How Far Up Switzerland's Biggest Bank Did U.S. Tax Evasion Scam Reach?

Former UBS banker Raoul Weil
Former UBS banker Raoul Weil, accompanied by his wife Susan Lerch Weil, arrives at federal court in Fort Lauderdale, Florida October 23, 2014. Andrew Innerarity/Reuters

The secret binder lay wedged in a hidden drawer inside a filing cabinet in his office on the Bahnhofstrasse in Zurich, the heart of the world of Swiss private banking.

Martin Liechti, a former top private banker at Swiss bank giant UBS, privately called the binder his "CYA file," a person briefed on the matter tells Newsweek. CYA was code for "Cover-Your-Ass" evidence Liechti had surreptitiously compiled—hundreds of incriminating emails, PowerPoint presentations, handwritten notes and spreadsheets—to show that other senior executives at UBS, including those at the very highest levels of the bank, were also aware of clandestine and illegal, under U.S. law, bank efforts to help tens of thousands of wealthy American clients evade U.S. taxes through secret offshore accounts.

Contents of the thick binder have spilled into the open in a highly unusual trial in a federal courtroom in Fort Lauderdale, Florida, key pieces of evidence that prosecutors have marshaled against Liechti's former boss and friend, Raoul Weil, once the third-highest ranking executive at UBS.

Weil, also a Swiss citizen, faces charges of conspiring to defraud the United States through his role in enabling tax evasion by 17,000 wealthy American clients of UBS who hid $20 billion in offshore accounts from the Internal Revenue Service from 2002 through 2007. Weil rose to head that U.S. cross-border business and private banking worldwide for the bank.

Liechti, the bank's former head of wealth management for the Americas, was effectively UBS's top private banker for the Americas, with Weil his boss. Arrested in 2008, Liechti got a non-prosecution deal, with immunity, from federal prosecutors when he immediately turned over the secret binder to them, persons briefed on the matter say.

The ongoing trial, now in its second week, with Liechti's testimony continuing today, is remarkable because it represents the first time a senior foreign bank executive—one who happens to speak three languages and sport impeccably tailored suits—has faced a jury trial on American soil, with former colleagues like Liechti doing the very un-Swiss thing of turning against him.

But as the latest chapter in the Justice Department's seven-year crusade against Swiss offshore private banking, the trial is also noteworthy because it it asking sticky new questions about the role of other senior executives at UBS, which is still the world's largest private bank.

Lawyers for Weil, 54, have maintained his innocence, arguing in court last week that a group of lower-level "rogue" subordinates were behind the global bank's peddling of offshore tax evasion schemes, and that Weil knew nothing of the efforts. Weil, who was extradited to the United States last December after checking into a luxury hotel in Bologna, Italy, has spent the past year wearing an electronic monitoring bracelet and living with unnamed friends in New Jersey, who helped post some of $10.5 million bail last December. Aaron Marcu, a lawyer for Weil, declined to comment.

Even Switzerland's top financial regulator, Finma, at the time called the Swiss Federal Banking Commission, wrote in February 2009 that it "did not find any indications that the bank's top management had any knowledge of violations" in the offshore private banking services for Americans. The report absolved Weil by saying that he had "zero tolerance" for noncompliance.

An even bigger question, according to senior American lawyers briefed on the matter, is whether Weil, who faces up to five years in jail, might eventually decide to cooperate with the government and finger other former senior UBS executives and former board members, some of whose names appear on Liechti's potentially incriminating documents.

"The interesting question is: Does Raoul want to flip on the board?"—a twist that could come even if he is found guilty and serves jail time, a senior former prosecutor involved in the broad UBS legal saga tells Newsweek.

Prominent in the unfolding story is Peter Kurer, the former chief general counsel of the bank from 2001 to 2008 and then chairman of UBS AG until he was fired in spring 2009, soon after UBS had averted indictment in February of that year by agreeing to pay $780 million. The bank admitted to wrongdoing over its sales of offshore tax evasion services and submitting to a deferred-prosecution agreement, now over for the bank as an entity.

Kurer, now a partner at BLR & Partners, a business consulting firm in Zurich, declined to comment.

