Prosecutions of offshore banks may help turn tide against secrecy

McClatchy Washington BureauJuly 3, 2013 

— On a cold winter’s day in the storied borough of Brooklyn, a car rolled to a stop at an appointed time on an appointed street. An attentive adult sent out a scurrying 5-year-old child to hand over a brown paper bag.

Inside that bag was about $150,000 in cash. The person receiving the cash was known only as Client 2, who got a transfer from Client 1. Both were apparently unknown to each other. Their clandestine transaction was arranged by Josef Beck, according to a federal indictment. The U.S. accused the Swiss adviser of working closely with Swiss banks to help Americans access their undeclared money.

It sounds like the stuff of a Hollywood movie, but it’s just one of many eye-popping tales buried in thousands of pages of court documents reviewed by McClatchy and used in the prosecution of Wegelin & Co., Switzerland’s oldest bank, whose origins date to 1741.

Wegelin officials pleaded guilty in January to helping Americans shelter taxable income in Switzerland, and sentencing was March 4. It marked a major victory for Preet Bharara, the U.S. attorney for the Southern District of New York. Wegelin was ordered to pay about $58 million on top of $16.3 million in forfeitures already obtained by U.S. authorities.

From clandestine meetings to phony foundations described in federal indictments, the secret world of offshore banking and the lengths to which Americans have gone to avoid taxes point to the complexities Congress will confront as it embarks on comprehensive tax restructuring. Fully 45 percent of Americans who’ve taken advantage of the IRS’s tax amnesty program held accounts in Switzerland.

The issue of offshore bank accounts has trailed politicians in recent years. A $3 million declared Swiss account and a number of holdings in the Cayman Islands dogged the campaign of GOP presidential nominee Mitt Romney last year.

Missouri Democratic Sen. Claire McCaskill wrestled with criticism on the campaign trail that her husband, Joseph Shepard, maintained an offshore tax haven in Bermuda. Treasury Secretary Jack Lew faced tough confirmation-hearing questions over an investment in an offshore fund.

What makes the Wegelin prosecution intriguing is the voluminous court documentation describing how the Swiss bank aggressively courted American account holders at rival Swiss giant UBS, which eventually reached a settlement with U.S. prosecutors:

There’s Client Q, a California man who sent his son to Switzerland to move $7.1 million into Wegelin and not report it to U.S. tax authorities. There was Client A, a naturalized U.S. citizen in Boca Raton, Fla., who on instructions from Wegelin communicated about the offshore account only during trips to the Caribbean island of Aruba, where she and her husband could access the $2.3 million they had stashed in Switzerland. Aruba markets itself to tourists as “One Happy Island.”

In 2005, Wegelin held about $245 million in undisclosed accounts owned by Americans, according to prosecutors. In charging documents, they said the sum had grown to more than $1.2 billion in 2010 thanks to American depositors who fled UBS during its prosecution and eventual settlement.

Coming after the February 2009 deferred prosecution settlement with UBS, the Wegelin prosecution may mark a turning point.

“It’s a significant step forward in the U.S. war against bank secrecy. Really, the concept of hiding accounts in Switzerland is over,” said Bryan Skarlatos, a tax attorney at the New York law firm of Kostelanetz & Fink LLP who works with clients to disclose their offshore financial holdings.

A former prosecutor who was involved in the UBS and Wegelin cases said that was mostly true about large banks but not necessarily the 24 government-owned cantonal, or state, banks in Switzerland.

“My best guess is that a lot of the behavior has moved to the canton banks,” which are smaller and can avoid detection more easily, said the former prosecutor, who demanded anonymity in order to speak freely.

Switzerland has long enjoyed a unique global status, with strict bank secrecy laws that encourage citizens everywhere to skirt paying their taxes at home because tax evasion is a crime in the host countries but not to the Swiss if it didn’t occur in their country.

Wegelin’s sentencing left some loose ends. The Swiss bank held 684 accounts that belonged to American citizens, 245 of whom took advantage of an Internal Revenue Service voluntary disclosure program and paid back taxes with interest totaling more than $13 million, according to court filings. That leaves 439 accounts belonging to Americans who, as of March, hadn’t claimed ownership and who prosecutors aver owe more than $23 million in back taxes.

