US Suit Forces Closure of Swiss Bank, or More Accurately, What Little Was Left of It

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?

Maybe not.

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.

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  1. Chris Engel

    At least the IRS is doing its part. They can ramp up these efforts, and the SEC can get their act together, and the OCC and FDIC thru the DoJ more aggressive, then we’ll have real justice perhaps.

  2. Student

    First, Wegelin was a partnership. So partners would have been liable with 100% of their net worth. I would guess that they now lost most of their net worth.

    Wegelin thought that Swiss government will protect them. That did not happen. Swiss government protects only UBS and CS.

    What makes this story especially sad is that Wegelin was NOT the worst offender.

    Take Credit Suisse for example. Their head of Private Banking – Walter Berchtold – actually became a whistleblower for the US government. To save his own skin, presumably. Think about what that means. First, CS courted clients in the US. Second, they blew the whistle on those clients?

    Legally, this means that first CS broke US laws and then CS broke Swiss laws. And it has yet to be shut down.

    Berchtold’s profile is no longer on CS website.

    1. Yves Smith Post author

      No, you have this wrong. They entered into a plea bargain. They don’t have any liability beyond what they paid.

      The US probably did not want to test their ability to enforce a judgment in the US against foreign nationals particularly since, as indicated below, this sort of evasion had been widely practiced and was considered legal in Switzerland (recall UBS and even the Swiss authorities fought the US for some time on the secrecy issue).

      To put it another way: the fact that they were theoretically liable personally did not mean they were practically liable. A Swiss court would have to be asked to enforce a US judgment. So the case would have been retried there. I could see any judgment being overturned, or at least severely cut back, in that arguably this behavior was considered kosher in Switzerland until the Swiss National Bank conceded the issue. So the conduct would not have been impermissible from 2002 to 2010, but say from 2008 or 2009 to 2010.

      From the Wegelin perspective, they probably faced at least $10 million of litigation (fighting the US case, not necessarily with a hope of winning but minimizing disclosures and building the best fact set for the case in Switzerland) and then fighting the effort to enforce the judgment in Switzerland. Plus you have the emotional wear and tear of years of fighting. And then they had the odds that they would lose. The flip side is how would the US know what the assets were sold for? Or even if they were told, was it dressed up in some ways the the regulators didn’t get (I’ve seen the economics of sales of servicers and other M&A muffed by the media, this is more common than you think). Or what the partners had hidden, and where (this is a big issue even in big ticket divorces in the US). You can’t judge the adequacy of the monetary charges unless you have all the pieces of the equation. We don’t, and I’m not certain the DoJ did.

      The real issue is how effective the US is in finding individuals who didn’t participate in the amnesty and shaking them down for $. As the Al Jazeera article indicates, it isn’t clear what the Feds got from the Wegelin bankers on this front.

    2. ebear

      Man, you are just not cynical enough! My guess is they knew damn well what would happen and rolled the dice betting they’d make enough off the former UBS clients plus the sale of the bank (planned far in advance) to offset any cost to themselves when the axe came down. They had an eight year run at a very lucrative trade, and being experts at tax evasion no doubt have their own stash somewhere well out of reach- Vanuatu, Netherlands Antilles or maybe North Korea…LOL!

      If what I just said isn’t true, then these people don’t deserve to be called bankers.

  3. scraping_by

    Switzerland is so 1940’s.

    Our current posterboy for tax evasion, the Honorable Mittens Romney, used the Caribbean to conceal assets. Luckily, no one’s so unsophisticated as to goggle at that.

    1. Capo Regime

      Yep and good democrat Al Gore was in a hell of a hurry to complete his sale of current TV to Al Jazeera before December 31ist and he did. Why? His 2012 new year resolution or could it be minimizing taxes……Lots of poster boys. Taxes are only for you little people!

      1. scraping_by

        Oh, as hereditary elite, Al’s no one’s Ralph Nader.

        The question is the public airing of dirty tax shelters. The American public has just had a serious education, courtesy of personal politics, of how easy you can become a free rider on this nation. And how advantageous it is.

        Mittens is no longer the Scary Clown who makes Barry look reasonable as he implements the neoliberal agenda and the Wall Street Grab. That job has shifted to Ohio for the remainder of the second term.

  4. diptherio

    “What is clear is that the Justice Department is aggressively pursuing foreign banks who have helped Americans commit overseas tax evasion,” he said.

    HAHAHA!!! Oooo, good one. What about foreign banks that help Americans, Mexicans, Colombians, Cubans, Iranians and others commit domestic money-laundering? The fine here, again, is a mere pittance: less than one half of one percent of the “hidden” money, which means the owners/managers of this pipsqueak little firm likely made out quite handsomely.

    Whoever said “crime doesn’t pay,” obviously did not work in finance.

    1. Capo Regime

      Right you are. Its always some low level trader or small bank. If its a big guy/firm its explained away or a trivial fine is levied (think Corzine or HSBC). Meanwhile if some poor 40k per year welder does not file or understates his income well he gets penalized at usurious rates and may find his automobile impounded. Ah justice in this delusional land…….all the justice you can afford and all the peace of mind and imunity you can buy…..

  5. IF

    German media isn’t quite as negative as you are on Wegelin. Yes, everyone noticed that the fine was pretty small (ignoring the destruction of the remaining bank). It is generally assumed that Wegelin will be used as a witness to the US prosecutors in future cases against a dozen or so other banks:
    “In court, Wegelin’s managers said they knew it was wrong, but thought they would not be prosecuted because it was legal in Switzerland and common practice in Swiss banking.

    Those last words in particular are causing huge concern. Some Swiss financial analysts are already speculating that Wegelin’s $58m fine, which many had expected to be higher, was kept low by the US authorities in return for Wegelin clearly implicating the rest of the Swiss banking community in tax evasion.”

    I admit, it is not clear yet what happened with the list of US clients with secret accounts. There seems to be some contradiction in different articles. Nevertheless, this case is seen in Germany as a blueprint to follow the US path in handling tax evasion in Switzerland. I am quite hopeful that this is going to end in the medium term with huge implications for Switzerland (probably none for the US).

    1. Yves Smith Post author

      Agreed that the key bit is if this process gets to the individuals who hid assets, We don’t know how successful the US will be, but it is keeping after it pretty relentlessly.

      What I am reacting to is the media headlines that treat the closure of the bank in the settlement as a big deal. In reality, the assets were transferred and the bank was effectively deal before it was indicted.

  6. ebear

    Swiss banks are like Swiss cheese – smelly and full of holes. What the world needs is a truly robust offshore bank – one with nuclear missiles that can target Washington should they ever be impertinent enough to start making demands.

  7. rob

    so what we know is that the US saw fit to indict a ham sandwich…;I mean a bank that was already emptied of funds and assets.what is just a hope and/or assumption;is that these “small potato’s” will in the future be used to go after the bigger fries……Not to bloody likely.

    Maybe someone can explain to me ,what was the actual percentage of those guilty, compared with those caught,in the “breaking the swiss banking privacy”,kabuki theatre.
    I remember a number like 50,000 account holders in the beginning.and the number who eventually “got caught”,was something like 4,000.And what they “got caught” for,I’m not sure.Meaning,what did each of them eventually plead down to…or something
    Does anyone have the “final” numbers on any of that stuff?

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