More on UBS: Swiss Government Supporting Bank Secrecy

The Swiss government may have made nice sounds about being less supportive of bank secrecy but it is now making it quite clear that it doesn't intend to see any end to its lucrative banking business--through which it helps citizens of other countries hide their assets from their countries and/or maybe from their spouses or creditors. 

You'll all recall that UBS entered into a deferred prosecution agreement for coming into the US to get wealthy clients to sign up for hidden offshore accounts and then failing to comply with US law and its agreement to serve as a "qualified intermediary" by filing required reports on its accountholders that were US persons.  It ultimately gave the US about 250 names of account holders.  But there are apparently about 52,000 more that it refuses to give up.  The DOJ filed a memo in late June in federal court in Florida asking the court to require the bank to hand over the names in response to the IRS summons.  And now Switzerland has filed its own statement in the case, indicating it will seize the information before it allows UBS to hand it over.  See Jolly, Swiss Vow to Block UBS from Providing Data to U.S., NY Times, July 8, 2009.

Is this realistically possible?  There is a principle of comity between nations, which should argue for the Swiss government to step aside here.   UBS, a bank chartered in Switzerland, has intentionally violated US laws in a way that it knew would lead to tax evasion by US citizens, which it knew is a crime in the US even if not in Switzerland.  It did this in the US, giving the US jurisdiction over its actions.  That information should therefore be avaialble in the US.  Its wrong can't be redressed by mere monetary damages: we don't know how much money was in all those accounts that haven't been declared that should have been taxable as income to date and without learning the identification of the taxpayeres, we can't assess the penalties and interest against them, or pursue them for criminal tax evasion.  Not pursuing those cases lets the wealthy continue to scoff at the law, and leaves their burden being borne by the overwhleming majority of compliant taxpayers.   And of course, though UBS says it is closing those accounts, we don't have any way to verify that such closings will actually occur or to otherwise hold UBS accountable, so more taxes may be evaded in the future. 

There is a good deal of irony here, in that UBS was one of the foreign banks that benefited from the US bailout of AIG, receiving at least $2.5 billion.  See Roland, Senator outraged over AIG funneling $2.5B to UBS, Investment News, Mar. 18, 2009.   UBS doesn't mind getting money from the US government, at the same time that it helps taxpayers keep from paying the government what they owe.

If the bank doesn't provide the information--and if the Swiss government abets it in avoiding doing so--then there should be no mercy here.  Somehow, UBS should not be permitted to engage in any investment, banking or other activities in the US.  Period.  And the US should try to up the ante on the tax treaty negotiation, pushing Swizerland to agree to regularly provide full information on all accounts held by all US citizens, without any specific information request, or else not giving the Swiss the kinds of generous terms that many of our treaties provide (like very low taxation of dividends and royalty income, for example).  And if the Swiss won't agree not to continue assisting greedy US taxpayers in tax evasion, then perhaps it will be necessary to begin phasing in a broader financial boycott of Swiss banks. 

Comments

[rawl]

Thank you for your informative website.

A few comments about your 8 July post concerning UBS.

1) The Swiss view information held in Switzerland as being their information. As was the case with Marc Rich possession may well be 9/10s of the law.

2) The QI treaty currently in force does not obligate the Swiss to give up the names of US persons who do hold US securities. Moreover, under the treaty, the US must make a specific request in a matter of 'tax fraud or the like' not just tax evasion. Hence it would seem to be the US not the Swiss who are violating norms of 'international comity'.

3) Judge Gold has addressed your point about 'no mercy' and has given the DOJ until noon on 12 July 2009 to respond. It will be interesting to see if the DOJ wants to bring down the house of financial cards \a la Lehman by 'shutting down' UBS in the US. If you liked Lehman and Bear Stearns you're gonna luv seeing the systematic worldwide financial disaster caused by the US ruining UBS.

4) The US has already agreed terms with the Swiss regarding a new taxation treaty; among many concessions the Swiss agreed to eliminate the distinction between tax fraud and tax evasion for taxpayers not resident in Switzerland. Now you want the US to re-negotiate this treaty? Do you think this new treaty will have any chance whatsoever of being ratified in Switzerland if this treaty is renogiated with harsher terms for the Swiss?

Finally, a tiny point. I believe that you mean "US persons" not "US citizens".
The DOJ wants to wring every cent it can out of "US persons", not just "US citizens"-- unless,of course, the "US person" happens to be a high government official like Timmy Geithner.

