US, UBS in high stakes battle over banking secrecy

Agence France-Presse

Posted at Feb 20 2009 11:15 AM | Updated as of Feb 20 2009 07:15 PM

WASHINGTON - Swiss bank UBS and US authorities Thursday were locked in a high-stakes legal tussle over banking secrecy despite a pact meant to settle a gigantic tax fraud case shaking the Swiss banking industry.

The showdown came a day after UBS admitted to US tax fraud and agreed to pay 780 million dollars as part of a provisional deal to settle charges by the US government that it helped thousands of American clients use Swiss accounts to evade US taxes.

Ratcheting up the pressure on Switzerland's biggest bank, the US government filed a lawsuit Thursday seeking a court order for UBS to disclose to the Internal Revenue Service (IRS) the identities of as many as 52,000 US customers who allegedly evaded taxes.

According to a UBS document filed with the lawsuit, as of the mid-2000s, those secret accounts held about 14.8 billion dollars in assets and the American clients had failed to pay taxes on income earned in those accounts.

"At a time when millions of Americans are losing their jobs, their homes and their health care, it is appalling that more than 50,000 of the wealthiest among us have actively sought to evade their civic and legal duty to pay taxes," said John DiCicco, a senior attorney with the Justice Department.

"It is time for those who are trying to hide from the IRS to rethink their actions," he said.

But UBS, Switzerland's banking flagship, refused the US government's demand for information on the US clients, saying it had "substantial defenses" and "intends to vigorously contest the enforcement of the summons in the civil proceeding."

The bank said that the objections were based on US law as well as terms of its agreement with the IRS and provisions of Swiss financial privacy and other laws, as well as international obligations, respected by Washington.

UBS, the world's largest manager of private wealth, stressed that information about undisclosed accounts maintained by Americans at the bank in Switzerland were protected from disclosure by Swiss financial privacy laws.

US legislators have accused UBS and other banks of helping wealthy Americans hide about 1.5 trillion dollars in overseas tax havens.

According to the US lawsuit, Swiss-based bankers actively marketed UBS’s services to wealthy American customers within the United States.

UBS documents filed with the lawsuit show that its bankers came to the United States to meet with clients nearly 4,000 times per year in violation of US law.

The US government alleged that UBS trained its bankers to avoid detection by US authorities and engaged in cross-border securities transactions it knew violated US security laws, according to court documents.

The lawsuit also alleged that UBS helped hundreds of US taxpayers set up dummy offshore companies, to make it easier for those taxpayers to avoid their reporting obligations under US tax laws.

As part of a "deferred prosecution agreement" announced Wednesday, UBS agreed to immediately provide Washington with the identities of, and account information for, certain US customers of UBS's cross-border business.

The Swiss Financial Markets Supervisory Authority (FINMA) ordered UBS to reveal to US authorities account details for about 250 to 300 customers, according to Swiss President and Finance Minister Hans-Rudolf Merz on Thursday.

"Banking secrecy remains intact," Merz told journalists, adding that it "doesn't protect tax fraudsters."

The Justice Department has received as part of the settlement the names and bank records of about 250 American clients of UBS, and, according to people briefed on the matter, was preparing to indict several for offshore tax evasion, the New York Times said.

The 250 clients include what one person said were "boldfaced names" in New York, Los Angeles, Miami and other major cities, some who had made their fortunes and some who had inherited it, the newspaper said in its online edition.

The indictments could come within several weeks, it said.

Lawyers in Zurich Thursday said they would sue FINMA for violation of the country's financial secrecy law, on behalf of four US clients of UBS whose identities were revealed to US authorities.

The decision to hand over client details sparked a debate on the future of banking secrecy in Switzerland, also under pressure from its European neighbors, notably Germany, over claims that it encourages tax evasion.