Lawyers Sweating Tax Probes as Swiss Bank Scams End

A Swiss Bank Is Set to Open Its Secret Files
The New York Times by LYNNLEY BROWNING - February 19, 2009

In the hush-hush world of Swiss banking, the unthinkable is happening: secrets are spilling into the open. UBS, the largest bank in Switzerland, agreed on Wednesday to divulge the names of well-heeled Americans whom the authorities suspect of using offshore accounts at the bank to evade taxes. The bank admitted conspiring to defraud the Internal Revenue Service and agreed to pay $780 million to settle a sweeping federal investigation into its activities. It is unclear how many of its clients’ names UBS will divulge. Federal prosecutors have been examining about 19,000 accounts at the bank, but UBS ultimately may disclose the identities of only a few hundred customers. But to some, turning over any names at all heralds the end of the secret Swiss bank account, whose traditions date to the Middle Ages. “The Swiss are saying that this is the end of Swiss banking as they knew it,” said Jack Blum, an offshore tax specialist. “Nobody will trust the security of the Swiss bank account.”

As part of the settlement, UBS agreed to cooperate with a broad summons issued by the Justice Department to turn over the names. Under the terms of a so-called deferred prosecution agreement, the bank and its executives could be indicted if UBS didn’t identify the customers. UBS has said it is closing the offshore accounts of its American clients. But under the deal with the United States authorities, the bank must provide periodic written evidence of that to prosecutors. UBS earned $200 million annually from the business. Prosecutors suspect that from late 2002 to 2007, UBS helped American clients illegally hide $20 billion, letting them evade $300 million a year in taxes.

In a striking admission, UBS said that from 2000 through 2007, some of its private bankers and managers had “participated in a scheme to defraud the United States” and the I.R.S. by helping American clients set up and conceal offshore accounts. The scheme involved falsifying or not properly obtaining or filing certain tax forms required of both the bank and its clients. UBS’s offshore private banking business once employed some 60 private bankers in Lugano, Zurich and Geneva. Prosecutors claimed UBS referred clients to lawyers and accountants who set up secret offshore entities to conceal assets from the I.R.S. UBS urged some American clients to destroy records and to stash watches, jewelry and artwork that they had bought with money hidden offshore in safe deposit boxes in Switzerland. The bank also encouraged them to use Swiss credit cards so the I.R.S. could not track purchases. In a statement on Wednesday, Peter Kurer, the chairman of UBS, said that “UBS sincerely regrets the compliance failures in its U.S. cross-border business that have been identified by the various government investigations in Switzerland and the U.S., as well as our own internal review. We accept full responsibility for these improper activities.” Marcel Rohner, the group chief executive of UBS, said in a statement that “it is apparent that as an organization we made mistakes and that our control systems were inadequate.”

In January a senior UBS executive, Raoul Weil, was declared a fugitive, two months after being indicted by a federal judge in connection with the investigation of the bank. Mr. Weil, a Swiss citizen, oversaw the cross-border private banking operations from 2002 to 2007. UBS had fiercely resisted turning over the names, even after some executives were indicted and implicated in the offshore private banking business. Swiss law distinguishes broadly between tax avoidance, tax evasion and tax fraud. Unlike in the United States, tax evasion is not a criminal offense under Swiss law. The move by UBS to settle the case, on the eve of a Senate subcommittee hearing next Tuesday on the matter, signals how close the bank came to being indicted for not cooperating with prosecutors. Indictment is a near-certain death knell for corporations.

Of the $780 million that UBS will pay, $380 million represents disgorgement of profits from its cross-border business. The remainder represents United States taxes that UBS failed to withhold on the accounts. The figures include interest, penalties and restitution for unpaid taxes As part of the deal, UBS also entered into a consent order with the Securities and Exchange Commission in which it agreed to charges of having acted as an unregistered broker-dealer and investment adviser for Americans. The settlement caps a painful run for UBS, which suffered more than $50 billion in losses in the collapse of the American mortgage market and received a $60 billion bailout from the Swiss government last October. The bank will not have to pay additional fines and penalties, which could have brought the deal to more than $1 billion. People briefed on the issue said the banking crisis and the recession were factors in this decision by prosecutors.

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