Significant Setbacks to U.S. War on Offshore Tax Evasion with Two Not Guilty Verdicts for Offshore Bankers

As reported in this blog and elsewhere over the past few weeks, Raoul Weil was on trial in Florida for conspiring with U.S. taxpayers to hide their assets from the IRS through secret accounts held at UBS AG. Weil was the former third-ranked officer at UBS and head of its wealth management division. He claimed that he was never told about the tax shelters and that he believed that the accounts that he was aware of complied with U.S. laws.

The government put on a number of witnesses, primarily lower-level former UBS employees who had obtained immunity in exchange for testimony and were shown to be unreliable under cross-examination. On Monday morning, defense counsel announced that they were resting their case without calling any witnesses, and closing arguments immediately were heard. The jury deliberated for 90 minutes and returned a not guilty verdict. For more discussion of the case, see Nathan Hale, Ex-UBS Exec Found Not Guilty in Tax Evasion Trial (Law360, 11/03/2014), available here.

Commentators have subsequently suggested that the government erred by charging one single conspiracy involving Weil and all of UBS’s U.S. clients who held secret accounts. Another government error was not appropriately considering the Weil’s ability to re-direct blame to lower-level employees, who directly manage the relationship with the bank’s U.S. clients, and to the U.S. clients themselves, who filed false tax returns with the IRS. See Jack Townsend, Raoul Weil Found Not Guilty, (Federal Tax Crimes, 11/3/14), available here, and Ex-UBS Executive Weil Acquitted in Tax Probe (swissinfo.ch, 11/04/2014), available here.

The other offshore banker to beat federal charges within the past week is Shokrollah Baravarian who was found not guilty on Friday. Mr. Baravarian, a former senior vice president at Mizrahi Bank, was on trial in Los Angeles for conspiring to conceal undeclared bank accounts held by Iranian Jewish exile customers in the U.S. The witnesses marshaled by the government for this trial included several individuals who had been indicted for tax evasion for hiding assets in accounts at Mizrahi Bank but pleaded guilty only to conspiracy, which then allowed the government to charge Mr. Baravarian with conspiracy. The government’s case unraveled when those witnesses testified that there was no agreement with Mr. Baravarian to hide assets from the IRS. After four hours of deliberation, the jury returned a not guilty verdict. For more reporting on the verdict, see Daniel Siegal, Banker Beats Israeli Account Tax Fraud Charges at Trial (Law360, 10/31/2014), available here.

While the government will likely continue to prosecute offshore banks and its bankers, it is unknown how these losses will affect the government’s overall strategy going forward. There are approximately 30 bankers and advisers who have been indicted by the Justice Department living in Switzerland, successfully avoiding extradition. And, approximately 100 Swiss banks had applied to the Justice Department’s amnesty program for Swiss banks, many of which recently pushed back on the obligations the Justice Department was requiring to obtain a non-prosecution agreement. Whether some of those banks drop out of the program in light of the government’s failure in these trials will soon be seen.

Former UBS Banker Trial Begins in Florida

Opening statements were heard on Tuesday and the first government witness testified yesterday in the trial of ex-UBS AG banking executive Raoul Weil. Prosecutors have sought to show him as the driving force behind the bank’s tax fraud scheme, and defense counsel has claimed that subordinates were at fault and he had no knowledge of the wrongdoing.

According to reporting from Law360, prosecutors explained to the jury in their opening statements that Mr. Weil was the driving force behind UBS’s tax evasion scheme, had many chances to close the cross-border business division but didn’t because it was profitable, and caused UBS bankers who came to the U.S. to meet with clients to engage in precautions “including storing client statements on a second hard drive that could be deleted instantly or meeting clients away from UBS offices – to avoid detection by federal authorities.” Defense counsel minimized Mr. Weil’s role and knowledge, blaming the tax evasion schemes on “subordinates who never told Weil about it and are now cooperating with the government to avoid prison time.” Carolina Bolado, Ex-UBS Exec Says He Didn’t Know About Tax Evasion Scheme (Law360, 10/14/2014, here).

Government witness Hansruedi Schmacher, who is also under indictment, testified yesterday of the details of how UBS managed its secret banking business for U.S. customers, according to a number of media reports. Meetings with customers were held in hotels, which location changed each trip; bankers carried no documents or business cards with the UBS logo or name; hard drives were encrypted; customers were identified on statements by code name, if statements were made available at all, and bankers utilized their own memory techniques to recall the code name used for each customer; customers were telephoned using U.S.-based phone rather than using a Swiss phone; and codes were used for accounts that were secret (“black” or “simple”) as opposed to ones that were declared to the IRS (“white” or “complex”).  Nathan Hale, Ex-UBS Exec Opens Up About Swiss Tax Shelters in Weil Case (Law360, 10/15/2014, here).

Two other key Swiss witnesses are expected. Martin Leichti, the former head of the cross-border banking at UBS, who may be able to establish Mr. Weil’s knowledge of the business division and tax evasion schemes.  The other is an unnamed former top executive at Neue Zürcher Bank who reportedly has recently turned himself over to the Justice Department in order to testify at Mr. Weil’s trial. Ex-banker heads to Florida to testify in Weil case (swissinfo.ch 10/08/2014, here).

The court is permitting three of Mr. Weil’s defense witnesses to testify through video link from London, because the witnesses will not travel to the U.S. to testify in person for the risk of being arrested. These witnesses have not yet been publicly named.  Matthew Allen, Ex-UBS executive Weil finally faces US court (swissinfo.ch 10/13/2014, here).

Mr. Weil was indicated in 2008 for hiding the tax evasion schemes at UBS for more than 20,000 U.S. citizens and over $20 billion in assets. He had been a fugitive and was arrested in 2013 in Italy and extradited to the U.S.  Mr. Weil pleaded not guilty earlier this year and, if found guilty, faces up to five years’ in prison.

DOJ Continues to Prosecute Those Who Fail to File FBARs to Disclose Offshore Accounts

Howard Bloomberg, a forensic account and certified fraud examiner of Atlanta, Georgia, pleaded guilty on Friday to failing to file a Foreign Bank Account Report (FBAR) for the year 2008. Mr. Bloomberg opened a bank account at UBS AG in July 1997. The value of Mr. Bloomberg’s account increased to approximately $930,000 in 2001, and he routinely wired funds from the UBS account to his U.S. accounts. He closed the UBS account in April 2008 and wired the balance of over $540,000 to the U.S.

For having admitted to not filing the 2008 FBAR, Mr. Bloomberg has agreed to pay a penalty of $278,397, representing 50% of highest balance in 2008, and file accurate FBARs from 1997 to 2008. At sentencing, currently scheduled for December, Mr. Bloomberg faces a maximum of five years’ imprisonment and 3 years’ supervised release. According to the U.S. Attorney for the Northern District of Georgia, Sally Quillian Yates:

The era of hiding money in secret Swiss bank accounts is over. Citizens should understand that failing to abide by their banking disclosure obligations to the U.S. Treasury Department could mean criminal prosecution.

(Press release here).

In addition, the trial of Raoul Weil is set to begin next Tuesday, October 14, in Florida. Mr. Weil is the former head of UBS’s global wealth-management business who was indicted in 2008 for allegedly supervising 60 private bankers who managed the secret assets of U.S. account holders. Mr. Weil appeared in court in 2013 and is currently living under house arrest in New Jersey.

For information on all prosecutions under the Department of Justice’s Offshore Compliance Initiative, which began in 2008 with its investigation of UBS, see its “scorecard” here.