UBS on Trial: The End of Secret Banking?

[Editor's note: Late on July 12, representatives of the U.S. government and UBS asked to delay the start of the trial because they are still trying to settle the case. The motion to stay will be delivered at 9am Eastern Time on July 13.]

Nothing less than the future of secret bank accounts is at stake. In a Miami courtroom starting on July 13, federal prosecutors will present their case that Swiss financial giant UBS (UBS) systematically and deliberately violated U.S. law by helping thousands of U.S. clients dodge U.S. taxes via offshore bank accounts. If prosecutors win, UBS could face multibillion-dollar fines—and even confiscation of its U.S. assets. The bank denies any wrongdoing.

The case revolves around some 52,000 U.S. private banking clients who had parked a combined $14.8 billion worth of assets in UBS accounts. The U.S. is demanding that UBS hand over the identities of the clients and their account details, presumably so the government can pursue tax-evasion cases against them. It's unprecedented in the history of Swiss banking for a foreign government to make such an outright demand.

UBS—backed by the Swiss government—has refused to comply. The bank says disclosing the information would violate Swiss law and devastate the country's world-famous reputation for banking privacy. (Not just that, if UBS were to hand over the data, it could also face prosecution from Swiss authorities for doing so.) Earlier this year, UBS agreed to pay $780 million to settle criminal charges in the U.S. that it abetted tax evasion, but the civil case coming to trial in Miami ups the ante.

Even after federal judge Alan Gold starts the proceedings on July 13, UBS and U.S. prosecutors could hammer out a settlement. But the assertiveness of American authorities marks a dramatically more aggressive global stance taken by the U.S. and other countries in recent years against tax evasion and offshore havens such as the Cayman Islands and Liechtenstein. The trial will also put pressure on high-net-worth individuals (and the banks that service them), who could be forced to come clean over where they're putting their assets.

"Cracking Down"

"In the past, governments weren't very aggressive [about offshore accounts]," says Clemens Fuest, research director at Oxford University's Centre for Business Taxation in Britain. "Now, the Obama Administration and others are cracking down on tax evasion and are enforcing laws globally."

At last April's G-20 summit in London, the leaders of the world's largest economies issued specific demands in their communiqué for tax havens to adopt international financial standards. The G-20 turned to a "name-and-shame" list prepared by the Paris-based Organization for Economic Cooperation & Development (OECD) that identified nations failing to sign on to its tax haven standards. On the OECD's so-called blacklist were countries such as Andorra and Monaco. Switzerland reluctantly agreed to the global standards earlier this year.

Still, the U.S. case isn't a sure win—and could backfire if prosecutors lose badly. For one thing, in its demand for account information, the U.S. has used a "John Doe" summons that doesn't implicate specific individuals suspected of tax evasion. Critics say that amounts to a "fishing expedition," which could cause the case to be thrown out of court.

What's more, the U.S.'s actions raise fundamental issues of state sovereignty. After all, the government is trying to enforce U.S. laws on a financial institution headquartered in another country. "The U.S. wants to turn the world's banks into agents of the IRS," complains James Nason, spokesman for the Swiss Bankers Assn., a trade body.

Rhetoric Heating Up

Yet even if UBS is based in Zurich, prosecutors allege, its employees gave advice to American citizens on U.S. soil about how to avoid taxes. Plus, the transactions may have involved U.S.-based financial assets. As such, the activities fall under America's global tax regime, and clients need to come clean. "If anyone is encouraging people to evade U.S. taxes, then authorities have a pretty good argument to get involved," says Lisa Osofsky, a regulatory adviser at consultancy Control Risks and a former U.S. federal prosecutor.

The rhetoric has heated up as the trial approaches. On July 8 the Swiss government warned that if the Miami judge rules against UBS, it will seize the contested client data itself to prevent the information from being disclosed to U.S. authorities. Folco Galli, spokesman for Switzerland's Federal Office of Justice, also notes that Switzerland will fine UBS if it violates Swiss law and hands over the file to the U.S. And, he warns, "The civil proceedings could also jeopardize the ratification of a new [U.S.-Swiss] tax treaty."

The implications for high-net-worth individuals are equally stark: Come clean and pay taxes or face prosecution. On June 25, for instance, Boca Raton (Fla.) resident Michael Rubinstein pleaded guilty to filing a false tax return that intentionally failed to disclose his Swiss bank account with UBS. Rubinstein's sentencing is set for late September, and he faces a maximum three-year prison sentence and a fine of up to $250,000. U.S. citizens had until June 30 of this year to disclose foreign bank accounts to authorities or face fines and potential prosecution. "We can expect more cases to follow [in the wake of UBS]," says Oxford researcher Fuest.

To be sure, not everyone with a foreign bank account is evading taxes. Analysts say there are many reasons to bank in places such as Switzerland and Monaco, ranging from world-class investment advice to a broadened range of financial products. But with U.S. prosecutors boring in on Switzerland's fabled secret bank accounts, the days of stashing money overseas to keep it from Uncle Sam could well be numbered.

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