Friday, 20 February 2009

UBS signals the end of the secret Swiss bank account


In the hush-hush world of Swiss banking, the unthinkable is happening: Secrets are spilling into the open.

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Guanyu said...

UBS signals the end of the secret Swiss bank account

By Lynnley Browning
19 February 2009

In the hush-hush world of Swiss banking, the unthinkable is happening: Secrets are spilling into the open.

UBS, the largest Swiss bank, agreed 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 having conspired to defraud the U.S. Internal Revenue Service and agreed to pay $780 million to settle a sweeping U.S. investigation into its activities.

It is unclear how many of its clients’ names UBS will divulge.

U.S. 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, believed to be the largest of its kind, UBS agreed to cooperate with a broad summons issued by the U.S. Justice Department. Under the terms of a so-called deferred prosecution agreement, its executives could now face indictment if UBS fails to identify the customers.

UBS has said it is closing the offshore accounts of its U.S. clients. But under the deal with the U.S. 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, enabling them to 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.

The bank’s offshore private banking business once employed about 60 private bankers in Lugano, Zurich and Geneva. Prosecutors said UBS had 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 their 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 U.S. law, Swiss law does not consider tax evasion a criminal offense.

The move by UBS to settle the case, before a U.S. 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 U.S. 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 the charges of having acted as an unregistered broker-dealer and investment adviser for Americans.

The settlement caps a painful run for UBS. The bank suffered more than $50 billion in losses stemming from the collapse of the U.S. mortgage market and received a $60 billion bailout from the Swiss government in October.