By David S. Hilzenrath
Washington Post Staff Writer
Friday, February 20, 2009
One day after the Justice Department claimed to have struck a blow against Swiss bank secrecy, it became clear yesterday how limited that blow was and how much a $780 million fraud settlement with Switzerland's largest bank left unresolved.
On Wednesday, the department announced that the Swiss banking giant UBS would immediately give up the names of an unspecified number of American clients to avoid prosecution on charges that it helped them use secret accounts to evade U.S. taxes.
"The veil of secrecy has been pulled aside," John A. DiCicco, acting assistant attorney general of the Justice Department's tax division, said in a Wednesday news release.
Yesterday, the Swiss president told reporters in Switzerland that UBS had given the U.S. government the identities of up to 300 clients -- a small fraction of the information the Justice Department and Internal Revenue Service have been seeking.
The IRS underscored the enormous gap yesterday in a fresh lawsuit alleging that as many as 52,000 U.S. taxpayers used secret accounts at UBS to hide money from the tax agency. That number was more than double previous estimates, including a figure of 19,000 that a Senate investigative panel last year reported getting from UBS.
The lawsuit filed yesterday seeks to force UBS to do what it has so far refused to do: give up the names of all the suspected tax dodgers.
UBS said it plans to "vigorously contest" the new lawsuit. The information the IRS seeks "is protected from disclosure by Swiss financial privacy laws," the Swiss bank said in a statement.
The U.S. government has been probing UBS with help from sources such as a former UBS banker, Bradley Birkenfeld, who last year pleaded guilty to helping a California real estate mogul evade millions of dollars of taxes. Birkenfeld told investigators that UBS personnel went to elaborate lengths to help U.S. clients stash money in secret Swiss accounts.
The investigation led to the indictment in November of a top UBS executive. The U.S. government has used internal bank documents to accuse UBS management of conspiring to deprive the U.S. Treasury of tax revenue.
In Wednesday's settlement, UBS admitted that it schemed to defraud the United States, in some cases by helping clients set up offshore companies to hide the true ownership of their Swiss accounts. The operation allegedly generated hundreds of millions of dollars of profit for UBS. The government said it demanded smaller penalties from UBS than it could have in consideration of the international financial crisis.
"The UBS deferred prosecution agreement represents a tremendous breakthrough in the national effort to combat offshore secrecy and tax abuse," Sen. Carl M. Levin (D-Mich.), who led the Senate investigation of UBS, said in a statement Wednesday. "Efforts to tear away the offshore cloak of secrecy are gradually succeeding and will continue."
Though Justice's criminal investigation has parted the curtains on what it calls a wide-ranging conspiracy at UBS, it is unclear how seriously it has altered the terms of Switzerland's legendary bank secrecy.
Under Swiss law, banks cannot expose clients whose only transgression is failing to disclose assets or income to the IRS. But banks can unmask clients who take active steps to deceive, such as creating dummy corporations to hide account ownership.
A statement by an IRS official filed in court yesterday suggested that Switzerland was sticking to that standard in refusing to turn over more than a few hundred client names. It appears that the IRS's requests for disclosure under an international treaty "may only result in the production of records for, at most, about 300 of those 52,000 accounts," IRS Deputy Commissioner Barry B. Shott said in the statement, dated Feb. 6.
As of Jan. 21, the Swiss government was willing to provide records for only 12 accounts, but not until the account holders had been given a chance to contest the disclosure in a Swiss court, Shott wrote.
By targeting information based in the United States, the IRS obtained the names of about 323 clients who held UBS accounts in both the United States and Switzerland and transferred money between them, IRS agent Daniel Reeves said in a separate court filing yesterday.
The greatest blow to Swiss bank secrecy thus far may be UBS's decision to close the secret Swiss accounts of its American clients, forcing depositors to move their money and sending a message that customers can't rely on the bank to keep their assets hidden.
Staff researcher Julie Tate contributed to this report.