by Dan Reeves Retired Senior Advisor, IRS Offshore Compliance Initiatives

There was a time when offshore financial secrecy was an absolute.  It didn’t matter if you were a dictator plundering the wealth of your own nation, an illegal arms dealer, a money launderer, a corrupt politician, a trafficker in human lives or simply a tax evader … what happened in a financial secrecy jurisdiction stayed in the financial secrecy jurisdiction.  Nowhere was that more sacrosanct than in Switzerland, a great nation made up of a great peoples that had embraced hundreds of years of absolute financial secrecy as a rich national tradition … and then there was UBS.

In February of 2009, UBS AG, the largest international bank in Switzerland admitted in a deferred prosecution agreement that it had conspired with United States taxpayers in committing the criminal act of tax evasion.  It didn’t just accomplish this by sitting in Geneva or Zurich or Lucerne waiting for U.S. taxpayers to show up on their doorsteps, it accomplished this by sending its employees secretly into the United States where they engaged in illegal banking activities that included soliciting U.S. taxpayers to open secret bank accounts with full knowledge that it was helping them commit tax evasion.  This wasn’t Swiss bankers doing what they do legally in Switzerland … this was Swiss bankers doing what they do ILLEGALLY while standing upon the sovereign soil of the United States of America.  UBS ultimately agreed to plead guilty to a criminal charge of conspiracy, paid a $780 million fine, agreed to exit the U.S. cross-border banking business and turned over to the IRS the identities and account records of nearly 5,000 high wealth U.S. clients with secret offshore bank accounts.

Enter Wegelin Bank, the oldest private bank in Switzerland, which had no concerns about its own exposure to U.S. laws.   After all, unlike UBS it had no operating divisions and no branch offices in the United States, hence no exposure they reasoned.  They were so confident in their belief that in August of 2009 Konrad Hummler, a managing partner of Wegelin, wrote an 8-page missive titled “Farewell America” in which he attacked the United States for its efforts at curbing offshore tax evasion and said that Wegelin was in the process of recommending that its clients exit all direct investments in United States securities.  According to the indictment, Wegelin was also in the process of campaigning UBS’s departing U.S. clients to move their secret accounts to Wegelin where they could continue to remain secret and tax-free.

On January 3, 2013, that same Konrad Hummler appeared before a United States federal district court judge in New York City where bank officials pleaded guilty to the criminal charges and acknowledged that for nearly a decade the firm had helped more than a 100 wealthy American customers evade taxes by hiding more than $1.2 billion in secret accounts.  Those officials further acknowledged that the bank believed it could not be prosecuted in the United States because it had no offices here, and had acted in accordance with Swiss law.  Of particular interest, they also said that this type of conduct was a common practice in the Swiss banking industry.

Now, in addition to pleading guilty to the criminal charges and paying $74 million in fines, restitution and forfeited funds, the bank has announced it is closing its doors.  The oldest private bank in Switzerland, founded in 1741, is closing after becoming the first foreign bank in history to plead guilty to tax evasion charges in the United States, all while maintaining no physical presence in the U.S.

What the bank had failed to take into account when it decided to pursue UBS’s former tax evading clients was that it did maintain a correspondent account in the United States as a necessary vehicle for funds transfers between the bank and its U.S. clients.  It also failed to consider the reputational and business risks associated with being indicted for helping U.S. taxpayers commit tax evasion in a post-UBS world.  In so doing, it has also set a precedent that will make it that much easier for the IRS and the Department of Justice to pursue other offshore banks that conspire with U.S. taxpayers to commit tax evasion, even if they have no physical presence in the U.S.

Well “offshore” certainly is not what it once was.  Of course there are the hangers on who still want to cling to the belief that somehow the good old days days will return someday, but that is very unlikely.  IRS and the U.S. Department of Justice have come into a treasure trove of information about offshore banks, private bankers, attorneys, accountants and others who promote, facilitate and enable offshore tax evasion through its incredibly successful offshore voluntary disclosure programs.  They are actively and aggressively mining data provided by more than 38,000 U.S taxpayers to identify the offshore banks and professionals who make it all possible.

Their efforts have naturally been focused initially on identifying and targeting those who are the most egregious in their tax evasion activities.  However, can there be any doubt that there are other banks, bankers, and professionals on the radar screen.  One has to wonder who is going to deliver the next black eye to the offshore world … will it be another bank in Switzerland … perhaps one in the Caribbean … or maybe one in the Far East.  Either way, for those of us who work in and around the “offshore world” these are interesting times we live in.

Leona Helmsley, the fabulously wealthy owner of luxury hotels in New York City, once famously said that “only the little people pay taxes” …  Bob Dylan, the legendary singer/songwriter, once famously said that “The Times They Are a-Changin’ ” …  Bob Dylan was right.

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