Switzerland embarked on an uphill battle to retain its treasured banking secrecy on Thursday, hours after UBS agreed to hand over client data to Washington in a landmark settlement of tax fraud charges.
With observers fearing the overnight deal marked the end of an era for the country's financial industry, Finance Minister Hans-Rudolf Merz told a press conference: It is evident there has been tax fraud (at UBS) ... (but) bank secrecy will stay.
UBS agreed to pay $780 million in Wednesday's settlement -- a lower figure than some had expected -- as well as identify some American clients who held undeclared bank accounts to avert criminal charges.
The settlement, which Swiss authorities say they agreed to broker to avoid putting the bank's existence at risk, could also have wide implications for the $7 trillion-offshore banking industry by making it harder to try to circumvent tax laws.
The settlement in the U.S. tax case is what we have been waiting for, Vontobel analysts said in a note to clients.
It is very positive for UBS to have closed off the case now as it will enable them to move forwards again and to start build up its reputation.
For Geneva lawyer Charles Poncet, the implications for the country's banking sector as a whole are less positive.
For Switzerland, it is a true catastrophe for the country's first industry, that is to say the banking sector, Poncet, a former member of the Swiss parliament, told Radio Suisse Romande.
The tax spat had been closely watched by cash-strapped western governments and could set a precedent for similar deals with other banks or by other jurisdictions.
We highlight that any success by the US tax authority could encourage tax authorities in other jurisdictions to pursue a similar strategy, Merrill Lynch analysts said in a note.
Shares in UBS
The shares rose sharply earlier on Thursday as investors hoped the embattled Swiss bank would refocus on pressing restructuring issues after the settlement.
UBS said it will book the settlement charge in its 2008 accounts, which will be published in an audited form in March.
ONE OF BIGGEST EVER SETTLEMENTS
Officials described the agreement as one of the biggest tax settlements ever, although smaller than media reports suggesting the fine could be up to 2 billion Swiss francs ($1.7 billion).
Swiss financial regulator FINMA, which played a key role in the settlement, said UBS had to hand over a limited quantity of client data to avert criminal charges.
Such charges could have had drastic consequences for UBS and its liquidity situation and ultimately put its existence at risk, the authority said.
Under the settlement, UBS admitted to helping U.S. taxpayers hide accounts from the U.S. Internal Revenue Service (IRS), the country's tax collection agency.
About 17,000 of 20,000 U.S. cross-border clients concealed their identities and the existence of their accounts, with $20 billion in assets, from the IRS, the Justice Department said.
The Justice Department did not say how many names of UBS clients would be filed under U.S. court seal. But Swiss newspaper, Le Temps, said in an article on Wednesday, that the data would involve about 250 clients.
After 18 months the U.S. government will recommend dismissal of charges against UBS providing it honors the terms of the agreement.
Sen. Carl Levin, the Democrat chairman of the U.S. Senate's investigations subcommittee that had pursued the fight against tax evasion welcomed the settlement as a tremendous breakthrough.
Ralph Cole, portfolio manager at Ferguson Wellman Capital Management in Portland, Oregon, who helps invest $2.2 billion, said the settlement was a modest positive for UBS.
It's a good thing to have this behind them, said Cole. But I think for most people, the concern with UBS was not these regulatory issues, it was more balance sheet items.
Under orders from Swiss market regulators, UBS agreed to immediately provide the U.S. government with the identities of, and account information for, certain U.S. customers.
UBS has also agreed to a speedy exit of the business of providing banking services to United States clients with undeclared accounts.
UBS' actions helped certain U.S. clients maintain undisclosed accounts in Switzerland and other foreign countries, which in turn enabled them to avoid paying tax, the SEC alleged.
(Additional reporting by Rupert Pretterklieber, Jason Rhodes and Stephanie Nebehay; Writing by John Stonestreet; Editing by David Holmes)
($1=1.173 Swiss Franc)