Commentary by Ann Woolner
Feb. 26 (Bloomberg) -- UBS AG has only itself to blame for landing in a vise, squeezed by Swiss banking secrecy law on one side and the U.S. Internal Revenue Service on the other.
If it hadn’t been so hungry for American wealth and brazenly offered to hide it, the Swiss bank might have rocked along for years without ever getting pinched.
But, no. UBS bankers came to the U.S. by the dozens to pitch the Zurich-based bank as a haven from taxation, a former banker has admitted. Carrying encrypted laptops, they helped customers create sham structures, advised them on avoiding U.S. reporting requirements or referred them to people who would.
The feds figure almost $18 billion was hidden in offshore UBS accounts in recent years.
That’s what investigators uncovered in a case that began with a single American, Igor Olenicoff, hiding $200 million. He claims he was led into the crime by UBS bankers, and now it has turned into an historic clash between U.S. and Swiss law.
Threatening criminal prosecution of the bank, the U.S. won a $780 million settlement, an admission that UBS bankers conspired to violate the law and identifying information on some 200 to 300 American clients.
That crack in the secrecy wall created enough of a stir that UBS and the Swiss Bankers Association had to explain why it happened and why it won’t necessarily lead to further disclosures.
It’s like this: So far, the only clients exposed were suspected of tax fraud, which involves lying to the government and is illegal in both countries. Mere tax evasion, where you just don’t get around to reporting your assets or income, isn’t a crime in Switzerland. And under a bilateral agreement, only conduct that is criminal in both countries can prompt Swiss banks to turn over information on their customers.
Prying Information
Now the U.S. is trying to pry open the crack to look for evaders. In federal court in Miami, the IRS demands that the bank name the American holders of more than 52,000 secret accounts.
Neither side can afford to lose the fight.
If UBS complies, Switzerland can prosecute the bankers for violating Swiss law and lift UBS’s banking license.
That isn’t all. The release of thousands of names would crumble public confidence in legendary Swiss bank secrecy, shrinking Switzerland’s international banking business, a linchpin in the economy.
Swiss authorities can’t let that happen, any more than U.S. authorities can walk away from the fight.
“The IRS can’t allow UBS to help people break federal tax law,” says Bryan Skarlatos, a partner at Kostelanetz & Fink in New York.
Suspected Tax Evaders
Whether by settlement or court order, the pressure is bound to eventually force into the open hundreds, possibly thousands of names of suspected tax evaders.
“There really is no such thing as bank secrecy anymore,” says Cono Namorato, a tax expert in Washington at Caplin & Drysdale. He predicts UBS will wind up giving up more names.
“It’s just a question of how and when the final package is going to be put together,” says Namorato, who, like Skarlatos, has clients with offshore accounts.
Fortunately, court rules favor the IRS at this stage in the case. It doesn’t have to do much to persuade the court to order UBS to lift its skirt.
If the bank defies a court order, hefty daily fines would no doubt follow.
And while an appeal might delay collection of the fines, prospects in the Atlanta-based 11th U.S. Circuit Court of Appeals also favor the IRS, according to Wilmer “Buddy” Parker III, a former federal prosecutor and now a white-collar criminal defense lawyer in Atlanta with an expertise in financial crimes.
A Fair Exchange
“There has to be some sort of government-to-government resolution,” says Namorato.
He suggests the IRS invite UBS customers to come in and declare their hidden assets in exchange for a discount in penalties. Already, nervous depositors are coming in.
Namorato says the more “passive” depositors, such as those with accounts passed down from parents or grandparents, could get an especially steep discount.
Those who were actively moving assets through a series of shelters, trusts and phony loans to evade U.S. reporting requirements could be in more trouble.
If the IRS distinguishes, as Switzerland does, between passive evaders and active fraudsters, and if the passive evaders come in on their own (perhaps under threat of being considered a fraudster), the Swiss could still claim it was honoring the distinctions laid out in the law.
Cross-Border Work
As for Switzerland’s international banking business, UBS has already pledged to wind down its cross-border work. It’s losing that business, anyway.
Beyond UBS, “The banks in Switzerland would be very cautious about these depositors in the future,” says Namorato.
Traditional tax havens around the world are shedding secrecy, too, under pressure from European and other countries.
Swiss secrecy already lost a lot of its sheen when it turned out Swiss banks had simply kept assets deposited by Europeans fleeing the Nazis, making it almost impossible for the families of Holocaust victims to find and claim their inheritances.
Besides, in these days of anti-bank fever and rising populism, transparency’s the watchword.
Secrecy isn’t what it used to be, thanks, in part, to UBS.
To contact the writer of this column: Ann Woolner in Atlanta at awoolner@bloomberg.net
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