THE BLOG
09/19/2009 05:12 am ET Updated May 25, 2011

UBS Deals Cause Switzerland To Back Down on Bank Secrecy

While we Americans are rightfully angry with our banks for taking us down the subprime road to unemployment, foreclosure, devastated retirement savings and all of the other trappings of recession, the Swiss must be furious with UBS for the havoc it has wrecked on the famous Swiss banking industry which relied on its stringent bank secrecy policies for much of its success. UBS helped more than 52,000 Americans evade US tax by helping them set up Swiss bank accounts through off-shore entities. Impressively, the IRS started investigating in May 2008 and has already racked up four guilty pleas and has publicly disclosed that it is actively pursuing more than 150 other criminal investigations in UBS-related cases.

Through the information obtained from taxpayers pleading guilty, the US has learned much more about how the system worked. Through the help of UBS representatives and Swiss lawyers, the Americans who purchased their services used entities formed in Hong Kong and other countries to funnel money through and did not report billions of dollars of reportable income. Some of the defendants have disclosed that UBS executives would travel to the US dressed as tourists in an attempt to avoid detection. One of the taxpayers who admitted guilt apparently got cold feet at one time and wanted to come clean with the IRS. To help reduce his anxiety, UBS helped move some of his funds to a smaller Swiss bank assuring him that, because the bank was smaller, it would not be subject to the same amount of scrutiny as UBS. A Swiss lawyer working with UBS also assured him that a high-ranking Swiss government official had provided assurances that his name had not been turned over to the IRS and that the official had been paid $45,000 for this information.

In February 2009, UBS and the US entered into a settlement agreement wherein UBS paid $780 million in fines and turned over 255 names of Americans who had committed tax fraud. Since then, the IRS has been battling UBS for the additional 52,000 names of evading taxpayers, but Switzerland told UBS that it would violate Swiss privacy rules if it turned the names over. Switzerland apparently felt that this demand so threatened its bank industry that it took over the negotiations with the US from UBS. At least 10 other Swiss and European banks have been identified as having held some of US tax evader funds and whether they too were engaged in wrongdoing will likely be pursued by the IRS.

Last week, the US and Switzerland reached an agreement under which Switzerland has agreed that UBS will disclose an estimated 4,450 names of Americans who evaded tax with its help and about 10,000 accounts. However, there has been no disclosure about what parameters will be used to determine which names will be released. This puts these US tax evaders in a real dilemma. Several months ago, the IRS introduced a program to allow UBS tax evaders to come clean and generally avoid jail time so long as they paid all past due taxes and substantial penalties. This program ends September 23, so the evaders now must decide whether to come clean, pay most of the hidden money to the IRS through taxes and penalties, but at least be able to sleep at night knowing that orange jumpsuits are not in their future or take the chance that they are one of the lucky ones whose name will not be revealed and their Swiss account holdings will remain secret and intact.

As a result of the UBS case, Switzerland has agreed to amend its tax treaty with the US. Historically, Switzerland distinguished between tax fraud and tax evasion, which enabled its banks to assure depositors that their accounts would remain secret. While the basis for the Switzerland's unique distinction between tax fraud and tax evasion is not entirely clear, it appears that Switzerland defined tax fraud as taking some active and deliberate action to defraud the tax authorities -- like falsifying a document -- whereas omitting things, like millions of dollars of income, was only tax evasion. And in Switzerland, tax fraud was a crime but tax evasion was only a civil matter and not of much consequence. Its tax treaties with other countries required Switzerland to cooperate with the other country in investigating tax fraud, but Switzerland thought tax evasion did not fall within these treaty obligations and the Swiss banks could assure depositors who committed only tax evasion of bank secrecy.

Most other nations don't take the same lax attitude toward tax evasion that Switzerland did and the OECD, an international organization, threatened to put Switzerland on the tax haven list. Switzerland capitulated and is adopting the OECD's definition which makes tax evasion, as well as tax fraud, a crime. This means that Switzerland, by treaty, will be obligated to cooperate with the IRS to catch US taxpayers cheating on their taxes, i.e., turn over names, account numbers, account information, etc.

Swiss banks reportedly are now hawking Switzerland's famous stability to potential depositors instead of its historic bank secrecy laws.