UBS must release data on 4,500 suspected tax cheats
— -- For generations of investors, the promise of Swiss bank secrecy represented virtually a "sacred institution" able to withstand all would-be challengers, including Hitler's military might, says William Sharp, a tax attorney whose Tampa law firm represents dozens of Swiss banking clients.
But the covenant became less than absolute on Wednesday, when Swiss banking giant UBS UBS reached an agreement with the U.S. Justice Department and the IRS that will disclose account data for roughly 4,450 wealthy American clients suspected of tax evasion — and ultimately lead to the release of thousands more names.
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"From an American tax perspective, the days of traditional Swiss banking secrecy are clearly over when it comes to accounts involving allegations of improper behavior," Sharp said in a phone interview from Zurich. "We're already seeing a rippling effect to other Swiss banks, and maybe even some non-Swiss banks."
The settlement of the closely watched tax battle requires Swiss authorities to "review and process" requests for account information at other Swiss financial institutions in cases with a similar "pattern of facts and circumstances" involving clients suspected of hiding income or assets offshore.
That provision sets the stage for authorities in the U.S. and other nations to seek account information from Credit Suisse and other Swiss banks, said Martin Press, a tax attorney whose Fort Lauderdale firm represents numerous Swiss banking clients.
IRS Commissioner Douglas Shulman said the unprecedented deal provides for disclosure of UBS accounts that at one point held an estimated $18 billion in assets. He declined to say how much the IRS expects to recover in back taxes, interest and penalties once the data are turned over.
"I believe this agreement gives us what we wanted — access to information about those UBS account holders most likely to have been involved in offshore tax evasion," said Shulman during a telephone news conference with reporters.
Saying the agreement helps resolve one of the bank's "most pressing issues," UBS Chairman Kaspar Villiger said the banking giant "welcomes the fact that the information-exchange objectives of the settlement can be achieved in a lawful manner under the existing treaty framework between Switzerland and the United States."
UBS shares closed at $15.44 on the New York Stock Exchange after Wednesday's announcement, a drop of 46 cents or nearly 2.9%.
Under the agreement, the IRS will submit a treaty request to the Swiss government describing the specific types of accounts for which the tax agency seeks ownership and financial information. IRS officials said the holdings in question included regular bank accounts, custodial accounts and nominee accounts suspected of being "sham trusts."
After receiving the U.S. treaty request, the Swiss Federal Tax Administration will seek the financial data from UBS, the Alpine nation's largest bank, and notify American owners that their account information may be disclosed to the IRS.
UBS is required to turn over data for the first 500 requested accounts within 60 days. The Swiss tax agency must get the remaining data on a continuing basis within nine months.
Swiss tax officials will submit the accounts to an expedited review, including expected legal challenges raised by the American account holders, before giving the data to U.S. authorities.
The agreement calls for a special task force of the Swiss tax agency to render its first 500 rulings within 90 days of receiving the U.S. treaty request. All other rulings must be concluded just under one year from the date of the initial U.S. application.
Tipping off Justice
American account holders who challenge the handover face the possibility of being tripped up by a federal law that requires them to notify the Justice Department of their appeal, said Bryan Skarlatos, a tax attorney at Kostelanetz & Fink, a New York City law firm that represents UBS clients.
An estimated 52,000 UBS accounts have some link to U.S. customers. But Shulman said some of those owners had previously disclosed their holdings to the IRS and had paid taxes over the years. He said the IRS all along wanted the 4,450 accounts targeted by the agreement because they had the most potential evidence of tax evasion.
However, the agreement includes a three-month delay before the public release of the IRS criteria used to select the UBS accounts. Skarlatos said the provision seemed aimed at pressuring all of UBS' American customers to take advantage of an IRS voluntary disclosure program that provides lower penalties to those who come forward.
Applications for that program are being accepted until Sept. 23 — well before the selection criteria are disclosed — and Shulman said the IRS currently has no plans to extend the deadline.
However, Shulman said UBS clients could still apply for the program for a short period after being notified their accounts could be given to the IRS.
"Once the Swiss government sends us the name, all bets are off," he said, indicating that those UBS clients could face stiffer criminal penalties and possible criminal prosecution.
IRS officials said they initially expect to get information for more than 5,000 UBS accounts. According to the agreement, that number ultimately is expected to climb past 10,000 including accounts disclosed under the IRS voluntary disclosure program and from other sources and proceedings, such as a separate criminal case against UBS that was tentatively settled in February.
In the criminal case, UBS agreed to pay $780 million in a settlement that deferred federal prosecution of evidence that it repeatedly sent bankers on secret trips into the U.S. to help American clients hide assets and income offshore. There is no additional financial penalty in Wednesday's deal.
Federal prosecutors had charged that UBS bankers had posed as tourists, used encrypted laptops, numbered accounts and other counter-surveillance tactics as they traveled to and from the U.S. to advise clients about the overseas holdings. Thirty-two bankers traveled to the U.S. and met with clients roughly 3,800 times during 2004 alone, prosecutors alleged.
As part of the criminal settlement, UBS handed over financial data for about 250 American-owned accounts that bore specific evidence of tax evasion. Federal prosecutors have filed criminal cases involving owners of four of those accounts.
UBS also agreed in February to shut down its offshore banking activities for American clients. But, until the outlines of Wednesday's civil lawsuit settlement were reached last week, UBS had balked at turning over most of the data demanded by the IRS. The bank had argued that disclosure would be a criminal violation of Swiss banking secrecy laws.
The Swiss government had backed that contention and had even raised the prospect of seizing the account data to prevent any handover.
A win for the IRS – and for UBS
Wednesday's settlement outlined a phased procedure for final legal conclusion of the criminal case against UBS. It also included a mechanism for U.S. authorities to reopen legal negotiations on terms of the civil agreement if the account data expected by the IRS are not ultimately produced.
"The IRS can claim victory," said Press, the Fort Lauderdale tax attorney. "The settlement gives the U.S. what it wanted: an entry into bank secrecy and a manner to deal with the Swiss government directly, with a system to get similar information" from other Swiss banks.
UBS and Swiss officials can also claim victory, because the vast majority of Swiss bank accounts will remain secret, said James Nason, a spokesman for the Swiss Banking Association.
"For us, it was crucial that the agreement conforms to prevailing Swiss law, because international clients rely very much on the predictability and stability of the Swiss legal system," Nason said. "It was also important that the privacy of clients innocent of any wrongdoing should remain protected."
Banking secrecy has been a part of the Swiss banking industry since the 1930s, making it a financial haven for investors seeking confidentiality and protection of their assets.
But the UBS deal could force the industry to rewrite its business model, said Jonathan Lachowitz, a financial planner and owner of White Lighthouse Investment Management in Lausanne, Switzerland.
"As the veil of Swiss banking secrecy is being broken by foreign governments, many of whom have been losing out on significant tax revenues, Swiss bankers will have to learn to compete on quality, service and price; something they have not been accustomed to," said Lachowitz.