New York (HedgeCo.Net) – UBS may have until July 13 to “vigorously contest” the demands of the Internal Revenue Service to disclose the names associated with 52,000 offshore bank accounts, but the vice that the troubled Swiss bank is finding themselves in is getting tighter by the day.  Tales of tax evasion, secrecy, greed, and diamonds smuggled in toothpaste tubes have garnered international interest, casting a blinding light of transparency on a bank that has helped thousands of wealthy Americans hide almost $15 billion from the U.S. government in recent years.

The wrath of the U.S. justice system doesn’t just stop at the bank.  The wealthy individuals behind those targeted accounts are in danger of facing penalties, back taxes, even prison terms for their role in shielding their assets.  And the UBS employees who catered to their client’s demands while showing them step by step how to hide their money and evade U.S. taxes?  They will no doubt face prosecution, a fate that UBS is well aware of.  And while UBS may uphold that their employees were acting in good faith, plenty of facts show otherwise.

“In my opinion, [the UBS employees] not only knew what they were doing was wrong, they were participating in the kind of international activities that you would only see in James Bond movies,” says Ken Rubinstein, Partner at New York City law firm Rubinstein & Rubinstein.     

According to a complaint filed by the SEC, these UBS employees often traveled to the United States with encrypted laptops after having received training on how to avoid detection by U.S. authorities.  These advisors then whisked their clients away to exclusive events such as art shows, yacht outings and sporting events, all funded by UBS.

Helping to kick-start the investigation was former UBS employee Bradley Birkenfeld, who pled guilty last year to charges of conspiracy and admitted to helping hide $200 million worth of client assets with the goal of avoiding taxes.  Birkenfeld even disclosed he purchased diamonds for an American client – and smuggled them out of the country via a toothpaste tube.  

The Defense

While the U.S. asserts they are entitled to these coveted names, UBS knows that the disclosure would no doubt end in their demise.  

"Swiss law strictly prohibits UBS and its employees from disclosing to the IRS the account information located in Switzerland that the IRS seeks,” UBS lawyers have said recently.

However, this “Swiss law” defense that UBS is spouting will not hold up in court, says Rubinstein, referring to the Mutual Legal Assistance Treaty that has been in place with Switzerland since 1977.

The Mutual Legal Assistance Treaty is an agreement that the United States has with countries all over the world, which enables the U.S. government to obtain information in foreign countries should there be any suspicions of tax fraud or shady activity. 

These treaties give the United States power to summon witnesses, obtain documents and other real evidence, issue search warrants and to serve process.  A treaty will trump any internal laws of a specific country, therefore making the bank’s claim to Swiss secrecy rights obsolete.  

The U.S. has also asserted that Switzerland was fully aware that what they were doing was illegal, despite any references to Swiss law, another fact that Rubinstein agrees with.

“UBS made a conscious decision that they could make more money by being international investment bankers, primarily focused in the US, than they could by being the traditional Swiss private bank to wealthy individuals,” he explains.  “They understood that the minute they held that presence in the U.S., they would be compromising the secrecy that a Swiss private bank normally has.”

What’s at Stake

“Secrecy laws are not designed to protect criminals and allow them to hide their money,” Rubinstein explains.  “They are designed to provide the individual privacy and protection from other individuals and companies, not from the government.”  

It is because of this fact that secrecy laws will continue to be upheld in foreign countries, though not for the purpose of avoiding taxes.   The treaties were enacted so the U.S. could easily probe into any suspicions regarding possible fraud. 

To this date, there are only a handful of countries that do not have a treaty with the United States; mainly Cuba and Monaco.

UBS knows that if they’re forced to disclose those names, they can say goodbye to their U.S. clientele.  If a judge rules against them, and they refuse to give up the information, they can be held in contempt of court, with the possibility that all of their U.S. assets would be frozen; a scenario that would essentially bankrupt the company.

UBS has already conceded to pay $780 million to the U.S. government in connection with criminal charges and has agreed to exit the cross-border business.  Shares of UBS closed yesterday at $8.34, after hitting an all-time low last month of $8.08, down 76 percent from last year’s peak.

Julie Scuderi
Senior Editor for HedgeCo.Net
Email: julie@hedgeco.net

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