Switzerland’s oldest bank, Wegelin & Co., has agreed to pay $74 million to the United States to settle charges that it conspired to evade taxes with its U.S. clients, in the first-ever guilty plea to tax law violations by a foreign bank.
The Justice Department and the Internal Revenue Service announced the guilty plea and settlement Thursday, the largest in a tax case since another Swiss bank, UBS, agreed in 2009 to pay $780 million to settle U.S. criminal charges under a deferred prosecution agreement and turn over the names of 4,500 clients.
Wegelin was indicted in February for conspiring to hide $1.2 billion from the IRS, the first time a foreign bank has been indicted for facilitating tax evasion by U.S. taxpayers (see DOJ Indicts Swiss Bank Wegelin on Tax Charges). On Thursday, one of Wegelin’s managing partners, Otto Bruderer, appeared on behalf of the bank to enter the guilty plea before U.S. District Judge Jed S. Rakoff in New York.
As part of its guilty plea, Wegelin agreed to pay approximately $20 million in restitution to the IRS and to pay a $22.05 million fine. In addition, Wegelin agreed to the civil forfeiture of an additional $15.8 million, representing the gross fees earned by the bank on the undeclared accounts of U.S. taxpayers. Together with the April 2012 forfeiture of over $16.2 million from Wegelin’s correspondent bank account, this amounts to a total recovery to the United States of approximately $74 million.
“There is no excuse for wealthy Americans flouting their responsibilities as citizens of this great country to pay their taxes, and there is no excuse for foreign financial institutions helping them to do so,” Manhattan U.S. Attorney Preet Bharara said in a statement. “Wegelin became a haven for U.S. taxpayers seeking to circumvent the tax code by hiding their money in secret off-shore accounts, and 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 U.S. law enforcement. Today’s guilty plea is 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 U.S. Treasury of billions of dollars of tax revenue. We will continue our efforts until this practice is eliminated in its entirety.”
Founded in 1741, Wegelin is Switzerland’s oldest bank. It provided private banking, asset management, and other services to clients around the world, including U.S. taxpayers living in the Southern District of New York. Wegelin had no branches outside Switzerland, but it directly accessed the U.S. banking system through a correspondent bank account that it held at UBS AG in Stamford, Conn. As of December 2010, Wegelin had approximately $25 billion in assets under management.
From 2002 through 2011, Wegelin conspired with various U.S. taxpayers and others, to hide from the IRS the existence of bank accounts held at the bank, and the income generated in those secret accounts. Wegelin carried out this scheme through among others, client advisers Michael Berlinka, Urs Frei, and Roger Keller, who began working at Wegelin in 2008, 2006, and 2007, respectively, according to the Justice Department.
In 2008 and 2009, Wegelin opened and serviced dozens of new undeclared accounts for U.S. taxpayers in an effort to capture clients lost by UBS in the wake of widespread news reports that UBS was being investigated by U.S. authorities for helping U.S. taxpayers evade taxes and hide assets in Swiss bank accounts. By mid-2008, UBS had stopped servicing undeclared accounts for U.S. taxpayers.
In the wake of the U.S. investigation of UBS, members of Wegelin’s senior management decided to take steps to capture the illegal business that UBS had exited. To capitalize on the business opportunity this presented and to increase its assets under management, and the fees earned from managing those assets, Wegelin employees told various U.S. taxpayer-clients that their undeclared accounts would not be disclosed to the United States authorities because the bank had a long tradition of secrecy. They also persuaded U.S. taxpayer-clients to transfer assets from UBS to Wegelin by emphasizing that, unlike UBS, Wegelin did not have offices outside of Switzerland and was therefore less vulnerable to United States law enforcement pressure.
Members of Wegelin’s senior management approved efforts to capture the clients who were leaving UBS and also participated in some meetings with U.S. taxpayer-clients who were fleeing UBS.
To further the goals of the conspiracy from 2002 through 2011, Wegelin took steps that included opening and servicing undeclared accounts for U.S. taxpayer-clients in the names of sham corporations and foundations formed under the laws of Liechtenstein, Panama, Hong Kong, and other jurisdictions for the purpose of concealing some clients’ identities from the IRS. The bank also accepted documents falsely declaring that the sham entities were the beneficial owners of certain accounts, when in fact the accounts were beneficially owned by U.S. taxpayers, and making them part of Wegelin’s client files. Wegelin permitted certain U.S. taxpayer-clients to open and maintain undeclared accounts at Wegelin using code names and numbers to minimize references to the actual names of the U.S. taxpayers on Swiss bank documents.
