There was a time when offshore financial secrecy was an absolute. It didn’t matter if you were a dictator
plundering the wealth of your own nation, an illegal arms dealer, a money
launderer, a corrupt politician, a trafficker in human lives or simply a tax
evader … what happened in a financial secrecy jurisdiction stayed in the financial
secrecy jurisdiction. Nowhere was that
more sacrosanct than in Switzerland, a great nation made up of a great peoples
that had embraced hundreds of years of absolute financial secrecy as a rich
national tradition … and then there was UBS.
In February of 2009, UBS AG, the largest international bank
in Switzerland admitted in a deferred prosecution agreement that it had
conspired with United States taxpayers in committing the criminal act of tax
evasion. It didn’t just accomplish this
by sitting in Geneva or Zurich or Lucerne waiting for U.S. taxpayers to show up
on their doorsteps, it accomplished this by sending it’s employees secretly
into the United States where they engaged in illegal banking activities that included
soliciting U.S. taxpayers to open secret bank accounts with full knowledge that
it was helping them commit tax evasion.
This wasn’t Swiss bankers doing what they do legally in Switzerland …
this was Swiss bankers doing what they do ILLEGALLY while standing upon the
sovereign soil of the United States of America.
UBS ultimately agreed to plead guilty to a criminal charge of conspiracy,
paid a $780 million fine, agreed to exit the U.S. cross-border banking business
and turned over to the IRS the identities and account records of nearly 5,000
high wealth U.S. clients with secret offshore bank accounts.
Enter Wegelin Bank, the oldest private bank in Switzerland,
which had no concerns about its own exposure to U.S. laws. After all, unlike UBS it had no operating
divisions and no branch offices in the United States, hence no exposure they
reasoned. They were so confident in
their belief that in August of 2009 Konrad Hummler, a managing partner of
Wegelin, wrote an 8-page missive titled “Farewell America” in which he attacked
the United States for its efforts at curbing offshore tax evasion and said that Wegelin was in the
process of recommending that its clients exit all direct investments in United
States securities. According to the
indictment, Wegelin was also in the process of campaigning UBS’s departing U.S.
clients to move their secret accounts to Wegelin where they could continue to remain
secret and tax-free.
3, 2013, that same Konrad Hummler appeared before a United States federal
district court judge in New York City where bank officials pleaded guilty to
the criminal charges and acknowledged that for nearly a decade the firm had
helped more than a 100 wealthy American customers evade taxes by hiding more
than $1.2 billion in secret accounts. Those
officials further acknowledged that the bank believed it could not be
prosecuted in the United States because it had no offices here, and had acted in
accordance with Swiss law. Of particular
interest, they also said that this type of conduct was a common practice in the
Swiss banking industry.
in addition to pleading guilty to the criminal charges and paying $74 million
in fines, restitution and forfeited funds, the bank has announced it is closing
its doors. The oldest private bank in
Switzerland, founded in 1741, is closing after becoming the first foreign bank
in history to plead guilty to tax evasion charges in the United States, all
while maintaining no physical presence in the U.S.
the bank had failed to take into account when it decided to pursue UBS’s former
tax evading clients was that it did maintain a correspondent account in the
United States as a necessary vehicle for funds transfers between the bank and
its U.S. clients. It also failed to
consider the reputational and business risks associated with being indicted for
helping U.S. taxpayers commit tax evasion in a post-UBS world. In so doing, it has also set a precedent that
will make it that much easier for the IRS and the Department of Justice to
pursue other offshore banks that conspire with U.S. taxpayers to commit tax
evasion, even if they have no physical presence in the U.S.
Well “offshore” certainly is not what it once was. Of course there are the hangers on who still
want to cling to the belief that somehow the good old days days will return
someday, but that is very unlikely. IRS and
the U.S. Department of Justice have come into a treasure trove of information
about offshore banks, private bankers, attorneys, accountants and others who promote,
facilitate and enable offshore tax evasion through its incredibly successful offshore
voluntary disclosure programs. They are actively
and aggressively mining data provided by more than 38,000 U.S taxpayers to
identify the offshore banks and professionals who make it all possible.
Their efforts have naturally been focused initially on
identifying and targeting those who are the most egregious in their tax evasion
activities. However, can there be any
doubt that there are other banks, bankers, and professionals on the radar
screen. One has to wonder who is going
to deliver the next black eye to the offshore world … will it be another bank
in Switzerland … perhaps one in the Caribbean … or maybe one in the Far
East. Either way, for those of us who
work in and around the “offshore world” these are interesting times we live in.
Leona Helmsley, the fabulously wealthy owner of luxury
hotels in New York City, once famously said that “only the little people pay
taxes” … Bob Dylan, the legendary
singer/songwriter, once famously said that “The Times They Are a-Changin’ ” … Bob Dylan was right.