Swiss Bank ZKB To Pay $98.5M For Role In US Tax Avoidance

By Natalie Olivo

Law360 (August 13, 2018, 8:50 PM EDT) — Swiss bank Zürcher Kantonalbank has agreed to pay $98.5 million after admitting to helping U.S. clients dodge taxes by letting them stash money in undeclared accounts that used code names and shell companies, Manhattan federal prosecutors announced Monday.

ZKB will hand over the amount as part of a deferred prosecution agreement, which the bank reached after admitting to helping U.S. clients collectively avoid paying more than $39 million in U.S. taxes between 2002 and 2013, according to prosecutors. The bank would have been given more credit for cooperating with the government if it hadn’t dissuaded two indicted employees from reaching out to the U.S. Attorney’s Office, prosecutors said.
Those two bankers, Stephan Fellmann and Christof Reist, were originally indicted on felony charges and pled guilty to misdemeanor charges on Monday.
“The substantial financial penalties imposed on the bank, and the two bankers’ pleas, should make clear that helping U.S. taxpayers to be tax evaders will not be tolerated,” Manhattan U.S. Attorney Geoffrey S. Berman said in a statement.
According to ZKB’s deferred prosecution agreement, information against the bank alleges one count of conspiracy to willfully and knowingly defraud the Internal Revenue Service, file false federal income tax returns and evade federal income taxes. If ZKB abides by the agreement, which includes a requirement to turn over information about the U.S. client accounts, the government said it will defer prosecution on the information for three years and then seek to dismiss the charges.
The bank released a statement on Monday announcing that the agreement “will have no negative impact” on its 2018 financial results.
“We are relieved that after seven years, we were able to conclude the investigation following an objective dialogue with the U.S. authorities,” Jörg Müller-Ganz, chairman of the board of directors at ZKB, said in a statement. “The solution that has now been reached marks the end of this matter and removes any related uncertainties.”
According to the prosecutors’ statement, ZKB helped U.S. clients dodge taxes by opening and maintaining undeclared accounts, including by allowing the clients to be identified by a code word instead of by name. The bank also allowed U.S. clients to maintain accounts held in the names of non-U.S. entities, some of which were sham structures existing solely to hide offshore assets, prosecutors said.
At ZKB’s “high-water mark” in 2008, the bank held approximately $794 million in assets relating to undeclared accounts held by U.S. clients, according to the statement.
That same year, U.S. enforcement actions against Swiss bank UBS became public. The bank, which reached a $780 million deal with the U.S. in 2009, had announced it would no longer be providing cross-border private banking services to U.S.-domiciled clients.
But instead of doing the same, ZKB’s external asset manager desk “treated UBS’ decision to stop accepting U.S. taxpayer-clients as a business opportunity, and actively sought to increase its U.S. taxpayer-client base,” according to the prosecutors’ statement.
However, while this desk sought to build up its U.S. client base, ZKB gradually started limiting securities accounts held by U.S. taxpayers. By 2012, the bank had closed virtually all accounts held by U.S.-domiciled taxpayers, and it has now ended all U.S. cross-border business, the statement said.
In December 2012, three ZKB bankers — Fellmann, Reist and Otto Hüppi — were charged in a New York federal court with conspiracy to defraud the U.S. and the IRS for their role in ZKB’s conduct, according to prosecutors.
Monday’s statement noted that during meetings with the bank’s officials and its in-house counsel — which were not attended by Fellmann and Reist’s independent U.S. counsel — the bankers heard statements that caused them “to feel dissuaded from reaching out to the U.S. Attorney’s Office in order to explore the possibility of cooperating.”
The bank, Fellmann and Reist ultimately sought cooperation during the summer of 2015, according to the statement. The two bankers each pled guilty to one count of conspiracy to willfully fail to file returns, supply information or pay tax.
Fellmann — whose name is spelled “Fellman” in the case name — and Reist are scheduled to be sentenced Nov. 30 and face up to one year in prison. Hüppi remains at large.
Sean Casey and Jim Walden of Walden Macht & Haran LLP, representing Reist and Fellmann respectively, told Law360 in an email on Monday that “we are grateful that the Department of Justice kept an open mind about this case and acted with fairness in dismissing the felony charges against our clients.”
They added that “a misdemeanor offense was appropriate for the conduct of both individuals.”
Counsel for ZKB could not immediately be reached for comment late Monday.
The government is represented by Andrew Douglas Beaty, Daniel Walter Levy, David Benton Massey, Jason Harris Cowley and Noah David Solowiejczyk of the U.S. Attorney’s Office for the Southern District of New York.
ZKB is represented by its in-house counsel and Philip Urofsky of Shearman & Sterling LLP.
Fellmann is represented by Jim Walden of Walden Macht & Haran LLP.
Reist is represented by Sean Casey of Walden Macht & Haran LLP.
Counsel information for Hüppi was not immediately available Monday.
The case is USA v. Fellman et al., case number 1:12-cr-00962, in the U.S. District Court for the Southern District of New York.
–Editing by Robert Rudinger.

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