1. In response to a deadline imposed by the United States Department of Justice (DOJ), the Swiss gave to the U.S. a cache of e-mails between Swiss bankers and their U.S. clients. The number of e-mails is in the millions. However, in a surprising move in this continuing chess game between DOJ and the Swiss, the information was provided to the DOJ in encrypted form. The Swiss state that they will de-crypt the information when the U.S. responds favorably, such as by agreeing to a global Swiss banking settlement covering all Swiss banks.
I am not a computer nor encryption expert, but I find it odd that the Swiss would think that the resources of the American government would not be used to crack the encryption. It’s almost a belief that Swiss encryption is better than American counter-encryption. But then again, the Swiss once believed that their banking secrecy was invincible also.
At some point, the Swiss bank account data, currently encrypted but in U.S. hands, will be revealed. This can happen by way of a global settlement with the Swiss (as the Swiss hope), going after individual banks one at a time (first UBS, then Credit Suisse, now Baer, Wegelin, the Kantonals, etc. . . ), or the US cracking the encryption. Once that happens, depending on the number of U.S. taxpayer account holders revealed, this could be the biggest breach of Swiss banking secrecy since UBS revealed close to 5,000 names of U.S. account holders. Good thing the IRS re-opened the OVDI a few weeks ago.
Query whether other countries, such as Britain and Germany, which reached agreements with Switzerland on non-compliant accounts, will now attempt to get more out of the Swiss.
In addition, one must ask whether the Swiss would try such a tactic – – revealing, but not actually revealing – – within the context of an actual lawsuit. The provision of the encrypted data was within the context of a DOJ investigation and settlement negotiations, not within the context of an actual lawsuit like United States v. UBS AG. An actual lawsuit would be held before an actual judge. A judge would probably not think very highly of purported compliance but not actual compliance. The U.S. assets of the Swiss banks (branch offices, assets on deposit, banking licenses) would be vulnerable to an adverse judgment or finding of contempt by a U.S. judge.
This is the latest example of not only the deterioration of Swiss banking secrecy, but also of how the Swiss, who previously promised their clients the world’s most secretive banking, will shed those promises and give up their clients in the face of foreign pressure.
We repeat: Good thing the IRS re-opened the OVDI a few weeks ago.
2. Last Week, Wegelin & Co., Switzerland’s oldest private bank, essentially split apart. One part, the part that used to service American account holders, remained Wegelin. The other, larger part containing Swiss and other European business, was spun off and sold. The reason for the break up was to contain the liabilities associated with the non-compliant bank accounts of U.S. taxpayers. We know that Wegelin has been under investigation by the IRS and DOJ for providing non-compliant banking services. In January 2012, three Wegelin bankers were indicted by DOJ for facilitating tax fraud via “secret” accounts. The indictments include allegations that Wegelin took over such accounts after the account holders left UBS in favor of other banks, supposedly “under the radar”. DOJ is also prosecuting Americans who had such accounts at Wegelin.
What is interesting is that to the Swiss, the U.S. accounts need to be isolated and separately contained, as a means of damage control. We are reminded of assets considered to be “high risk”, such as collateralized debt instruments and subprime mortgages, and left out of sales of banks and bank assets, sold on their own at a sharp discount because of their toxicity.
Will Wegelin’s acquirer (Notenstein Privatbank, an entity set up specifically for this acquisition, which in turn was bought by Swiss bank Raiffeisen) now be insulated from liabilities arising from the non-compliant accounts of U.S. taxpayers?
Our answer is, probably. For one thing, if Raiffeisen is now the target of a DOJ subpoena or “John Doe” summons, it will now probably be able to legitimately say that it lacks the account data responsive to the DOJ request, since that information will likely have remained with Wegelin. In fact, assuming that Raiffeisen was not offering similar non-compliant banking services as UBS, Credit Suisse, Wegelin, etc., and further assuming that Raiffeisen only bought “clean” European accounts rather than non-compliant American accounts, it is likely that Raiffeisen may be insulated from future DOJ attacks. However, to the extent that former Wegelin bankers merely changed employers, these individuals may still face accountability for assisting tax fraud at their former employer. As we have seen, DOJ charges both banks and individual “facilitators” including foreign bankers, attorneys and trustees (along with, of course, American owners of such accounts).
3. As we have written, Switzerland still offers banking advantages: a safe and stable political, economic and social structure; experienced banking infrastructure and regulation; an educated, savvy banking workforce; good investment opportunities; privacy and confidentiality vis-a-vis private, civil creditors, and asset protection. What Switzerland no longer offers is tax secrecy. Thus, assuming a Swiss account is tax-compliant, it offers many benefits. Assuming a Swiss account, or any foreign account, is not tax-compliant, the beneficial owner of the account must take heed of the eradication of offshore banking secrecy, and make the account compliant.