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Wednesday, March 13, 2013

A Different Version of the “Dumb” Swiss Banker Story

 

bloomberg#2

 

bi

 

A funny story out from Switzerland today. It was widely covered in the press (Link). I think the story that is “out there” is bullshit. My take:

 

The story in the media is that a Mr. Beda Singenberger, a Swiss Private Banker “accidentally” sent a list of US clients with black money accounts to the Department of Justice. The DOJ promptly smashed all 60 of them. Money was forfeited, fines were paid and some folks are doing time.

Fairyland. It doesn’t work like that.

 

Beda was using a time-honored Swiss tradition referred to as either the “Double Blind” or simply, “Belt and Suspenders”.  A Swiss lawyer would set up a Trust Agreement for a newly formed trust that was legally domiciled in Lichtenstein. An actual trust was set up in Lichtenstein, but this is just a recording formality that has a small initial cost.

The new Trust is given a secret name; call it “Cassandra”. The Swiss lawyer then proceeds to set up an investment account with a friendly Swiss banker. The name on the new account is Cassandra. There is no other information regarding the account other than that the account is legally registered in Lichtenstein.

 

A US person with this set up has two layers of protection from the IRS/DOJ. The first in the Swiss banking secrecy laws. For years it was believed that these laws would protect black accounts. That all fell apart in 2008. There is no Swiss banking secrecy that can provide a shield from the IRS any longer.

But, the second level of protection is impenetrable. The DOJ can lean all they want on the Swiss banker to divulge names. But, in this case, the only thing the banker has is the name Cassandra, and the name of a Swiss lawyer who set the Trust up.

The Swiss lawyers are completely protected. They, like US lawyers, are not obligated to reveal information regarding client activity. The Swiss version of the Attorney/Client confidentiality privilege will not be violated – ever.

 

You have to trust me on this – If I have all the details on how this works, then you can be 100% certain that the nice folks at the DOJ are also aware of the details. The boys at the DOJ hit a wall over client privilege. They must have been working overtime to break this last wall down.

The private Swiss bankers get money from clients, and they invest it. Nothing special, stocks and bonds. To do this basic investing requires a clearing relationship with some NY based entity. Assume that the SEC knew that Beda was dirty, and they wanted to nail him. The DOJ could easily put a block on the assets of the Swiss Private Bank. They would then send a nice letter that says, “Come talk to us”.

Note: This was how the Wegelin Bank got shut down in the US.

 

At this point, an expensive D.C. tax lawyer gets involved and “he” has a sit down with “somebody”. Cards get put on the table.

The Swiss banker is totally screwed. Not only are the assets of his US customers frozen, but other assets that belong to folks from Iran, South America, China, Africa etc are also blocked. If the banker ends up losing the assets of some pirate from Somalia, the banker will be found dead.

On the other hand, if the Swiss banker turns over the US names he is in violation of Swiss banking laws, he may end up in Swiss jail, and for sure, his banking career is finished.

Note: “He” knows who they are. There are regular face-to-face meetings – cash withdrawals – investment strategy- new fee agreement {5% a year, thank you so much}. This is not a bank with big doors and tellers. A floor on a back street with a few offices is the reality. A conference room, bottled water, fresh bills to count and all smiles. (Plus, the shopping on the Bahnhofstrasse is great – and easy with all the new found cash!)

 

So the Swiss banker’s US lawyer cuts a deal. The Swiss banker will “accidentally” provide the names to the DOJ. In return, the DOJ releases any funds/assets that are not US owned.

 

The DOJ is pleased as punch. They finally broke down a double blind. Any other US person who thought they were protected by the Trusts and the lawyers,  are now crapping in their pants. (There are thousands in this position today) If they were smart, they would do a disclosure/settlement deal with the DOJ. (Big Fines – No Jail time – No perp walk)

The Swiss banker can go on living. He may look stupid, but at least he doesn’t have the Taiwanese mafia after him. And who knows, his remaining (non US) clients will appreciate what he did for them (screw the Americans). They might just give the banker a bit more loot to manage as a result. Everybody is happy – except a few folks in the US who got caught with their pants down.

 

So that’s my story. The message in my version is that the DOJ is playing hard ball and winning. They are Terminators, nothing stops them. There is a positive spin to this story – folks who cheat the system are getting nailed. The dark side is that the Terminators are out there, and working 24/7. They have big computers and very big balls. Think of a rhino that puts its head down, and just charges through the bushes. Everything gets trampled in the process.

 

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Comments

  1. Now if we can get the DOJ to play hardball on the US bankers who caused the financial crisis and will cause the next one.