The bank also ensured that account statements and other mail for U.S. taxpayer-clients were not mailed to them in the United States. It instead communicated with some U.S. taxpayer-clients using their personal email accounts to reduce the risk of detection by law enforcement; and issued checks drawn on, and executing wire transfers through, its U.S. correspondent bank account for the benefit of U.S. taxpayers with undeclared accounts at Wegelin and at least two other Swiss banks.
In so doing, Wegelin sometimes separated the transactions into batches of checks or multiple wire transfers in amounts that were less than $10,000 to reduce the risk that the IRS would detect the undeclared accounts.
U.S. taxpayers are required to report the existence of any foreign bank account on their federal income tax returns if it holds more than $10,000 at any time during a given year, as well as any income it earns, the Justice Department noted.
By 2010, the collective maximum value of the assets in undeclared accounts beneficially owned by U.S. taxpayer-clients of Wegelin was more than $1.2 billion, with many accounts holding more than $10,000 in any one year.
The April 2012 forfeiture of approximately $16.2 million from Wegelin’s correspondent bank account was the result of a civil forfeiture complaint filed in February 2012. As alleged in the complaint, Wegelin used its correspondent bank account at UBS to help U.S. taxpayers with undeclared accounts repatriate money that they had hidden at Wegelin. This was often done in a manner designed to evade detection by U.S. authorities. For example, U.S. taxpayers routinely asked Wegelin to issue and send them checks, which were drawn on Wegelin’s correspondent bank account, and that represented funds held in their secret accounts at the bank.
Further, Wegelin permitted at least two other Swiss banks to issue checks drawn on its correspondent bank account for the benefit of U.S. taxpayers holding undeclared accounts at these other banks. The sheer volume of transactions in Wegelin’s correspondent bank account served to conceal the repatriation of money from U.S. taxpayers’ undeclared accounts at Wegelin and the other banks. On April 24, 2012, U.S. District Judge Laura Taylor Swain entered an order forfeiting over $16.2 million seized from the U.S. correspondent account of Wegelin. As part of its plea agreement, Wegelin agreed not to contest the April 2012 forfeiture.
By entering its guilty plea in this case, Wegelin waived any objections to service of the summons and the superseding indictment in this case and agreed, as part of its plea agreement, not to contest service of process in this case in the future.
In entering the guilty plea on Wegelin’s behalf, Bruderer admitted, among other things, that “[f]rom 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, among other things, filed false tax returns with the IRS.” Bruderer also admitted that “[i]n furtherance of its agreement to assist U.S. taxpayers to commit tax evasion in the United States, Wegelin, among other things, opened and maintained accounts at Wegelin in Switzerland for U.S. taxpayers who did not complete W-9 tax disclosure forms.” A W-9 is an IRS form used through which U.S. taxpayers can identify themselves as such to a bank, thereby causing the bank to report income generated in the U.S. taxpayers’ account to the IRS.
Bruderer further admitted that “Wegelin knew that certain U.S. taxpayers were maintaining non-W-9 accounts at Wegelin in order to evade their U.S. tax obligations, in violation of U.S. law, and Wegelin knew of the high probability that other U.S. taxpayers who held non-W-9 accounts at Wegelin also did so for the same unlawful purpose.” Bruderer also admitted that “Wegelin intentionally opened and maintained non W-9 accounts for [certain U.S.] taxpayers with the knowledge that, by doing so, Wegelin was assisting these taxpayers in violating their legal duties” and that “Wegelin was aware that this conduct was wrong.”
Wegelin is headquartered in St. Gallen, Switzerland, and, in addition to the payment of restitution, faces a fine of up to approximately $40,000,000, representing twice the gross pecuniary loss to the IRS.
Berlinka, 42, Frei, 52, and Keller, 48—who all reside in Switzerland—were charged in the Indictment in January 2012 and the Superseding Indictment in February 2012. They each face up to five years in prison, a maximum term of three years of supervised release, and a fine of the greatest of $250,000, or twice the gross pecuniary gain derived from the offense or twice the gross pecuniary loss to the victims. Berlinka, Frei, and Keller have not been arrested.
Wegelin is scheduled to be sentenced by Judge Rakoff on March 4, 2013.
“This is an unprecedented plea by a foreign institution subjecting itself to U.S. jurisdiction,” said James Mastracchio, practice team leader for BakerHostetler’s National Tax Controversy Practice. “But we should keep in mind, that as the global banking community becomes FATCA compliant—particularly for those foreign institutions operating in countries with intergovernmental agreements—transparency and the sharing of information will continue with the US and by agreement and in practice, such that foreign financial institutions will be under greater pressure to make unprecedented agreements to follow US laws and regulations. While most likely not the primary incentive, this plea does provide an example of what might become the normal relations between the U.S. and FATCA-compliant jurisdictions.”