Wegelin Indicted in SDNY with Money Laundering Forfeiture (2/2/12)

Wegelin & Co. has been indicted.  The DOJ Tax press release is here; the indictment is here; and the related forfeiture complaint is here.  (The indictment and forfeiture complaint are provided with the permission of Tax Analysts.) The indictment is a superseding indictment adding Wegelin as a defendant to the prior indictment of three individual bankers affiliated with Wegelin.  See my prior blog, New Swiss Enabler Indictments - Bankers Related to UBS and, Allegedly, Wegelin (1/3/12), here.  The allegations of the prior original indictment are essentially repeated.  Many of those allegations related to Wegelin, identified in the original indictment as Swiss Bank A.  A number of paragraphs with various additional allegations, some interesting and others not so.  The indictment charges a single conspiracy count which alleges a conspiracy to (i) defraud (Klein) and (ii) commit offenses of evasion (7201) and tax perjury (7206(1)). In terms of the indictment, nothing is particularly surprising, although I am sure there will be a lot of comment about it.  For present purposes, I will just quote interesting parts of the press release.  Although alleging long term promotion of U.S. tax evasion through Wegelin, the press release notes particularly Wegelin's attempt to leverage its insularity from the U.S. by hustling UBS U.S. depositors:

In the wake of the IRS investigation, members of Wegelin's senior management affirmatively decided to capture the illegal business that UBS exited. To capitalize on the business opportunity this presented and to increase the assets under management, along with the fees earned from managing those assets, Berlinka, Frei, Keller and others, acting on behalf of Wegelin, told various U.S. taxpayer-clients that their undeclared accounts would not be disclosed to U.S. authorities because the bank had a long tradition of secrecy. They also persuaded U.S. taxpayer-clients to transfer assets from UBS to Wegelin by emphasizing, among other things, that unlike UBS, Wegelin did not have offices outside of Switzerland and was therefore less vulnerable to U.S. law enforcement pressure. Members of the Swiss bank's senior management approved efforts to capture the clients who were leaving UBS and also participated in some meetings with U.S. taxpayer-clients who were fleeing UBS. In February 2009, UBS entered into a deferred prosecution agreement with the Justice Department on charges of conspiring to defraud the United States by impeding the IRS. As part of the deferred prosecution agreement, UBS paid $780 million in fines, penalties, interest and restitution.

The indictment contains a lot of detail behind that summary.  It is fun reading for those who have the time and interest.

I think some  readers at least might be interested in a recitation of the co-conspirators.  So, here goes; some are pseudonyms as is typical in large conspiracy indictments).

1.  Of course, the individual named defendants previously indicted are named: Berlinker, Frei, and Keller.
2. Client Advisor, a Wegelin person who was team leader for the individual defendants.
3. Managing Parter A, head of the Zurich branch of Wegelin.
4. Executive A, a member of the Wegelin executive committee.
5. Beda Singenberger, an independent asset managers holding Wegelin accounts.  Singenberger has previously surfaced in the Swiss bank debacle.  For prior blogs mentioning Singenberger, see here.
6. Gian Gisler, UBS client advisor.  For previous blogs mentioning Gisler, see here.

Contemporaneously, the Government filed a complaint to forfeit Wegelin assets being held by UBS's U.S. affiliate acting as a correspondent bank.  I find forfeiture the most interesting part of the U.S. juggernaut against Wegelin and, by inference, the remaining recalcitrant Swiss banks (as well as the Swiss Government which serves those banks), because the clear message is that Swiss banks with little apparent U.S. footprint can be reached.  So, I turn to forfeiture..


The opening paragraph of the forfeiture complaint is:

1.  This an action by the United States of America seeking forfeiture of all funds, approximately $16.2 million, on deposit at UBS AG, Account No. 101-WA-358967-000, held in the name of Wegelin & Co. (the "Defendant Funds"). The Defendant Funds are subject to forfeiture pursuant to 18 U.S.C. § 981(a)(1)(A), as property involved in transactions in violation of 18 U.S.C. § 1956.

This is money laundering forfeiture.

