U.S. Lets Swiss Banking Giant UBS Off the Hook
“The Swiss have once again proven their sovereignty and respect for the financial privacy of individuals. This is a good day for the rule of law, and the protection of private property”. – Alex Stanczyk
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Traditions die hard.
Since the founding of the Swiss Confederation in 1291, Switzerland has protected the privacy of its financial accounts. It may be the world’s most secretive banking jurisdiction, with a vaunted ability to protect its depositors from unwanted prying.
Switzerland converted this tradition to law in 1934, when it enacted its strict banking secrecy law. Revealing financial information without the client’s consent is prohibited.
For more than a year now, this tradition of bank secrecy, or financial privacy as the Swiss call it, has been under attack from one of the most powerful agencies in the world — the U.S. Internal Revenue Service. In July 2008, the IRS served a “John Doe” summons on UBS, seeking records that would identify U.S. taxpayers with accounts at UBS in Switzerland who have not reported these accounts to the IRS. UBS failed to comply with the summons.
So in February, the U.S. Department of Justice filed a petition to force the Swiss banking giant to turn over some 52,000 names of U.S. account holders the IRS suspects failed to pay taxes on earnings from those accounts, as required under U.S. law. UBS has continued to refuse to disclose the names, arguing that doing so would violate Swiss banking laws. It is a crime in Switzerland for bankers to provide information on client accounts to foreign tax authorities, and bankers who violate this law may be subject to criminal prosecution that includes the possibility of a prison sentence.
Fearing that UBS might, nevertheless, succumb to U.S. pressure, the Swiss government formally joined the fray in early July. The Swiss stated in a friend of the court brief that if a U.S. judge ordered UBS to turn over the account names, the government would seize UBS’ bank records, if necessary, to prevent UBS from divulging the information. Switzerland last took this type of action 25 years ago when it seized the accounts of tax fugitive Marc Rich.
The IRS countered, saying that while bank secrecy may be important in Switzerland, protecting that secrecy must be considered in the context of UBS actions. As the bank admitted earlier this year, UBS willfully assisted thousands of U.S. clients to evade hundreds of millions of dollars in taxes.
On the strength of information provided by former UBS private banker Bradley Birkenfeld on the bank’s tax practices, U.S. tax authorities were poised to tear down the wall of Swiss banking secrecy.
Yet, such an outcome now appears out of reach.
On July 31, just three days before the parties were to go to trial, the U.S. and Swiss governments reached a tentative agreement in a civil case filed on Feb. 19. This agreement, which has not yet been finalized, means that UBS is not likely to give U.S. tax authorities the names of all 52,000 American clients the IRS suspects are evading taxes on some $15 billion held offshore in secret Swiss bank accounts. Neither the U.S. nor the Swiss government provided details on the number of names that would be provided. On August 7, U.S. District Judge Alan Gold, who is presiding over the civil case, approved a request from both parties for another teleconference Aug. 12. A related but separate criminal case has been settled.
