Basler Kantonalbank, based in the Swiss city of Basel, has signed a deferred prosecution agreement that has been approved by US District Court for the Southern District of Florida, as the result of an investigation by the Internal Revenue Service. It will pay a criminal fine and restitution plus a civil forfeiture sum of $29.7 million in proceeds illegally derived from its conduct.

In the agreement and related court documents, Basler Kantonalbank admits that between 2002 and 2012 it conspired with its employees, external asset managers, and clients to defraud the United States with respect to taxes, commit tax evasion and submit false federal tax returns. At its peak in 2010, the bank held approximately 1,144 accounts on behalf of US customers, with an aggregate value of approximately $813.2 million. Many, but not all, of these were undeclared accounts that were part of the conspiracy. The agreement also requires the bank to divulge certain material information it may later uncover regarding US-related accounts and also to divulge certain information consistent with the DoJ’s defunct Swiss Bank Programme with respect to accounts closed between 2009 and 31 December 2017. The DoJ will put off prosecuting the bank for conspiracy for an initial period of three years to allow it to "demonstrate good conduct," which might or might not entail the handover of sensitive personal information to the Americans on a legally questionable basis.

What the payments are for

The $60.4 million penalty is in three parts. The bank has agreed to pay $17.2 million in restitution to the IRS, which represents the unpaid taxes resulting from its participation in the conspiracy. Second, it has agreed to forfeit $29.70 million to the United States, which represents gross fees (not profits) that it earned on its undeclared accounts. Finally, it has agreed to pay a fine of $13,500,000. It has made extensive efforts to put things right and has waived any claim it might have made of foreign sovereign immunity. Among other remedial efforts, it has taken steps to require all US-related accounts be tax compliant, it has closed a branch office that was responsible for much of the tax fraud and dismissed the employees involved in the offence, and it has reached out to former clients to encourage them to participate in IRS-sponsored voluntary disclosure programmes.

A lack of integrity

According to documents that it had to submit to the court as part of the agreement, Basler Kantonalbank is incorporated by the Parliament of the Basel City Canton. Between 1997 and 2014 it had a private-banking branch in Zurich. Its employees met some clients directly, but it dealt with its undeclared US customers primarily through external asset managers, including one Martin Lack who later pled guilty to a tax-fraud conspiracy charge. In or around 2003 Lack left UBS, where he had been a team head on the North America desk, and brought over 20 undeclared US clients to Basler Kantonalbank. He met the head of the Zurich branch, along with other top brass, and discussed the idea of bringing his clients to the bank. With the knowledge and encouragement of the leadership of these important people, Lack travelled to the United States to meet the clients with undeclared accounts.

The head of the Zurich branch was also aware that Lack was persuading new clients to sign "opening forms" for Basler Kantonalbank while he was in the US. Some of those forms falsely stated that they were signed in Zurich. During his trips to the US Lack also provided clients with cash services. He accepted cash from clients who wanted to make deposits to their Swiss accounts and used those funds to provide cash to other clients who wanted to make withdrawals. When he returned to Switzerland, he provided Basler Kantonalbank with receipts for the transactions so that the clients’ accounts could be reconciled. The bank recorded the cash transactions as having occurred in Switzerland as normal withdrawals and deposits. The Zurich branch’s managers were aware of these practices. The bank also provided Lack with office space in Zurich for several months after he was released by an external asset management firm for whom he initially worked.

Behind the times

In March 2008, Basler Kantonalbank became aware that UBS was thinking of closing its cross-border business that serviced HNW Americans. Soon after, in May 2008, it became public knowledge that UBS’s cross-border business was under criminal investigation by US authorities. Basler Kantonalbank’s Zurich branch saw this as a business opportunity and tried to attract clients who were leaving UBS. The bank was aware that many such clients wanted to continue to conceal their accounts. In one email, Basler Kantonalbank employees said that a prospective client “received a letter from UBS stating that they either have to tax their assets held with UBS...or that, otherwise, they would have to look for a new bank.” The email made it clear that the funds to be transferred to the Bank “were never taxed in the USA.”

To attract new clients, the bank signed up several new external asset managers and offered them finder’s fees. In 2008 it reached an agreement with a Swiss financial advisor (who was later indicted in the US for conspiring with American taxpayers to defraud the public fisk) who brought in ten clients with more than $73 million in assets from UBS and Credit Suisse. Another advisor brought in a family from New York that transferred more than $100 million in undeclared assets from a bank in Liechtenstein.

During this process, Basler Kantonalbank and the external asset managers working with the bank promoted Basler Kantonalbank as a safe haven because it lacked an office in the US and therefore, supposedly, would not be subject to a US criminal investigation. Between July 2008 and March 2009, Basler Kantonalbank opened 398 new accounts for US customers, with a resulting inflow of approximately $441.6 million in new assets.

Throughout the conspiracy, the bank promoted Swiss bank secrecy as a means of concealing assets and income from taxation in the United States, provided HNWs with hold-mail services and 'assumed name' and 'numbered' accounts, and let them set up accounts through nominee entities set up in tax havens such as the British Virgin Islands, Liechtenstein and Panama.     

As it watched the DoJ's incursion into Swiss banking from 2009 (the UBS settement) onwards with horror, Basler Kantonalbank started to wind its undeclared business down, but very gradually. Only when Lack was indicted in the US in late 2011 did it decide to drop its US-domiciled clients. This wise decision came too late to save it from the predicament in which it now finds itself.