Switzerland on Thursday embarked on a struggle to defend a landmark decision allowing bank giant UBS to transfer client data to the United States in a tax settlement that experts say will dilute bank secrecy laws.
Some observers believed the deal opens cracks in the country's tough bank secrecy laws and could potentially undermine the $7-trillion global offshore banking industry.
President and Finance Minister Hans-Rudolf Merz defended the settlement said the principles of secrecy remained in place. He said UBS had had no choice but to settle the case to avoid criminal charges that could have threatened its existence and undermined Switzerland's economy.
Bank secrecy will stay, Merz told a news conference.
It became evident that if the American authorities would bring UBS to an indictment...the whole threat would have been falling also on our economy.
Switzerland does not consider tax evasion a crime, and Swiss law prohibits disclosure of client data or names unless the country's authorities believe the client has committed a serious crime such as money laundering or tax fraud.
Both Merz and UBS Chairman Peter Kurer said on Thursday the data exchange concerned solely cases of tax fraud, though a Swiss administrative court has not yet had the chance to say whether any fraud had been committed.
The financial crisis is heaping added pressure on tax havens like Switzerland to stop helping the wealthy hide their money from the taxman as governments seek funds to pay for more spending.
Germany has said it wants Switzerland put on a tax haven blacklist and launched a probe last year into its nationals stashing assets in Liechtenstein.
The German Finance Ministry had taken note of the UBS settlement but had no comment to make, a spokeswoman said.
U.S. President Barak Obama also wants to get tough on tax evasion, helping introduce a Senate bill in 2007 to crack down on offshore tax havens.
Thousands of wealthy westerners avoid taxes by hiding assets in Switzerland and other offshore centers, and U.S. lawmakers say tax havens deprive Washington of $100 billion a year.
Former UBS banker Bradley Birkenfeld, who once smuggled a client's diamonds into the United States in toothpaste, said he and other UBS bankers helped the bank earn $200 million a year managing $20 billion in assets held in offshore tax havens.
UBS's $780 million fine was a lower figure than some had expected. It agreed to settle to avert criminal charges that would have kicked in after a February 18 deadline set by the U.S. Department of Justice.
The probe had added to uncertainties hanging over UBS, which has written down more toxic assets than any other European bank during the credit crisis and suffered billions of dollars in client withdrawals, and the deal lifted shares more than 3 percent.
For Switzerland, (the settlement) is a true catastrophe for the country's first industry, that is to say the banking sector, Geneva lawyer Charles 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.
POSITIVE FOR UBS
UBS investors welcomed the news the case was closed, however, and its shares rose 5.3 percent to 12.86 francs by 9:12 a.m. EST, outperforming the DJ index of European bank stocks, which was up 0.5 percent <.SX7P>.
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.
UBS said it will book the settlement charge in its 2008 accounts, which will be published in an audited form in March.
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.
(Additional reporting by Rupert Pretterklieber, Jason Rhodes and Stephanie Nebehay; Writing by John Stonestreet; Editing by David Holmes)
($1=1.173 Swiss Franc)