Jan 4 The U.S. government has raised the stakes
in its crackdown on Swiss banks through a hard-charging
prosecution that has forced the closing of a 272-year-old Swiss
firm for offering tax-evasion services to wealthy Americans.
Tax lawyers and former prosecutors said on Friday the
closing of Wegelin & Co, Switzerland's oldest private bank,
served as a stark warning for some Swiss banks under
investigation, especially smaller firms such as Wegelin.
Wegelin, founded in 1741, said on Thursday it would shut its
doors permanently after pleading guilty to an indictment
charging it with helping Americans dodge taxes through secret
It was the first time the United States forced a foreign
bank to close because of its sale of tax-evasion services.
"The Justice Department wanted a scalp to send a message to
all the other banks, in particular the small cantonal and
private banks," said Christopher Rizek, a tax lawyer at Caplin &
Drysdale in Washington, D.C., and a senior former Treasury
Department tax official.
Around a dozen banks are under criminal scrutiny by the
Justice Department, including Credit Suisse AG, 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, U.S. sources familiar with the
probes previously told Reuters. So are UK-based HSBC Holdings
Plc and three Israeli banks, Hapoalim, Mizrahi-Tefahot
Bank Ltd and Bank Leumi, U.S. sources
briefed on the matter said previously. Those banks have not
commented on the inquiries.
The widening probe grew out of an investigation of Swiss
bank UBS AG, which in 2009 entered into a
deferred-prosecution agreement and paid a $780 million fine
after admitting to wrongdoing in selling tax-evasion services to
Unlike UBS or Credit Suisse, both major global players
widely regarded as "too big to fail," Wegelin and the cantonal
banks are smaller institutions unlikely to pose any systemic
risk to the global financial system if indicted or put out of
As such, the old model in which UBS averted indictment and
survived does not appear to be a road map going forward for
smaller banks, tax lawyers said.
Jeffrey Neiman, a former federal prosecutor involved in
criminal proceedings against UBS, said that "the cantonal banks
that have similar exposure now have a blueprint to look at in
order to see how to resolve their liability."
The prosecution and closing of Wegelin, however, did not
sacrifice a significant number of jobs. 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
In contrast, after Arthur Andersen was found guilty for its
role in the failed energy company Enron Corp, the accounting
firm went out of business in 2002. A 2005 Supreme Court ruling
later overturned the conviction, but it was too late to save the
Wegelin's plea offers other hints of things to come. The
Swiss government has been at odds with the United States over
secrecy laws that govern bank client data and the plea leaves
open the question of how or whether the bank will disclose
client data in coming months. Going forward, the role of the
Swiss in resolving the logjam could be magnified.
Neiman said the plea, which ended the case against Wegelin,
but required it to preserve client data, suggested the U.S.
government had decided to take the issue of client data "head-on
with the Swiss government" and not with the Swiss banks.
"Clearly there is another process at work here and it's one
in which there is now not going to be a compelled disclosure in
connection with a plea," said Scott Michel, a tax lawyer at
Caplin & Drysdale in Washington, D.C. with many wealthy clients
of Swiss banks. A Justice Department spokesman did not return
calls requesting comment.
As part of its agreement, UBS was required to turn over some
4,450 client names, a long process that involved Swiss financial
and legal authorities and rattled sacred Swiss secrecy laws.
U.S. authorities have long maintained that client data is their
But by leaving open the question of how or if Wegelin will
disclose client data, the Wegelin plea magnifies the new role
the Swiss government will likely have to play in resolving its
logjam with the United States over secrecy laws protecting bank
A Swiss government source declined to comment on
long-running talks between Switzerland and the Justice
Department and U.S. Internal Revenue Service regarding a
handover of American client names. The two sides are set to meet
"shortly," the source said.
U.S. authorities already hold more weapons in their arsenal
following the 2009 agreement with UBS. Since then, tens of
thousands of Americans have come forward to the I.R.S. to
voluntarily disclose their hidden offshore accounts, providing a
road map to the inner workings of Swiss banks, and prosecutorial
leverage over them.
Last December, Switzerland agreed to comply with new U.S.
disclosure rules on offshore accounts controlled by Americans, a
new enforcement regime known as FATCA, or the Foreign Account
Tax Compliance Act.
"The Justice Department has a lot more leverage now than it
did with UBS," said James Mastracchio, a tax controversy lawyer
at Baker Hostetler in Washington, D.C. Unlike UBS, whose case
dragged out over several years, Wegelin, indicted less than a
year ago, "had a very fast acceptance of responsibility."