UBS in US court showdown

July 10, 2009
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, MIAMI, July 10 – A courtroom showdown set to begin Monday in Miami pits Swiss financial giant UBS against American tax authorities in a key test for Switzerland\’s long tradition of bank secrecy.

US authorities are asking a federal court to order UBS to reveal the names of American offshore account holders, saying the Swiss bank "systematically and deliberately" violated US laws.

The case stems from a lawsuit filed earlier this year and affects as many as 52,000 US taxpayers suspected of holding UBS offshore accounts to avoid paying US taxes.

But the Swiss government has vowed to prevent UBS from releasing client data to US tax authorities and argued that the effort aimed to "provoke international conflict" because it could force UBS to violate Swiss laws.

Jacob Frenkel, a securities lawyer and former US prosecutor, said the case calls for a diplomatic solution because it involves conflicting laws of the two countries.

"UBS cannot violate Swiss law, that\’s the fundamental premise," Frenkel said.

"And if that means UBS has to pick up and leave the United States absent a solution, UBS will do what it needs to do to comply with its home country\’s laws."

Federal Judge Alan Gold, who is presiding in the case, has asked the US Justice Department to detail what actions it would seek in view of the Swiss government\’s hard line on preventing the release of client information.

"The United States shall address… how far it intends to proceed by way of enforcement, up through and including receivership and/or seizure of UBS\’s assets within the United States," the judge said, ordering prosecutors to file a new brief by Sunday.

But Frenkel said an adverse outcome for UBS — which could involve fines, or confiscation of its US assets — could have a chilling effect on international financial institutions.

Such an outcome "would make every non-US based financial institution question whether it should continue doing business on US soil," he said.

Ross Albert, a former Securities and Exchange Commission enforcement lawyer who practices with the Atlanta firm Morris, Manning & Martin, argued that "both countries have a strong interest in reaching a mutual accommodation."

"What is frightening is that this is the financial equivalent of Armageddon," Albert said.

"UBS is one of the largest financial institutions in the world and if it loses the ability to conduct business in the United States, it\’s going to fail."

Albert said the imposition on UBS of a massive fine — some reports have suggested a figure of more than four billion dollars — "would go a long way toward vindicating the US government."

UBS has argued that it cannot comply with the US demand without violating Swiss banking secrecy law, which would make it liable for prosecution in Switzerland.

In its court filing, the Swiss government supports that claim, saying the company was "unable to comply with the summons without violating Swiss law."

Earlier this year, in response to strong international pressure, Switzerland agreed to negotiate bilateral deals to help foreign authorities clamp down on tax cheats.

But such deals would allow information to be swapped only where there is evidence of the offense, with automatic data transfers remaining prohibited.

The UBS case comes after the Swiss bank settled a tax fraud case in the United States under a "deferred prosecution agreement" that requires the bank to cooperate with US authorities.

The bank has also agreed to pay 780 million dollars under a provisional deal to settle charges that it helped US clients evade taxes.

Swiss President Hans-Rudolf Merz on Tuesday suggested that UBS could resolve the issue by paying taxes claimed by the US on behalf of its clients, but the bank posted losses of 17 billion dollars last year and warned in June of further losses in the second quarter.

The Swiss government last year injected six billion Swiss francs, then equivalent to 3.9 billion euros or 5.2 billion dollars, into UBS in a bid to stabilize the bank after huge losses due to its exposure to the US subprime mortgage crisis.

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