Friday, October 18, 2013

Swiss Bank Frey to Close (10/18/13)

Bank Frey is under investigation by DOJ Tax -- readers will recall that it is one of the banks that were excluded from the Swiss Bank settlement initiative.  See prior Federal Tax Crimes Blogs on that initiative here.  It is now reported that Bank Frey will close.

Some of the news reports are:
  • Bank Frey ceases banking activities (Swissinfo.ch 10/18/13), here. Excerpt:
“As a result of developments in recent years, circumstances and challenges have presented themselves, especially in Switzerland, that mean it no longer makes sense for a small bank to continue its cross-border services,” said Markus A. Frey, thechairman of the board who founded the institution in 2000. “Bank Frey will therefore cease its operative business activities as a bank.”
  • Alice Baghdjian, Swiss private bank shuts up shop over U.S. tax row (Reuters 10/18/13), here. Excerpts:
Swiss private bank Frey & Co. is to close due to "unsustainable costs" stemming from the country's dispute with the United States over alleged tax evasion, it said on Friday, making it the second Swiss bank to shut as a result of the row. 
Switzerland and the United States have been at odds since 2010 over a U.S. campaign to get Switzerland's banking secrecy laws cracked open so it can identify possible U.S. tax evaders, a campaign which felled Wegelin, Switzerland's oldest bank, in January following an indictment. 
* * * * 
After shareholders voted to close Frey on Thursday evening the bank said increased regulation of financial institutions has resulted in a rise in costs in recent months, meaning it was no longer possible for a small private bank to keep running. 
"As a result of developments in recent years, circumstances and challenges have presented themselves, especially in Switzerland, that mean it no longer makes sense for a small bank to continue its cross-border services," Chairman Markus A. Frey said in a statement 
However, the business was financially healthy and would not be liquidated, the bank said.
  • Robert W. Wood, Swiss Bank Frey To Close Over IRS Investigation (Forbes 10/17/13), here.
I doubt, however, that this move will stop the investigation.  And it is not clear what the bank will do.  It is not being liquidated.  Perhaps that is to assure that there will be assets to pay whatever monetary penalties may result.

Addendum 10/19/13 12:30pm:


The following are excerpts from Stephanie Soong Johnston, Swiss Bank Ends Operations, Citing U.S.-Swiss Tax Dispute, 2013 TNT 203-8 (10/21/13):

"The writing's on the wall, and their indictment appears to be imminent," said Jeffrey A. Neiman, a former assistant U.S. attorney who led the prosecution of Swiss bank UBS and is now in private practice in Florida. If the bank is indicted, the DOJ will have a harder time collecting penalties, Neiman told Tax Analysts. "But in reality the Justice Department is getting the blood it wants with the extinction of another Swiss bank," he said.
* * * * 
  According to Bryan C. Skarlatos of Kostelanetz & Fink LLP, Bank Frey's closure will not prevent the DOJ from continuing its investigation. "If the DOJ cannot reach an agreement with the bank itself, that only increases the chance that the DOJ may look to hold certain individuals responsible for the bank's actions," he said. 
Scott D. Michel of Caplin & Drysdale said that closing the bank before it could be indicted may affect the DOJ's tactics. "Bank Frey, as with Wegelin, has no presence in the United States, and therefore the principal leverage that the DOJ would have against it would arise from a criminal indictment causing reputational and other damage," Michel explained. The DOJ also could seize Bank Frey's U.S. correspondent accounts, as it did in the Wegelin case, he added. 
Bank Frey's closure also prevents an indictment or a deferred prosecution agreement from disrupting operations, Michel said. "Note that one factor the DOJ considers in deciding whether to indict a business entity is collateral damage, [such as whether] putting the entity out of business creates disruptions, loss of jobs, etc.," he said. "Ironically, the closure of the bank means that this issue may well disappear from the factors under consideration." 
According to Thierry Boitelle of Bonnard Lawson in Geneva, Bank Frey's closure is a harbinger of smaller banks' futures in Switzerland. "There is simply so much compliance in force now and even more rapidly on its way that small banks can no longer cope with the costs of being compliant," he said. "The risks of being noncompliant are enormous, that the U.S.-Swiss dispute clearly demonstrates."
The following are links to the bios of the persons quoted in the article:

  • Scott Michel, here.
  • Jeff Neiman, here.
  • Bryan Skarlotos, here.

