U.S. authorities are moving toward taking legal action against Wegelin & Co, which could lead to an indictment of one of Switzerland's last pure private banks, on charges that it enabled wealthy Americans to evade taxes, according to two persons with knowledge of the case.
Negotiations in the case have reached a critical stage, with an indictment possible though the bank is seeking a deferred prosecution agreement, which would be less damaging. The outcome depends on how prosecutors, the U.S. State Department and the U.S. Treasury Department agree to treat the matter, the sources said.
Founded in 1741, Wegelin is one of Switzerland's oldest banks. An indictment of it would be a blow to a national tradition of banking secrecy that dates back to the Middle Ages. It would be a step forward for a U.S. crackdown on offshore tax evasion by Americans through Swiss banks.
The crackdown started around 2007 with an investigation of UBS AG, Switzerland's largest bank. It has since spread to the entire Swiss banking industry. Dozens of U.S. clients and at least two dozen Swiss bankers have been charged, in moves that have strained U.S.-Swiss relations.
Albena Bjorck, a spokeswoman for Wegelin, declined to comment on Friday when asked whether the bank was considering the possibility of being indicted. Charles Miller, a Justice Department spokesman, declined to comment.
The latest turn in the Wegelin case comes amid a broad criminal probe by the U.S. Justice Department of 11 Swiss and Swiss-style banks, including Wegelin, suspected of selling offshore tax evasion services to tens of thousands of wealthy Americans. Inquiries, growing out of scrutiny of UBS, are focused on Credit Suisse AG and Basler Kantonalbank among others.
Basler Kantonalbank confirmed a year ago that it was under investigation and in contact with U.S. authorities. Credit Suisse said in July its offshore private banking practices were under investigation and that it would continue to cooperate with the U.S. authorities.
On a parallel track, Swiss government officials and the U.S. Internal Revenue Service are trying to negotiate a civil settlement for more than 300 other Swiss banks - the remainder of the Swiss banking industry - on the matter of private banking services that may have enabled tax evasion.
THREE BANKERS INDICTED
Wegelin confirmed on Wednesday that three of its employees had been indicted by U.S. prosecutors in Manhattan for selling tax evasion services to wealthy Americans. The charges outlined the sales role of senior unnamed partners at the bank.
The office of the Manhattan U.S. Attorney said on Tuesday that the indictment of the three bankers charged them with trying to capture business lost by UBS AG and another large international Swiss bank in the wake of widespread news reports that the Internal Revenue Service was investigating UBS in 2008 and 2009.
In 2009, UBS paid $780 million to settle Justice Department criminal charges that it helped thousands of U.S. clients hide $20 billion. UBS later turned over 4,450 American client names, on top of an initial 255 at the time of the settlement. It was a watershed breach in Swiss bank secrecy, which protects client confidentiality under law and does not consider tax evasion a crime.
If Wegelin could negotiate a deferred prosecution deal, it could resemble the one struck by U.S. authorities with UBS. Under such an arrangement, Wegelin would admit to criminal wrongdoing with its offshore private banking services, pay an undisclosed fine and agree to be monitored for a period of time.
Bjorck said in an emailed statement on Thursday that Wegelin & Co. acknowledges the U.S. justice authorities' decision to press charges against three of its employees. Since April 2011, both external and bank internal experts have, in minute detail, examined its entire banking business with U.S. clients over the last 10 years.
The bank and its U.S. lawyers have prepared their legal assessment of the matter in anticipation of the expected proceedings.
She declined on Friday to elaborate what she meant by expected proceedings. Wegelin is based in St. Gallen, in northeastern Switzerland.
NO U.S. OFFICES
Wegelin is a small bank where eight partners hold unlimited liability for its operations. It has no U.S. offices or branches and it conducted its tax evasion business in part through correspondent banking accounts at UBS in Stamford, Conn., according to the indictment of the three Wegelin bankers.
One of Wegelin's eight top managing partners, Konrad Hummler, a leader in Swiss financial circles, has publicly lambasted the U.S. crackdown on Swiss private banking.
In a 2009 investment commentary entitled Farewell America, which is on Wegelin's website, Hummler chastised the United States for breathtaking moral duplicity in maintaining enormous offshore tax havens in Delaware, Florida and others of its states and for waging wars in foreign countries and at home (according to reliable sources, the tentacles of the narcotics mafia now reach well into political circles).
Bjorck declined to make Hummler available for interviews this week.
(Editing by Kevin Drawbaugh and Muralikumar Anantharaman)