Julius Baer, the Zurich-based Swiss private banking giant, has resolved its Deferred Prosecution Agreement (DPA) with the US Department of Justice, settling its liability in connection with its facilitation of tax evasion among its US clients in 2001-9. This article is in the nature of a post mortem of the entire case.

The bank has fulfilled its obligations that the agreement enumerated and the US Attorney’s Office for the Southern District of New York has tabled a motion to dismiss the charges that have been hanging over it since 2016, when the agreement was struck. As a consequence, the competent US Federal Court in New York has approved the motion and formally dismissed the charges against the Bank, thereby terminating the DPA.

In 2016 Julius Baer admitted to helping US taxpayer-clients hide billions of dollars in offshore accounts. At the same time, its former employees Daniela Casadei and Fabio Frazzetto pled guilty to felony tax charges. At the time, US Attorney Preet Bharara said: “Bank Julius Baer not only turned a blind eye to tax avoiders, but actually conspired with them to break the law.”

The US federal Justice Department’s Tax Division, the US Attorney for the Southern District of New York and the federal Internal Revenue Service levied the criminal charges against the bank, with the US attorney also striking up a deferred prosecution agreement with the bank to settle the charges in exchange for internal reforms and payment of a fine of US$547.25 million. The story of the bank’s misconduct, never before told on Compliance Matters, is related below.

From the archives

The criminal charge of 2016 was contained in a so-called 'information' that alleged one count of conspiracy to (1) defraud the IRS, (2) send off false federal income tax returns and (3) evade federal income taxes. Julius Baer has obeyed all of the terms of the agreement, so the US Government has dismissed the charges after deferring them for three years. Casadei and Frazzetto each pled guilty to 'informations' of their own.

Means and methods

The bank and its co-conspirators, according to the information, opened and managed bank and securities accounts for their US clients that were not reported to the IRS on form 1040 and on FBARs (Form 114, entitled "Report of Foreign Bank and Financial Accounts," separate from tax returns) and the income was also not reported to the IRS.

Julius Baer’s client advisors allowed US clients to open undeclared accounts using code names or numbers so that they could sign those names and numbers on bank documents rather than using their own signatures. That way, their names appeared on the fewest documents possible. Client advisors also permitted those clients to place assets in undeclared accounts held in the names of foreign relatives in order to conceal the ownership of the assets. They also induced their US customers to travel from the United States to Switzerland to discuss their undeclared accounts, which seems to have irked the Justice Department not a little. Some of the 1040 forms that the clients did sign failed to report their undeclared income. The misconduct took place between 2001 and 2009.

The information document accuses one Fabio Frazzetto, a client advisor, of opening a new undeclared account in the name of an Israeli citizen and resident who was a cousin to a family of US taxpayer clients. Frazzetto then transferred the US family's assets into the account that the Israeli nominally controlled in order to conceal their financial interests in the funds.

Shadowy structures

In or about 2000, Julius Baer signed a qualified intermediary agreement with the IRS which took effect in 2001. By this agreement, it was generally obliged to identify and keep records of any accounts that held US-source income, including US securities. To circumvent this, the document states, Julius Baer helped US clients with undeclared accounts to open accounts nominally held by sham structures formed under the laws of other countries such as Liechtenstein and the British Virgin Islands.

Part of this effort involved Julius Baer referring certain US taxpayer-clients to third-party service providers to set these structures up. Julius Baer then treated these structures as the account holders. Sometimes, relationship managers in Switzerland admitted openly in emails that the actual beneficial owners were US citizens when mentioning the qualified intermediary agreement. It was in 2008 that the bank reached its high-water mark in respect of the number of undeclared accounts for Americans held by its structures. In that year there were 1,043 such accounts, representing just over one-third of all undeclared accounts held by US taxpayer-clients at Julius Baer.

Dos and don'ts

In March 2006, the head of Julius Baer's North America Team of client advisors sent his subordinates an email full of 'dos and don'ts' to consider when travelling to the US to meet American clients. The hilarious cloak-and-dagger text reads as follows.

At immigration, when filling out the entry form or when asked by the officer about the object of your visit, say that you are in banking (never lie) but if and when asked in which field, respond "EDP dept," "investment banking" or "lending," but certainly not private banking. Market research, mergers and acquisitions is always a good answer.

When asked by the officer what you will do while in the USA, say business and of course some leisure, trying to take some time to enjoy your beautiful country. Proud government employees usually love this type of statement. One can throw in skydiving. This tends to shift the questioning away from the business purpose to the 'fun time' part of the trip. Preferably dress casual.

Do not carry any Baer papers with you, no business or calling cards, no Baer research material. This material should be sent prior to arrival. Do not bring a laptop which holds client data (absolutely nothing). No cell phone with saved client phone numbers. Client's phone list must be faxed to hotel upon arrival (use two lists, one with names only and one with phone/fax numbers). Send/receive lists separately and anonymously (no Baer remarks upon them).

Data, other materials and communication. Portfolio valuations have to be faxed without header/logo to either a Baer office or to the hotel or the client. Fax portfolio valuation separately, not several at once. Whenever possible, do not have a portfolio valuation. Get a portfolio breakdown and performance over the phone from an assistant in a phone call and discuss market generalities rather than specific instruments in a particular portfolio. Of course, this is not always possible...

Only use mobile phone registered in and operating from Switzerland. Avoid phone calls from hotel to clients. It is recommended to purchase a telephone calling card from the post office. This allows you to use practically any phone with no specific link left behind.

In the shadow of UBS

The US "Swiss Bank Programme" (2015-18) which sounded the death knell of Swiss banking secrecy had its genesis in the UBS prosecution of 2009. In February of that year, UBS signed a groundbreaking deferred prosecution agreement in which it pled guilty to charges of conspiring to defraud the United States by impeding the IRS. As part of the agreement, it handed over the identities of, and account information for, some American UBS customers and paid $780 million in fines, penalties, interest, and restitution.

Julius Baer took part in these momentous events at one step removed. In or around November 2007, it heard that UBS was closing its US offshore business. In an email in December, the North American Team head described this as a big opportunity and Julius Baer began opening accounts for Americans who formerly had accounts at UBS.

By February, however, Julius Baer had learnt that some UBS relationship managers were under investigation by the Americans with regard to their management of offshore accounts. It thereupon ceased to recruit RMs from UBS but continued, in the words of another email, to "continue to focus on moving the UBS clients rather than the RMs through business introducer and fiduciary contact."

In the first half of 2008 Julius Baer embarked on a rip-roaring onboarding drive, opening 247 undeclared accounts for Americans who once banked with UBS, bringing in SFr609 million in new assets under management. These Americans generally came in through third-party referrals and as accounts managed by third-party asset managers.

In May 2008, UBS admitted in public that the Americans were investigating it, causing consternation at Julius Baer. The bank ceased to set up new structures that involved not sending the W-9 forms to the US authorities (Form W-9 is used in the US income tax system by a third party who must send off an information return to the IRS). By November, Julius Baer was embarking on a lengthy exit plan for US client accounts that lacked evidence of US tax compliance, also prohibiting the opening of non-W-9 accounts for US clients. By June the next year, it had started to close accounts held by sham structures with US beneficial owners.

Swiss regulators saying no to coming clean

It is interesting to note that in November 2009 Julius Baer actually decided to 'come clean' to the US authorities, even though it was not aware of being under investigation. It informed the Swiss financial regulator of its intention and the regulator dissuaded it from doing so, claiming that this would sap its bargaining power with the American Government. This proved to be a bone of contention between the bank and the US Department of Justice in subsequent years.