Although it is a long Verified Complaint containing overlapping allegations with the Indictment, here are key allegations regarding the money laundering:

The Nature and Risks of Correspondent Banking and Wegelin's Correspondent Account at UBS

18. As reported in a 2001 investigative report published by the Minority Staff of the Senate Permanent Subcommittee on Investigations entitled Correspondent Banking: A Gateway For Money Laundering:

   Correspondent banking is the provision of banking services by one bank to another bank. It is a lucrative and important segment of the banking industry. It enables banks to conduct business and provide services for their customers in jurisdictions where the banks have no physical presence. For example, a bank that is licensed in a foreign country and has no office in the United States may want to provide certain services in the United States for its customers in order [to] attract or retain the business of important clients with U.S. business activities. Instead of bearing the costs of licensing, staffing and operating its own offices in the United States, the bank might open a correspondent account with an existing U.S. bank. By establishing such a relationship, the foreign bank, called a respondent, and through it, its customers, can receive many or all of the services offered by the U.S. bank, called the correspondent. 

   Today, banks establish multiple correspondent relationships throughout the world so they may engage in international financial transactions for themselves and their clients in places where they do not have a physical presence. Many of the largest international banks located in the major financial centers of the world serve as correspondents for thousands of other banks. Due to U.S. prominence in international trade and the high demand for U.S. dollars due to their overall stability, most foreign banks that wish to provide international services to their customers have accounts in the United States capable of transacting business in U.S. dollars. Those that lack a physical presence in the U.S. will do so through correspondent accounts, creating a large market for those services. 

Correspondent Banking: A Gateway For Money Laundering (Feb. 2001).

19. Because foreign financial institutions may not be subject to oversight by U.S. regulatory authorities, providing these foreign financial institutions access to the U.S. financial system through the correspondent banking system increases the risk of money laundering. In order to combat these risks, among other means, Federal Financial Institutions Examination Council ("FFIEC") publishes The Bank Secrecy Act/Anti-Money Laundering Handbook (the "Handbook"), a publication that helps identify money-laundering risks and establishes guidelines for U.S. financial institutions to mitigate those risks. In terms of correspondent accounts, the Handbook explains their inherent money-laundering risk and how criminal elements such as drug traffickers have used them to launder funds. The Handbook further explains: 

Because of the large amount of funds, multiple transactions, and the U.S. bank's potential lack of familiarity with the foreign correspondent financial institution's customer, criminals and terrorists can more easily conceal the source and use of illicit funds. Consequently, each U.S. bank, including all overseas branches, offices, and subsidiaries, should closely monitor transactions related to foreign correspondent accounts. 

Handbook, Correspondent Accounts (Foreign) -- Overview.

20. The Handbook also explains the danger of "nested" foreign correspondent accounts. "Nested accounts occur when a foreign financial institution gains access to the U.S. financial system by operating through a U.S. correspondent account belonging to another foreign financial institution." These nested accounts pose a further money-laundering risk because they provide additional foreign financial institutions access to the U.S. financial system and make it more difficult to identify the source and nature of the funds being sent to or from a correspondent account at a U.S. financial system.

21. Because of the heightened risk of money laundering through correspondent accounts, the U.S.A. Patriot Act and related regulations impose certain obligations on U.S. financial institutions housing correspondent accounts for foreign financial institutions to guard against money laundering. As explained in the Handbook:

Due diligence policies, procedures, and controls must include each of the following:

Determining whether each such foreign correspondent account is subject to [Enhanced Due Diligence]. 

Assessing the money laundering risks presented by each such foreign correspondent account.

Applying risk-based procedures and controls to each such foreign correspondent account reasonably designed to detect and report known or suspected money laundering activity, including a periodic review of the correspondent account activity sufficient to determine consistency with information obtained about the type, purpose, and anticipated activity of the account.

Handbook, Foreign Correspondent Account Recordkeeping and Due Diligence -- Overview. 

22. Since at least the late 1990s, Wegelin has had a correspondent bank account with UBS in Stamford, Connecticut. Through this correspondent relationship, Wegelin could wire funds from Switzerland to the Stamford Correspondent Account in the United States and, in turn, wire funds from the Stamford Correspondent Account to other accounts in the United States or to accounts overseas. Wegelin also had the ability to issue checks drawn on the Stamford Correspondent Account. These checks functioned like any check drawn on an account at a U.S. financial institution and could be deposited, or cashed for U.S. dollars, at other financial institutions.

23. Wegelin also offered nested correspondent services to other Swiss banks, including Swiss Bank C and Swiss Bank D, two Swiss banks that also held undeclared accounts for U.S. taxpayers. These additional Swiss banks were able to have Wegelin issue checks drawn on the Stamford Correspondent Account on their behalf. Swiss Bank C used this nested relationship, despite the fact that Swiss Bank C maintained its own correspondent account with UBS in the United States, which allowed it to conduct wire transactions in the United States, but did not include check-writing abilities.

