UBS clients plan defences in tax evasion probe

Wealthy American clients of UBS are adopting different strategies to counter the threat of confidential data being handed over to a United States tax evasion probe.

The Swiss bank is under pressure to release records of suspected tax cheats. Some clients have hired lawyers to fight such a move while others appear willing to cut deals with the US tax agency.

The US Department of Justice suspects UBS of helping some 20,000 US citizens illegally hide assets from the Internal Revenue Service (IRS). The IRS served a summons on the bank in July demanding confidential details of these suspects.

At a special shareholders meeting in Lucerne on Thursday, UBS chairman Peter Kurer said the bank had uncovered a small number of fraud cases in relation to the US probe.

“Our investigations have uncovered a limited number of cases of tax fraud as defined by both US and Swiss law,” he said.

Kurer added that UBS would not hide behind banking secrecy in a clear hint that some information would be handed over to the US authorities.

“I want to make it very clear that bank-client confidentiality is an important institution. We do not regard it lightly and we have not violated it. [But] it is not there to protect cases of tax fraud. Such an absolute pretence would only damage bank secrecy,” he added.

Tax evasion is not a crime in Switzerland, but breaching banking secrecy without clear evidence of fraud is against the law. Switzerland and the US have since been involved in intensive talks to resolve the issue.

Ultimately, such a decision would have to be taken in the Swiss federal administrative court, but the authorities have so far remained tight-lipped on what progress has been made.

An estimated 120 to 250 UBS clients have enlisted the help of Swiss lawyers in anticipation of appealing against an adverse ruling.

One lawyer, Dimitri Santoro, told swissinfo that lifting the veil of secrecy would signal “the end of offshore banking in Switzerland” and lead to a flood of similar demands from other countries.

No evidence

The US has taken issue with UBS for exploiting a 1996 tax treaty loophole by helping clients set up special companies or trusts to hide assets.

“The IRS obviously considers such a structure as tax fraud. According to Swiss law, however, such a set up does not even qualify as tax evasion,” Santoro said.

The lawyer added that the IRS has failed to provide the name of his client – a minimum requirement for even considering the release of confidential data. “The prerequisites for a transfer of bank information to the US under the applicable bilateral tax agreement are not met,” Santoro said.

Swiss legal experts agree that the general nature of the IRS demand falls far short of the strict criteria set down before banking secrecy can be lifted.

But Professor Urs Behnisch of law firm Meyer Lustenberger fears that the US authorities could retaliate with measures that would make it impossible for UBS to do any business in the country.

“To avoid this the Swiss authorities could tend to an exchange of information,” he told swissinfo.

Coming clean

Other US clients of UBS are cutting their losses and confessing to the IRS before they are found, according to a report in the Wall Street Journal newspaper.

The US financial daily reported on Monday that such wealthy people implicated in the tax evasion investigation could seek an amnesty by applying to the agency’s voluntary disclosure programme.

By coming clean before they are detected, they could avoid criminal prosecution, the newspaper said. The IRS was not able to comment to swissinfo on the suggestion that it was planning to set up a system to fast track UBS customers through the program.

swissinfo, Matthew Allen in Zurich

How the case unfolded

In December 2007, an American billionaire property developer admitted filing a false tax return and had to pay $52 million (SFr54 million) in backdated taxes.

On May 14, 2008, former UBS employee Bradley Birkenfeld and a Liechtenstein businessman were charged by the US authorities with helping an American billionaire avoid paying taxes on $200 million of assets deposited in Swiss and Liechtenstein bank accounts.

Birkenfeld turned whistleblower, giving details of UBS private banking practices to US prosecutors.

In July, a Miami court authorised the IRS to issue a summons on UBS demanding the release of confidential information on clients the agency suspected of tax evasion.

In the same month, UBS told a congressional hearing that it would stop offshore banking activities for US clients.

In November, Raoul Weil, the head of UBS’s Wealth Management International division, was indicted in the US for allegedly helping US citizens evade taxes.

Evasion vs fraud

People wishing to dodge paying taxes on their assets can do so by three means: avoidance, evasion and fraud.

Avoidance is the legitimate means of structuring finances so they don’t fall under the scope of taxable assets. This can be done, for example, by setting up a trust fund or by changing country residence or nationality.

Evasion is the deliberate concealing of the true state of assets from the tax authorities – in other words, lying about the extent of your assets.

This is a civil offence in Switzerland and some other countries, such as Austria and Liechtenstein, but criminal in most countries.

The main distinction between evasion and fraud is that the perpetrator tells lies on official documentation. This is sometimes known as “aggravated” tax evasion.

Unless evidence of tax fraud can be provided, Swiss banks are not obliged to hand over details of accounts and client assets to investigators.