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.
In June 2008, former UBS private banker Bradley Birkenfeld pleaded guilty to a charge of conspiring to defraud the United States for similar conduct. Birkenfeld is scheduled to be sentenced on May 1, 2009. Also, in June 2008, the U.S. District Court in Miami authorized the Internal Revenue Service to serve upon UBS a so-called “John Doe” summons seeking records that would identify United States taxpayers with accounts at UBS in Switzerland who have elected to conceal the existence of their accounts from the IRS.
“It is apparent that as an organization we made mistakes and that our control systems were inadequate,” explains Marcel Rohner, group CEO of UBS. “We will strengthen our compliance programs. UBS seeks to achieve the highest standards of compliance throughout its organization and is committed to fulfilling its obligations under the laws and regulations in every country in which it operates.”
Details of the agreement are as follows:
- UBS will pay a total of $780 million to the United States, $380 million representing disgorgement of profits from maintaining the U.S. cross-border business and $400 million representing U.S. federal backup withholding tax required to be withheld by UBS, together with interest and penalties, and restitution for unpaid taxes associated with certain account relationships involving fraudulent sham and nominee offshore structures and otherwise as covered by the deferred prosecution agreement (DPA).
- UBS will complete the exit of the U.S. cross-border business out of non-SEC registered entities, as announced in July 2008, which these settlements now allow us to do in a lawful, orderly and expeditious manner.
- UBS will implement and maintain an effective program of internal controls with respect to compliance with its obligations under its qualified intermediary (QI) agreement with the Internal Revenue Service (IRS) as well as a revised legal and compliance governance structure in order to strengthen independent legal and compliance controls.
- Pursuant to an order issued by the Swiss Financial Market Supervisory Authority (FINMA), information will be transferred to the DOJ regarding accounts of certain U.S. clients as set forth in the DPA, who, based on evidence available to UBS, appear to have committed tax fraud or the like within the meaning of the Swiss-U.S. Double Taxation Treaty.
Under the DPA, the DOJ has agreed that any prosecution of UBS be deferred for a period of at least 18 months, which is subject to extension under certain circumstances, such as UBS needing more time to complete the implementation of the exit of its U.S. cross-border business. If UBS satisfies all of its obligations under the DPA, the DOJ will refrain from pursuing charges against UBS relating to the investigation of its US cross-border business. The agreements do not resolve issues concerning the pending “John Doe” summons which the IRS served on UBS in July 2008.
Additionally, FINMA published today the results of the investigation conducted by the Swiss Federal Banking Commission (SFBC). The SFBC concluded that UBS violated the requirements for proper business conduct, and it barred UBS from providing services to U.S.-resident private clients out of non-SEC registered entities. Further, the SFBC ordered UBS to enhance its control framework around its cross-border businesses and announced that the effectiveness of such a framework will be audited.
The order by FINMA in support of the resolution achieved with the DOJ was instrumental in averting the imminent risk of further negative implications and uncertainties for the bank.
The cost for the settlement will be fully charged to the performance year 2008 and will be reflected in the audited results for 2008 to be published in March 2009.
The full text of the agreement is available online at: