US tax cheats pay for secret Swiss accounts

Whistle blower Birkenfeld (l) was also jailed Keystone

The United States authorities are wasting no time in meting out swift punishments on tax cheats who used Switzerland’s UBS bank to hide their assets.

The Internal Revenue Service (IRS) has named and shamed 17 offenders on their website with sentences ranging from tough fines and prison time. The Swiss parliament recently ratified a deal to hand 4,450 UBS client names to the IRS.

One watch manufacturer was put behind bars for ten months, a children’s toy dealer will spend six months under house arrest after serving three months in jail while a yacht broker received two months in prison and five months of home confinement.

On top of jail sentences, the guilty must all pay up the taxes they dodged in the first place and in addition face heavy fines. The most severe financial penalty listed to date was $20.4 million (SFr21.3 million) issued to a watch dealer.

Another group of seven tax dodgers are said to have hidden some $100 million in secret UBS accounts. In 2008 the US Department of Justice (DoJ) estimated that up to 20,000 US citizens had some $20 billion in assets hidden abroad.

The details of such convictions reveal a highly sophisticated web of evasion, sometimes dating back to the 1970s, that could involve setting up fake companies in various countries or repatriating funds via bogus loans.

More banks targeted

The growing list of confessions, judgments and punishments follows the release of 285 UBS client names to the US tax authorities last year. Observers expect more convictions from that batch, with thousands of names yet to be revealed.

“The IRS and the DoJ have moved quickly, as time is measured in the world of criminal tax cases, to bring as many as they have,” US tax lawyer Scott Michel told swissinfo.ch.

“Criminal tax cases often take a long time, and there are clearly other cases under investigation that present more mitigating circumstances and perhaps greater complications than the ones brought so far. These will take more time.”

The public naming and shaming of individuals is designed to flush more tax evaders out into the open with voluntary disclosures before they get caught and handed more severe penalties.

But with the publicity surrounding the UBS case diminishing, Michel is among many observers who believe that the US authorities might soon start to move against the clients of other banks in offshore tax havens.

“I suspect there will come a time when the deterrent effect obtained by yet another UBS prosecution will be quite minimal, compared with the splash the IRS and DOJ could achieve by moving after customers of other banks in non-Swiss jurisdictions. That time may in fact be fast approaching,” he said.

Private banking changing

The US authorities are not just targeting bank customers who hid assets abroad. Swiss bankers and tax advisors have also been hit with indictments.

The most high profile of these was former UBS employee turned whistle blower Bradley Birkenfeld, who is currently serving time for aiding and abetting tax evasion despite giving evidence that sparked the UBS probe in the first place.

Michel thinks it is unlikely that many finance professionals in Switzerland could be forced to face the US courts, but the accusations could hamper their movements in case they run into the US justice web. “These indictments place these individuals in some form of national house arrest,” he said.

The high profile investigation caused immense damage to the reputation of UBS, causing it to cease cross border services with US clients. Other Swiss institutions, such as private bank Wegelin, also stepped out of the US market.

Credit Suisse and the Swiss branch of HSBC have also been caught up in tax evasion investigations – conducted by European countries rather than the US.

“Catastrophic gamble”

The furore surrounding the international tax evasion crusade is changing the way Swiss private bankers conduct their business. Some banks have stopped offshore activities and are building up onshore bases in other countries.

Bank Sarasin recently announced that it would enforce its own rigorous checks to ensure that offshore clients have declared invested assets to their home tax authorities.

But such moves are unlikely to help the thousands of US clients who will shortly come under the scrutiny of the IRS. According to Scott Michel, there is only one course of action available for such account holders.

“Frankly, anyone who knows they are, or are likely to be on the list of 4,450 who has not consulted US tax counsel about whether to initiate a voluntary disclosure is taking a huge and potentially catastrophic gamble,” he said.

Matthew Allen, swissinfo.ch

The UBS tax saga

In 2008, UBS – then the world’s largest wealth manager – was caught in an IRS sting that used information from a former employee to build a case that the bank has helped US citizens to evade taxes.

In February 2009, UBS admitted its guilt and was forced to pay a $780 million fine and hand over the names of some 285 clients. The current trials and convictions are a result of this list of names being handed on to the IRS.

However, an IRS demand for 52,000 more names escalated the case into a diplomatic and political saga.

In August 2009, the Swiss and US governments agreed to a deal that would hand over the confidential details of 4,450 UBS clients.

But a Swiss federal administrative court ruling in January 2010 that the handover of the original 285 names was illegal, left the deal in doubt.

Such doubts were finally dispelled in June when the Swiss parliament voted to allow the 4,450 names to be handed over to the US authorities. These names will be processed in batches before being passed on to the IRS in phases.

UBS has ended all cross border wealth management services for US clients but still retains an onshore wealth management presence in the US.