Switzerland has agreed to reveal the names of about 4,450 wealthy American clients of UBS AG to U.S. authorities in a tax dispute settlement that pierces Swiss banking secrecy and now threatens to spill over to other banks.
The deal promises to end years of investigation and uncertainty for UBS, which announced later on Wednesday that the Swiss government was exiting the stake it had taken to aid the bank during the financial crisis.
With Switzerland's famed banking secrecy under fire, the Swiss have also agreed to process requests by the United States seeking information from banks besides UBS about account holders suspected of evading U.S. taxes.
This announcement today should send a signal, no matter what institution you're with, the IRS is willing to pursue both the institution and the individual, Internal Revenue Service Commissioner Doug Shulman told reporters on Wednesday.
The accounts were at one time worth $18 billion, Shulman said, though he could not provide a current figure.
U.S. authorities would not name any other foreign banks being probed, but the IRS is expected to use the Swiss deal as a template to pursue further prosecutions.
The IRS is now gaining institutional skill and knowledge in how to pursue these types of cases and they're going to use that. This is, I believe, the beginning and not the end, said Peter Hardy, a former federal prosecutor and specialist in white-collar crime at Post & Schell in Philadelphia.
The UBS dispute had strained relations between the United States and Switzerland and challenged the latter's jealously guarded bank secrecy laws. The deal may add steam to a global effort among cash-strapped governments to crack down on tax-evading jurisdictions.
But the settlement could help UBS, the world's second-largest wealth manager, restore an image that has been battered by the financial crisis.
UBS said the Swiss government was exiting its 6 billion Swiss franc ($5.6 billion) stake, with the shares to be placed with institutional investors.
UBS shares fell 2.9 percent on the New York Stock Exchange, ahead of the news of the government exiting its stake, after closing one percent lower in Europe.
Among Swiss rivals, Credit Suisse was down 0.2 percent on the NYSE, while Julius Baer closed down 0.8 percent in Europe.
UBS Chairman Kaspar Villiger said the tax agreement helps resolve one of UBS' most pressing issues. I am confident that the agreement will allow the bank to continue moving forward to rebuild its reputation through solid performance and client service.
In February, UBS agreed to pay $780 million and disclose about 250 client names to settle a criminal probe by U.S. authorities. One former UBS banker testified that he smuggled a client's diamonds into the United States in a tube of toothpaste.
Wednesday's deal effectively ends a separate civil lawsuit by U.S. authorities that sought up to 52,000 account names. There was no further monetary penalty.
It's good to get this out of the way but the confidence of a lot of clients has been compromised so I'm not sure we will see inflows return in Q3. It will take time to recover reputation from this, said Jaap Meijer, an analyst at Evolution Securities in London.
Other Swiss banks are fretting that the U.S. taxman's spotlight may now fall on them. The Wall Street Journal reported on Wednesday that more European banks have been identified in the U.S. tax probe, including Switzerland's Credit Suisse, Julius Baer, Zuercher Kantonalbank and Union Banque Privee (UBP).
TAXPAYERS URGED TO COME FORWARD
Switzerland may claim its banking secrecy remains intact, but some private bankers say it is no longer a selling point for its banks, which will need to offer other skills like wealth management and legacy planning to attract clients.
The majority of assets in Swiss private banks are from European Union citizens, said David Williams, an analyst at Fox-Pitt Kelton in London. I think it won't be long before we see action from the European Union along similar lines.
The revised treaty between the United States and Switzerland would allow action in the case of tax fraud and the like in the UBS case, the Swiss government said. Precise details will be published 90 days after the agreement comes into force.
The U.S. government retains the right to go back and use a summons to collect the names, which roughly equal the number of accounts, if the settlement process fails, said IRS chief Shulman.
Shulman said notices from UBS to clients would go out in stages, but warned U.S. citizens to come forward now.
Once the Swiss government turns over names, all bets are off, Shulman said, noting these clients could face civil and criminal prosecution.
Under a temporary amnesty program in effect until September 23, U.S. citizens can come forward and declare accounts, pay fines and in general avoid criminal prosecutions.
Taxpayers who turn themselves in voluntarily pay all unpaid taxes plus interest, pay 20 percent of the amount of tax that was underpaid over the past six years, and a penalty of 20 percent of the highest value of that account over six years.
Officials said taxpayers face much harsher punishment if they are discovered by the IRS.
You can end owing more than is in the account, when you add up all the liabilities, said an IRS official who was not authorized to be named.
The UBS case has boosted the amnesty program. The agency saw about 400 people come forward during one week in July compared to about 100 during all of 2008 alone.
(Additional reporting by Sam Cage and Martin de Sa'Pinto in Zurich, Steve Slater in London, Jeremy Pelofsky in Washington, and Tom Brown in Miami; Editing by Erica Billingham and Tim Dobbyn)