Publication Image Swiss Bank To Give Up Depositors' Names to Prosecutors

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Swiss Bank To Give Up Depositors' Names to Prosecutors
Evan Perez, Carrick Mollenkamp. Wall Street Journal. (Eastern edition). New York, N.Y.: Feb 19, 2009. pg. A.1
Abstract (Summary)

The agreement marks the first time Swiss financial regulators have allowed one of their banks to reveal the identity of account holders normally held secret under centuries of Swiss banking tradition. "Client confidentiality, to which UBS remains committed, was never designed to protect fraudulent acts or the identity of those clients, who, with the active assistance of bank personnel, misused the confidentiality protections" that were part of tax agreements with the U.S., Mr. Kurer said.
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In a significant break from Switzerland's tradition of banking secrecy, UBS AG will turn over the names of about 250 account holders as soon as Thursday as part of a $780 million settlement with U.S. prosecutors.

UBS must abide by terms of the settlement or risk being indicted, in what's known as a deferred prosecution agreement. The U.S. government has conducted a wide-ranging tax-evasion probe over the Swiss bank's offshore private-banking services for wealthy Americans.

UBS became the focus of the U.S. criminal and civil probes in 2007, when a former UBS executive, Bradley Birkenfeld, told U.S. officials that the bank allegedly began telling American customers in 2002 it wasn't required to disclose their identities to the Internal Revenue Service.

U.S. prosecutors have estimated that UBS holds an estimated $20 billion in assets for U.S. clients in accounts that it hid from U.S. authorities. These accounts generated about $200 million a year in revenues for the bank, prosecutors said.

The agreement marks the first time Swiss financial regulators have allowed one of their banks to reveal the identity of account holders normally held secret under centuries of Swiss banking tradition. Some Swiss lawmakers have opposed the move, claiming it would destroy the Swiss banking industry. Even before the U.S. agreement, many of the world's wealthy who have relied on Swiss banks have been spooked enough to move assets to other jurisdictions, according to lawyers and prosecutors.

The Securities and Exchange Commission also announced UBS agreed to pay $200 million to settle charges it violated U.S. regulations requiring its bankers to register in order to sell U.S. securities.

The agreement will settle the criminal investigation against the bank, but a civil case against UBS filed by U.S. tax authorities remains open. In that case, U.S. authorities have subpoenaed UBS to turn over the names of 19,000 clients who IRS investigators believe used UBS's services to avoid taxes.

Under Wednesday's agreement, UBS acknowledged the subpoena, but has the option to challenge it. If the bank's legal challenges are unsuccessful and it still refuses to turn over the names, U.S. prosecutors might be able to pursue new criminal charges against the bank.

The settlement puts the Swiss bank on the road to closing an embarrassing period which also included massive write-downs tied to bad bets on subprime loans. Earlier this month, UBS reported a net loss of 8.1 billion Swiss francs ($6.9 billion) for the fourth quarter, contributing to a total loss of 19.7 billion francs for 2008.

In the fourth quarter, UBS's private and business bank division had net new money outflows of 58.2 billion francs.

UBS Chairman Peter Kurer, who had said a settlement was a top priority for 2009, said in a statement the bank accepted responsibility for the improper activities and that it was committed to the settlement agreements. "UBS sincerely regrets the compliance failures in its U.S. cross-border business," Mr. Kurer said.

"Client confidentiality, to which UBS remains committed, was never designed to protect fraudulent acts or the identity of those clients, who, with the active assistance of bank personnel, misused the confidentiality protections" that were part of tax agreements with the U.S., Mr. Kurer said.

Swiss Financial Market Supervisory Authority said in a statement that it welcomed the deal and that it helped avoid "the looming threat of formal criminal charges" being filed against UBS.

The agreement "spares the government from pursuing what would have been a colossal and resource-intensive effort to prosecute UBS," said Peter D. Hardy, a former U.S. prosecutor and partner at Post & Schell in Philadelphia.

The settlement doesn't specify how many names UBS has to turn over, only that the bank will identify the owners of what prosecutors call sham entities that UBS allegedly set up for the purposes of tax evasion. It is a disclosure that no Swiss bank has made before, prosecutors said.

UBS told a Senate investigation last year that at least 250 such accounts existed.

Prosecutors in Florida have indicted one former high-level UBS executive, Raoul Weil, on charges of helping Americans evade taxes and temporarily detained a second executive as a material witness. Both executives are believed to be back in Switzerland. A U.S. judge has declared Mr. Weil a fugitive after he failed to respond to charges.

Wednesday's settlement doesn't protect Mr. Weil and potentially other UBS executives -- and possibly outside consultants. They continue to face prosecution. Mr. Weil's lawyer, Aaron R. Marcu, said in a statement late Wednesday that his client was an "innocent victim" of a political dispute between the U.S. and Switzerland. Mr. Marcu added that Mr. Weil told employees to follow Swiss and U.S. law.

Mr. Birkenfeld, the former UBS executive who tipped off U.S. officials, has pleaded guilty to the same charge of abetting tax evasion, and is helping the IRS and the Justice Department.

The IRS obtained a broad civil summons from the U.S. District Court for the Southern District of Florida in July 2008 to request that UBS hand over the names of all of its American clients, but the bank has yet to do so.

IRS Commissioner Doug Shulman said, "People who have hidden unreported income offshore need to get right with their government."

The investigation of UBS has prompted hundreds of clients to own up to a failure to pay back taxes, according to U.S. government officials and lawyers.

Under the settlement, UBS admits to allegations that the government laid out in its case against Mr. Birkenfeld, who became a cooperating witness.

According to documents included with Wednesday's settlement, bank executives had delayed until August 2007 a decision to wind down the U.S. operations, which had been profitable, because it wasn't clear whether a buyer could be found. UBS also was worried about its reputation, the documents said. During the same period, UBS was just coming to grips with losses at its investment bank.

"UBS executives knew what they were doing was illegal," said Alexander Acosta, the U.S. attorney in Miami overseeing the government's investigation into the bank. "They refused to stop this activity."

The government has described in court documents how UBS bankers allegedly lavished attention on clients, inviting them to events held at gatherings frequented by the wealthy, such as the Art Basel art fair in Miami Beach, Fla., and a tennis tournament in Key Biscayne, Fla.

Credit: By Evan Perez and Carrick Mollenkamp