  2. As usual, very interesting story Bruce. Sounds about right.

  3. Lets remember that illegal immigrants, with little or no formal education, regularly outsmart the Ivy League educated DoJ bad boys each and every day. The mud covered, uneducated masses have been winning for decades. Ditto for drug gangs — although they seem to have outwitted the DEA by putting moles inside the DEA on top of standard tricks.

    If you walk across the US-Mexican border wearing neon orange clothing and holding a “Screw US immigration law” sign and you announce your intentions weeks ahead of time — even the bad boys of Homeland Security can figure out how to catch you.

    Walk across the border at night, and hundreds of sympathizers will leave food and water to help you. Dozens of celebrities will encourage immigration “reform”. Politics will prevail over written law.

    We don’t have smart or dumb Swiss bankers — they are irrelevant. We have an increasingly desperate bureaucracy in Washington, trying to create an appearance that they are still in control.

    If the DoJ boys had any clue what they were doing, they would be looking at money laundering through Asia, the US and UK Carribean islands, Bermuda, etc. They don’t look there — and they won’t even if they read this comment.

    Every bureaucrat in Washington knows: Going after Goldman is really bad for your career.

    Go after some peon banker, put the story in the paper so the CNN crowd can run propoganda about getting tough on the rich … but don’t actually fix anything. The power players in Washington like the status quo.

  4. “And who knows, his remaining (non US) clients will appreciate what he did for them.”

    Well, maybe. If I was one of those non-US clients and learned that the US Feds were succeeding in getting the info they want, I’d worry that the door is now open and the Feds in my country will now see it as an opportunity and figure out a way to get the details they want from the Swiss.

  5. Mercy!!! Finally, a blog post that isn’t about how to save SS the greatest ponzi scheme in history!

    • Glad to oblige. I’ll be back on SS soon…..

      • If SS was actually important to anyone, it should have been fully funded all along — like Congress’ own pensions.

        Writing about the danger of icebergs after the Titanic already hit one is absurd. Why would anyone write dozens of warnings after the hit? You are the jerk running around the tilting deck yelling “I told you so!!” Even if you did, who cares? Too late to save the ship

        Try learning from the experience (force honest and balanced spending going forward) instead of trying to put bubble gum over the gash in the ship’s hull. You are way way way too late

        Our “new” (but pretty much the same) ship’s captain Obama is trying to claim there is no debt crisis …. mostly because he thinks he will be out of office by the time the last lifeboat gets launched. Try writing about that lie and stop trying to save a ponzi scheme.

        BTW — Bruce, do you have any children? You mentioned you are single now, but do you have any regard for future generations?

        • Jeepers! I don’t think I deserved that.

          I have two kids, long since out of the nest. Do I care about them and what they will face? Sure I do.
          That’s one of the reasons I write all the time about SS. It’s a huge inter-generational wealth transfer.

          I have said in these pages dozens of times that I favor a big means test to stop what is happening to the next few generations. I care much more about them, then I do myself.

          Sincerely,
          Ponzi Saver

          • Rich people get almost the same SS payments as the middle class (because both taxes and benefits are capped at about $92K salary). Means testing out the top 1% is not going to save very much — lets be generous and say it lowers the ponzi scheme’s cost by 2% … if anything, that is a huge over-estimate. Even if you somehow got the top 10% to agree to means testing, you might shave 20% (at best) off the unfunded liabilities. And as many liberal congress members have pointed out, once you make SS means tested, it destroys the “entitlement lie” and exposes the program as simply a welfare benefit.

            And means testing would also involve the IRS (and/or SS administration) collecting gobs of net-worth data … much of which is impossible to value. Private equity, privately owned companies, deferred compensation schemes … just to name a few things. If you put all your “wealth” into annuities, then technically you are broke but you have rather high income for life. Including the present value of pension/health benefits would put many union employees into the “rich” category. Your means testing idea is simply not workable — too many ways to game the system.

            If you really care about your kids — get rid of social security and pay down a large chunk of the national debt. All these benefits you keep talking about are not free. Someone — future generations including your kids — are going to have to pay all for all this debt binging.

            You cannot claim to care about your kids and also support endless debt spending. You are lying to yourself

        • Bubba Joe, I am going to remember and use your first sentence for a long time…of course, crediting you. Sweet!
          Interesting article, Bruce. I’ll be crediting you as well.

  6. So why do these rich US investors solve the problem once and for all and change their citizenship and turn in their US passports?

  7. I don’t get it. You said all the swiss banker knows is nicknames like Cassandra. So how did he get the names of the US investors with the Lichtenstein accounts?