17 comments:

  1. I would take the bank at its word for why it is folding, i.e., that the business was no longer economically viable.

    The Reuters article said that Frey had a little less than $1 billion in assets at the end of 2012. The Swissinfo article said that in September 2012, 44% of assets were from US clients, and assets had tripled between March 2009 and February 2012. I don't know why anyone would keep their money there after the legal situation arose with the US. They were a small bank under intense pressure. In any event, the assets under management have probably dwindled and the bank is probably not profitable. The news reports say that up to 1/3 of the Swiss private banks will close over the next several years.

    These little banks want to manage assets using other banks as custodians, and then their costs go down and they can still charge fees. Just a guess, but that might be what Frey will do. If they had a book of business worth selling, they probably would have done what Wegelin did and sell assets and liquidate.

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  2. The first thing that Bank Frey will do will be to get rid of its American clients, since America absolutely hates the American client who doesn't bank in America. FATCA will destroy 10% of Swiss banks regardless if they they have American clients not, since they, like Bank Frey, are too small to be able to afford the America's compliance costs that it doesn't force upon itself. This is awesome for American financial competition since America is now recognized as likely being the largest and most secret tax haven. The US is the second easiest country to open a money laundering firm in, just after Kenya.


    America doesn't give a damn about tax evasion. It only cares about destroying any financial competition. Next, America will force FATCA upon Kenya to ensure that America will be #1 in money laundering as well.

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  3. SwissTechie,


    I disagree with your comment that America doesn't give a damn about tax evasion and only wants to destroy the competition. The Swiss had an unfair competitive edge because it could rely upon the deposits of despots, drug dealers, tax evaders, probably Somali pirates and others. For their enablement of those skullduggers, the Swiss received outsized profits that they could not have achieved had they competed with other countries, including the U.S. for the delivery of cost-effective financial services. (This is not to mention that the secrecy in which the Swiss banks shrouded themselves to make even more by simply taking the accounts of others who failed for one reason or another to come claim them (think of the Holocaust victims and the Swiss banks behavior regarding their accounts).)


    So, all of this activity by the U.S. and other countries will have a competitive effect on Switzerland,mostly because it begins to erode the dubious competitive advantage they had in the first place.


    Jack Townsend

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  4. When the real work/costs are being done by others, how do these small Swiss banks have any competitive advantage? Well, we know the answer to that question -- because they could sell people on their smallness and hence perceived invulnerability to the rule of law from other countries. Now that that perceived advantage is clearly gone, they should disappear. Bank Frey will be followed by others, including those beyond the 14 being investigated.


    Jack Townsend

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  5. Can you prove that each small bank was selling people on their smallness and hence perceived invulnerability to the rule of law from other countries? America is seeking to destroy competition by burdening them with compliance costs, regardless of how they sell their business or to whom.
    While being excited about America's ability to destroy business regardless if they did right or wrong, have you ever taken the time to think about the innocent people who will be harmed in the process? Why does one excuse harm caused to the innocent simply because one is excited about a competing bank being forced out of business?

    Is it not supposed to be the innocent whom one is supposed to protect?

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  6. SwissTechie,


    I do appreciate your concern. While I can't prove that each small bank misbehaved by selling their smallness and obscurity vis-a-vis the U.S. tax system, I can say with certainty that some did. I based that on the sales pitches they made to clients in the OVDP/I programs. Bank Frey was one. There are others on the DOJ Tax's list of 14. Indeed, I suspect that that exclusive list is populated principally by Swiss banks who made the unfortunate choice to fill the vacuum created by UBS's forced exit from the U.S. tax cheat market place.


