In the first-ever indictment of an overseas bank in the U.S. for facilitating tax fraud, the Justice Department has charged Wegelin & Co., Switzerland’s oldest bank, with allegedly conspiring to hide more than $1.2 billion from the Internal Revenue Service.

U.S. officials said Thursday they have seized $16 million from Wegelin’s U.S. correspondent bank account in connection with the indictment and a warrant. The bank recently announced plans to separate its U.S. operations from its non-U.S. operations. Other Swiss banks such as Credit Suisse, Julius Baer and Basler Kantonalbank have also come under pressure recently from the IRS and the Justice Department, following a crackdown on UBS in 2008 (see Swiss Official Urges U.S. Tax Deal to Shield Other Banks).

“Today's indictment is another step in our ongoing effort to pursue hidden offshore assets—no matter where they are located,” said IRS Commissioner Douglas Shulman in a statement. “We are continuing our work to crack down on offshore tax evasion. Through our efforts, we are gaining access to more and more information on institutions and individuals involved in offshore tax evasion, and you can expect us to pursue all avenues to stop this abuse.”

Wegelin, founded in 1741, is Switzerland’s oldest bank and provides private banking, asset management and other services to clients around the world, including U.S. taxpayers living in New York City. 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. 

Wegelin had approximately $25 billion in assets under management as of December 2010. The bank is charged in a superseding indictment with Michael Berlinka, Urs Frei and Roger Keller, three client advisers at the bank who were previously charged with the same conspiracy. They began working as client advisers at the Swiss bank in 2008, 2006 and 2007 respectively.

From 2002 through 2011, Wegelin, Berlinka, Frei and Keller allegedly conspired with various U.S. taxpayers and others to hide the existence of bank accounts held at Wegelin and the income generated in those secret accounts from the IRS. In 2008 and 2009, Wegelin, Berlinka, Frei and Keller have been accused of opening and servicing dozens of undeclared accounts for U.S. taxpayers in an effort to capture clients lost by UBS in the wake of widespread news reports that the IRS was investigating UBS 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 IRS investigation, members of Wegelin’s senior management decided to capture the illegal business that UBS exited, according to prosecutors. To capitalize on the business opportunity this presented and to increase the assets under management, along with the fees earned from managing those assets, Berlinka, Frei, Keller and others, acting on behalf of Wegelin, allegedly told various U.S. taxpayer-clients that their undeclared accounts would not be disclosed to U.S. 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, among other things, that unlike UBS, Wegelin did not have offices outside of Switzerland and was therefore less vulnerable to U.S. law enforcement pressure. 

Members of the Swiss bank’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, according to the indictment. In February 2009, UBS entered into a deferred prosecution agreement with the Justice Department on charges of conspiring to defraud the United States by impeding the IRS. As part of the deferred prosecution agreement, UBS paid $780 million in fines, penalties, interest and restitution.

Prosecutors say that Wegelin and its client advisers took a number of steps to attract clients, including 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.

They also allegedly accepted, as part of Wegelin’s client files, documents falsely declaring that the sham entities were the beneficial owners of certain accounts, when in fact the accounts were owned by U.S. taxpayers.

The bank also allegedly 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. Among the code names were “Elvis.” The bankers also are accused of ensuring that the account statements and other mail for their U.S. taxpayer-clients were not mailed to them in the United States. They communicated with some of their U.S. taxpayer-clients using their personal email accounts to reduce the risk of detection by law enforcement.

The bank and its client advisers also allegedly 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 doing so, the bank 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. 

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. 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.

U.S. taxpayers routinely asked Wegelin to issue and send them checks, which were drawn off the bank’s correspondent bank account, representing funds held in their secret accounts at the bank. 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 Swiss 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, according to prosecutors.

“As alleged, Wegelin Bank aided and abetted U.S. taxpayers who were in flagrant violation of the tax code,” said Preet Bharara, U.S. Attorney for the Southern District of New York, in a statement. “And they were undeterred by the crystal clear warning they got when they learned that UBS was under investigation for the identical practices. Today’s indictment makes clear that we will seek to punish not only those U.S. taxpayers who violate the law in an effort to avoid paying their fair share of taxes, but also the individuals and entities who facilitate their crimes.”

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