On February 2, 2012, Wegelin & Co., Switzerland’s oldest private bank, became the first overseas bank to be indicted by the United States for aiding tax fraud—but it may not be the last. The company is one of at least 11 banks under criminal investigation by the U.S. Department of Justice (DOJ)—a list that is rumored to include banks such as Credit Suisse, Julius Baer, Zürcher Kantonalbank and Basler Kantonalbank. Wegelin was targeted for having helped wealthy Americans evade taxes on at least $1.2 billion from 2002 through 2011. Its colorful leading partner, Konrad Hummler, probably did not help their case when he apparently called America the “worst aggressor since the Second World War” for its efforts in cracking down on Swiss banks.

Wegelin’s unprecedented indictment is part of the U.S. Government’s continuing effort to stop Americans from evading taxes by storing their money overseas.  The crackdown on foreign banks involves “undeclared accounts” which hold income that was never reported to the U.S. Internal Revenue Service (IRS).  The U.S. is seeking to force the banks to turn over all their clients’ names for such accounts.  To date, it has been difficult for the U.S. to do so in the largest of the tax havens, Switzerland, due to the country’s narrow reading of tax evasion law and other bank secrecy laws.  Thus, DOJ decided to up the ante by issuing an indictment.   

Wegelin, in response to the indictment, refused to even show up in the U.S. courts—a move which caused the court to declare it a “fugitive.”  The bank’s defense was that it had not been properly served with a criminal summons, but it remained clear that DOJ would nonetheless try to bring the case forward.  For Wegelin, the damage had already been done. Investors saw the writing on the wall and began to withdraw their assets from the bank—so much so that Wegelin, in an attempt to save some of their employees’ jobs, decided to sell most of its assets to another Swiss bank, effectively bringing an end to the 270-year-old bank.   

While Wegelin was the first indictment of an overseas bank, warning shots had already been fired in 2009.  That was the year that the largest Swiss bank, UBS, avoided prosecution by paying the U.S. government $780 million, disclosing information about over four thousand accounts and admitting that it had aided tax evasion.  Now, the Swiss government is seeking a settlement for the entire Swiss banking industry encompassing more than 300 banks—which could ultimately result in the disclosure of account information for thousands of U.S. taxpayers.  Negotiations have been unsuccessful so far with the Swiss government, which is said to be demanding that the U.S. waive criminal prosecution of the banks.

Regardless of a possible settlement, it appears Swiss law may be in for a change.  U.S. criminal laws apply to foreign banks that do business in the United States even if the banks have no U.S. branches.  This allows DOJ to pursue foreign banks such as Wegelin for having aided and abetted tax evasion.  DOJ strategy is to pursue those banks who refuse to produce the names of U.S. taxpayers who are account holders.  However, even if a Swiss bank was willing to hand over a client’s information, as many of them are, they currently have many difficulties in doing so.  First and foremost, Swiss law makes it a criminal offense to even reveal a client’s identity.  Thus, Swiss banks feel caught between a rock and a hard place and are stuck looking for a way out of the current entanglement. 

These developments have lead to increasing pressure on Swiss lawmakers which culminated in the passage of an amendment to the U.S. Tax Treaty by the Swiss Parliament on March 5, 2012.  Before the amendment, the U.S. had to supply a name and address to obtain account information from a Swiss bank.  Now, the U.S. will be able to ask the banks to disclose names of U.S. taxpayers who exhibit certain “behavioral patterns” indicating tax evasion under U.S. law, such as trying to conceal who owns the account through the use of a trust.  However, the treaty must be ratified by the U.S. Senate before it can be implemented.

With the potential change in Swiss law and more aggressive DOJ prosecutions it is likely to become much more difficult for American citizens to hide their money abroad.  DOJ’s Tax Division has stated that its “top litigation priority is the concerted civil and criminal effort to combat the serious problem of non-compliance with our tax laws by U.S. taxpayers using secret offshore bank accounts.”  In turn, the IRS on January 9, 2012, initiated its third Offshore Voluntary Disclosure Program to allow such individuals to avoid criminal prosecution and come into compliance.  Under the previous two disclosure programs in 2009 and 2011, over 33,000 taxpayers stepped forward, bringing in more than $4.4 billion in taxes and penalties.  The voluntary disclosure program allows individuals to receive reduced penalties for working with the IRS to disclose their undeclared income. Those seeking to come into compliance are encouraged to consult experienced legal counsel to see if the voluntary disclosure program is applicable to their situation.