The indictment of three Swiss bankers employed by Switzerland's oldest private bank sheds light on an obscure corner of hidden offshore wealth: the relationships some smaller banks have with bigger banks for moving clients' money around the world.

These inter-bank ties are increasingly important to a U.S. crackdown on Swiss banks suspected of enabling tax evasion for wealthy Americans, said persons briefed on the matter.

The Swiss bankers, indicted on Tuesday, work for Wegelin & Co, a boutique private bank based in St. Gallen, Switzerland with no U.S. offices.

The three were charged with conspiracy and fraud for enabling dozens of wealthy Americans to evade taxes on $1.2 billion in hidden assets over 2006 through 2010, in part by shifting some of the money through the Connecticut branch of UBS AG, the Swiss banking giant.

UBS was not faulted in the indictment for the shifting, which took place through a relationship common in the banking world and known as 'correspondent banking.'

Details in the indictment of the shifting signal that U.S. authorities are increasingly probing correspondent banking relationships, according to persons briefed on the matter and to tax lawyers who have read the charges.

Authorities are probing Swiss banks and Swiss-style banks suspected of selling tax evasion services to tens of thousands of wealthy Americans in recent years. Eleven of those banks - including Wegelin, Credit Suisse and regional Basler Kantonalbank - are under criminal investigation.

The rest of the Swiss banking industry is attempting to hammer out a civil settlement with the tax-collecting U.S. Internal Revenue Service (IRS) covering any wrongdoing.

UBS PROBE

The wide probe is an outgrowth of scrutiny of UBS, which ended in 2009 when the bank reached a deferred prosecution agreement with the Justice Department. UBS admitted to criminal wrongdoing and paid a $780 million fine for selling tax evasion services to Americans through its private bank.

The agreement expired in 2010, when UBS met its requirements to dismantle its offshore undeclared banking for Americans and strengthen its internal procedures oversight.

A person briefed on the matter said U.S. prosecutors and IRS criminal investigators were scrutinizing correspondent banking relationships of some Swiss banks, including Wegelin and cantonal, or regional, banks.

Investigators, this person said, were interviewing taxpayers over whether the correspondent banks, including UBS, directed former clients of their own banks to the smaller banks for which they still provide correspondent services.

The scrutiny, this person said, was ultimately aimed at building evidence not against the correspondent banks, but against their clients, the smaller Swiss banks.

The indictment's focus on the role of correspondent banking gives us insight into how prosecutors are going to put these things together, said Scott Michel, a tax lawyer at the firm of Caplin & Drysdale in Washington, D.C.

Karina Byrnes, a spokeswoman for UBS in New York, declined to comment on UBS's mention in the indictment.

Albena Bjorck, a spokeswoman for Wegelin in St. Gallen, also declined to comment, but said in an emailed statement:

Wegelin & Co remains committed to assisting in the clarification of matters regarding former U.S. clients and has authorized its lawyers in the United States to negotiate with the U.S. justice authorities to the extent possible under Swiss law.

SHADOW OVER A BANKING NICHE

Correspondent banking, a staple of the global financial system, allows smaller banks around the world without an overseas presence to send money to clients in other countries via larger banks in those countries.

The smaller bank is the customer of the larger bank, which acts as an agent, or conduit, by accepting deposits, processing other wire transfers and handling other business transactions on behalf of the smaller bank's clients.

In general, banking rules require the correspondent bank to know that the smaller bank for which it is transferring money has adequate know-your-customer procedures in place.

Nearly every large-to-mid-sized bank in the United States and other countries provides correspondent services, fueling transfers of at least billions of dollars daily around the world. But this sub-industry has at times been tarnished.

In 2001, a report by the Senate Permanent Subcommittee on Investigations, an investigative panel, found correspondent banking was a main conduit for money launderers.

Various regulations in recent years in the wake of the 2001 Patriot Act have required U.S. banks to increase their scrutiny of correspondent banking services provided to foreign banks.

UBS ROLE CAME AMID HEIGHTENED SCRUTINY

The role of UBS's correspondent banking services for Wegelin, as outlined by Manhattan federal prosecutors in the indictment against the three Wegelin bankers - Michael Berlinka, Urs Frei and Roger Keller - came amid UBS's own legal woes for enabling offshore tax evasion.

William Sharp, a tax lawyer in Tampa, Fla., who represents American clients of Swiss banks, said he was astonished by the indictment's charge that UBS provided correspondent banking services to Wegelin in particular in 2008 and 2009, when UBS was under federal investigation for enabling tax evasion.

UBS should have said, this is toxic, we don't want to get near this stuff, he said.

Byrne, the UBS spokeswoman, declined to provide details about UBS's know-your-customer procedures for correspondent banking relationships. In 2000, the bank was a co-founder of the Wolfsberg Group, an association of 11 of the world's largest banks that promised to combat money-laundering and other improprieties in private banking.

(Reporting By Lynnley Browning. Editing by Kevin Drawbaugh, Bern.)