COMMENT: Picking Through The Rubble Of Wegelin's Demise In US

Tom Burroughes Group Editor London 8 March 2013

COMMENT: Picking Through The Rubble Of Wegelin's Demise In US

Here are some brief thoughts by an experienced US lawyer about the implications of the recent Wegelin tax evasion case.

In the wake of the US penalties imposed on Swiss private bank Wegelin, which has now ceased to exist under a name that dates back to 1741, this publication interviewed lawyer Dina Kapur Sanna, of Day Pitney, about the case and its implications. She is a partner in the individual clients department and practices in the area of US federal tax planning for high net worth individuals with property interests and/or heirs in more than one country.

To read the latest developments in the Wegelin case, which is the first example of a foreign bank to be charged and prosecuted in this way in the US, click here.

The comments below cover some familiar ground - such as the UBS case of 2009 and the development of the FATCA Act. However, they also predict what might be the effect on non-domestic US firms more broadly. 

As far as Swiss banks in general are concerned, what is the overall significance of this development?  In broad terms, is it believed that other US nationals are still likely to have such accounts, or is it increasingly being disclosed?

2013 heralds a watershed moment for Swiss banks. The $58 million in fines and penalties to which Wegelin & Co was sentenced on 4 March reflects the plea agreement between Wegelin and the US government after it admitted to helping Americans evade taxes hide more than $1.2 billion in undisclosed Swiss accounts.

In the Justice Department announcement, Preet Bharara, US attorney for the Southern District of New York, said the bank "has now paid a steep price for aiding and abetting tax fraud”. Other taxpayers with undeclared accounts, no matter where those accounts may be, "should know that their bank may be next”, he said. He added that it was a "watershed moment in our efforts to hold to account both the individuals and the banks - wherever they may be in the world - who are engaging in unlawful conduct that deprives the US Treasury of billions of dollars of tax revenue”.

Many believe the UBS deferred prosecution agreement signalled the end of Swiss bank secrecy. This refers to the criminal case brought by the Justice Department in 2009 against UBS which ended with the bank avoiding prosecution by agreeing to pay $780 million to the US and handing over account details of 4,450 US customers. Since then many other high profile Swiss banks have come under investigation. 

At the same time, the IRS has announced a series of three Offshore Voluntary Disclosure Programs targeted towards US taxpayers with unreported foreign income. As of the middle of 2012, these programs had resulted in the collection of more than $5 million of back taxes, interest and penalties. The Offshore Voluntary Disclosure Programs are part of a wider effort by the IRS to stop offshore tax evasion and ensure tax compliance. A big part of this effort is implementing third-party reporting provisions of the Foreign Account Tax Compliance Act (FATCA).

FATCA was enacted by Congress in 2010 as part of the Hiring Incentives to Restore Employment Act of 2010. It requires foreign financial institutions to report to the IRS information about financial accounts held by US taxpayers or by foreign entities in which US taxpayers hold a substantial interest. As of last month, there is a US-Switzerland agreement which requires Switzerland to direct all reporting Swiss financial institutions to register with the IRS by 1 January, 2014, and comply with FATCA due-diligence, reporting, and withholding requirements. Switzerland also agrees to instruct reporting Swiss financial institutions to request certain information from pre-existing account holders and report it to the IRS and to obtain consent from new account holders to report this information as a condition of opening the account.

As a result, time is rapidly running out for taxpayers who think they can hide from the US government. But it is worth noting that not all delinquent US taxpayers are tax evaders. Many are born abroad to US citizen parents and unaware of their secondary citizenship derived through birth; others are green card holders who left the US but did not properly surrender their green cards for US tax purposes. For these taxpayers, compliance comes at a steep cost.

The Wegelin case highlighted the risks that old-style banks face when their partners have unlimited liability. Do you think that business model is on the way out?

The Wegelin case marks the first time the US investigation has caused a foreign institution to close. It may be that Wegelin became a target because it announced publicly that it would not co-operate with the US and in effect dared the US to do something about it.

What is interesting about Wegelin is that, unlike UBS, it had branches only in Switzerland and was bound only by Swiss bank secrecy laws and yet it still pleaded guilty. Having sold off all its non-US businesses, it is speculated that the bank's partners were keen to end a protracted legal fight with the US in order to recover as much of the sale proceeds as possible. This may have been piqued by the fact that Wegelin's partners had personal financial liability for the bank.

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