When Swiss bankers Stephan Fellman, Otto Huppi and Christof Reist began their six-year campaigns to lure US taxpayers into opening accounts at the Swiss financial institution Kantonal Bank Zurich (KBZ), they advertised their services as discreet and operating under the radar of US agencies, particularly the Internal Revenue Service. Now, thanks to an indictment unsealed last week in Manhattan federal court, the three bankers have the US government’s full attention, as they face criminal charges of conspiracy to commit tax fraud.
Starting in 2007, the indictment says, a total of 190 US taxpayers entrusted about $423 million to the three “client advisors” at KBZ. The bankers advised the taxpayers on how to conceal the funds from the IRS, even suggesting codenames for the accounts in which the funds would be held. When rumors spread of the IRS investigation and imminent prosecution of UBS, the three bankers enticed customers from UBS to KBZ with confident offers of airtight protection from exposure to the IRS.
US customers who were intent on beating the IRS out of their share of US income tax came from across the United States to Switzerland. Huppi, a US citizen, would at times travel to the US to contact clients. The indictment, which was returned on December 12, lists US persons from Arizona, California, Florida, Illinois and Pennsylvania.
The indictment did not reveal names of customers or even the name of KBZ. According to Bloomberg.com, KBZ confirmed that two current and one former employee were charged with US tax evasion.
KBZ is the largest cantonal bank in Switzerland. Cantonal banks are local institutions with offices and assets in a particular canton, or region, of the famous bank secrecy haven. KBZ has no affiliates in the US.
A spokesperson with the US District Court in the Southern District of New York said Fellman, Huppi and Reist have not been arrested and are fugitives. Each could face a maximum five year prison term. All three are believed to be in Switzerland, which typically does not extradite persons for tax crimes in another country.
Indictments continue against Swiss banks and individuals
This case against Fellman, Huppi and Reist is a new chapter in the continuing saga of the US tax battle with Switzerland about the use of Swiss bank accounts to harbor billions of dollars outside the taxing reach of the IRS. The bankers are just three of several individuals indicted for tax conspiracy in the last year. In January 2012, three Swiss bankers with Wegelin were charged with conspiracy to help hide more than $1.2 billion from the IRS. Additionally, two Swiss financial advisers who assisted taxpayers in concealing $267 million were indicted in April 2012.
Triggered by the landmark UBS case in 2009, the hunt for other banks holding undisclosed accounts of US taxpayers in the same fashion has accelerated. UBS handed over to the IRS the names of 4,450 account holders, a fraction of the 52,000 US persons the IRS in initially sought from the bank. UBS also paid $780 million and admitted to participating in criminal activity by helping US accountholders evade taxes.
This month, Wegelin & Co., Switzerland’s oldest private bank announced it would be closing permanently after it admitted to charges of conspiracy in helping US taxpayers evade taxes on at least $1.2 billion. Wegelin agreed to pay $57.8 million to the United States and may be required to provide the names of US account holders. Wegelin has no branches in the US, but had direct access to the US banking system through a correspondent bank account held with UBS.
Last week, Wegelin announced it would be closing its doors permanently.
In a statement on February 2, the US Justice Department said, “This is the first time an overseas bank has been charged by the United States for facilitating tax fraud by U.S. taxpayers.”
Swiss bank secrecy imperiled as Switzerland signs FACTA agreement
It is not just tax evasion that is at issue in these cases. A tantalizing aspect is the number of financial criminals who made their money from fraud, corruption, money laundering, identity theft, for example, are hiding among the “pure” tax evaders.
Suppositions lead to eye-popping numbers. Of the 52,000 US taxpayers who hid fortunes at UBS until 2009, if only 10% of them derived their wealth from financial crimes other than tax evasion, and each met the UBS requirement of a minimum $5 million opening deposit for these accounts, an astounding $26 billion was under the control of this small number of US persons.
Some experts believe that the continuing pressure from the Justice Department and IRS on Swiss banks and bankers, and the reputational harm that ensues, is part of an ongoing strategy to convince the Swiss government that its age-old policies of bank secrecy need to be changed.
There are signs that official Swiss views on bank secrecy may be softening. In December, Switzerland became an IRS partner in implementing the US Foreign Account Tax Compliance Act (FATCA) by signing an “Intergovernmental Agreement” with the US Treasury Department. In general, this obligates Swiss financial institutions to report accounts of US individuals with more than $50,000. Ideally, this agreement, which is still awaiting approval by the Swiss Federal Council and Swiss Parliament, would take effect on January 1, 2014.
IRS offers Voluntary Disclosure Program for offshore evaders
To reap the rewards of the thousands of US tax evaders fleeing from Swiss institutions, in 2009 the IRS launched an amnesty program known as the Offshore Voluntary Disclosure Program (OVDP). Taxpayers who voluntarily disclose their unreported offshore accounts face a one-time, fixed penalty applying to only one year of unfiled taxes. While the IRS does not guarantee a taxpayer who participates in the program will avoid criminal prosecution and audit, the agency indicates it would be unlikely to pursue charges.
Under this program the IRS has collected about $5 billion in taxes, penalties and interest from some 34,500 disclosures in the past four years. After the UBS scandal erupted in 2009, an estimated 15,000 US taxpayers disclosed their offshore accounts to the IRS in just the first year of the program.
Bethany Kroes, an attorney at Mahany & Ertl, in Milwaukee, who represents taxpayers with offshore accounts, said, “As soon as indictments like this come down, the phone starts ringing off the hook. There’s definitely a reactionary feel. A lot of people feel like they can just ignore [their tax delinquency]… and then they realize the IRS is actually prosecuting.”