Overview of Wegelin and Its Co-Conspirators' Mail and Wire Fraud Scheme to Defraud the United States

24. From at least in or about 2005 up through and including in or about 2011, more than 100 U.S. taxpayer-clients of Wegelin and other Swiss banks, conspired with, at various times, Wegelin and many of Weglin's employees, including Berlinka, Frei, Keller, Managing Partner A, Executive A, Client Advisor A, other Client Advisors at Wegelin, Swiss Bank C and Swiss Bank D, and others known and unknown, to defraud the United States of certain taxes due and owed by concealing from the IRS undeclared accounts owned by U.S. taxpayers at Wegelin and other Swiss Banks including Swiss Bank C and Swiss Bank D. As of in or about 2010, the total value of such undeclared accounts at Wegelin alone was at least $1.2 billion. In particular, Client Advisors at Wegelin, including Berlinka, Frei, and Keller, and others opened dozens of new undeclared Wegelin accounts for U.S. taxpayers in or about 2008 and 2009 after UBS and another large international bank based in Switzerland ("Swiss Bank B") closed their businesses servicing undeclared accounts for U.S. taxpayers ("the U.S. cross-border banking businesses") in the wake of widespread news reports in Switzerland and the United States that the U.S. Department of Justice was investigating UBS for helping U.S. taxpayers evade taxes and hide assets in Swiss bank accounts. These Client Advisors did so after the Managing Partners, including Managing Partner A, affirmatively decided to take advantage of the flight of U.S. taxpayer-clients from UBS by opening new undeclared accounts for these U.S. taxpayers at Wegelin. As a result of this influx of former UBS U.S. taxpayer-clients into Wegelin, Wegelin's undeclared U.S. taxpayer assets under management, and the fees earned by managing those assets, increased substantially. As part of their sales pitch to U.S. taxpayer-clients who were fleeing UBS, at various times, client advisors at Wegelin told U.S. taxpayer-clients that their undeclared accounts at Wegelin would not be disclosed to the United States authorities because Wegelin had a long tradition of bank secrecy and, unlike UBS, did not have offices outside Switzerland, thereby making Wegelin less vulnerable to United States law enforcement pressure. Managing Partner A and another executive of Wegelin participated in some of these meetings. At various times, Berlinka, Frei, and Keller collectively managed undeclared U.S. taxpayer assets worth hundreds of millions of dollars. As part of the scheme to defraud, Wegelin, Swiss Bank C, and Swiss Bank D provided U.S. taxpayer-clients with undeclared accounts access to funds in these undeclared accounts in a manner that obscured the source of these funds, that is, the U.S. taxpayer-clients' undeclared accounts in Switzerland. Also as part of this scheme, these U.S. taxpayer-clients, used the U.S. mails, private and commercial interstate carriers, and interstate wire communications to submit tax returns that were materially false and fraudulent in that these returns failed to disclose these undeclared accounts or the income generated from these accounts.

For a related blog, see HSBC Reportedly Being Investigated for Money Laundering (1/26/12), here. and the comments to that blog noting that DOJ Tax will not normally permit garden variety tax crimes to be ramped up to money laundering charges with the far greater incarceration and fines.  The Swiss banks' conduct is not garden variety tax crimes, but truly large scale and industrial strength tax crimes. The allegations specifically against Wegelin are strong, if true, and I suspect replicated in many other Swuss banks' conduct.  Still, the indictment does not charge money laundering.  But the Government is using money laundering as a tool to put the heavy hammer on Wegelin via financial costs, penalties, etc.

I think all of this will make a substantial point to the Swiss in the current standoff regarding access to information.  See my prior blog: Swiss Government and Swiss Banks Continue to Play Games (2/1/12), here.

Links regarding the Wegelin indictment:

Lynnley Browning, U.S. Justice Department indicts Swiss bank Wegelin (Reuters 2/3/12), here.
Kara Scannell and Haig Simonian, Wegelin charged with aiding tax evasion (Financial Times 2/3/12),  here.

Prosecutors call Wegelin a fugitive when its representative fails to appear in court.  See David Glovin, Wegelin Doesn’t Appear at Hearing, Called ‘Fugitive’ by U.S. (Bloomberg 2/10/12), here.


For all blogs on Wegelin, see here.