The UBS Imbroglio
By Claudio Guler for ISN
Judge Alan S Gold of the United States Florida Southern District Court
external pagewas to preside over civil proceedings in the tax dispute between the US and Union Bank of Switzerland (UBS) later today in Miami. US authorities are outraged that UBS client advisors roamed the US from 2002 to 2007 in search of wealthy clients and provided them with unlicensed, tax-free wealth management services.
The US hopes to crack Switzerland’s banking secrecy and obtain the client information of up to 52,000 high-net-worth Americans suspected of withholding an estimated $14.8 billion in taxes from the US Internal Revenue Service (IRS). The Swiss are looking to hammer out a deal that preserves banking secrecy and eschews further disrepute. The US claims that tax havens deprive its treasury of roughly $100 billion a year.
UBS admitted wrongdoing on 18 February 2008, after a former US-based employee, Bradley Birkenfeld, informed on the bank in exchange for a reduced penalty in his own tax fraud investigation. UBS entered into a Deferred Prosecution Agreement and pledged to cooperate with US authorities or again face criminal charges. It also released the names of some 300 alleged US tax cheats, paid a $780 million fine and immediately began exiting the US offshore wealth management business.
The IRS, with the backing of US Senator Carl Levin (D-Michigan) who has since introduced the Stop Tax Haven Abuse Act in the US Congress, felt a external pagecivil suit was the best and possibly only means to compel UBS to cooperate and demanded UBS reveal its entire roster of American offshore clients. UBS and the Swiss authorities declined, arguing that the request constituted a “fishing expedition” and would expose UBS employees to criminal proceedings in Switzerland.
The Swiss have largely deemed the IRS’ follow-up civil suit an underhanded blow. They accuse the US – a country with questionable corporate taxation practices of its own, a fresh record of financial calamity, and a thirst for funds to plug fiscal deficits – of targeting asymmetric Switzerland unreasonably.
Yet UBS and Switzerland are on the defensive. UBS’ actions assured that should a climate of fiscal thrift arise, the proverbial sleeping dog would be prime for an awakening. Now, a compromise, one that avoids devastating entirely the integrity of Swiss banking secrecy increasingly looks like the best Switzerland can hope for.
Recent glimmers of hope have proven ephemeral. external pageSwitzerland renegotiated a double taxation treaty with the US on 19 June: It is still in ministerial channels. The move is part of Switzerland’s broader initiative to renegotiate 12 double taxation treaties before the end of 2009 to bring itself into line with OECD standards on information exchanges and get off the OECD’s grey list. Some hoped, to no avail, that these negotiations would also resolve the tax dispute.
On 23 June, the New York Times published an article headlined “ external pageSettlement Anticipated in UBS Case,” which quoted an American official arguing, “To have a complete meltdown in Swiss-US relations and go to the mat with Switzerland three years from now when money is getting back into the system doesn’t make sense.” The US swiftly denied the official’s conjecture. UBS has three years to appeal any adverse ruling by Judge Gold.
In the interim, frustrations are growing and Swiss-US relations are suffering a setback. The conservative Swiss People’s Party (SVP) is external pagepining to anchor banking secrecy in the national constitution. Other, smaller Swiss banks are avoiding or external pageretreating from the lucrative US market altogether, never mind their legal status.
If releasing names in bulk is not an option for Switzerland (assuming it can mount and maintain a proper defense), the US and Switzerland will likely have to reach a diplomatic compromise - it promises to be expensive. Swiss Finance Minister Hans Rudolf Merz hinted on 7 July that USB might consider paying back lost taxes. Switzerland has also been in talks with the US to receive Guantanamo Bay inmates as President Obama shuts down the base. These overtures, however, may be ineffective in the short run.
In response to the UBS scandal, on 23 March, the external pageIRS initiated a temporary, more lenient voluntary disclosure program to encourage US taxpayers with offshore accounts to come clean.
Considering the unusually aggressive nature of the US’ offensive against UBS, it seems unlikely that the US would settle before the IRS concludes its program has paid adequate dividends. Moreover, for the US, this case is about money, but it is also about names, sovereignty limitations, and just maybe, some showcase criminal proceedings down the road.
