An update on Hummler and Bank Wegelin
Hummler was remarkably candid in his 2011 Bürgenstock address in stating that the sole reason that Bank Wegelin was growing massively was by helping foreigners evade domestic taxation. The U.S. and other EU nations were fed up Swiss banks aiding and abetting tax evasion by their nationals. Hummler presented his foreign customers, and his bank, as brave resistors to the oppression of government taxation. Indeed, he claimed in one of his newsletters that there was a natural law property right to avoid all taxation of income and wealth because the bank’s foreign clients had been promised by the Swiss that their banks would help the foreign clients evade taxes with impunity.
“[F]oreign clients have so far enjoyed the benefit offered by Switzerland of noncriminalization for simple tax evasion. In terms of property theory, this is a “property right” that had previously been assured; should one wish (or be obliged) to modify it, this amounts to expropriation in the sensitive area of personal integrity.”
The Wall Street Journal had an article explaining how the U.S. government responded to Hummler’s claim that Swiss banks had a legal duty to aid and abet U.S. citizens’ tax evasion.
“Speaking in Swiss-German, Hummler announced the bank had sold most of its assets to another Swiss bank. According to a person familiar with the matter, Hummler called it a last-ditch effort to preserve employees’ jobs amid withdrawals of assets by investors who were increasingly worried about a growing problem: a U.S. federal investigation into Wegelin’s sale of tax-evasion services to wealthy Americans. The dark-suited bankers and conservatively dressed office clerks, said the person, were in shock and tears.
The news for Wegelin, its headquarters nestled in the town of St. Gallen next to the Appenzell Alps near the German-Austrian borders, would only get worse. Six days later the U.S. Justice Department, acting on plans it had been making for weeks, indicted the 270-year-old bank on charges of enabling wealthy Americans to evade taxes on at least $1.2 billion from 2002 through last year. U.S. criminal laws apply to foreign banks that do business in the United States, even if the banks, like Wegelin, have no U.S. branches. The charges made Wegelin the first overseas bank in history to be indicted by U.S. authorities and marked a milestone in a burgeoning American crackdown on Swiss bank secrecy and efforts to force banks to turn over client names. The sale and the subsequent indictment effectively brought an end to the storied bank.
Under Hummler’s oversight, which began after he joined Wegelin in 1991, the bank grew rapidly, managing some $1.2 billion in undeclared U.S. assets as of 2010 from only $240 million in 2005.
Soon after the UBS investigation hit Switzerland, Wegelin told its U.S. clients to sell all their U.S. assets held through the bank. But it also took at least $1.2 billion from Americans who were fleeing the U.S. crackdown on U.S. tax evaders at UBS over 2008 and 2009, according to the indictment. Wegelin’s spokesman declined when asked for comment on this charge.
One of Hummler’s friends said he was confused by this.
“What I do not understand is that Wegelin approached all its customers, in 2009, to sell all U.S. and U.S.-related assets – at the same time the bank was about to acquire U.S. customers from UBS,” said the friend Heinz Zimmermann, a finance professor at the University of Basel.
Wegelin was “undeterred by the crystal-clear warning they got when they learned that UBS was under investigation for the identical practices,” the indictment said.”
The Swiss are the primary beneficiaries of the rise of the One Percent
I spent much of Saturday in the Appenzell Alps. They are beautiful. It was the day that they bring the cows down from higher elevations because of the risk of cold weather and snow. The people moving the cows dress up in traditional costumes (the men wear an earring in one ear). One of the groups of men yodeled. It is a magical region. It is also an exceptionally conservative region, including one area that was the last to bar Swiss women from voting (a bar overturned by the courts, not the people of the region). Hummler remains a hero to much of this region. He also remains a hero to many of the people, particularly the Swiss, who attend the Bürgenstock meeting. This includes many thoughtful Swiss who trade derivatives. The U.S. is the hypocritical villain in their eyes, and U.S. financial regulation of derivatives and criminal prosecutions are our great sins.
