax evasion case

Switzerland's oldest private bank, Wegelin & Co, said Thursday that it is going out of business after pleading guilty to charges of helping American citizens avoid US taxes. It remains unclear whether the bank will reveal the names of its US clients.

By News Wires (text)
Wegelin & Co, the oldest Swiss private bank, said on Thursday it would shut its doors permanently after more than 2 ½ centuries, following its guilty plea to charges of helping wealthy Americans evade taxes through secret accounts.

The plea, in U.S. District Court in Manhattan, marks the death knell for one of Switzerland’s most storied banks, whose original European clients pre-date the American Revolution. It is also potentially a major turning point in a battle by U.S. authorities against Swiss bank secrecy.

A major question was left hanging by the plea: Has the bank turned over, or does it plan to disclose, names of American clients to U.S. authorities? That is a key demand in a broad U.S. investigation of tax evasion through Swiss banks.

“It is unclear whether the bank was required to turn over American client names who held secret Swiss bank accounts,” said Jeffrey Neiman, a former federal prosecutor involved in other Swiss bank investigations who is now in private law practice in Fort Lauderdale, Florida.

“What is clear is that the Justice Department is aggressively pursuing foreign banks who have helped Americans commit overseas tax evasion,” he said.

Charles Miller, a Justice Department spokesman, declined to comment immediately.

Wegelin admitted to charges of conspiracy in helping Americans evade taxes on at least $1.2 billion for nearly a decade. Wegelin agreed to pay $57.8 million to the United States in restitution and fines.

Otto Bruderer, a managing partner at the bank, said in court that “Wegelin was aware that this conduct was wrong.”

He said that “from about 2002 through about 2010, Wegelin agreed with certain U.S. taxpayers to evade the U.S. tax obligations of these U.S. taxpayer clients, who filed false tax returns with the IRS.”

Initially vowed to resist

When Wegelin last February became the first foreign bank in recent memory to be indicted by U.S. authorities, it vowed to resist the charges. The bank, founded in 1741, was declared a fugitive from justice when its Swiss-based executives failed to appear in U.S. court.

The surprise plea effectively ended the U.S. case against Wegelin, one of the most aggressive bank crackdowns in U.S. history.

“Once the matter is finally concluded, Wegelin will cease to operate as a bank,” Wegelin said in a statement on Thursday from its headquarters in the remote, small town of St. Gallen next to the Appenzell Alps near the German-Austrian border.

But the fate of three Wegelin bankers, indicted in January 2012 on charges later modified to include the bank, remains up in the air. Under criminal procedural rules, the cases of the three bankers -- Michael Berlinka, Urs Frei and Roger Keller -- are still pending.

Although Wegelin had about a dozen branches, all in Switzerland, at the time of its indictment, it moved quickly to wind down its business, partly through a sale of its non-U.S. assets to regional Swiss bank Raiffesen Gruppe.

A corporate indictment can be a death knell. In 2002, accounting firm Arthur Andersen went out of business after being found guilty over its role in failed energy company Enron Corp. A 2005 Supreme Court ruling later overturned the conviction, but it was too late to save the company.

Wegelin, a partnership of Swiss private bankers, was already a shadow of its former self - it effectively broke itself up following the indictment last year by selling the non-U.S. portion of its business.

Dozens of Swiss bankers and their clients have been indicted in recent years, following a 2009 agreement by UBS AG, the largest Swiss bank, to enter into a deferred-prosecution agreement, turn over 4,450 client names and pay a $780 million fine after admitting to criminal wrongdoing in selling tax-evasion services to wealthy Americans.

‘Wake-up call’

William Sharp, a tax lawyer in Tampa, Florida, with many U.S. clients of Swiss banks, said Wegelin’s plea “should serve as a wake-up call” to the world banking community servicing U.S. clients to takes steps to ensure compliance with U.S. law.

Sharp called Wegelin’s change of heart “shocking.”

Banks under U.S. criminal investigation in the wider probe include Credit Suisse, which disclosed last July it had received a target letter saying it was under a grand jury investigation.

Zurich-based Julius Baer and some cantonal, or regional, banks are also under scrutiny, sources familiar with the probes previously told Reuters. So are UK-based HSBC Holdings and three Israeli banks, Hapoalim, Mizrahi-Tefahot Bank Ltd and Bank Leumi, sources also said previously.

Those banks have not commented on the inquiries.
In a statement after the plea, Assistant U.S. Attorney General Kathryn Keneally said it was a top Justice Department priority “to find those who continue to shirk their tax obligations,” as well as those who help them and profit from it.
“The best deal now for these folks is to come in and ‘get right’ with the IRS, before either the IRS or the Justice Department finds them,” she said.

Under its plea, Wegelin agreed to pay the $20 million in restitution to the IRS as well a civil forfeiture of $15.8 million, the Justice Department said.

Wegelin also agreed to pay an additional $22.05 million fine, the Justice Department said. U.S. District Judge Jed Rakoff, who must approve the monetary penalties, set a hearing in the case for March 4 for sentencing.

Last year, the U.S. government separately seized more than $16 million of Wegelin funds in a UBS AG account in Stamford, Connecticut, via a civil forfeiture complaint.

Since Wegelin has no branches outside Switzerland, it used UBS for correspondent banking services, a standard industry practice, to handle money for U.S.-based clients.

In court papers, Bruderer said that Wegelin “believed it would not be prosecuted in the United States for this conduct because it had no branches or offices in the United States and because of its understanding that it acted in accordance with, and not in violation of, Swiss law and that such conduct was common in the Swiss banking industry.”

The case is U.S. v. Wegelin & Co et al, U.S. District Court, Southern District of New York, No. 12-cr-00002.