If a settlement is in the cards, it may still be some time. But the trial injunction looks auspicious.
The US hopes to crack Switzerland’s banking secrecy and obtain the client information of up to 52,000 high-net-worth Americans suspected of withholding an estimated $14.8 billion in taxes from the US Internal Revenue Service (IRS). The Swiss are looking to hammer out a deal that preserves banking secrecy and eschews further disrepute. The US claims that tax havens deprive its treasury of roughly $100 billion a year.
UBS admitted wrongdoing on 18 February 2008, after a former US-based employee, Bradley Birkenfeld, informed on the bank in exchange for a reduced penalty in his own tax fraud investigation. UBS entered into a Deferred Prosecution Agreement and pledged to cooperate with US authorities or again face criminal charges. It also released the names of some 300 alleged US tax cheats, paid a $780 million fine and immediately began exiting the US offshore wealth management business.
The IRS, with the backing of US Senator Carl Levin (D-Michigan) who has since introduced the Stop Tax Haven Abuse Act in the US Congress, felt a external pagecivil suit was the best and possibly only means to compel UBS to cooperate and demanded UBS reveal its entire roster of American offshore clients. UBS and the Swiss authorities declined, arguing that the request constituted a “fishing expedition” and would expose UBS employees to criminal proceedings in Switzerland.
The Swiss have largely deemed the IRS’ follow-up civil suit an underhanded blow. They accuse the US – a country with questionable corporate taxation practices of its own, a fresh record of financial calamity, and a thirst for funds to plug fiscal deficits – of targeting asymmetric Switzerland unreasonably.
Yet UBS and Switzerland are on the defensive. UBS’ actions assured that should a climate of fiscal thrift arise, the proverbial sleeping dog would be prime for an awakening. Now, a compromise, one that avoids devastating entirely the integrity of Swiss banking secrecy increasingly looks like the best Switzerland can hope for.
Recent glimmers of hope have proven ephemeral. external pageSwitzerland renegotiated a double taxation treaty with the US on 19 June: It is still in ministerial channels. The move is part of Switzerland’s broader initiative to renegotiate 12 double taxation treaties before the end of 2009 to bring itself into line with OECD standards on information exchanges and get off the OECD’s grey list. Some hoped, to no avail, that these negotiations would also resolve the tax dispute.
On 23 June, the New York Times published an article headlined “ external pageSettlement Anticipated in UBS Case,” which quoted an American official arguing, “To have a complete meltdown in Swiss-US relations and go to the mat with Switzerland three years from now when money is getting back into the system doesn’t make sense.” The US swiftly denied the official’s conjecture. UBS has three years to appeal any adverse ruling by Judge Gold.
In the interim, frustrations are growing and Swiss-US relations are suffering a setback. The conservative Swiss People’s Party (SVP) is external pagepining to anchor banking secrecy in the national constitution. Other, smaller Swiss banks are avoiding or external pageretreating from the lucrative US market altogether, never mind their legal status.
If releasing names in bulk is not an option for Switzerland (assuming it can mount and maintain a proper defense), the US and Switzerland will likely have to reach a diplomatic compromise - it promises to be expensive. Swiss Finance Minister Hans Rudolf Merz hinted on 7 July that USB might consider paying back lost taxes. Switzerland has also been in talks with the US to receive Guantanamo Bay inmates as President Obama shuts down the base. These overtures, however, may be ineffective in the short run.
In response to the UBS scandal, on 23 March, the external pageIRS initiated a temporary, more lenient voluntary disclosure program to encourage US taxpayers with offshore accounts to come clean.
Considering the unusually aggressive nature of the US’ offensive against UBS, it seems unlikely that the US would settle before the IRS concludes its program has paid adequate dividends. Moreover, for the US, this case is about money, but it is also about names, sovereignty limitations, and just maybe, some showcase criminal proceedings down the road.
If a settlement is in the cards, it may still be some time. But the trial injunction looks auspicious.