- Written by Amy Walsh
On February 2, 2012, the United States government made an unprecedented move in its unrelenting investigation of the world of secret Swiss banking: it indicted a foreign bank with no branches in the United States for helping Americans evade taxes. Specifically, a federal grand jury sitting in Manhattan indicted Wegelin & Co. -- the oldest private bank in Switzerland – for conspiring with U.S. taxpayers and client advisors employed by Wegelin to defraud the IRS by concealing the U.S. taxpayers’ accounts at Wegelin. In addition, U.S. authorities seized $16.2 million of funds from a correspondent account that Wegelin held at UBS.
This development is a major event in the government’s ongoing investigation of the role of Swiss banks in U.S. tax evasion – an investigation that began approximately four years ago when the government focused its sights on UBS. In 2009, unable to withstand the pressure that the U.S. government brought to bear, UBS publicly admitted to conspiring to defraud the U.S. government of billions of dollars in taxes by helping wealthy Americans hide their money in secret Swiss accounts. In exchange for not being indicted, UBS agreed to turn over to the U.S. government the names of approximately 4,000 American account holders and paid a fine of $780 million.
Based on the government’s allegations, the end of secret Swiss banking for Americans at UBS was only the beginning of the story for Wegelin. The indictment alleges that after UBS and another large Swiss bank closed their business servicing undeclared U.S. accounts, Wegelin affirmatively decided to capture the illegal cross border business that UBS was giving up. According to the indictment, one Wegelin executive told the Wegelin private bankers that Wegelin was not exposed to the risk of prosecution that UBS faced in the United States because Wegelin was smaller than UBS. The indictment alleges that the executive also told the private bankers that Wegelin could charge high fees to its new U.S. clients because those clients were afraid of criminal prosecution in the United States. According to the allegations, the Wegelin private bankers, who were also indicted, told their U.S. taxpayer-clients that their undeclared accounts at Wegelin would not be revealed to the U.S. government because unlike UBS, Wegelin would not be vulnerable to U.S. law enforcement pressure since it did not have offices outside Switzerland. The charges allege that in order to hide the identity of the true beneficiary of the Swiss account, Wegelin opened accounts in the names of sham corporations and foundations formed under the laws of Panama, Hong Kong and Lichtenstein. In addition, according to the indictment, Wegelin helped their American clients repatriate undeclared money to the U.S. by issuing checks drawn on, and executing wire transfers through, Wegelin’s correspondent bank account at UBS in Stamford, Connecticut.
From a practitioner’s point of view, one of the most alarming allegations in the indictment is that one of the Wegelin private bankers advised his American clients, whose names were at risk to being turned over to the U.S. by UBS, not to make a voluntary disclosure to the IRS and assured the clients that their account information would remain secret from the U.S. government. This alleged advice must have been one of the more egregious factors for the U.S. government in weighing whether to indict a Swiss bank – i.e., the fact that a Swiss banker not only assisted a U.S. taxpayer in hiding a Swiss bank account, but also advised the U.S. taxpayer not to even explore (perhaps with the benefit of U.S. tax counsel) the option of making a voluntary disclosure to the IRS.
The fact is that the IRS – even after having obtained names from UBS and having indicted the oldest Swiss private bank – is still accepting taxpayers into its offshore voluntary disclosure program. Recognizing that there are still many taxpayers who want to become compliant, the IRS re-opened its Offshore Voluntary Disclosure Initiative (OVDI) which had ended on September 9, 2011. Taxpayers who are not already under investigation or audit, and who make a complete and truthful voluntary disclosure to the IRS about all their foreign accounts, can eliminate the risk of criminal prosecution, as long as they pay the unpaid tax, interest, a 20% accuracy related penalty on the unpaid tax, and a one-time 27.5% penalty on the highest aggregate balance of the taxpayers foreign accounts and any other tax non-compliant foreign assets held between 2003 and the present. Moreover, there are reduced penalties for taxpayers who are foreign residents or who inherited the foreign account, if they meet certain criteria spelled out by the IRS.
The lessons learned from the Wegelin indictment are two-fold. From a banking entity’s perspective, when the U.S. government seeks cooperation from a bank and meets resistance, it will exert as much pressure as it can under the law, which includes bringing an indictment, seizing and forfeiting assets, and broadcasting these events in order to persuade other similarly situated entities to comply with U.S. demands for cooperation. From an individual taxpayer’s perspective, the doors to the OVDI are still open and there is no announced deadline to join. However, taxpayers must not delay in consulting with tax professionals to make an informed decision because several foreign banks are currently under investigation, and it will only be a matter of time before they buckle under U.S. governmental pressure to turn over the names of their clients. In addition, the Swiss Parliament recently amended its tax treaty to make it easier for U.S. authorities to obtain information about undeclared foreign account holders. Finally, the Foreign Account Tax Compliance Act (FATCA), which was passed in 2010, will be implemented by January 2012. FATCA requires foreign financial institutions to enhance their efforts in identifying U.S. taxpayers and report certain information to the IRS to insure compliance with U.S. tax laws. For an individual with an interest in an undisclosed foreign account, the OVDI provides a relatively straightforward way to eliminate the risk of criminal prosecution, to simplify the use of the account, and to clean up reporting issues going forward.
Amy Walsh is a partner at Kostelanetz & Fink LLP. Ms. Walsh was formerly an Assistant United States Attorney in the Eastern District of New York for 11 years, where she was the Chief of the Business & Securities Fraud Section.