    • The question the DOJ asks is: “Show us the info for any account that is domiciled in the USA.”
      The answer, “All of our clients are register in Lichtenstein not the USA, so buzz off!”

      But as I explained (or tried to) in the Note there has to be face to face meetings. The names are known, there is no paper trail to prove it. I repeat the note:

      Note: “He” knows who they are. There are regular face-to-face meetings – cash withdrawals – investment strategy- new fee agreement {5% a year, thank you so much}. This is not a bank with big doors and tellers. A floor on a back street with a few offices is the reality. A conference room, bottled water, fresh bills to count and all smiles. (Plus, the shopping on the Bahnhofstrasse is great – and easy with all the new found cash!)

    • The paperwork says “Casandra LLC” … but the person(s) making deposits and/or receiving withdrawals is a living person who can be imprisoned. If it is a go between, that person is not going to take the fall for the real Casandra. More likely, the person behind Casandra is going to collect his/her own cash at some point. Assuming the lawyer in Switzerland / Lichtenstein claims attorney/client privilege, it just means the client can’t ever receive another check / wire transfer, and the lawyer cannot ever telephone / contact the client. As soon as the client is contacted in any way, the atty/client veil is lifted.

      More to the point, the Swiss bank had to decide whether to give up Casandra’s real name or else forfeit *all* monies in the US, including monies belonging to Somali pirates, terrorists, etc — persons who would not hesitate to harm or kill the Swiss banker.

      Heads, the IRS keeps all the monies — both the US citizen / Casandra trust AND the pirate killers. The pirates will have a really bad attitude about that, not to mention they will fear the US government will likely figure out the pirate’s true identity. Tails the banker gives up the true identity of Casandra, the US citizen gets screwed by his public servants — and the pirates move their money to a bank that does not have a US branch (which outside G7 countries is not unusual).

      The big question is this: what happens when some of the Chinese party officials’ money gets caught up in this sweep? What happens when a Goldman guy (like Mario Draghi) gets caught? What happens when (not if) the Saudi / Kuwaiti royal family gets caught up in one of these IRS data grabs?

      There are lots of “evil doers” in the world — about half of them are long time US allies. A big reason the US government hasn’t signed a lot of UN treaties is because the definition of “terrorism” would likely encompass things the US government has done / is doing…. and/or our allies are doing (often on our behalf). As the suits go after the “terrorists” that they don’t like, there is no way to avoid catching as many friends as foes. Collateral damage, as the euphemism goes, is going to be very high.

      6 of the 10 wealthiest counties in the US are those in Virginia and Maryland that surround Washington DC. That means: six out of ten times, prosecuting “the rich” means going after the political establishment itself

      And that is why W/Obama haven’t prosecuted anyone over the banking mess. Washington DC is as guilty as Wall Street — and they are frequently the same people.

      • For example: Uncle Sam went after those evil Columbian and Mexican drug cartels. Evil doers!!! And they tried to limit the exposure to only Pablo Escabor and buddies…

        But the genie is impossible to put back into the lamp … next thing you know, major G7 banks (Bank of New York, Chemical, etc) get hauled in for money laundering. Just recently, it was HSBC

        That gets expensive when whichever bank has to pay a big fine — and then the government bails that bank out. It is also embarrassing because in every single case, the government regulators knew, or should have known based on info they had all along.

        Sometimes, it turns out the money launderer is a member of Congress, trying to conceal bribe money:
        http://www.cnn.com/2006/POLITICS/05/21/jefferson.search/index.html

  8. Thanks Bruce, another interesting piece. I do wonder though if there’s a potential longer-term impact from this. If the DOJ can, and clearly will, use their powers to freeze US held assets (brokerage accounts for example) in order to push their demands through, wouldn’t there gradually be a demand from the clients of Swiss bankers/lawyers/advisers (or indeed anywhere else in the world) to demand that any assets they own are held outside of the US? Seems to me this might come back and bite the US financial industry where the sun rarely shines.

  9. But What Do I Know? says:

    More like Mr. Beena Singenbanker, amirite?

  10. Great piece! Thanks for sharing.

  11. I have suspected this for years. However, the US DOJ is playing a very dangerous game that might only to bigger and more impenetrable banking secrecy laws in the future under the guise of national sovereignty.

  12. Too bad the DOJ is so selective in their pursuit of the bad guys, as Bubba Joe pointed out the biggest thieves of all are In and around DC. Would be nice to see HSBC, Goldman, etc. get some criminal charges on the executives instead of pissant fines – nothing more than protection money for the govt. Mafia. No way will the big Wall St. to Washington circle jerk ever end.

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