    Without getting into how I know, I am certain banks outside the 14 did that as well. Those banks may not have been as aggressive, but they at least dabbled in the adventure.


    Jack Townsend

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  7. You are right and you are wrong, Jack.

    The Swiss banks marketed themselves for tax avoidance and charged higher fees for the service. The banks and the country thus profited. You are correct on this front.

    You are wrong to think this will disappear anytime soon. US deposits were a small percentage of Swiss banking deposits. In fact, assets at the large Swiss banks are growing. Growth is coming from Asia, South America, Russia, Africa, etc. The EU is cracking down and there are new international agreements coming into effect, but the business model will continue in Switzerland and in other jurisdictions including the largest tax and bank secrecy jurisdiction in the world, the US.

    It remains to be seen what will happen when small banks like Frey leave the scene. It could be that money goes to the larger or stronger survivors. It could go into hard assets. It will go somewhere. But some of these disappearing banks may become money managers that use other banks as custodians to hold the funds and handle the costly compliance issues. It is actually more cost efficient and profitable of a business model. The big banks can do this for less money and are basically matketing themselves for these back office functions. The economies of scale help.

    Frey said it is not liquidating. It's money on deposit must be handled in some fashion. If it is not a bank, it must continue business in some form. I am guessing as an independent money manager using another bank to hold the funds.

    As for how this effects its dealings with the US, that is anyone's guess. I doubt it will have much of an effect since the firm is not liquidating. They are just giving up their bank license. Who knows, maybe the bank's lawyers ran the scenario past the US first? The last thing the bank or its principals probably want to do is further anger the prosecutors.

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  8. Thanks, Noone.


    Your comments are always excellent.


    Jack Townsend

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  9. An added comment about Category 4 banks.

    The US Swiss bank deal provides:

    "[I]f the Department, in its sole discretion, determines that the Swiss Bank has ... materially violated the terms of any agreement with the United States, the United States may pursue any and all legal remedies available to it, including investigating and instituting criminal charges against the Swiss Bank, without regard to any other provision of the Non-Target Letter or this Program. For purposes of this provision, the Swiss Bank will agree that any prosecutions that are not time-barred by the applicable statute of limitations on the date of the announcement of the Program may be commenced against the Swiss Bank, and the Swiss Bank will agree to waive any defenses premised upon the expiration of the statute of limitations, as well as any constitutional, statutory, or other claim concerning pre-indictment delay, and will agree that such waiver is knowing, voluntary, and in express reliance upon the advice of the Swiss Bank’s counsel." [See, Part IV.C.3].

    "The Tax Division may decline to provide a Non-Target Letter if it determines that any information or evidence provided by the Swiss Bank is materially false, incomplete, or misleading, or if it has evidence that contradicts the verification of the Independent Examiner under Paragraph IV.C, above, or otherwise demonstrates criminal culpability by the Swiss Bank." [See, Part IV.C.4].



    Here's what this means: Even if you meet all the requirements of a Category 4 bank (see earlier post), the US still has the right to take away your amnesty (even after the Non-Target Letter has been sent) and to prosecute you criminally if you violated the terms of any agreement with the US (i.e., the Qualified Intermediary Agreement) or if we can otherwise demonstrate your criminal culpability.


    In all cases I can recall reading about, the bank was accused of violating the terms of its Qualified Intermediary Agreement with the US. All it takes then is one customer and/or one employee, where a single misstep has been made, and at the "sole discretion" of the US, the bank loses its Category 4 amnesty -- possibly even retroactively.


    Perhaps someone can explain to me why a bank would go into this voluntary program as a Category 4 bank, instead of just sitting on the sidelines and praying for the best? Especially since if you go into the program as a Category 4 bank, you are waiving all statute of limitations defenses.


