Zürcher Kantonalbank Enters into Deferred Prosecution Agreement with U.S. Attorney’s Office on Tax-Evasion Facilitation

On August 13, the U.S. Attorney’s Office for the Southern District of New York announced the filing of a Deferred Prosecution Agreement (DPA) with Zürcher Kantonalbank (ZKB), a Swiss-based financial institution, and of an information charging ZKB with one count of conspiracy to willfully and knowingly (1) defraud the IRS, (2) file false federal income tax returns, and (3) evade federal income taxes.  The DPA and the information stem from ZKB’s helping U.S. taxpayer-clients to evade their U.S. tax obligations, file false federal tax returns, and otherwise hide hundreds of millions of dollars in offshore bank accounts held at ZKB.

Under the terms of the DPA, ZKB must pay $98.5 million and cooperate with  prosecutors in providing detailed information about accounts in which U.S. taxpayers have a direct or indirect interest and in making treaty requests to Switzerland or other countries for account information.  In addition, Stephan Fellmann and Christof Reist, two ZKB bankers who are Swiss citizens and who had been indicted in 2012 on related charges, each pleaded guilty to one count of conspiracy to willfully fail to file returns, supply information, or pay tax.  A third ZKB banker, Otto Hüppi, remains a fugitive.

The U.S. Attorney’s Office’s release stated that ZKB helped U.S. taxpayer-clients evade taxes

by opening and maintaining undeclared accounts for U.S. taxpayers at ZKB, and by allowing third-party asset managers to open undeclared accounts for U.S. taxpayers at ZKB.  ZKB held approximately 2,000 undeclared accounts on behalf of U.S. taxpayer-clients, who collectively evaded over $39 million in U.S. taxes, between 2002 and 2013.

In furtherance of a scheme to help U.S. taxpayers hide assets from the IRS and evade taxes, ZKB undertook, among other actions, the following:

  • ZKB entered into approximately 349 “code word agreements” with U.S. taxpayer-clients under which the bank agreed not to identify the U.S. taxpayers by name on bank documents, but rather to identify the U.S. taxpayers by code name, in order to reduce the risk that U.S. tax authorities would learn the identities of the U.S. taxpayers. ZKB understood that a primary reason why U.S. taxpayers sought these “code word” accounts was to evade detection by U.S. tax authorities.
  • ZKB opened and maintained accounts for many U.S. taxpayer-clients held in the name of non-U.S. corporations, foundations, trusts, or other legal entities (collectively, “structures”), thereby helping those U.S. taxpayers conceal their beneficial ownership of the accounts. Some of the structures had no business purpose (“sham structures”), but rather, existed solely for the purpose of helping ZKB’s U.S. taxpayer-clients hide their offshore assets.
  • ZKB agreed to hold bank statements and other mail relating to approximately 750 accounts of U.S. domiciled taxpayer-clients at ZKB’s offices in Switzerland, rather than send them to U.S. taxpayer-clients in the United States, which helped ensure that documents reflecting the existence of the accounts remained outside the United States and beyond the reach of U.S. tax authorities.
  • ZKB solicited new business through the website http://www.swiss-bank-accounts.com, which was operated by a third party, and which resulted in the opening of accounts at ZKB for U.S. taxpayer-clients whose accounts were undeclared.

It is instructive to compare and contrast the ZKB DPA resolution with the 2016 DPA resolution of similar tax-evasion facilitation charges by the U.S. Attorney’s Office for the Southern District of New York with another Swiss financial institution, Bank Julius Baer (Julius Baer):

  • Nature of Charges: Like ZKB, Julius Baer was charged with conspiring with many of its U.S. taxpayer-clients and others to help U.S. taxpayers hide billions of dollars in offshore accounts from the Internal Revenue Service (the “IRS”) and to evade U.S. taxes.
  • Types of Corporate Conduct: Like ZKB, Julius Baer used “code word agreements” with U.S. taxpayer-clients and opened and maintained accounts for many U.S. taxpayer-clients held in the name of non-U.S. structures.
  • Size of Penalties: Julius Baer’s penalty per its DPA was $547 million, in part because the size of Julius Baer’s assets under management (AUM) and profit associated with its undeclared U.S. taxpayer accounts was substantially greater than ZKB’s AUM and profits.
    • AUM: At their respective high-water marks in 2007 and 2008, Julius Baer had approximately $4.7 billion in AUM relating to approximately 2,589 undeclared accounts held by U.S. taxpayer-clients, while ZKB had approximately $794 million in AUM relating to undeclared accounts held by U.S. taxpayer-clients.
    • Profits: From 2001 through 2011, Julius Baer earned approximately $87 million in profit on approximately $219 million gross revenues from its undeclared U.S. taxpayer accounts, including accounts held through structures. From 2002 through 2013, ZKB earned approximately $21 million in profits on approximately $24 million gross revenues from its undeclared U.S. taxpayer accounts, including accounts held through structures.
  • Extent of Banks’ Cooperation with Authorities: Julius Baer began by at least 2008 to implement institutional policy changes to cease providing assistance to U.S. taxpayers in violating their U.S. legal obligations, sought to self-report its conduct relating to U.S. taxpayers to U.S. law enforcement authorities, and took what the U.S. Attorney’s Office characterized as “exemplary actions to demonstrate acceptance and acknowledgement of responsibility for its conduct.” Those actions included a “swift and robust internal investigation” and furnishing the U.S. Government with “a continuous flow of unvarnished facts gathered during the course of that internal investigation.” It even encouraged certain of its employees — including two client-advisers who later pleaded guilty to conspiracy to defraud the IRS, to evade federal income taxes, and to file false federal income tax returns – “to accept responsibility for their participation in the conduct at issue and cooperate with the ongoing investigation.”

In marked contrast, after Fellmann, Reist, and Hüppi were charged in the Southern District of New York in 2012  with conspiracy to defraud the United States and the IRS for their role in ZKB’s offense, ZKB officials took a series of actions that, based on the description by the U.S. Attorney’s Office, smack of endeavors to obstruct justice:

  • “Although ZKB retained independent U.S. counsel for the bankers, beginning in 2013 and continuing through 2015, ZKB’s in-house counsel and, at times, ZKB employees from the Human Resources department and other departments, regularly met with FELLMANN and REIST. At those meetings, which were not attended by FELLMANN and REIST’s independent U.S. counsel, ZKB, among other things, made statements that caused FELLMANN and REIST to feel dissuaded from reaching out to the U.S. Attorney’s Office in order to explore the possibility of cooperating.  In addition, ZKB’s in-house counsel suggested to FELLMANN that he did not have any information of value to contribute to the U.S. Attorney’s Office’s ongoing investigation.  Furthermore, based on conversations with ZKB, FELLMANN and REIST felt that their continued employment at ZKB and ZKB’s ongoing payment of their legal fees would be threatened should they take steps that were viewed by ZKB as inconsistent with the bank’s own interests.  Due in part to these discussions with ZKB, FELLMANN and REIST did not seek to cooperate with the investigation until the summer of 2015, approximately two and a half years after being indicted.”

Fellmann and Reist are scheduled to be sentenced on November 30, 2018.

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