U.S. Department of Justice building in Washington, D.C. Photo credit: Diego Radzinschi/ALM

Here's a sure way to lose half your cooperation credit in a federal investigation: Let your in-house counsel advise employees not to cooperate with U.S. prosecutors.

That's what Swiss government-owned Zürcher Kantonalbank did, and now it owes the United States $98.5 million in restitution, forfeiture and fines. The Zurich-area institution is the largest canton (township) bank and the fourth-largest bank in Switzerland.

U.S. Attorney Geoffrey Berman for the Southern District of New York in Manhattan Tuesday announced reaching a three-year deferred prosecution agreement with the ZKB. The bank admitted to conspiring to help U.S. taxpayer-clients evade about $39 million in taxes by hiding their funds in offshore accounts at the bank from 2002 to 2009.

In a statement, the ZKB said paying the penalty “will have no negative impact on the bank's 2018 financial results.” It said it has “adjusted its cross-border wealth management business since 2009,” and is “committed to a strict tax-compliance business policy,” focusing on markets in Europe.

Dr. Jörg Müller-Ganz, chairman of the board of directors, said in the statement, “We are relieved that after seven years, we were able to conclude the investigation following an objective dialogue with the U.S. authorities. The solution that has now been reached marks the end of this matter and removes any related uncertainties. We look forward to forging ahead with the positive development of our bank.”

In its own statement, the U.S. Attorney's Office said, “The amount of ZKB's cooperation credit was reduced [50 percent] by the government due to ZKB's actions … in dissuading two indicted ZKB bankers from cooperating with U.S. authorities for years after their indictment.”

The two indicted bankers, Stephan Fellmann and Christof Reist, also pleaded guilty Tuesday for their role in the conspiracy. Both are Swiss citizens. They each face up to one year in prison at their sentencing hearings, scheduled for Nov. 30.

The statement of facts within the DPA describes how the bank lost its cooperation credit.

The document says the bank retained independent U.S. counsel for the indicted bankers to avoid any conflict of interest. But, it adds, for two years starting in 2013, unnamed in-house counsel, at times joined by personnel from the human resources department, “regularly met with Fellmann and Reist.”

The document said without U.S. counsel present, ZKB's “in-house counsel discussed … substantive and strategic matters relevant to the pending U.S. criminal case, as well as job placements and career development.”

It continues, “In-house counsel informed Fellmann and Reist that it was the bank's view that they should wait to resolve their criminal cases in conjunction with ZKB reaching a resolution with U.S. authorities because it would be in the bankers' best interests to resolve their cases along with the bank rather than separately.” It adds, Fellmann and Reist “felt dissuaded from reaching out” to U.S. prosecutors.

Fellmann and Reist also “felt that their continued employment at ZKB and ZKB's ongoing payment of their legal fees would be threatened should they take steps that were viewed by ZKB as inconsistent with the bank's own interests. Due in part to these discussions, Fellmann and Reist did not seek to cooperate with the United States until the summer of 2015,” the document said.

Needless to say, the prosecutors were not pleased. “The government views the actions of ZKB with respect to indicted bankers Fellmann and Reist, described in the statement of facts, as inconsistent with a policy of full cooperation,” it said.

The DPA was signed by Thomas Fischer, general counsel at ZKB since the beginning of 2017, and by outside counsel Philip Urofsky, of Shearman & Sterling.