    If you don't meet the Category 4 requirements or you have some bad facts in your closet (and top management or outside counsel may not know all the ghosts in their bank's closet because lower level employees may not want to highlight their own misdeeds), you are quickly going to find yourself either disqualified or your lawyer advising to file as a Category 3 bank -- which is one extremely small step away from being deemed a Category 2 bank. Indeed, if you are a bank worried about some bad facts in your closet, you are probably not really a Category 3 bank anyway -- you are probably really a Category 2 bank. So, get ready for the Category 2 fines...or...after all...this program is voluntary.

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  10. Jack, how did you learn of these sales pitches? If it's from your clients, I would take them with a grain of salt, since thy would be motivated to shift culpability to the banks and away from themselves.

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  11. Higher bank fees in Switzerland have been cited as evidence that a higher fee was charged for secrecy. However, it should be noted that fees were and are the same at each bank for all customers regardless of their nationality. Were Swiss citizens paying higher fees for secrecy?

    As to foreign deposits from Latin America in Miami and other US cities, the Florida Bankers Association is on record as lobbying against any type of reciprocal disclosure to foreign governments. Also, nonresident noncitizens fill out IRS form W8 (instead of the W9) filled out by US residents/citizens and therefore avoid both withholding or reporting to the IRS of their interest income, or even their identities, since form W8 is NOT forwarded to the IRS.

    " How can you say to your brother, ‘Let me take the speck out of your eye,’ when all the time there is a plank in your own eye?" Matthew 7:3

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  12. When I hear this type of information from my clients, I caution them that I need the unvarnished truth about the sales pitches because they may well have to tell that truth to the grand jury or agents of the grand jury who are investigating the banks and the enablers for the banks. Lying to the grand jury is a serious offense. Thus they must tell the truth to me and then, if necessary, the IRS and the grand jury. I remind them that the only way they can screw things up once they join the program is not to tell the truth and the whole truth. So, when they describe those events after this "come to Jesus" talk, I tend to believe them.


    I also cross-examine my clients about this issue (and other issues where appropriate). If I perceive some fuzziness in their answers, I hone in and dig until I am confident I have the truth.


    Jack Townsend

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  13. I can't speak to whether Swiss citizens/residents were paying higher fees than they had to. I can easily judge whether a U.S. citizen could have gotten lesser fees at the U.S. bank down the street where they live as opposed to what they incurred at a bank in a small country an ocean and continent away. So, my question inevitably is why a rational person would do that. Usually, there is no good answer to that question. Often, the secrecy they feel they need is not just from the IRS but from spouses, girl friends, business partners (including illegal businesses), etc., etc., etc. But they are buying secrecy, and for the cases I encounter that need for secrecy includes secrecy from the IRS.


    Jack Townsend

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  14. yes you are correct the normal banking fees for checking and savings account were and still are the same at each bank for all customers regardless of their nationality.

    Currently at ZKB it costs 6 CHF p.a. for a US citizen to hold a checking account with online banking privileges - Jack sorry but US citizens are not getting a better deal at the US bank down the street where they live . Btw. US banks are notoriously bad and uncompetitive with regards to their european counterparts when it come to retail Forex pricing and exchange.

    I think Anonymous points correctly in the direction of "HE WHO LIVES IN A GLASS HOUSE SHOULDN´T THROW STONES" with regards to the US being a tax haven of their own with regards to Delaware,Florida,Nevada and Wyoming.
    http://www.lectlaw.com/filesh/bbg33.htm

    I think what Jack is correctly trying to say is that for claiming NW behaviour, these US taxpayers have very little RC for having an offshore bank account in a small country an ocean and continent away without declaring income and filing the FBARs on time - with regards to the standard account fees and charges Jack is incorrect but correct when it come to PB (private banking) and their "management" fees !

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  15. There are those who have family in Switzerland or elsewhere in Europe who inherited money or want it there so it's available to family. There are those who want to hold accounts in foreign currencies. For them foreign acocunts make sense.

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