US charges Wegelin with aiding tax fraud

More than $16 million has been seized from UBS, Wegelin’s correspondent bank in the US Keystone

The United States Justice Department says it has indicted Switzerland’s oldest private bank, Wegelin & Co.

US officials claim the bank – founded in 1741 – conspired with Americans and others to hide more than $1.2 billion (SFr1.1 billion) in client assets from the Internal Revenue Service.

The announcement represents the first time an overseas bank has been indicted by the United States for enabling tax fraud by US taxpayers.

Justice officials said on Thursday they had also seized more than $16 million from Wegelin’s correspondent bank in the US. Because Wegelin has no branches outside Switzerland, it used correspondent banking services, a standard industry practice, to handle money for US-based clients.

On January 27, Wegelin effectively broke itself up by selling the non-US portion of its business.

Wegelin senior managing partner Konrad Hummler said the sale had resulted from “the extraordinarily difficult situation and threat to the bank brought about by the legal dispute with the US”.

“Tradition of bank secrecy”

The Justice Department’s indictment said Wegelin “affirmatively decided to capture for Wegelin the illegal US cross-border banking business lost by UBS and deliberately set out to open new undeclared accounts for US taxpayer-clients leaving UBS”.

US clients were told that Wegelin presented less risk amid the crackdown because it had no branches outside Switzerland and “had a long tradition of bank secrecy”.

The indictment also accused Wegelin of helping two unnamed Swiss banks “repatriate undeclared funds to their own US taxpayer-clients by issuing cheques drawn on Wegelin’s Stamford correspondent account”.

The transfers were separated into chunks below the $10,000 threshold at which such transfers are reported to the IRS. Wegelin, the indictment said, “co-mingled” the repatriated funds with other, unrelated funds, to better conceal their origin and nature.

Indictment

The charges provided new details on how the bank worked to solicit new US clients fleeing UBS. According to the indictment:

Wegelin, one of the last “pure” private banks, is principally owned by eight managing partners and run by an executive committee that includes partners. One unindicted co-conspirator, named as “Executive A” at the bank, was a member of Wegelin’s executive committee and worked in Zurich.

Wegelin used a special code, “BNQ”, on around 70 new US undeclared accounts that were opened over 2008 and 2009. It also sometimes opened accounts for US citizens who held passports from other countries, and opened the accounts through the non-US passports.

Wegelin recruited US clients through a website that was run by an unidentified third party. The website boasted that “Swiss bank secrecy is not lifted for tax evasion … Neither the Swiss government nor any other government can obtain information about your bank account”. Unlike the US, Switzerland generally does not consider tax evasion to be a crime.

Wegelin gave accounts special names, including “Elvis” and “Limpopo Foundation”. The charges detailed the bank’s work for nearly three dozen American clients, known only as clients A through JJ.

Wegelin encouraged clients not to come forward to the IRS and disclose their names in exchange for reduced penalties. Clients who did so in recent years helped provide the Justice Department with a roadmap to the inner workings of Wegelin – a map that led to the bank’s indictment.  

Latest blow

The charges against Wegelin – of fraud and conspiracy – provide a rare glimpse into the world of Swiss private banking in the wake of a crackdown on UBS.

In 2009, UBS paid $780 million and entered into a deferred prosecution agreement with the Justice Department over charges that it engaged in fraud and conspiracy by enabling scores of Americans to evade taxes through its private bank.

The bank later turned over the names of more than 4,500 clients – a watershed in Swiss bank secrecy, which protects the confidentiality of clients and their data.

The indictment signals a ramping up of pressure on ten other Swiss banks under investigation by the Justice Department, including Credit Suisse, Julius Bär and Basler Kantonalbank.

It also represents the latest blow to the tradition of Swiss bank secrecy in a long-running US crackdown on tax dodgers. Switzerland is seeking a global solution for its entire banking industry, not just the 11 banks under criminal scrutiny.

On Tuesday, the Swiss finance ministry handed US authorities encrypted data on bank employees who served US clients suspected of dodging taxes and said it would only provide the key to decipher the data once the row was settled.

It was reported earlier this week that the finance ministry had talked seven banks out of handing over data directly to the US authorities.

Government frustration

Swiss Finance Minister Eveline Widmer-Schlumpf expressed her frustration at the stalled talks to US Treasury Secretary Tim Geithner at the World Economic Forum in Davos last week.

A deal to solve the long-running dispute appears to be stuck on Swiss demands for the US to waive criminal prosecutions against its banks. Widmer-Schlumpf was optimistic enough in Davos to tell reporters that the deal could be concluded by the end of this year.

But that time scale was not fast enough for Wegelin, which announced its enforced sale to the Raiffeisen banking cooperative the very day after Widmer-Schlumpf’s high-level meeting.

Wegelin’s demise will only increase fears in Switzerland that the US sees more mileage in picking off individual institutions with criminal prosecutions than agreeing to a civil resolution that covers all Swiss banks.

There is also evidence of banks wanting to break away from the government-led defensive formation to seek a swift resolution that could persuade fewer clients to take their assets elsewhere.

Wegelin & Co

The origins of Wegelin & Co date back to 1741 when Caspar Zyli founded a linen trading and transport company in St Gallen whose revenues were used to provide loans. His son, Hans Anton, developed the European business and in 1802 acquired Notenstein, creating Nothveststein in St Gallen’s city centre, which remains the headquarters of Wegelin today.

In the middle of the 19th century, when railway developments required the support of large investors, the company’s banking activities took on greater importance. Wealthy families flocked to the bank to manage their fortunes. Clients included Napoléon III and his wife Empress Eugénie.

The business was renamed Wegelin & Co by Zyli’s nephew Emil Wegelin to comply with the changes in the company’s mandate resulting from its involvement in railway construction.

It has eight managing directors, each of whom has accepted an “unlimited liability” for the fortunes of the bank – meaning they are personally liable for the commitments of the bank.

The bank has branches in 12 Swiss cities in addition it its St Gallen headquarters. It employs 700 people and manages some SFr24 billion.  

(With input from Matthew Allen in Zurich)