The US government's effort to catch every tax dodger out there -- from potential cabinet appointments in the Obama White House to high earners who thought they were avoiding taxes through loopholes -- may end up pushing some foreign private bankers off its shores.
On Wednesday, Switzerland's largest bank, UBS, agreed to pay $780 million in fines, identify certain US clients and put an end to tax shelters in a settlement with federal authorities over accusations that the bank helped nearly 17,000 Americans evade taxes. The clients had combined assets of $20 billion, according to the department of justice (DOJ).
Presumably the American clients -- the DOJ did not say how many UBS clients will be revealed -- are now exposed to investigations by the Internal Revenue Service (IRS), which is the US tax collection agency. This in turn could lead to further fines and charges, and revenue for the US government.
So much for Swiss privacy.
According to the DOJ, in 2000, after UBS purchased the brokerage firm Paine Webber, the Swiss bank voluntarily entered into an agreement with the IRS that required UBS to report to the IRS income and other identifying information for its US clients who held US securities in a UBS account. The agreement also required UBS to withhold income taxes from US clients who directed investment activities in foreign securities from the US.
The DOJ, citing court documents, also said in a statement: "In order to evade those new reporting requirements, employees and managers within the cross-border business, with the knowledge of certain UBS executives, helped US taxpayers open new UBS accounts in the names of nominees and/or sham entities. According to court documents, the assets of the individual's accounts were then transferred to the newly created accounts, as to which the US taxpayer would not be identified as a beneficiary. The information asserts that this device was used by UBS to justify evading its reporting obligations and helped US taxpayers to continue to conceal their identities and assets from the IRS."
"UBS executives knew that UBS's cross-border business violated the law," added R Alexander Acosta, US attorney for the Southern District of Florida, which is where the case was heard. "They refused to stop this activity, however, and in fact instructed their bankers to grow the business. The reason was money -- the business was too profitable to give up. This was not a mere compliance oversight, but rather a knowing crime motivated by greed and disrespect of the law."
The DOJ added that UBS bankers routinely travelled to the US to market Swiss bank secrecy to US clients interested in attempting to evade US income taxes. According to the DOJ, court documents assert that, in 2004 alone, Swiss bankers allegedly travelled to the US approximately 3,800 times to discuss their clients' Swiss bank accounts. The information further alleges that UBS managers and employees used encrypted laptops and other counter-surveillance techniques to help prevent the detection of their marketing efforts and the identities and offshore assets of their US clients. Clients of the cross-border business in turn filed false tax returns, which omitted the income earned on their Swiss bank accounts, and failed to disclose the existence of those accounts to the IRS.
The upshot is that UBS had entered into what is known as a deferred prosecution agreement on charges of conspiring to defraud the US by impeding the IRS. UBS will pay a total of $780 million to the US -- $380 million in profits from maintaining the US cross-border business and $400 million for US federal backup withholding tax required to be withheld by UBS, together with interest and penalties, and restitution for unpaid taxes.
For the US tax collector, this is an unparalleled coup -- greater than the $456 million agreement it made in 2005 with accounting firm KPMG over its promotion of tax shelters.
For UBS, this case, which has dragged on for more than one year, is now one step nearer to closure. It's a problem the bank simply doesn't need, especially given that on February 10 it posted a 2008 net loss of SFr19.7 billion ($16.8 billion), up 375% from the 2007 loss of SFr5.2 billion. The department of justice has agreed that any prosecution of UBS be deferred for a period of at least 18 months, which is subject to extension under certain circumstances, such as UBS needing more time to complete the exit from its US cross-border business. If UBS satisfies all of its obligations under the agreement, the department of justice will refrain from pursuing charges against the firm relating to the investigation of its US cross-border business, the bank said in a statement.
In a sign that UBS doesn't want any more problems with regulators, the mea culpa from the bank was indeed rather lengthy.
"UBS sincerely regrets the compliance failures in its US cross-border business that have been identified by the various government investigations in Switzerland and the US, as well as our own internal review," Peter Kurer, chairman of UBS, said in a statement. "We accept full responsibility for these improper activities. We are firmly committed to the terms of the settlement agreements we have reached with the DOJ and the SEC. We are determined to fully comply with the terms of these agreements and will complete the process without delay."
"Client confidentiality, to which UBS remains committed, was never designed to protect fraudulent acts or the identity of those clients, who, with the active assistance of bank personnel, misused the confidentiality protections embedded in the QI [qualified intermediary] Agreement with US authorities by providing false declarations regarding their tax status," Kurer continued.
This was followed up with yet another admission.
"It is apparent that as an organisation we made mistakes and that our control systems were inadequate," UBS's group CEO, Marcel Rohner, said in the same statement. "We will strengthen our compliance programmes. UBS seeks to achieve the highest standards of compliance throughout its organisation and is committed to fulfilling its obligations under the laws and regulations in every country in which it operates."
Implications for others
It is clear that Swiss banking will no longer be associated, in the US at least, with banker confidentiality. But will that be a disincentive for other Swiss banks to operate in the US?
"The veil of secrecy has been pulled aside and we will continue to aggressively pursue those who shirk their federal tax obligations or assist others in doing so," John DiCicco, acting assistant attorney general of the justice department's tax division, said in a statement.
One Swiss private banker in Singapore said: "It doesn't mean we'll stop doing business in the US, it's still profitable. But we'll be doubly diligent that clients pay their taxes."
Another private banker added, however, that some Swiss firms have decided to stop accepting Americans as clients.
Most bankers FinanceAsia spoke to were keen to point out that private banks do not actively seek to help a client avoid tax payments. But one Swiss banker, based in Hong Kong, said: "Well, even If my firm was there, I wouldn't choose to work in the US right now. Why chance it?"
He was referring to a series of criminal charges underway. In November, Raoul Weill, the former head of UBS AG's wealth management business, was indicted by a federal grand jury in Fort Lauderdale and charged with conspiring to defraud the United States for his alleged role in overseeing the United States cross-border business. The district court recently declared him to be a fugitive.
And in June 2008, former UBS private banker Bradley Birkenfeld pleaded guilty to a charge of conspiring to defraud the US for similar conduct. Birkenfeld is scheduled to be sentenced on May 1, 2009.
But at the same time, there will be clients looking for assistance from private bankers. According to reports, UBS has been closing the accounts of US clients and those people will no doubt be looking for other private bankers. Now, the clients who did evade taxes face the dilemma of whether or not to step forward to the US government, hat in hand, or to continue to try to hide their money and chance not getting caught. They should be reminded that the IRS has a reputation for being bullish when it hones in on a tax evader -- it wasn't the FBI that jailed the famous gangster Al Capone, but rather the IRS.