Wegelin & Co. was ordered to pay U.S. authorities almost $58 million at the end of a criminal case after the Swiss bank pleaded guilty to helping American taxpayers hide more than $1.2 billion from the Internal Revenue Service.
U.S. prosecutors called the misconduct by Switzerland’s oldest private bank, which started in the early 2000s and continued until 2011, “extraordinarily willful.” Wegelin said the U.S. investigation was responsible for forcing it out of business after 272 years.
U.S. District Judge Jed Rakoff in Manhattan approved the sentence, which Wegelin had agreed to with prosecutors, after crediting the bank with showing up to plead guilty rather than fighting his court’s jurisdiction. Wegelin said it had believed that Swiss banking secrecy laws and the fact it had no offices in the U.S. shielded it from prosecution there.
“To me, what justifies this deal -- which is what it is -- is the practical reality that it would have been difficult for the government to have obtained jurisdiction over the bank,” Rakoff said in yesterday’s hearing. “Some credit has to be given to the bank for coming forward in those circumstances.”
The fine, restitution and forfeiture ordered yesterday, in addition to $16.3 million seized by the U.S. from Wegelin’s correspondent bank account last year, totals a $74 million recovery for the U.S. government. Rakoff also put the bank on probation for a month to ensure it makes the ordered payments.
“Wegelin has now paid a steep price for aiding and abetting tax fraud that should be heeded by other banks, bankers, and advisers who engage in the same conduct,” U.S. Attorney Preet Bharara said in a statement yesterday. “U.S. taxpayers with undeclared accounts -- wherever those accounts may be -- should know that their bank may be next, and they should pay what they owe the IRS before we come find them.”
In January, Otto Bruderer, a managing partner at St. Gallen-based Wegelin, entered the guilty plea to one count of conspiracy in Manhattan federal court. Wegelin last year became the first Swiss lender indicted in a crackdown on offshore firms suspected of helping Americans evade taxes.
Under the financial terms approved by Rakoff, the bank will pay $20 million in restitution to the U.S., forfeit $15.8 million in fees earned on the undeclared accounts and pay a fine of more than $22 million. Wegelin also agreed not to fight the $16.3 million seizure.
Wegelin’s lawyer, Richard Strassberg, argued against a term of probation, telling Rakoff it wasn’t necessary to force Wegelin to pay.
“I could send the corporate charter to jail,” Rakoff joked. “That would be interesting.”
Before approving the plea agreement, Rakoff questioned both sides whether the government had settled for too little after calling Wegelin’s crime “extraordinarily willful.”
Prosecutors claimed that U.S. taxpayers conspired with Wegelin and with three of its client advisers, Michael Berlinka, Urs Frei and Roger Keller, to hide income from the IRS. The individual defendants, who live outside the U.S., were indicted in January 2012 and haven’t appeared in court to answer the charges. The bank held more than $1.2 billion in assets not declared to the IRS, according to the indictment.
The U.S. said Wegelin and the three advisers wooed U.S. clients fleeing UBS AG, the largest Swiss bank, after an investigation of that company became public. UBS avoided U.S. prosecution in 2009 by admitting it aided tax evasion, paying $780 million and handing over data on 250 accounts. It later disclosed information on about 4,450 more accounts.
Wegelin opened new undeclared accounts for at least 70 U.S. taxpayers who were former UBS clients, according to the indictment. Most of those clients were given an internal code of “BNQ,” indicating the accounts were undeclared.
The effort to recruit UBS clients was backed by Wegelin’s senior management, according to the indictment.
Wegelin believed UBS was targeted by prosecutors for actions the bank had taken in the U.S., Strassberg told Rakoff. Because Wegelin had no offices in the U.S., executives believed it was safe from prosecution, he said.
“By pleading guilty, Wegelin acknowledges that this conduct was wrong despite its belief that, as a practical matter, it would not be prosecuted in the U.S. for this conduct because it had no branches or offices in the U.S. and because of its understanding that it acted in accordance with, and not in violation of, Swiss law and that such conduct was common in the Swiss banking industry,” Wegelin said in a Feb. 25 sentencing memorandum to Rakoff.
About 245 U.S. taxpayers with undeclared Wegelin accounts participated in a voluntary disclosure program, paying back $13.3 million in unpaid taxes and interest, according to prosecutors. Taxpayers who didn’t enter the disclosure program face possible criminal prosecution.
Earlier in the case, Wegelin declined to answer the charges or appear in court, prompting Rakoff to declare the bank a “fugitive.”
Wegelin said in its sentencing memorandum that U.S. accounts never made up more than about 5 percent of the bank’s clients.
Wegelin was founded in 1741 by a textile merchant in St. Gallen, a small city near the German-Austrian border, the bank said in its sentencing memorandum. After 250 years of control by Wegelin’s founding family, the bank sold a majority stake to outside partners. Wegelin had a single branch with just 30 employees in the 1990s when Bruderer and Konrad Hummler joined as managing partners. Over just a decade, the two men grew Wegelin into a bank with 12 branches and more than 700 employees, it said.
The indictment of the Wegelin client advisers in January 2012 marked “the beginning of the end” for the bank, it said.
“Prominent individual and institutional clients, egged on by competitors predicting Wegelin’s imminent indictment and collapse, fled to the perceived safety of other financial institutions,” Wegelin said in the memorandum. Key employees were recruited by competing banks and Wegelin faced the possibility of breaching contracts with counterparties if it were charged, the bank said.
Wegelin, which had $25 billion in assets in December 2010, announced Jan. 27 that it had agreed to sell its non-U.S. business to Switzerland’s Raiffeisen Group. In the announcement, Wegelin said any liability for the firm’s U.S. business would remain with the current partners. Wegelin didn’t disclose the sale price. Wegelin is in the process of winding up its U.S. accounts, it said.
The case is U.S. v. Wegelin & Co., 12-cr-00002, U.S. District Court, Southern District of New York (Manhattan).