UBS Case Opens Door To Secrets Of Swiss Banking

August 13, 2009


Is the United States blasting open the wall of Swiss banking secrecy in the historic settlement reached Wednesday over customer records at Zurich-based UBS AG — or is it just getting a peek behind the curtain?

The answer lies in the details — if and when they are revealed.

On Wednesday, the U.S. government reached agreements with Switzerland and its largest bank that will give the Internal Revenue Service information on thousands of UBS customers suspected of using secret offshore accounts to evade income taxes.

According to a person familiar with the pact, the U.S. will get details on thousands of UBS’ largest clients, although it may take some time, as the request will be handled through the established treaty process between the two governments.

“The parties have initialed agreements,” Stuart D. Gibson, an attorney with the Justice Department’s tax division in Washington, D.C., told U.S. District Judge Alan Gold in a conference call. “It will take a little time” to finalize the agreements, then the parties will file a “stipulation of dismissal” of the UBS suit.

The IRS has been seeking to enforce a “John Doe summons,” demanding the names of 52,000 UBS customers with $14.8 billion in secret offshore accounts, citing evidence they likely broke U.S. tax law.


The IRS pointed to UBS’ own admissions of its elaborate role in helping Americans hide money offshore when the bank signed a deferred prosecution agreement in February and paid a fine of $780 million to avoid criminal prosecution.

UBS, which sponsors the Art Basel Miami Beach event, said it welcomed the settlement to the case, which put it in the crossfire of U.S. and Swiss law. Amid the international sparring, the Swiss government said it was prepared to seize records from UBS if necessary to protect long-standing tenets of banking secrecy, which provide a key selling point for the country’s robust financial sector.

Some settlement details — including how many UBS customer names will be exposed — will become public when the final agreements are filed with the court, which could come as early as next week. It will likely remain debatable, however, whether the United States extracted the maximum from the Swiss government and its top bank.

“This settlement better be good,” said Edward M. Robbins Jr., a Beverly Hills, Calif. tax attorney, whose client, Igor Olenicoff, helped trigger the UBS investigation. “We won’t know until we see the settlement agreement whether the U.S. rolled over and got some crumbs.”

The sensitive negotiations dragged on until 4 a.m. Wednesday, just hours before the Justice Department was set to update Judge Gold on the status of the case. If talks had failed, the judge was ready as early as Aug. 17 to hear the case.

The case marks the biggest assault ever on Swiss banking secrecy, and fallout is reaching well beyond UBS. UBS and other Swiss banks, such as Credit Suisse, are shutting down their cross-border business that provides accounts to U.S. clients.

Many UBS clients have made voluntary disclosures under an IRS program that sets a Sept. 23 deadline for avoiding criminal prosecution by paying back taxes, interest and penalties. “We’ve been pleased with the response,” IRS spokesman Bruce Friedland said. The settlement is likely to spur more tax cheats to rush to resolve their tax issues. Once the agency begins investigating a taxpayer, the voluntary route is not an option.

“We’re already seeing an uptick today on the phone,” said William M. Sharp, a Tampa tax attorney who represents many clients with Swiss accounts.

“Those who were sitting on the fence post are going to come in.”

Meanwhile, federal prosecutors keep pursuing information obtained through the voluntary disclosures to build more cases and already are on the trail of at least one more Swiss bank, according to a recent criminal case filed in Fort Lauderdale federal court.

Alan L. Weisberg, a tax attorney with WEISBERG KAINEN MARK, PL in Miami, said that during voluntary disclosures, the IRS elicits information “on bankers and other people who are seen as enablers, because they are going to expand this.”

Weisberg, a former federal prosecutor, said “I see no reason to think it’s going to stop there.”

Still, some legal experts think the IRS could have gained more by pushing the “John Doe summons” in federal court, where many say the agency was likely to prevail.

Indeed, some tax attorneys believe Gold tipped his hand on his willingness to enforce the subpoena when he told the Justice Department to consult with others in the executive branch and come back and tell him how far the United States was willing to go to press UBS to comply — including seizing UBS assets in the United States.

Once the case spiraled into a diplomatic dispute between friendly governments, more was at stake than the simple question of how many UBS customers the IRS could nail. Secretary of State Hillary Clinton discussed the UBS case with Swiss Foreign Minister Micheline Calmy-Rey in a Washington meeting July 31.


“I expect the parties have crafted a settlement agreement that should respect bank secrecy laws, but at the same time should broadly construe the exception for tax fraud,” Sharp said.

“That should enable the IRS to extract its pound of flesh from hundreds, if not thousands, of customers.”

Attorney Weisberg added: “Politically and diplomatically, they’ve got this issue of `doesn’t Switzerland have its right to have its own laws too?’ And I think they’re trying to resolve this more for diplomatic reasons than for legal reasons.”