July 17 (Bloomberg) -- UBS AG, the world's largest wealth manager, will stop offering offshore-banking services to U.S. clients through non-U.S. branches, said Mark Branson, chief financial officer of UBS's global wealth-management unit.

``We have decided to exit entirely the business in question,'' Branson said today in Washington. ``UBS will no longer provide offshore banking or securities services to U.S. residents through our bank branches. Such services will only be provided to residents of this country through companies licensed in the United States.''

Branson disclosed the step during testimony to a U.S. Senate subcommittee that's investigating tax compliance by banks in so-called tax havens. UBS, the biggest Swiss bank, is cooperating with tax-evasion probes by U.S. prosecutors and regulators; tax evasion through offshore accounts robs the U.S. Treasury of $100 billion annually, the subcommittee said.

``One of the things that current management is trying to do is maintain the reputation of the core Swiss business, and that has been undermined'' during the U.S. tax probe, said Derek Chambers, an equity analyst at Standard & Poor's in London, who rates the stock ``hold.'' The decision to close the U.S. business is ``fairly drastic,'' he said.

UBS, based in Zurch, has been rocked by fallout from the collapse of the subprime mortgage market. The company reported net losses of 25.4 billion Swiss francs ($25.6 billion) in the nine months through March, more than any other bank hit by the global credit-market contraction. The firm raised $30 billion from shareholders and investors in Singapore and the Middle East to replenish capital after more than $38 billion in writedowns.

`More Footloose'

Former Chairman Marcel Ospel, Chief Executive Officer Peter Wuffli, his finance chief Clive Standish, investment bank CEO Huw Jenkins and other senior managers at the securities unit all lost their jobs as a result of the losses.

``There are a number of different things hitting UBS at the same time,'' said London-based Morgan Stanley analyst Huw van Steenis, who has an ``equal weight'' rating on UBS shares. ``They're losing assets in domestic Switzerland, they'll clearly be losing money in the U.S. both off-shore and on-shore and then there will be, no doubt, some clients who become a bit more footloose and look to find some other relationships.''

Switzerland-based UBS bankers who weren't licensed to conduct business or solicit clients in the U.S. frequently did so to woo wealthy Americans interested in secret Swiss accounts and trusts or shell companies in tax havens such as the British Virgin Islands, the Senate Permanent Subcommittee on Investigations said in a report released in Washington late yesterday.

Moving Accounts

UBS in November stopped opening Switzerland-based accounts for U.S. clients, though it continued to serve some existing customers. The bank will now ask U.S. clients to transfer assets to accounts at UBS entities regulated by the U.S. Securities and Exchange Commission, spokesman Serge Steiner said.

The bank hid as much as $17.9 billion for 19,000 Americans who didn't declare assets to the Internal Revenue Service, according to the subcommittee's 114-page report. ``UBS has opened thousands of accounts in Switzerland that are beneficially owned by U.S. clients, hold billions of dollars in assets, and have not been reported to U.S. tax authorities,'' the report said.

Offshore banking for U.S. clients brought UBS about $200 million in annual revenue, former UBS banker Bradley Birkenfeld said in a statement when he pleaded guilty last month to helping a billionaire UBS customer evade U.S. taxes. Branson didn't say how much income U.S. clients generated for the firm.

Yachts, Golf

The subcommittee today said 20 Swiss bankers made more than 300 trips to the U.S. since 2003 to solicit Americans at UBS- sponsored yachting regattas, art shows, and golf tournaments. UBS's Swiss bankers used encrypted computers, used pay telephones and code names for clients to avoid detection, the panel said. Birkenfeld once smuggled diamonds in a toothpaste container, he said in court papers.

``UBS genuinely regrets any compliance failures that may have occurred,'' Branson testified. ``We will take responsibility for them. We will not seek to minimize them. On behalf of UBS, I am apologizing, and committing to you that we will take the actions necessary to make sure this does not happen again.''

Subcommittee Chairman Carl Levin, a Michigan Democrat, lauded the bank for its actions.

``You've changed your business and your business practices,'' Levin said. ``We can't reach all the banks. We have reached yours. That represents progress.''

Fifth Amendment

Levin said after the hearing that he was surprised by Branson's contrition. Branson testified minutes after Martin Liechti, the head of the bank's international wealth management program for the Americas, invoked his Fifth Amendment right to not incriminate himself, after being compelled to appear under subpoena.

Levin said he would leave it to bank regulators to determine whether UBS's bank license should be revoked in the United States.

UBS earned almost 7 billion francs from its wealth- management units in 2007, when the bank reported a total pretax loss of 3.74 billion francs. The bank managed 1.84 trillion francs in assets for affluent clients at the end of March, including 709 billion francs for U.S. domestic clients.

The firm's wealth-management group added a net 5.6 billion francs in the first quarter, down from 31.5 billion francs in the previous period. Swiss clients pulled 2.5 billion francs in the first three months of the year. Affluent clients may pull 10 billion francs from the bank in the second quarter, according to estimates from JPMorgan Chase & Co. analysts last month.

Taxes, Spouses

Investors have traditionally parked money in offshore accounts for two primary reasons: to protect money from a politically unstable domestic market or to avoid taxes, S&P's Chambers said. ``The third attraction would be investment expertise, but I'm not sure how compelling that is'' for U.S. residents, he said.

The subcommittee cited other reasons why people use offshore accounts: To avoid paying legal judgments and to hide money from spouses.

Relationships with clients who don't want to transfer to a U.S.-regulated unit will be terminated ``in an orderly fashion'' within the next 24 months, UBS's Steiner said. He declined to say how many customers are affected by the bank's decision.

To contact the reporters on this story: Ryan J. Donmoyer in Washington at rdonmoyer@bloomberg.net; Elena Logutenkova in Zurich at elogutenkova@bloomberg.net

Last Updated: July 17, 2008 15:11 EDT