Now it is narrowly true that the filing of a criminal suit by US prosecutors did force the closure of a bank. But as one might suspect, there is vastly less here than meets the eye. And that isn’t simply because the institution in question was a Swiss bank I am pretty certain you never heard of.
The oldest private bank in Switzerland, Wegelin, decided to try to fill the gap in the tax evasion market that opened up when the US went after UBS. From 2002 to 2010, the bank helped US clients file bogus tax returns, enabling them to escape paying taxes on about $1.2 billion of assets. The US decided to go after them (as it is with other Swiss banks, including Julius Baer and Credit Suisse). The US filed suit, first against Wegelin executives, then the bank itself. After the indictment last Feburary, the bank said it would fight. Instead, it pleaded guilty, agreed to pay $57.8 million in restitution and fines and said it would cease operating as a bank.
Wow, what a victory, right?
Let’s look at the sequence, which you can discern simply from reading the Financial Times, emphasis ours:
1. The US charged three bankers as well as implicating a managing director
2. One week later, the bank sold “The bank…sold the bulk of its business to Swiss co-operative lender Raiffeisen, prompting the effective disappearance of Wegelin.” This transaction was a sale of assets, meaning any liabilities, such as litigation, remained with Wegelin.
3. The US indicted Wegelin one week after the sale to Raiffeisen.
In other words, there was pretty much nothing to sue by the time the US sued Wegelin. “The bulk of its business” leads me to believe this was an asset sale, meaning good assets were transferred to Raiffeisen, the liability and the license were left behind. The bank was closely held, and I would expect the overwhelming majority of the proceeds to have been distributed to the owners.
Don’t assume that the filing of the suit against the execs triggered the sale. You don’t do deals in a week. Now it is possible the deal was prompted by news of an investigation, and it was sped up by the suits against the staffers. Even so, it would have had to be very far along. So the US suit was tantamount to shutting the barn door after the horse was in the next county.
Nevertheless, the suit is getting plenty of play in the financial press and the blogosphere, no doubt because the DoJ wants to be seen as tough, particularly after the truly shameful $1.9 billion settlement with HSBC over money laundering. Bad enough that the prosecutor ‘fessed up that Treasury got it to stand down on filing a criminal suit; the penalty is simply wimpy given the seriousness of the bad conduct and the apparent viability of a prosecution. But even if you were to take this story at face value, it’s hardly impressive. This is an old but far from prominent Swiss bank. So if you are a not very powerful foreign institution, with little in the way of US operations, you have reason to be afraid of the authorities, at least if you are depriving them of tax revenue. Merely being a threat to the public at large, say by money laundering or stealing people’s homes, or wrecking the global economy, is another matter entirely.
The bank was pretty much dead, so the formal closure gives the Feds a scalp without costing the shareholders all that much. The real question is what the former owners had to cough up relative to the proceeds of the sale, and we spectators in the cheap seats have no ready way of finding out. And Al Jazeera (hat tip nathan) points out it isn’t clear whether the authorities got the names of the taxpayers that Wegelin was helping to escape the taxman:
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? This 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,” he said.
Charles Miller, a Justice Department spokesman, declined to comment immediately.
So while the public is likely to buy the official PR that the US has set a precedent in its efforts against evildoing banks, and more tough action will follow, banks will parse what happened more closely. My bet is they will see this as all hat, no cattle.