Thank you again for your splendid blog!

[rawl]

Sorry, I made an error on point 2.

Under the current tax treaty the Swiss are only obligated to give up information on US persons if there is a specific inquiry with evidence to support a claim of 'tax fraud or the like' and if that person
holds US securities.

[LindaMBeale]

1) Clearly the Swiss view it as "their" information. Is that correct, however, given the method of acquisition? And yes, possession is a huge weapon here, since without the names of the account holders, the IRS is powerless to do anything to pursue the noncompliance. Means it is even more important for the developed world to continue the pressure on banking secrecy jurisdictions.
2) The US-Swiss tax treaty information exchange provision, you are correct, is not helpful to the US. (Though IF we had the names, we might well be able to show tax fraud-- filing an intentionally incorrect return. That's what makes the Swiss position requiring specificity of information requests so ridiculous.) BUT that is not the issue here. The bank put itself under US jurisdiction by carrying out its activities in this country. And it signed a "qualified intermediary" (QI) agreement with the IRS. Its obligations under that agreement are not the same as its obligations otherwise under the Treaty. As a QI, it is required to provide certain accurate information about account holders (ie, not claim they are non-US persons when they are US persons). Violating that agreement and then claiming that you can get away with it by using the laws of the country back home where you have the account information squirreled away is, well, squirrelly. For the Swiss government to support that kind of irresponsible "we can violate your laws and get away with it by hiding behind our laws" behavior demonstrates a lack of comity.
3) Yes, Judge Gold has addressed my "no mercy" point. And the "too big to fail" problem clearly rears its ugly head again here. It is one of the huge issues this country has to face--we have let banks acquire way too much power over our economy so that at least some and at least to some extent consider themselves entitled to break the law for their own gain. Would punishing UBS by cutting off its operations in this country have the same effect as the Bear Stearns situation? Not clear. Also, it is not clear that we made the right decision in the early days of the financial crisis. I wonder if we might not have been better off by biting the bullet and doing the restructuring needed early on--more pain and angst at the outset, but possibly less federal treasury and less power in the banks at the end of it all. So while you are probably correct on the practical side in terms of what DOJ will actually do, I'm not sure that is correct in terms of what would be best for the US and world economy. Bank secrecy a la Switzerland is a very large problem worldwide, in that it facilitates the kind of nontransparent movement of monies that causes large problems. I think we should consider risking UBS's ouster from the US for its flagrantly inappropriate and irresponsible behavior
4) There is a tentative agreement on a new treaty, whose terms haven't been revealed in detail and it is not clear that they genuinely eliminate the distinction, since the discussion I've seen suggests it may be more a gesture than a reality--or perhaps you have information that I haven't seen yet?

As to renegotiation, it seems that if the Swiss take the kind of action they are taking, one or the other country will have to play chicken. You seem to think it should be the US. I'm not convinced.

5) yep--the technical term is "US person".

[Asher Rubinstein]

I think that if the Swiss government does make good on its threat to “seize” the banking data, then UBS would attempt to argue that it is impossible to comply with a court order to release the data. In other words, the announcement of a Swiss government seizure of data would precipitate UBS’ claim of impossibility of performance.

I don’t believe that such a strategy would be successful. I suspect that UBS will be forced to settle, because (a) otherwise UBS would risk losing its valuable banking license in the US (as you've mentioned above), (b) UBS has too many assets within the US, subject to US jurisdiction and potential attachment, and (c) should (a) and (b) occur, the effects will be felt not just at UBS but throughout the entire Swiss economy . . . and, as speculated above, the world economy. I think it will be the Swiss who will be forced to cave.

[LindaMBeale]

I suspect this would be a great betting vehicle, wouldn't it. All I know for sure is that it OUGHT TO BE the Swiss who cave, and not the US, since it was UBS that flagrantly violated the law.

[Daniel]

One interesting perspective I saw that I haven't seen before said, “The global infrastructure of international financial secrecy with headquarters in Switzerland has helped bleed trillions of dollars in illicitly generated money out of Africa and the rest of the developing world." (from http://www.newsy.com/videos/timeout_of_the_titans)

Now, I'm not saying that justifies the US's absurd charges against UBS, but it's just something to think about at any rate.

[LindaMBeale]

Daniel--why are they "absurd charges"?