For more than a year now, this tradition of bank secrecy, or financial privacy as the Swiss call it, has been under attack by the U.S. Internal Revenue Service. In July 2008, the IRS served a "John Doe" summons on UBS, seeking records to identify U.S. taxpayers with accounts at UBS in Switzerland who have not reported these accounts to the IRS. UBS dud not comply with the summons.
In February, the U.S. Department of Justice filed a petition to force the Swiss banking giant to turn over some 52,000 names of U.S. account holders the IRS suspects failed to pay taxes on account earnings as required under U.S. law.
UBS has continued to refuse to disclose the names, arguing that doing so would violate Swiss banking laws. It is a crime in Switzerland for bankers to provide information on client accounts to foreign tax authorities. Bankers who violate this law may be subject to criminal prosecution that includes the possibility of a prison sentence.
Fearing that UBS might, nevertheless, succumb to U.S. pressure, the Swiss government formally joined the fray in early July. The Swiss stated in a friend of the court brief that if a U.S. judge ordered UBS to turn over the account names, the government would seize UBS' bank records, if necessary, to prevent UBS from divulging the information. Switzerland last took this type of action 25 years ago when it seized the accounts of tax fugitive Marc Rich.
As the bank admitted earlier this year, UBS willfully assisted thousands of U.S. clients to evade hundreds of millions of dollars in taxes.
On the strength of information provided by former UBS private banker Bradley Birkenfeld on the bank's tax practices, U.S. tax authorities were poised to tear down the wall of Swiss banking secrecy.
Yet, such an outcome now appears out of reach.
On July 31, just three days before the parties were to go to trial, the U.S. and Swiss governments reached a tentative agreement in a civil case filed on Feb. 19. This agreement, which has not yet been finalized, means that UBS is not likely to give U.S. tax authorities the names of all 52,000 American clients the IRS suspects are evading taxes on some $15 billion held offshore in secret Swiss bank accounts.
On August 7, U.S. District Judge Alan Gold, who is presiding over the civil case, approved a request from both parties for another teleconference Aug. 12. A related but separate criminal case has been settled.
THE UBS STORY
UBS helped its U.S. clients evade U.S. taxes through very creative means. Internal Revenue agent and offshore compliance technical officer Daniel Reeves described many of the bank's practices in his Feb. 19 declaration in the civil case before the federal district court in Miami.
Its July 2008 report, "Tax Havens and U.S. Tax Compliance," presents evidence that from 2000 to 2007, UBS engaged in practices designed to hide the existence of accounts from U.S. authorities.
As the PSI report detailed, UBS opened tens of thousands of accounts in Switzerland for American clients, and these accounts hold billions of dollars in assets that the owners have failed to declare to the IRS.
The PSI report also noted that UBS estimated in December 2004 that it had some 52,000 undeclared account relationships with American taxpayers with assets valued at roughly 17 billion francs.
Reeves highlighted evidence from the PSI report showing the extent to which UBS tried to shield its clients:
For example, the bank helped create documents indicating that sham offshore companies, rather than the U.S. taxpayers, were the beneficial owners of the UBS accounts.
It told its American clients whom to contact to set up offshore structures that would prevent the IRS from learning the true owners, according to the report.
Bankers hand-carried client checks when traveling to the U.S. to avoid drawing attention that might have occurred if UBS wired the funds electronically.
UBS bankers used encrypted laptops and carried a generic PowerPoint presentation on their computers to show U.S. authorities if needed.
UBS bankers were told to indicate on their customs forms that their trips to the U.S. were for pleasure, not for business. The bankers always stayed at a different hotel when they returned to the U.S.
They didn't print anything on UBS stationery. The bank advised its American clients to use credit cards issued under UBS' name to avoid detection by U.S. tax authorities.
As the PSI reported, UBS client-advisors came to the U.S. about three times a year, stayed for up to three weeks a time, and met with four customers each day for a total of nearly 10,000 contacts a year.
UBS bankers solicited clients in the U.S. without a license from the Securities and Exchange Commission.
NEXT CHAPTER: THE CIVIL CASE
Although the criminal matter was settled, the civil tax matter brought remains outstanding.
As IRS Deputy Commissioner Barry B. Shott said in his February 19 declaration in the civil case, the Swiss government will provide information on suspected tax cheats only if the person has affirmatively committed fraudulent or deceptive acts, such as falsifying a document.
As Shott indicated, the Swiss government will not tell the U.S. government that a taxpayer is simply earning income on an undeclared account (U.S. citizens are liable to tax on all their income wherever earned).
Department of Justice senior litigation counsel Stuart Gibson has little sympathy for UBS. He noted in February that the bank should not be given any credit in the civil case for complying with the terms of the Justice Department's agreement in the criminal case.
"Certainly agreeing to cease helping U.S. taxpayers break the law should count for nothing," Gibson remarked. "After all, the fact that UBS finds itself in a difficult position is completely the result of its own conduct."
Although the U.S. has not yet obtained any names through the civil case, many clients with undeclared Swiss accounts have voluntarily come forward. As part of an IRS program that began in March and ends on
September 23, taxpayers who voluntarily disclose their unreported offshore accounts may be eligible for clemency, but not amnesty.
The IRS has also made it clear that the taxpayer must disclose the account before the IRS has started an investigation.
There is more at stake than just tax evasion.
TOO BIG TO FAILU.S. taxpayers are required to file tax returns every year and to report the existence of, and any income earned from, a foreign bank account that at any time during the year has more than $10,000.
But significant tax evasion occurs through offshore accounts. The Permanent Subcommittee on Investigations has looked into tax havens and tax compliance and reported that offshore tax evasion costs the U.S. $100 billion each year.
Switzerland's financial secrecy is a vessel for tax evasion, and the U.S. would be justified in taking action against Swiss banks that it suspects of abetting breaches of U.S. law."
As important as collecting unpaid taxes is to the IRS, there are other issues that are more important to the U.S. and Swiss governments.
Preventing the collapse of another major financial institution is one of those issues. The financial services sector accounts for 12.5 percent of Switzerland's gross domestic product. According to the Boston Consulting Group, Switzerland is home to 27 percent of the world's $7.3 trillion of offshore banking deposits.
Preserving Switzerland's financial center may, ultimately, explain why the U.S. and Switzerland reached agreement.
Joann M. Weiner is a tax specialist who worked for the U.S. Treasury Department and most recently as a contributing editor for Tax Analysts. She holds a Ph.D. in economics and is an adjunct professor at The George Washington University, where she teaches public economics and a seminar on the causes and consequences of the financial crisis.Read the complete article at : http://www.politicsdaily.com/2009/08/10/u-s-lets-swiss-banking-giant-ubs-off-the-hook/
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