The United States Government's Pursuit of Swiss Banks who Assist American Tax Evaders

The United States Government's Pursuit of Swiss Banks who Assist American Tax Evaders


The United States Government's Pursuit of Swiss Banks who Assist American Tax Evaders

 

What do you think of when I say ‘Switzerland’? The average American citizen may respond with “Chocolate, skiing, tall mountains, and high-quality watches.” When the American attorney is asked the same question, however, her mind goes elsewhere, and she may respond with, “banking secrecy” or even “tax evasion.

          In this presentation, we’ll look at this stereotype and discuss how Switzerland’s banking industry has earned its reputation. Additionally, we’ll examine what the United States is doing on the legal front to hold Swiss bankers accountable for assisting American tax evasion, and where these efforts have, and have not, been successful.

Switzerland is a magnet for wealthy foreigners and one reason for this is the nation’s banking system. Swiss bankers are estimated to hold at least 30% of the trillions of dollars of personal wealth hidden in the world’s tax havens.[1]

Banking secrecy and confidentiality is not only prevalent in Switzerland, it is also in Swiss law. In 1934 the Swiss government passed the Federal Act on Banks and Savings Banks. The Act’s most noteworthy provision is Article 47, which enforced confidentiality and shrouds the Swiss banking system in secrecy. Article 47 criminalized a Swiss bank’s disclosure of client identities.[2] A Swiss banker faces up to six months in prison and a 50,000 Swiss franc-fine should he reveal a client’s identity.[3] The confidentiality rules are comparable to attorney-client and doctor-patient confidentiality rules elsewhere.

In the 80-plus years since the Act’s passage, Swiss banks earned a reputation not only for their professionalism, but also for confidentiality and secrecy.[4] James Breiding, the author of the book Swiss Made - The Untold Story Behind Switzerland's Success, explains other reasons for foreigner attraction to Swiss banks.

First, Switzerland is a model of political and economic stability.[5] Not only does Switzerland stay neutral in international political conflicts, the Swiss Franc is backed up by a high percentage of gold reserves, contributing to economic stability.[6] Moreover, banking has historically played a key role in the Swiss economy as a major employer and for having accounted for nearly 6% of the Swiss gross domestic product.[7] Put simply, Swiss bankers know how to make money for their clients.

In 2007, the United States began an intensive tax investigation of Swiss banks when it probed the financial activities of one of the world’s largest banks, United Bank of Switzerland. A former UBS investment banker, Brad Birkenfeld, exposed UBS’s role in assisting wealthy Americans dodge taxes in the United States.

Though it’s not illegal for Americans to have bank accounts in Switzerland, United States tax law requires all American taxpayers to disclose all foreign accounts and pay income tax on their earnings in them.[8] Additionally, the United States Investment Advisers Act of 1940 requires bankers to register with the Securities Exchange Commission in the United States prior to advising clients on investment and banking.[9]

Birkenfeld revealed that inside UBS, thousands of American clients have routinely ignored the tax rules requiring disclosure of foreign accounts. Moreover, hundreds of Swiss bankers traveled to the United States to recruit clients without registering with the SEC. In 2008, the US accused UBS of helping wealthy Americans evade $20 billion in taxes by setting up their undisclosed offshore accounts.[10]

The Department of Justice then filed a lawsuit against UBS and the Internal Revenue Service intensified its investigation for tax evasion. Swiss banks reacted by expelling Americans and refusing to opening new accounts for Americans.[11] In return for the Department of Justice dropping its lawsuit, larger Swiss banks disclosed the names of almost 4,500 American account holders who the DOJ suspected of evading United States taxes.[12]

The DOJ then established an amnesty period, known as the Swiss Bank Program. This program permitted Swiss banks that believed they had committed tax crimes to be eligible for non-prosecution agreements if they satisfied certain requirements, such as paying penalties and providing detailed information about accounts associated with American taxpayers.[13]

A few years after this was set in motion, a number of Swiss private banks, such as Bank Frey and Bank Wegelin, continued to set up offshore accounts for American citizens.[14] This is where we reach the story of Swiss banker, Stefan Buck, a Bank Frey employee.

