Swiss banks and American taxes

Swiss banks and American taxes

Pawn sacrifice

  by D.S. | BERLIN

A MONTH ago, Konrad Hummler, managing partner of Wegelin & Co, the oldest Swiss private bank, said it was unlikely that an American court would charge his bank with tax fraud. Three of his employees, who managed accounts for American clients, had just been so charged. But indicting the bank itself would have “a destabilising effect” on the entire system, he argued.

The Southern District Court of New York clearly did not care. On February 2^nd it filed its indictment against Wegelin, for conspiracy to defraud the United States by concealing undeclared accounts from the Internal Revenue Service (IRS). Mr Hummler probably saw the writing on the wall: the week before, he sold the bulk of the bank to Raiffeisen, a Swiss mutual bank, but retained Wegelin’s American business and—according to the deal—any legal risk.

That makes Wegelin, founded in 1741, a shadow of its former self. But the little bank based in St Gallen is a mere pawn in a much bigger game being played between Switzerland and America over banking secrecy and tax fraud.

Since UBS, Switzerland’s biggest bank, paid a $780m fine in February 2009 and handed more than 4,400 names of clients to the American authorities, the country has been trying to negotiate a “global deal”. It would include a one-time cash payment (the sum being talked about ranges from $2 billion to $10 billion) and get the Department of Justice (DoJ), the IRS and the American courts off Switzerland’s back.

In the course of this negotiation several Swiss banks, in a target list of eleven, have delivered data about their American clients to Finma, the Swiss financial watchdog. Some of the information has been passed to the American authorities, but with the clients’ names blacked out.

The big issue for the Swiss is whether they can preserve their hallowed bank secrecy while complying with some of the American demands. Some say that the Swiss are on a hiding to nothing, because the DoJ, the IRS and the American courts will go on hounding Swiss banks and banking authorities until they reveal actual names. Others argue more antagonistically that these banks have not broken any Swiss law, since tax avoidance is not a criminal offence. And they may not even have broken any law in America either, since holding undeclared money is not itself an offence there.

Mr Hummler has made it clear that he shares the second view. The Neue Zürcher Zeitung, of whose board he happens to be president, seems to sympathise: “Politicians look on, while just a threat from US prosecutors puts an end to the oldest Swiss bank, without establishing any breach of the law,” thundered an editorial.

But the Southern District Court’s indictment makes colourful reading, even if the guns described in it may not be of the smoking kind. One Wegelin employee is said to have shuffled €16,000 cash between two clients sitting separately in the same Manhattan restaurant. And a client on a safari in Africa apparently sent a cryptic message to get his holiday paid from a Wegelin bank account.