Mark Branson, UBS's former chief financial officer for the global unit Weil once ran, is also involved. In a July 2008 hearing held by the Senate Permanent Subcommittee on Investigations, Branson testified under oath that UBS "did have detailed written policies that prohibited our employees from engaging in some of the conduct that our internal investigation has uncovered, such as assisting in the creation of sham offshore companies to defraud tax authorities."

Such conduct is typically the province of lower-level employees and rank-and-file private bankers, not senior executives. In other words, senior executives weren't involved—the opposite of what Liechti now contends regarding Weil, and a disconnect that prompts the question of which man—Branson or Liechti—might potentially be less than forthright in his remarks.

At the Senate hearing, Branson, a British citizen, repeatedly exasperated Senate members with what they called his evasiveness, a transcript shows. The Swiss government apparently approved, appointing Branson last March chief executive of Finma, the very organization that absolved UBS's top management in the 2009 report. Branson is the first non-Swiss to head the powerful regulator. Vinzenz Mathys, a Finma spokesman, said by email that "as usual in such cases, FINMA does not comment on this case.

Switzerland's centuries-old tradition of banking secrecy makes it a crime to disclose client names. Unlike in the United States, Switzerland does not consider tax evasion to be a crime. (Tax fraud, involving money-laundering and the like, is considered a crime in the Alpine country, as it is in the United States.)

Weil's travails began in earnest when one of his private bankers, Bradley Birkenfeld, an American based in Geneva, blew the whistle on the bank's top brass, including Liechti, Weil and Kurer, in 2007. Birkenfeld, who in court papers in his 2008 case admitted to smuggling diamonds for a client in a toothpaste tube, spent 30 months in jail for his role but emerged in late 2012 richer by $104 million, the beneficiary of the largest whistle-blower reward in American history.

Since 2007, American prosecutors have charged more than four dozen American clients of Swiss banks, including UBS and Credit Suisse and nearly three dozen foreign bankers, lawyers and financial intermediaries involved with secret offshore accounts have been indicted. In 2012, the Justice Department indicted Switzerland's oldest private bank, Wegelin & Co., in 2013, shuttering it for good.

More than 38,000 wealthy American clients of Swiss banks have voluntarily come forward in the past six years to pay more than $5.5 billion on hidden assets. Switzerland is the world's largest offshore financial center, with $2.3 trillion in assets, or one-quarter of the world's hidden, undeclared wealth, according to Boston Consulting Group data.

R. Alexander Acosta, a former prosecutor who oversaw the criminal case against UBS and is now the dean of Florida International University College of Law, tells Newsweek that "in the typical cases, when someone who is senior level is prosecuted, something that often happens is they flip and provide evidence that goes higher up the chain." Acosta, who stressed he was speaking in general and not about UBS or Weil in particular, added that "the Justice Department always prefers going higher up the chain."

Questions about the role and knowledge of executives senior to, on par with or just below Weil—a group that does not include rank-and-file private bankers—have been asked since 2009, when UBS signed its deferred-prosecution agreement. In an accompanying statement of facts, the bank admitted that unnamed, unindicted co-conspirators "occupied positions at the highest levels of management within UBS, including positions on the committees that oversaw legal, compliance, tax, risk and regulatory issues related to the U.S. cross-border business."

That tantalizing language is repeated in the Weil indictment. Both documents also cite as unindicted co-conspirators unnamed lower-level desk heads, managers and private banks, all underlyings who, the Weil indictment says, received training from Weil's division on the tricks of the trade, such as using encrypted laptops and switching hotels to avoid detection.

"If the government wins its case against Weil, it will encourage the Department of Justice to keep maintaining pressure against other big fishes in order to get them sentenced (and against the small fishes to get their testimony and collaboration in order to get the other big fishes)," Douglas Hornung, a banking and white collar criminal defense lawyer in Geneva, tells Newsweek.

Liechti began compiling the CYA binder in early 2008, as UBS fell under heightened scrutiny by the Justice Department. According to the person briefed on the matter, Liechti was "concerned that up-the-chain would say they didn't know what was going on. But they did."