UBS Settlement Puts Spotlight On Tax Evasion

It's been an eventful week for Swiss banking giant UBS. It posted a $1.3 billion loss on Tuesday — its third straight quarterly loss.

But that news was tempered by last week's announcement that UBS has reached a settlement with the U.S. government in a lawsuit involving thousands of American UBS customers. The government said many of those U.S. citizens and residents with secret UBS accounts may be tax evaders.

Going into the lawsuit, the U.S. had a strong case. UBS is Switzerland's largest bank, one that in recent years greatly expanded its U.S. presence. Two years ago, the Justice Department began an investigation that found the company conspired to help wealthy Americans set up secret bank accounts that would help them evade taxes.

In February, UBS reached an agreement with the U.S. government in which the company admitted wrongdoing and agreed to pay a fine of $780 million. At the same time, UBS turned over to the U.S. information on a couple of hundred account holders whose names were discovered in the investigation.

For the Internal Revenue Service and the Justice Department, that wasn't enough. The government filed a lawsuit seeking the names of all 52,000 American citizens and residents with secret UBS accounts.

Settlement With The U.S. Government

But on Friday, just before the case was to go to trial in Miami, at a photo op with the Swiss foreign minister, Secretary of State Hillary Clinton confirmed that there was a settlement.

"There has been an understanding between the Swiss government and our government over the ongoing litigation concerning UBS," Clinton said.

For months, U.S. officials insisted that they were going to trial and would settle for nothing less than full disclosure from UBS.

Scott Michel, a partner with Caplin & Drysdale, a Washington, D.C., firm representing many UBS account holders, says what changed things was the involvement of the Swiss government.

Switzerland places great value on its bank secrecy laws. The Swiss government said publicly that it would seize UBS records rather than allow the company to hand over secret account information to U.S. authorities.

Michel says it gave UBS a great defense.

"UBS would have gone to the judge and said, 'Your honor, there's nothing we can do. We don't have this information. The government has seized it from us.' And in all likelihood, that might have ended the case," he says.

Disclosing The Identity of 5,000 U.S. Account Holders

Details of the settlement are still being negotiated. Reuters is reporting that U.S. officials are not seeking a fine. But the settlement reportedly will require UBS to hand over the names of about 5,000 U.S. account holders — just 10 percent of what the government originally wanted.

"I would have liked to have seen the 52,000 names," says Raymond Baker, the director of Global Financial Integrity, a Washington, D.C., group that advocates for tougher international scrutiny of tax havens.

He wanted to see the case go to trial. Settling for less than full disclosure from UBS, he says, is a lost opportunity.

"I would have liked to have seen Swiss bank secrecy as far as its dealings with the United States come to an end," Baker says.

Even though any settlement is likely to be less than what the government was seeking, Reuven Avi-Yonah, an international tax law expert at the University of Michigan, says it's still a significant win for the U.S. "Five thousand names is not such a small amount of names. And the main purpose of this whole affair is to act as a deterrent," he says.

Amnesty Program

The Treasury Department is offering an amnesty program for Americans with secret accounts at UBS and other Swiss banks.

Michel, the Washington, D.C., attorney, says his firm has nearly 200 clients with UBS accounts who have already come forward under the program.

With this settlement, many more UBS customers are now likely to do the same.

Michel says by agreeing to turn over the names of 5,000 possible tax evaders, UBS and Switzerland have set an important precedent that begins to lift the veil of Swiss banking secrecy.

"I wouldn't be surprised if, once this UBS deal is inked and the data starts flowing, if the United States then makes additional treaty requests along the same framework for customers of Credit Suisse or other financial institutions that are located in Switzerland but that have a footprint in the United States," he says.

It's a precedent that may eventually be brought to bear on the Cayman Islands, Singapore, Liechtenstein and many other nations that have been identified as international tax havens.