The US government has raised the stakes in its crackdown on Swiss banks through a hard-charging prosecution that has forced the closing of a 272-year-old Swiss firm for offering tax-evasion services to wealthy US citizens.
Tax lawyers and former prosecutors said on Friday that the closing of Wegelin & Co, Switzerland’s oldest private bank, served as a stark warning for some Swiss banks under investigation, especially smaller firms such as Wegelin.
Wegelin, founded in 1741, said on Thursday it would shut its doors permanently after pleading guilty to an indictment charging it with helping US citizens dodge taxes through secret accounts.
It was the first time the US forced a foreign bank to close because of its sale of tax-evasion services.
“The [US] Justice Department wanted a scalp to send a message to all the other banks, in particular the small cantonal and private banks,” said Christopher Rizek, a tax lawyer at Caplin & Drysdale in Washington and a senior former US Treasury Department tax official.
Around a dozen banks are under criminal scrutiny by the US Department of Justice, including Credit Suisse AG, which disclosed last July that 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, US sources familiar with the probes said previously. So are UK-based HSBC Holdings PLC and three Israeli banks, Hapoalim, Mizrahi-Tefahot Bank Ltd and Bank Leumi, US sources briefed on the matter said previously. Those banks have not commented on the inquiries.
The widening probe grew out of an investigation of Swiss bank UBS AG, which in 2009 entered into a deferred-prosecution agreement and paid a US$780 million fine after admitting to wrongdoing in selling tax-evasion services to wealthy US citizens.
Unlike UBS or Credit Suisse, both major global players widely regarded as “too big to fail,” Wegelin and the cantonal banks are smaller institutions unlikely to pose any systemic risk to the global financial system if indicted or put out of business.
As such, the old model in which UBS averted indictment and survived does not appear to be a road map going forward for smaller banks, tax lawyers said.
Jeffrey Neiman, a former federal prosecutor involved in criminal proceedings against UBS, said that “the cantonal banks that have similar exposure now have a blueprint to look at in order to see how to resolve their liability.”
However, the prosecution and closing of Wegelin did not sacrifice a significant number of jobs.
Although Wegelin had about a dozen branches, all in Switzerland, at the time of its indictment, it moved quickly to wind down its business, partly through a sale of its non-US assets to regional Swiss bank Raiffeisen Gruppe.
In contrast, after Arthur Andersen was found guilty for its role in the failed energy company Enron Corp, the accounting firm went out of business in 2002. A 2005 Supreme Court ruling later overturned the conviction, but it was too late to save the firm.
Wegelin’s plea offers other hints of things to come. The Swiss government has been at odds with the US over secrecy laws that govern bank-client data and the plea leaves open the question of how or whether the bank will disclose client data in the coming months.
Going forward, the role of the Swiss in resolving the logjam could be magnified.