Swiss bank is set to open its secret files

Published on February 19, 2009

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Swiss bank is set to open its secret files

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 Wednesday to divulge the names of well-heeled U.S. clients 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 U.S. government investigation into its activities.

It is unclear how many of its clients’ names UBS will divulge. U.S. government 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 U.S. 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 did not identify the customers.
UBS has said it is closing the offshore accounts of its U.S. 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 U.S. 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 IRS by helping U.S. 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 IRS.

UBS urged some U.S. 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 IRS could not track purchases. In a statement  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 U.S. judge in connection with the  investigation of the bank. 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  U.S. clients.

The settlement caps a painful run for UBS, which suffered more than $50  billion in losses in the collapse of the U.S. 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.
By Lynnley Browning
Published: Thursday, February 19, 2009

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