July 31, 2009 / 1:11 PM / 10 years ago

UPDATE 5-U.S., UBS breakthrough averts tax dispute showdown

* 11th-hour deal should avert trial

* Dispute had strained U.S.-Swiss relations

* Dispute was over U.S. taxes, Swiss bank secrecy

* UBS seen disclosing far less than 52,000 client names

* UBS shares close up nearly 7 percent in New York (Recasts to add State Department comment, other details throughout)

By Tom Brown

MIAMI, July 31 (Reuters) - The U.S. government and Swiss bank UBS AG struck an 11th-hour deal to settle a dispute over tax evasion and Switzerland’s bank secrecy on Friday, heading off a showdown that had threatened to sour relations between the United States and Switzerland.

The case — which first grabbed the media spotlight in June 2008 when a former UBS banker admitted he once smuggled a client’s diamonds into the United States in a toothpaste tube — had been expected to go to trial on Monday.

The main sticking point was that U.S. authorities wanted UBS UBSN.VX(UBS.N) to disclose the names of 52,000 wealthy American clients suspected of using the bank to evade taxes — a demand that shook the global offshore banking industry and tested Switzerland’s vaunted tradition of bank secrecy.

Under the settlement, described as an “agreement in principle” expected to be finalized by next Friday, UBS is likely to reveal far fewer than 52,000 client names, but would include the biggest accounts, a U.S. government source told Reuters.

The deal could serve as a template for other global banks doing business in the United States.

It remains to be seen if it will boost confidence in UBS, which has been hard hit by mortgage losses and client withdrawals. But the bank’s shares closed up 6.9 percent, or 95 cents, at $14.74 on Friday on the New York Stock Exchange.

Before meeting in Washington on Friday, U.S. Secretary of State Hillary Clinton and her Swiss counterpart, Micheline Calmy-Rey, said they were pleased with the preliminary agreement.

“The parties have reached an agreement in principle on the major issues,” U.S. Justice Department attorney Stuart Gibson said in a conference call with Florida federal court Judge Alan Gold.

“There are some other issues that need to get resolved, and we expect to be able to resolve them during the coming week,” Gibson said.

He gave no details of the settlement, but said a final agreement should be ready in time for a pretrial status conference in the case that the judge set for Friday, Aug. 7.

Judge Gold tentatively reset the UBS trial date for Aug. 10 in U.S. District Court for the Southern District of Florida. But the trial would be called off if a final agreement is signed.


It was not clear if Clinton and Calmy-Rey had helped broker the deal, which was hammered out by government officials. Swiss Foreign Ministry spokesman Lars Knuchel and State Department spokesman P.J. Crowley welcomed the agreement.

“What we were facing was the prospect of a conflict between U.S. laws and Swiss law that might in some way complicate a very strong bilateral relationship. And I think both the secretary and the federal councilor were relieved,” Crowley said.

The U.S. investigation into UBS led to the indictment in Feburary 2008 of Raoul Weil, a Swiss citizen who was then head of UBS AG’s wealth management business. He was charged with conspiring to help thousands of Americans hide $20 billion in assets from U.S. tax authorities.

Weil, who has since left UBS and denies any criminal wrongdoing, is considered a fugitive from U.S. justice. A U.S. spokesman for Weil’s lawyer said Weil was in Switzerland.

In February 2009, UBS agreed to pay $780 million to settle criminal charges it was facing under a separate but related tax dispute. It agreed to hand over data related to about 250 U.S. clients who had secret Swiss accounts and promised to close its offshore business to U.S. clients.

The Swiss government stretched its bank laws to the limit to pass along the data without formally violating its laws, but tax lawyers said the case was a serious hit to bank secrecy.


Swiss media have reported that UBS was likely to pay a multibillion-dollar fine as part of any agreement. But a U.S. government source who has followed the case closely downplayed talk of a financial penalty.

“I don’t think there’s going to be a fine component at all. I don’t think that was ever really on the table,” said the source, who spoke on condition of anonymity.

Though he said the settlement was likely to give U.S. authorities far fewer than 52,000 UBS client names to go after, he stressed that it would involve a sizable transfer of data by the Swiss bank involving some of its biggest U.S. customers.

Joann Weiner, a former Treasury Department tax official, said if the U.S. Internal Revenue Service got roughly 10,000 client names from UBS, it would be a pretty good deal.

Some observers said the “devil was in the details” of the settlement being worked out and believed it could still take weeks, not days, to finalize.

“The negotiations are really testing the bandwidth, the elasticity of the exceptions to Swiss bank secrecy laws,” said attorney William Sharp, who represents U.S. clients of UBS.


The U.S. case against UBS is part of a global effort by the world’s most developed countries to clamp down on tax evasion. Lawyers expect some European countries to follow the United States’ lead in cracking down on offshore banking.

Lawyers and tax experts say the United States will continue pushing foreign banks to ensure their American clients pay the IRS the taxes they owe their home country.

“I think it wants to set a precedent that will enable it to go after other Swiss banks that have a footprint in the U.S.,” said Scott Michel, a Washington lawyer who advises individuals and companies on tax issues.

“So the IRS can use whatever information template is being used with UBS,” he said.

In addition to exerting pressure on banks, the IRS has a voluntary disclosure program that allows delinquent taxpayers to come forward and report undisclosed foreign income, pay a penalty and generally avoid criminal prosecution.

Under the program, which began in March and is set to expire in September, about 400 individuals came forward to the IRS last week alone, an IRS spokesman said. That was up from about 100 voluntary disclosures in all of 2008. (Reporting by Tom Brown; Additional reporting by Pascal Fletcher and Jim Loney in Miami, Sue Pleming, Deborah Charles and Kim Dixon in Washington; Editing by Pascal Fletcher, Gary Hill)

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