Financial Regulatory Forum

Judge asks if US govt would shut UBS in tax fight

By Reuters Staff
July 9, 2009

By Lisa Jucca and Tom Brown

ZURICH/MIAMI, July 8 (Reuters) – A judge ordered the U.S. government to say whether it was prepared to shut Swiss bank UBS AG in the United States as part of a battle to learn the identity of 52,000 secret accounts suspected of being used by Americans to avoid taxes.

U.S. District Judge Alan Gold, set to preside over a hearing Monday of a suit seeking to force UBS to provide the information, asked specifically Wednesday about “receivership and/or seizure of UBS’ assets within the United States.”

Gold said such remedies might be requested of the court if UBS failed to comply, or was prevented from complying by the Swiss government. He gave the U.S. Justice Department until noon (1600 GMT) on Sunday to respond.

Switzerland has vowed to prevent UBS from handing over client information to U.S authorities, in an attempt to defend bank secrecy, and says the tax case targeting its biggest bank is souring diplomatic ties.

Washington has accused UBS of hiding nearly $15 billion in assets in secret accounts but the tax litigation is also crucial for the future of the multibillion-dollar wealth management industry and is pushing several offshore banks to force clients to come clean.

The Swiss Justice Ministry said earlier on Wednesday that Swiss law prevents UBS from handing over client information and the government would seize UBS client data, if necessary, to stop that happening.

Peter D. Hardy, a former U.S. prosecutor, said Gold may be pushing for a last-minute settlement in the case, but the judge was also putting the Justice Department in a tough spot.

“They’re going to have to be very delicate and thoughtful in terms of how they respond to this,” said Hardy, a partner at the Post & Schell law firm in Philadelphia.

The U.S. government was criticized in 2002 over the collapse of accounting firm Arthur Andersen with the loss of thousands of jobs.

Andersen failed to reach a settlement with the Justice Department over its auditing of Enron and surrendered its audit license after being found guilty on a single criminal charge. The U.S. Supreme Court eventually overturned the verdict but Andersen never recovered.

DATA BATTLE

The UBS case, which comes amid a global fight against tax cheats supported by the U.S. administration, has damaged the UBS brand and could result in an expensive settlement for the bank at a time when the bank needs to focus on restructuring.

“Switzerland will use its legal authority to ensure that the bank cannot be pressured to transmit the information illegally, including if necessary by issuing an order taking effective control of the data at UBS,” the Swiss government said in a response to U.S. authorities, filed in court in Miami on Tuesday.

Although Swiss criminal law prohibits banks passing on client information to foreign authorities, UBS and Switzerland have already made concessions on their treasured bank secrecy.

UBS agreed to pay in February $780 million, admitted wrongdoing and disclosed about 250 client names to avert tax fraud criminal charges the Swiss government said threatened the bank’s survival.

And faced with the threat of possible sanctions from the G20, Switzerland — along with other tax havens — vowed in March to redraft its tax treaties with the United States and other countries and cooperate more on tax evasion.

In a court brief last week, the U.S. Justice Department said that UBS had already acknowledged that its bankers committed “very serious crimes on U.S. soil” and had therefore subjected the bank to the full jurisdiction of U.S. law. “Swiss banking secrecy is not an impenetrable wall,” it said.

But Berne said the fact that UBS had released some names in settling the criminal case and admitted wrongdoing did not undermine the legitimacy of Swiss banking secrecy as a whole.

Although the court hearing is due next week, the Swiss government has not ruled out the possibility of UBS and Washington agreeing another out-of-court settlement.

Swiss Finance Minister Hans-Rudolf Merz has repeatedly said there is still room for a deal and Swiss Economy Minister Doris Leuthard told Reuters in an interview on Tuesday that it expected UBS to pay a price as the bank had made mistakes.

Swiss media have said UBS may have to pay 3-5 billion Swiss francs ($2.76-$4.6 billion). The bank raised 3.8 billion francs of capital late in June and will report earnings on Aug. 4. (Additional reporting by Sven Egenter and Emma Thomasson; Editing by Erica Billingham and Tim Dobbyn)

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