UBS Forced to Lift Secrecy Skirt for Peek by IRS: Ann Woolner

[Joanne98]

Feb. 26 (Bloomberg) -- UBS AG has only itself to blame for landing in a vise, squeezed by Swiss banking secrecy law on one side and the U.S. Internal Revenue Service on the other.

If it hadn’t been so hungry for American wealth and brazenly offered to hide it, the Swiss bank might have rocked along for years without ever getting pinched.

But, no. UBS bankers came to the U.S. by the dozens to pitch the Zurich-based bank as a haven from taxation, a former banker has admitted. Carrying encrypted laptops, they helped customers create sham structures, advised them on avoiding U.S. reporting requirements or referred them to people who would.

The feds figure almost $18 billion was hidden in offshore UBS accounts in recent years.

That’s what investigators uncovered in a case that began with a single American, Igor Olenicoff, hiding $200 million. He claims he was led into the crime by UBS bankers, and now it has turned into an historic clash between U.S. and Swiss law.

Threatening criminal prosecution of the bank, the U.S. won a $780 million settlement, an admission that UBS bankers conspired to violate the law and identifying information on some 200 to 300 American clients.

That crack in the secrecy wall created enough of a stir that UBS and the Swiss Bankers Association had to explain why it happened and why it won’t necessarily lead to further disclosures.

It’s like this: So far, the only clients exposed were suspected of tax fraud, which involves lying to the government and is illegal in both countries. Mere tax evasion, where you just don’t get around to reporting your assets or income, isn’t a crime in Switzerland. And under a bilateral agreement, only conduct that is criminal in both countries can prompt Swiss banks to turn over information on their customers.

Prying Information

Now the U.S. is trying to pry open the crack to look for evaders. In federal court in Miami, the IRS demands that the bank name the American holders of more than 52,000 secret accounts.

Neither side can afford to lose the fight.

If UBS complies, Switzerland can prosecute the bankers for violating Swiss law and lift UBS’s banking license.

That isn’t all. The release of thousands of names would crumble public confidence in legendary Swiss bank secrecy, shrinking Switzerland’s international banking business, a linchpin in the economy.

Swiss authorities can’t let that happen, any more than U.S. authorities can walk away from the fight.

“The IRS can’t allow UBS to help people break federal tax law,” says Bryan Skarlatos, a partner at Kostelanetz & Fink in New York.

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