Bank to close after US conspiracy admitted

NATE RAYMOND AND LYNNLEY BROWNING
Last updated 17:20 04/01/2013

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Switzerland's oldest private bank says it will shut its doors permanently after more than 2 1/2 centuries, following its guilty plea to charges of helping wealthy Americans evade taxes through secret accounts.

The plea, in a United States District Court in Manhattan on Thursday (Friday, NZ time), marks the death knell for one of Switzerland's most storied banks, Wegelin & Co, whose original European clients pre-date the American Revolution.

It is also potentially a major turning point in a battle by US authorities against Swiss bank secrecy.

A major question was left hanging by the plea: Has the bank turned over, or does it plan to disclose, names of American clients to US authorities? That is a key demand in a broad US investigation of tax evasion through Swiss banks.

"It is unclear whether the bank was required to turn over American client names who held secret Swiss bank accounts," said Jeffrey Neiman, a former federal prosecutor involved in other Swiss bank investigations who is now in private law practice in Fort Lauderdale, Florida.

"What is clear is that the justice department is aggressively pursuing foreign banks who have helped Americans commit overseas tax evasion."

Charles Miller, a department spokesman, declined to comment.

Wegelin, a partnership of Swiss private bankers, admitted to charges of conspiracy in helping Americans evade taxes on at least US$1.2 billion (NZ$1.5b) for nearly a decade. Wegelin agreed to pay US$57.8 million (NZ$70.2m) to the United States in restitution and fines.

Otto Bruderer, a managing partner at the bank, said in court that "Wegelin was aware that this conduct was wrong".

He said that "from about 2002 through about 2010, Wegelin agreed with certain US taxpayers to evade the US tax obligations of these US taxpayer clients, who filed false tax returns with the IRS."

INITIALLY VOWED TO RESIST

Last February, when Wegelin became the first foreign bank in recent memory to be indicted by US authorities, it vowed to resist the charges.

The bank, founded in 1741, was declared a fugitive from justice when its Swiss-based executives failed to appear in US court.

The surprise plea effectively ended the US case against Wegelin, one of the most aggressive bank crackdowns in US history.

"Once the matter is finally concluded, Wegelin will cease to operate as a bank," Wegelin said in a statement on Thursday (Friday, NZ time) from its headquarters in the remote, small town of St Gallen next to the Appenzell Alps near the German-Austrian border.

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But the fate of three Wegelin bankers, indicted in January 2012 on charges later modified to include the bank, remains up in the air. Under criminal procedural rules, the cases of Michael Berlinka, Urs Frei and Roger Keller are still pending.

A corporate indictment can be a death knell. In 2002, accounting firm Arthur Andersen went out of business after being found guilty over its role in failed energy company Enron Corp. A 2005 Supreme Court ruling later overturned the conviction, but it was too late to save the company.

Wegelin is already a shadow of its former self. The bank had about a dozen branches, all in Switzerland, at the time of its indictment, but moved quickly to wind down its business, partly through a sale of its non-US assets to regional Swiss bank Raiffesen Gruppe.

Dozens of Swiss bankers and their clients have been indicted in recent years, following a 2009 agreement by UBS AG, the largest Swiss bank, to enter into a deferred-prosecution agreement, turn over 4450 client names and pay a US$780m (NZ$947m) fine after admitting to criminal wrongdoing in selling tax-evasion services to wealthy Americans.

'WAKE-UP CALL'

William Sharp, a tax lawyer in Tampa, Florida, with many US clients of Swiss banks, said Wegelin's plea "should serve as a wake-up call" to the world banking community servicing US clients to takes steps to ensure compliance with US law.

Sharp called Wegelin's change of heart "shocking".

Banks under US criminal investigation in the wider probe include Credit Suisse, 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, sources familiar with the probes previously told Reuters. So are UK-based HSBC Holdings and three Israeli banks, Hapoalim, Mizrahi-Tefahot Bank and Bank Leumi, sources also said previously.

Those banks have not commented on the inquiries.

In a statement after the plea, Assistant US Attorney General Kathryn Keneally said it was a top justice department priority "to find those who continue to shirk their tax obligations", as well as those who help them and profit from it.

"The best deal now for these folks is to come in and 'get right' with the IRS, before either the IRS or the justice department finds them," she said.

Under its plea, Wegelin agreed to pay the US$20m (NZ$24.3m) in restitution to the IRS as well a civil forfeiture of US$15.8 million (NZ$19.2m), the department said.

Wegelin also agreed to pay an additional US$22.05m (NZ$26.76m) fine, the department said. US District Judge Jed Rakoff, who must approve the monetary penalties, set a hearing in the case for March 4 for sentencing.

Last year, the US government separately seized more than US$16m (NZ$19.4m) of Wegelin funds in a UBS AG account in Stamford, Connecticut, via a civil forfeiture complaint.

Since Wegelin has no branches outside Switzerland, it used UBS for correspondent banking services, a standard industry practice, to handle money for US-based clients.

In court papers, Bruderer said Wegelin "believed it would not be prosecuted in the United States for this conduct because it had no branches or offices in the United States 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".

- Reuters

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