One man’s role in exposing secrets of Swiss banking

Dan Reeves, a former investigating officer for the Internal Revenue Service (IRS) in the US, launched a tidal wave of investigations into Swiss private banking secrecy in 2008. As a result some Swiss banks have been washed away. Many are now seeking to do deals rather than perish under a sea of litigation and reputational damage.

Mr Reeves, a dry and dour official from Pennsylvania, has made a career out of fraud and forensic investigation. His work had gone largely unnoticed until he explored deeply incriminating material relating to Swiss banks.

Now Mr Reeves’ probes have put the Swiss government under notice that the country’s banks can no longer apply their own rules to their US operations. As part of a deal with the US, the Swiss agreed to surrender details of private client accounts, UBS leading the way by providing “administrative assistance” relating to a mass handover of files by Swiss federal authorities from February 2009.

A number of Swiss private banks continue to be subject to investigations started by Mr Reeves, who retired from the IRS last year. Some 14 Swiss banks are being probed by US authorities for alleged facilitation of tax evasion.

Secrecy is no longer a selling point for Swiss private banks, says Mr Reeves, and it is likely to get banks into trouble with the US authorities. He warns ominously: “The US authorities want to send out the message: ‘We are on the hunt for those facilitating tax evasion. Your days are numbered. We might not find you tomorrow but you need to start worrying that we are going to come and knock on your door.’”

Demand is shrinking as a result of US efforts. “There was a time when you bragged to your friends about having a Swiss bank account,” he explains. “Now you had better keep your mouth shut!” 

Mr Reeves anticipates the number of suppliers of products based on secrecy to decline. “When you can reduce the demand for their product, you also reduce the suppliers of the product,” he says. “And when you reduce the supply it becomes easier and easier to find those suppliers and do something about them.”

Since 1999, Mr Reeves had been investigating US-based clients who had credit cards issued by offshore banks, when he heard revelations about the activities of UBS in the US. A whistleblower was telling the US Department of Justice how Swiss private bankers were “behaving like James Bonds” to gain and retain clients, while enabling them to evade local taxation. UBS bankers were disguising the fact that they were servicing clients in the US to stay beneath the radar of the IRS and other financial regulators. This enabled them to freely bring products benefiting from Swiss levels of taxes to American clients.

In May 2008, Bradley Birkenfeld, a former wealth manager at UBS, was telling the Department of Justice and subsequently Mr Reeves at the IRS, how Swiss bankers were finding numerous subterfuges to avoid disclosing their US business and clients to the local authorities, as required by the Qualified Intermediary Program. QIP has since been superseded by FATCA (the Foreign Account Tax Compliance Act). “Swiss private banks were committing criminal acts on US soil,” says Mr Reeves indignantly. “They didn’t care what they were doing in Switzerland so much, because there it was not against the law.”

UBS visited clients and transacted business in complete anonymity. Their schemes were numerous and convoluted. When Mr Birkenfield planned his visits, he was warned of the risks and briefed on how to explain his movements. He took care against a suspicious US agent at customs checking his computer by having key information encrypted. That information would show the products and the identities of clients. Stays in individual hotels were kept down to two days to allay suspicions. Communications about transactions were conducted using code words. Contact with the Swiss headquarters was kept to a minimum to avoid intercepts.

Some client requests required great ingenuity. One asked Mr Birkenfeld to bring in some diamonds from Switzerland, so the banker packed them in a toothpaste tube to avoid the scrutiny of customs officials. The ruse failed, as the diamonds showed up on the screening machine and he was arrested, indicted and convicted. In September 2012 he was rewarded for his evidence against Swiss banks with the largest ever payout – $104m (€76.5m) – to a single whistleblower.  Mr Reeves says he found Mr Birkenfeld a “normal person. I enjoyed speaking to him.”

Swiss marketing to US high net worth clients was conducted under the umbrella of apparently innocent events, such as art fairs selling expensive European works. “They would try to encourage them to open up Swiss bank accounts by offering them complimentary tickets,” says Mr Reeves. “They would tell the clients that the best reason to open a Swiss bank account was to stop paying taxes on their income from financial investments and the account was secret. They were engaged in these activities while standing on the sovereign soil of the United States.”

Evidence of abuse of private Swiss bank accounts, accumulated by Mr Reeves, was presented to a court in Miami, where a judge was required to assess whether Switzerland had abused the principle of ‘comity’, that is the respect that one country shows to another in observing its laws. The judge found in favour of the US and the matter went viral. “It was not intended as an attack on Swiss bank secrecy per se,” says Mr Reeves. “It was viewed as such and it became a huge case.”

The US authorities made it clear that the case had implications for all Swiss banks, and not just UBS, on whose affairs they had concentrated. “This concerned Swiss banking secrecy in general. If we turn over records related to one bank, other banks will be affected. If the largest bank in Switzerland can be forced to do this, then what about smaller banks?”

Mr Reeves says that he was the “sword of Damocles” hanging over the Swiss. “If they had said ‘no, we are not going to do anything’, the judge would order them to turn over the records and it would have become an international incident.”

The Swiss concession led to the country’s federal authorities’ submission of private details of UBS banking clients with more than SFr1m (€800,000) on deposit. This meant 4,450 clients faced the prospect of an investigation by Mr Reeves and his IRS colleagues. “That is a lot of accounts to get out of Switzerland when Switzerland has never given a single account ever, to anyone.”  

No less than 39,000 Swiss bank account holders took up an offer made by the US authorities to forgo criminal prosecutions, in return for a penalty of 20 per cent of assets held offshore based in the highest year when they were held. Mr Reeves says that deals have been concluded on less than one third of the accounts and $5.5bn has been paid in penalties. He anticipates the US authorities netting $20bn.

UBS was thoroughly investigated by the Department of Justice and reached a Deferred Prosecution Agreement, whereby it paid a fine of $780m to the US authorities. “For UBS, the US cross border matter has been finally and comprehensively resolved since autumn 2010,” says a UBS spokesman.

Many private banks have suffered reputational damage as a result of the activities of Dan Reeves and his team at the IRS. At least two have closed their doors for the last time.

The matter does not stop there. In late 2013, Raoul Weil, the former head of global wealth management at UBS, returned to the US from self-imposed exile in Italy. This threatens to reignite pressure on Swiss private banking. His case may add to the detail already provided by Mr Birkenfeld, of the secret activities of private banks in the US.

The announcement in January 2013 that Bank Wegelin was to close particularly shocked the Swiss banking establishment. It was the country’s oldest private institution and had a distinguished record of servicing local Swiss high net worth individuals. Wegelin had no branches outside Switzerland, but it used UBS for correspondent banking services, to handle money for US-based clients.

Bank Frey, another Swiss private bank has also indicated its intention to close its international services. “It no longer makes sense for a small bank to continue its cross-border services,” said its chairman Markus Frey last October. The US authorities had refused to reach a settlement with the small bank as it was already under investigation. Credit Suisse and Julius Baer are among a group of other banks also being investigated. The largest banks potentially face massive fines as part of Deferred Prosecution Agreements or convictions. 

A report from KPMG, in conjunction with the University of St Gallen, puts the number of prospective bank closures as high as 30 per cent over the next three years. Many of these may also be market related, continuing a process started in 2012.

While more banks are likely to close, Zeno Staub, the CEO of Vontobel Holding, a Swiss private bank, believes that some smaller banks may switch licences to become asset managers and help reduce regulatory costs. “I would expect it [the US investigation] to accelerate the process of closure,” he warns.