A federal judge in January allowed prosecutors to have the IRS issue a summons in order to require UBS to produce information about U.S. taxpayers with accounts that transferred to Wegelin and other Swiss banks.

“This summons is the latest step in our efforts to identify and prosecute U.S. taxpayers who think they can evade their legal responsibility to pay taxes by secreting their money away in anonymous offshore accounts at Wegelin and other banks,” Bharara said in a January statement.

The Justice Department issued a similar “John Doe” summons April 30 that allows the IRS to seek records about U.S. offshore accounts that were transacted through a special account at Wells Fargo, used by Canadian Imperial Bank of Commerce FirstCaribbean International Bank.

The former federal prosecutor said that many American-owned accounts at Wegelin appeared to involve inherited wealth, where parents had established but never declared the accounts that had since passed on to their children.

“There was a distinction between some who had passively held accounts there, and others who took affirmative actions” to hide funds, said the former prosecutor.

It still leads to the question of who are these Americans hiding money abroad? Are some involved in organized crime? Do they have links to U.S. politics?

Bharara’s office won’t comment. The Wegelin charging documents refer to dozens of unidentified co-conspirators “not named as a defendant herein.” Those names have never made public, yet there’s no explanation of why they’re not being prosecuted. They’re not listed as cooperating witnesses.

McClatchy asked the same questions of the IRS. Spokesman Dean Patterson declined to discuss how many participants have been in the IRS voluntary disclosure program or how many belatedly declare holdings from Swiss bank accounts versus offshore holdings elsewhere.

In 2002, IRS officials told Congress there were 1 million to 2 million undeclared offshore accounts controlled by Americans. Eleven years later, the IRS can’t or won’t provide a current estimate.

The agency’s Offshore Voluntary Disclosure Program allows holders of undeclared offshore accounts to come clean about their assets and pay taxes owed plus a 27.5 percent penalty. Last June, the IRS reported that $5 billion had been collected from almost 35,000 taxpayers who declared offshore accounts under programs that started in 2009.

The Treasury Department, through its Financial Crimes Enforcement Network, compiles a list of properly declared offshore accounts with assets above $10,000. There were 671,347 such accounts declared to U.S. authorities last year, more than double the 322,414 accounts declared in 2007 and almost four times the 170,000 reported in 2002. The sharp uptick began in 2009, the year of the aggressive prosecution of UBS, thus the numbers suggest that more account holders are coming into legality.

Yet the Wegelin case documents showed how Swiss banks and their affiliated Swiss client advisers went to extraordinary lengths to help Americans evade taxes in undeclared offshore accounts.

Wegelin associate Hans Thomann allegedly would call U.S.-based account holders to tell them he’d be in New York to visit “relatives” and asked about taking back “gifts,” what a federal indictment described as “code for cash.” Federal investigators described the case of another Client 2 from New Jersey, whose account in 2007 had exceeded $1.5 million, where Thomann collected sums as large as $140,000 for deposit at Wegelin.

Thomann scheduled at least 15 meetings at a Manhattan Hotel in New York, prosecutors said, chosen because it didn’t have security cameras in the restaurant at the time.

Prosecutors think that 30 percent of the U.S. accounts at Wegelin were established in the names of sham companies in places known for tax evasion such as Panama, Nevis, Liechtenstein and the British Virgin Islands.

Court documents also show how Wegelin and affiliated middlemen asked American account holders to limit withdrawals to sums under $10,000, an amount above which banks must notify authorities about the transaction. The use of multiple payments under $10,000 is known in banking circles as “smurfing,” and it’s used in drug trafficking and all sorts of money-laundering schemes.

Successive efforts to combat money laundering, drug trafficking and later terrorist financing have spotlighted the risks from offshore accounts. The recent prosecutions cap an effort that began in earnest in the mid-1990s, and many large global banks think they’re now being scapegoated.

“We’ve radically improved reporting and account monitoring,” said John J. Byrne, the executive vice president of the trade group Association of Certified Anti-Money Laundering Specialists, adding that many offshore havens have done what the United States asked yet face tarnished reputations. “I do think the offshore connotation has dramatically changed since the 1990s, generally for the good.”

Email: khall@mcclatchydc.com; Twitter: @KevinGHall

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