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28 February 2024

Banks yet to come out of woods

By Kim Dixon

The Swiss court ruling in favour of a US client who stashed funds in a UBS account sets a higher hurdle to aggressive efforts by the US government to go after other banks helping wealthy tax cheats – but the banks are not out of the woods yet.

A Swiss court ruled last week that the client's failure to file a tax form did not constitute "fraud or the like", a requirement for data to be revealed under a double taxation agreement with the United States.

The ruling puts in jeopardy Switzerland's delivery of 4,450 UBS client accounts to US authorities, as agreed in August.

Caught in the crosshairs are other foreign banks the US says it is informally examining for possibly helping US tax cheats. A voluntary amnesty programme for those with undeclared income turned up accounts at Credit Suisse Julius Baer and HSBC, among others.

"It presents a serious roadblock to pursuing other banks," said Peter Henning, law professor at Wayne State University and a former criminal division attorney at the Justice Department.

Still, the Internal Revenue Service and Department of Justice believe they have a strong case and will want to fight the Swiss ruling. Officials have already said they are informally looking at other unnamed banks.

"I expect they've gotten the names of other banks already. Clients who hide money in Swiss accounts often will do it in more than one bank. You always diversify and spread your risk," said Henning.

The Swiss government said earlier this week it could resolve the legal impasse, but also said the ruling meant it could not co-operate in 4,200 of the 4,450 cases covered by last year's deal. If that happens, US authorities could resume their civil case against the bank that was halted when the deal was reached.


One possibility is for Switzerland to bring the matter to the parliament for a retroactive approval of the deal. If upheld, it could be a powerful precedent for prosecutions against other banks.

The US is not alone in its pursuit of tax evaders. France, Germany and others are going after tax cheats as they struggle with red ink. "If they allow it, and say it's a new treaty, that means any country can go to the Swiss government and say we want to sign an agreement with you," said Columbia law professor Alex Raskolnikov.

The Internal Revenue Service has maintained that it expects the Swiss to produce the information.

If the Swiss government fails to find a solution, the ruling would likely prompt US officials to go back to Miami federal court to enforce its so-called John Doe summons seeking unidentified defendants meeting certain criteria.

Before that case was settled, the judge asked the US government how it would enforce the summons if granted, asking if it was willing to take over UBS assets in the US.

"What's the Swiss parliament going to do when UBS property in US is possibly subject to seizure?" said Charles Rettig, an attorney for UBS clients at Hochman, Salkin.

Swiss bank secrecy gives account holders protection against outside scrutiny. The deal struck to end the US case against UBS in exchange for client names was a major departure from that tradition.

US authorities have not revealed how many of some 14,700 names gathered in a US tax amnesty programme were UBS clients, increasing the pressure on the Swiss government to find a way to hand over the requested data as agreed.

The US admits it got lucky when former UBS banker Bradley Birkenfeld walked in the door and handed over internal documents detailing higher ups who knew of practices to lure Americans to keep money there untaxed.

Illegal activity

Despite that, Birkenfeld is now in jail because prosecutors say he held back information about his own role in helping a California billionaire evade taxes. "The issue is on what jurisdictional grounds does DOJ enforce a summons against other banks?" said George Clarke, a white collar attorney at Miller Chevalier.

In the UBS case, the US cited illegal activity on US soil.

"If they've got evidence that another big Swiss bank engaged in that kind of culpable conduct in the US, they'll do the same," Clarke said. "The question is, do they have that?"

It just takes one key person, Columbia's Raskolnikov said. "Let's not forget that all of this started with one man who knew the workings [of UBS]," he said. "People at the time were shocked." (Reuters)


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