U.S. trial delay seen bringing UBS tax deal nearer

ZURICH/MIAMI Mon Jul 13, 2009 6:02pm EDT

UBS Chairman Kaspar Villiger arrives for a speech during the general shareholders meeting in Zurich, April 15, 2009. REUTERS/Arnd Wiegmann

UBS Chairman Kaspar Villiger arrives for a speech during the general shareholders meeting in Zurich, April 15, 2009.

Credit: Reuters/Arnd Wiegmann

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ZURICH/MIAMI (Reuters) - A federal court judge in Miami approved a delay in a high-profile trial on Monday in which U.S. tax authorities hoped to force UBS AG to reveal the identities of thousands of Americans suspected of using the Swiss bank to evade taxes.

Both UBS and the U.S. Justice Department requested the postponement on Sunday as the parties said for the first time that they were engaged in talks for a possible out-of court settlement of the case centering on Switzerland's jealously guarded tradition of bank secrecy.

Presiding Judge Alan Gold of U.S. District Court for the Southern District of Florida agreed to the request to delay the trial's opening until August 3 and said he would gladly give further extensions on request "to assist in accomplishing any goal of settlement."

Gold also set a telephone status conference for July 29, when he said he hoped the participants would be prepared to say whether the August 3 trial would take place as scheduled.

"UBS welcomes Judge Gold's decision to approve a temporary stay of the litigation. It is a positive development that the governments will now engage in intensive discussions over the next two weeks and attempt to negotiate a resolution," the bank said in a statement.

The case, seen as key to the future of the global offshore banking industry, seeks to force UBS to reveal the identities of 52,000 rich Americans suspected of using secret bank accounts to dodge taxes. This would be in breach of Swiss bank secrecy laws.

A source familiar with the situation told Reuters the talks led by the U.S. and Swiss governments were aimed at finding a way to allow the transfer of bank client data without breaching Swiss law. The source did not rule out a payment from UBS.

"The likely scenario will be a compromise where there may be some limited information provided to the U.S. government, (but) it won't be what the U.S. government is looking for," said Keith Wirtz, president and chief investment officer of Cincinnati, Ohio-based Fifth Third Asset Management.

The Justice Department, which cautioned it remained ready to ratchet up its legal fight with UBS, said any settlement would include the bank providing data on a significant number of its U.S. clients.

A person familiar with the situation told Reuters last week that, to circumvent Swiss law, the Swiss government could agree to disclose UBS bank client data indirectly, possibly by helping the U.S. Internal Revenue Service cross-check U.S. banks' data about transfers from Switzerland and UBS.

Any settlement is likely to dent Swiss privacy laws, however. It could involve the transfer of some client data, but would help UBS move on from a damaging row that is hurting its brand and deflecting it from its aim to return to profit.

"This is one of those nagging clouds over UBS that if it gets lifted allows UBS to function like a normal bank," Wirtz said. The bank's shares rose 4.75 percent to 13.23 Swiss francs on Monday, but they are still down almost 15 percent in 2009.

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UBS Chairman Kaspar Villiger said last week the focus of the discussions was the client data, not a possible fine and said that speculation of UBS having to pay billions of dollars in the tax dispute were completely unfounded.

Many analysts still expect UBS to be saddled with a big financial penalty, though. Earlier this year, the bank agreed to pay $780 million and to disclose around 250 U.S. client names when it settled a separate but linked criminal case in the United States.

"At the end of the day this is a tax case," said Tom Cardamone, a managing director at Global Financial Integrity, a think tank that monitors global illegal financial flows.

"If the assumption is the owners of these 52,000 accounts haven't paid their back taxes forever... there has to be some adjustment for that," he said.

The UBS case comes during a global fight against tax cheats supported by the U.S. administration. U.S. tax officials have accused UBS of hiding $20 billion of U.S. taxpayers' money in undeclared offshore accounts, or just over 1 percent of the bank's total wealth under management.

Tax lawyers say European governments are also trying to recoup unpaid tax money from offshore banks.

The subprime debt crisis has led UBS to report the biggest annual loss in Swiss corporate history in 2008 and accept state aid. It is losing clients at its wealth management division, but a resolution of the tax spat could give it some relief.

"If the U.S. case settles soon then definitely I believe the net new money flows will improve worldwide, slowly but surely, also in Wealth Management Americas," said Vontobel analyst Teresa Nielsen.

UBS manages more than $600 billion at its Wealth Management Americas division. The bank is due to report second-quarter results on August 4. (Additional reporting by Kim Dixon in Washington and Rupert Pretterklieber, Martin De Sa'Pinto and Katie Reid in Switzerland, and Juan Lagorio in New York; Editing by Erica Billingham, Matt Daily, Tim Dobbyn and Leslie Gevirtz)

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