Opening The Vaults; Is Bank Secrecy Over?

What's next after the US has access to Swiss bank account information?

July 2, 2008 — -- The country's wealthiest people have long relied on Swiss banks for privacy; some to secure their substantial assets, some to conceal them. A big shroud of secrecy, however, may soon be lifted. All American holders of Swiss bank accounts at the banking giant UBS could have their account information turned over to the U.S. government as part of an effort to identify tax evaders.

The Justice Department yesterday was granted a wide-reaching subpoena that allows the IRS to seek taxpayer bank data from December 2002 through 2007. The investigation stems from a criminal case involving a former UBS banker who pled guilty last month to conspiracy charges, but the ripple effect will likely extend far beyond his clients. The banker, Bradley Birkenfeld, conjectured that UBS had an estimated $20 billion of undeclared assets that were associated with US taxpayers.

"This could open up a whole can of worms," said former federal prosecutor David Rosenfield.

"There is a strong possibility that this is not an isolated case," said Rosenfield, who now practices white collar defense with Herrick Feinstein in New York. "This is far beyond what the U.S. government has done in the past."

Previously, the U.S. has requested access to specific accounts held by specific individuals, but in this instance the government has requested so-called "John Doe" summonses, in order to access the accounts of an unknown number of unknown Americans. Experts say the John Does could run into the tens of thousands of customers.

'This is the latest crack in bank secrecy," said a former federal prosecutor and defense attorney Sean O'Shea. "This could involve the evasion of hundreds of millions of dollars."

Since the request was granted, some experts ask whether or not those who have been avoiding paying U.S. taxes on their accounts will turn themselves in.

"Will this cause U.S. taxpayers to cut their losses and come in and cooperate and try to cut a deal?" asked Rosenfield. "We might see a flood of people coming in and offering to pay back taxes."

Another expert in money laundering warns that anyone who has avoided paying any taxes using a UBS account should be very worried right now, and that they may face a whole range of penalties above and beyond paying back taxes.

"Expect to have your assets frozen or your money seized and a grand jury subpoena," said Robert Targ, a former federal prosecutor who is now a partner at Diaz, Reus & Targ. "The IRS will be looking for unpaid taxes, penalties and interest and you may be exposed to possible criminal prosecution."

UBS has so far said that it is cooperating with US investigators, but only to the extent of Swiss law.

"As we have noted, UBS takes this matter very seriously and is working diligently with both Swiss and US government authorities consistent with Swiss law and the legal frameworks for intergovernmental cooperation and assistance," said UBS spokesperson Kris Kagel yesterday.

In the past, the Swiss banks have resisted granting requests for account information if they were solely for the purpose of catching tax evaders. Tax evasion is not a crime in Switzerland.

Some experts predict that UBS may attempt to return to court arguing a lack of jurisdiction.

"UBS will likely argue that they are only subject to Swiss law," O'Shea predicts. "In that situation, the DOJ will argue that they operate in the United States and are subject to US laws."

Others argue that UBS will likely cooperate with the request in order to continue doing business in the U.S.

"It would be a fatal move for the bank to dig its feet in," said Sandy Boucher of Intelysis Corp.

Boucher said that if the bank itself is found to have violated US law it could have a federal monitor assigned to oversee its future activities in the U.S.

"Rather than prosecute," said Boucher, "the bank will likely be given a rigorous series of things to do in order to avoid prosecution." Those requirements could include a thorough audit of past accounts and then a federal monitor assigned to the bank for a period of time to make sure it doesn't happen again.

As for the Swiss government, Boucher says that the Swiss will have to make a political decision on how to proceed with regard to their bank secrecy laws.

The US has a Mutual Legal Assistance Treaty (MLAT) with Switzerland to work on criminal cases but this does not include tax evasion. At the moment, the U.S. is saying that there have been no indications that the Swiss government will attempt to hold up the DOJ request.

"I'm not sure if we've had any particular communications with the Swiss, in terms of passing messages from the Department of Justice to them," said State Department spokesmen Tom Casey at yesterday's briefing. "As far as I know, though, I think there has certainly not been any diplomatic issue associated with this, that's come up."

Experts are wary to predict how the Swiss government will respond, but should they intervene that repercussions could be substantial.

"The reputational and financial risk is huge," said Boucher.

The Swiss Embassy did not return calls for comment.

This latest method for tracking tax evaders may spread beyond UBS and even beyond Switzerland. Experts point out that is has only become easier for the government to obtain records of foreign account holders. For example, the Cayman Islands have become more cooperative in turning over account information, which used to be very tightly held.

Indeed the IRS Commissioner warned that the long held secrecy of overseas banking is coming to an end.

"We will be taking additional steps to ferret out offshore tax avoidance beyond today's announcement involving UBS," warned IRS Commissioner Doug Shulman. "People should take notice that the secrecy surrounding these accounts is rapidly fading."

Kirit Radia contributed to this report.

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