UBS, US negotiate tax issues on 52,000 accounts
UBS AG, the largest Swiss bank by assets, is in talks with the U.S. government to settle a lawsuit seeking the names of 52,000 American account holders suspected of using Swiss secrecy laws to evade taxes.
The bank agreed with the U.S. and Swiss governments to seek a settlement and postpone an evidentiary hearing today in a Miami courtroom, according to a court filing. The U.S. sued UBS on Feb. 19, a day after the bank agreed to pay $780 million to defer prosecution for helping wealthy Americans evade taxes.
Under that agreement, UBS also agreed to an unprecedented breach of Swiss secrecy laws by giving the Internal Revenue Service data on more than 250 accounts. Switzerland, which supports UBS in the case, said the U.S. push for data on 52,000 other accounts is a threat to its sovereignty and would force the bank to violate Swiss criminal laws protecting bank secrecy.
“This adjournment gives people at very high levels of both governments time to get involved and consider the implications of this litigation,” said Bryan Skarlatos, a tax lawyer at Kostelanetz & Fink LLP in New York. “The symbolic value of this case is huge. It’s King Kong versus Godzilla. It’s the IRS versus bank secrecy jurisdictions.”
In a statement yesterday, the Justice Department said any settlement “would necessarily include a provision requiring UBS to provide the Internal Revenue Service information on a significant number of individuals with UBS accounts.”
U.S. District Judge Alan Gold had set an evidentiary hearing for today. In a joint filing seeking a stay of the case, UBS and the Justice Department asked Gold to reset the hearing for Aug. 3 and 4 if they cannot reach a settlement. Gold must still rule on that request.
The postponement request is backed by the Swiss Federal Department of Justice and Federal Department for Foreign Affairs, according to a Swiss statement. The Swiss declined further comment, citing confidential “ongoing settlement negotiations” between the governments.
UBS, in a statement, said it “welcomes the announcement that the U.S. and Swiss governments have agreed to negotiations.”
Switzerland had hardened its public posture on the case, saying in a July 7 court filing it “will use its legal authority to ensure that the bank cannot be pressured to transmit the information illegally, including if necessary by issuing an order taking effective control of the data at UBS.”
On July 8, Gold directed the Justice Department to consult the government’s executive branch, including the State Department, before responding by yesterday to the Swiss threat.
Gold directed the government to say by yesterday “how far it intends to proceed,” including the possibility of seizing UBS assets in the U.S. and imposing a receivership.
In a July 9 memo, UBS Chief Executive Officer Oswald Gruebel said: “The core of the dispute turns on a conflict between the Swiss banking confidentiality laws, to which we are bound, and the U.S. objective to collect taxes owed by its citizens. Honoring the IRS summons would require UBS to violate Swiss criminal law, and we simply cannot comply.”
In its response to Gold yesterday, the Justice Department said it was “premature” to respond to “the question of whether UBS will be able to comply” with any court order.
“To the best of our knowledge the Swiss government has not yet taken such action, nor has it made clear what it means when it suggests that it will issue an order ‘taking effective control’ of the UBS records,” according to the filing.
“The fact that UBS finds itself in a difficult position is completely the result of its own conduct,” according to the filing. It urged Judge Gold to rule on the merits of the case, not on whether “UBS may or may not comply.”
The Gold order directing the U.S. to comment on possible seizure of UBS assets in the U.S. raised the stakes in the case, according to Skarlatos, whose firm represents bank clients.
“The judge said, ‘If you think that’s going to carry the day or scare me off, I still have power and authority over all your assets in the United States and I’m still going to exercise it,’” Skarlatos said.
“The real problem is that UBS came to the United States and actively engaged in a business plan to violate the laws in the United States,” he said. “Swiss laws don’t apply when you actively violate the laws of the United States.”
Swiss law recognizes tax fraud and not tax evasion as a crime. Any settlement would probably require a revision to the current tax treaty between the U.S. and Switzerland, said Lawrence Horn, a tax attorney at Sills Cummis & Gross in Newark, New Jersey.
“Someone is going to have to come up with a new definition of tax fraud to be more expansive to allow the Swiss government to save face,” Horn said.
As part of its deferred-prosecution agreement, UBS admitted Feb. 18 that from 2000 to 2007 its Swiss private bankers helped Americans evade U.S. taxes through sham offshore companies in tax havens including Panama, Hong Kong and the British Virgin Islands. UBS said it created misleading forms saying those companies, not taxpayers, were the beneficial account owners.
UBS also said its private bankers marketed securities and banking services in the U.S., even though it didn’t have the required license from the U.S. Securities and Exchange Commission. Those bankers, UBS said, met with clients in the U.S. and communicated with them regularly as they traded securities in their accounts or transferred assets.
The case is U.S. v. UBS AG, 09-cv-20423, U.S. District Court, Southern District of Florida (Miami).