It was only in the course of this trip that I began to understand that the Swiss have been the greatest beneficiaries of the rise of plutocracy in the U.S. and other portions of the world. The justly infamous Citicorp memoranda celebrating the rise of “plutonomy” shows that the “1%” have three economic goals. They wish to use their political power and legal and accounting experts to minimize the taxes they pay and they want to accumulate more toys and playgrounds – particularly ultra-expensive luxury goods that demonstrate that they hold the most elite status. Switzerland provides tax evasion to the American “one-percent,” but as least as valuable is the Swiss practice of pandering to plutocrats by praising their crimes as acts of brave rebellion against a tyrannical state. Switzerland also makes a significant portion of the plutocrats’ favorite playthings. The ultra-expensive Swiss watch is simply the most famous example. Switzerland is a nation of stunning beauty famous for its ability to draw the foreign “one percent” by catering as a playground to the plutocrats. Swiss elites have a symbiotic relationship with foreign plutocrats, many of whom grew wealthy by helping to cause the financial crisis.
The prevailing position of Swiss members of the derivatives industry was that self-regulation worked well in Switzerland. The Swiss senior financial regulator who spoke to the Bürgenstock meeting announced that Swiss financial regulation would only occur if it met four tests:
- It showed net benefits through a benefit/cost test
- A thorough review was conducted of the “necessity” for regulation and its impact
- The rule would be “neutral” in terms of competition (i.e., not hurt or aid any firm more than any other competitor)
- The rule “improved the attractiveness of location” (i.e., Switzerland would only adopt rules that helped it “win” the competition in financial regulatory laxity)
To sum it up, the Swiss senior financial regulator announced that his foundational principle was winning the regulatory race to the bottom. He wasn’t there to hear my opening keynote so he did not respond to my arguments against engaging in such a race. However, it is clear that the Swiss remain convinced
(a) that their disdain for U.S. financial regulation and income taxation is appropriate and even brave and principled and
(b) that U.S. financial regulation is hypocritical and harmful.
(c) It was also abundantly clear that it was inconceivable to the senior Swiss regulator that his prime function was to serve as a regulatory “cop on the beat” and prevent accounting control fraud (much less tax evasion).
Switzerland’s giant banks, UBS and Credit Suisse, have been in repeated scandals and both would have failed but for (indirect) support from the U.S. Federal Reserve, but the dominant Swiss view is that they escaped the Great Recession so repeated bank fraud by the most elite Swiss banks “macht nichts.” Senior Swiss regulators see their principal task as protecting elite Swiss banks’ aiding and abetting of foreign tax evasion from being subject to effective regulatory or prosecutorial counter-measures.
Swiss industry members went from discussions about how evil Greece was for not successfully preventing massive tax evasion by its elites to discussions about how evil it was for other nations to try to prevent Swiss banks from aiding and abetting tax evasion by elites. They saw no contradiction in the two positions, taken an hour apart.
I stress that this is the position of the thoughtful Swiss not simply that of their extreme right wing whose primary issue is the influx of non-Swiss, particularly Muslims. Hummler’s barely veiled effort to blame American blacks for the crisis is one that is shared by many Germans prominent in business and finance. The WSJ article on Hummler and Wegelin contains a coded variant on this theme.
“In recent years, under Hummler, Wegelin refashioned a retail space below its headquarters into a bar it christened Nonolet (from the Latin phrase “pecunia non olet” or “money does not reek”). The purpose, Christian Raubach, a Wegelin partner, told Reuters in 2009, was to ensure a glossy crowd below the wood-paneled offices of the private bank, whose logo of a “W” between two griffins declares in German “Private Bankers since 1741.” “You cannot have a strange business there like a kebab shop” or patrons “vomiting” after a night drinking beer, Raubach said.”
A “kebab shop” is such a “strange business” that Wegelin’s bankers “cannot have” it near them. Muslims run kebab shops. The Swiss, German, Dutch, and Austrian versions of the U.S. tea party are very large, have many elite adherents from the financial sector, and frequently display their impassioned prejudices. They want stringent governmental regulation of some aspects of life, e.g., deporting foreigners and restricting Muslim dress, but they are often strong opponents of vigorous financial regulation and bear deep resentments against the U.S.
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Analysis and Opinion articles by William K.Black
About the Author
William K. Black is the author of The Best Way to Rob a Bank Is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. He spent years working on regulatory policy and fraud prevention as Executive Director of the Institute for Fraud Prevention, Litigation Director of the Federal Home Loan Bank Board and Deputy Director of the National Commission on Financial Institution Reform, Recovery and Enforcement, among other positions.
Bill writes a column for Benzinga every Monday. His other academic articles, congressional testimony, and musings about the financial crisis can be found at his Social Science Research Network author page and at the blog New Economic Perspectives.
Follow him at: @WilliamKBlack