On February 18, UBS announced that it had reached a $780 million deal with the U.S. Department of Justice. It also admitted to helping U.S. taxpayers hide accounts from the IRS.
As part of the agreement reached with the U.S. government, UBS says it will share the identities of, and account information for, certain United States customers of UBS’ cross-border business. Various news reports estimated that some 19,000 accounts will be reviewed and that at least 250 names are being turned over.
“UBS executives knew that UBS’s cross-border business violated the law,” said R. Alexander Acosta, U.S. Attorney for the Southern District of Florida. “They refused to stop this activity, however, and in fact instructed their bankers to grow the business. The reason was money — the business was too profitable to give up. This was not a mere compliance oversight, but rather a knowing crime motivated by greed and disrespect of the law.”
UBS has also agreed to expeditiously exit the business of providing banking services to United States clients with undeclared accounts, according to the DOJ.
The U.S. wealth-management unit of UBS has made headlines recently for its aggressive recruiting of financial advisors. In the past quarter, it added 274 FAs in the United States, including two top teams from Morgan Stanley and Goldman Sachs in Texas. It ended 2008 with 8,182 advisors, down 37 from 2007.
“UBS sincerely regrets the compliance failures in its U.S. cross-border business that have been identified by the various government investigations in Switzerland and the U.S., as well as our own internal review,” says Peter Kurer, chairman of UBS AG. “We accept full responsibility for these improper activities.
“Client confidentiality, to which UBS remains committed, was never designed to protect fraudulent acts or the identity of those clients, who, with the active assistance of bank personnel, misused the confidentiality protections embedded in the qualitative intermediary agreement with U.S. authorities by providing false declarations regarding their tax status,” he adds.
The tax evasion worked as follows, the DOJ asserts: After it purchased the brokerage firm Paine Webber, UBS voluntarily entered into an agreement with the IRS that required UBS to report to the IRS income and other identifying information for its United States clients who held United States securities in a UBS account. Court documents allege that the agreement also required UBS to withhold income taxes from United States clients who directed investment activities in foreign securities from the United States.
The DOJ information further claims that, in order to evade those new reporting requirements, employees and managers within the cross-border business, with the knowledge of certain UBS executives, helped United States taxpayers open new UBS accounts in the names of nominees and/or sham entities. According to court documents, the assets of the individual’s accounts were then transferred to the newly created accounts, as to which the U.S. taxpayer would not be identified as a beneficiary.
The information also asserts that this device was used by UBS to justify evading its reporting obligations and helped United States taxpayers to continue to conceal their identities and assets from the IRS.
Plus, the DOJ information claims, Swiss bankers routinely traveled to the United States to market Swiss bank secrecy to United States clients interested in attempting to evade United States income taxes. Court documents assert that, in 2004 alone, Swiss bankers allegedly traveled to the United States approximately 3,800 times to discuss their clients’ Swiss bank accounts. The information further alleges that UBS managers and employees used encrypted laptops and other counter-surveillance techniques to help prevent the detection of their marketing efforts and the identities and offshore assets of their U.S. clients.
According to the information, clients of the cross-border business in turn filed false tax returns which omitted the income earned on their Swiss bank accounts and failed to disclose the existence of those accounts to the IRS.
In light of the bank’s willingness to acknowledge responsibility for its actions and omissions, its cooperation and remedial actions to date, and its promised continuing cooperation and remedial actions, the government says it will recommend dismissal of the charge, provided the bank fully carries out its obligations under the agreement.
In November 2008, UBS executive Raoul Weil was indicted by a federal grand jury in Fort Lauderdale and charged with conspiring to defraud the United States for his alleged role in overseeing the United States cross-border business. The district court recently declared him to be a fugitive.