The New York Times published an in-depth story on Buck’s work activities as he set up Swiss bank accounts for dozens of Americans, years after the US government began shining the light on Swiss bank activities.[15] On April 16, 2013, the US government indicted Buck, alleging that he had committed at least two overt acts in furtherance of a conspiracy to defraud the United States.[16] Rather than staying in Switzerland from where he would not be extradited and permanently live under US indictment, he travelled to the United States to face trial. His trial began in late 2017.

Buck was principally charged with conspiracy to commit tax fraud. Conspiracy is a crime that punishes a defendant for agreeing with another party to commit an offense.[17] Conspiracy is an inchoate offense, meaning a defendant can be found guilty of conspiracy even if the crime that is the subject of the conspiracy is never committed.[18] In prior cases, courts have established that assisting someone to frustrate or obstruct the IRS’s function of collecting income taxes or interfering and obstructing the IRS while its collecting taxes is criminal conspiracy under federal criminal law.[19]

In the Buck case, the alleged criminal conduct included assisting clients who sought cash withdrawals, purchases of jewelry, opening new undeclared accounts, providing clients with nameless debit cards, and filing false statements of beneficial ownership, among other actions, all intended to help Americans avoid paying income taxes.[20] 

During his trial, Buck’s attorney argued that his client did not criminally conspire with his American clients because his clients, not him, were the people who were trying to avoid their own income taxes. Buck himself owed no taxes to the United States. Furthermore, he argued that Swiss laws prohibited him from disclosing client identities and that his activities were merely assisting Americans in compliance with Swiss law.

In late November 2017, the jury delivered a “not guilty” verdict, delivering a blow to the government’s quest to hold Swiss banks at least partly responsible for tax evasion.

Still, the prosecutions, lawsuits and scrutiny have had substantial cumulative effects on Swiss banks. In December 2017, the international daily newspaper The Financial Times published an article with the headline, “The Decline of the Swiss Private Bank,” arguing that US scrutiny has led to the industry’s decline and that the more than $5 billion in fines and compensation that Swiss banks have been forced to pay for their roles in helping American clients avoid taxes has tarnished Swiss banking reputation.[21]

Despite international investigations and these pessimistic headlines, Swiss banks continue to play a key role for managing the wealth of the world’s richest people. The Swiss judiciary is also intervening, and defending banking privacy. In early 2018, the Swiss Federal Court, the nation’s highest court of law, ruled against Swiss private banks that sought to transfer information about their employees and other third parties to the DOJ, finding that information on Swiss identities weren’t indispensable for making a case against an alleged American tax evader.[22] 

In the face of these judicial setbacks, both domestic and international, the United States may look to be more cooperative with Switzerland and avoid antagonistic methods of curbing American tax evasion.[23]   


Footnotes:

[7] Id.

[10] Helena Bachmann, “Can Swiss Banks Thrive After the UBS-U.S. Deal?”, TIME MAGAZINE, Aug. 20, 2009, http://www.time.cornitime/businessiarticle/0,8599,1917648,00.html.

[11] Carolyn Najera, “Combating Offshore Tax Evasion: Why the United States Should be Able to Prevent American Tax Evaders from Using Swiss Bank Accounts to Hide Their Assets,” 17 Sw. J. Int’l L. 205, (2011).

[12] Id.

[16] United States v. Buck, 2017 U.S. Dist. LEXIS 158080

[17] 18 USCS § 371

[19] United States v. Rosengarten, 857 F.2d 76 (2d Cir. 1988).

[23] Anand Sithian, “‘But the Americans Made Me Do It!’: How the United States v. UBC Makes the Case for Executive Exhaustion,” 25 Emory Int’l L. Rev. 681, (2011).