Shares in Swiss banking giant UBS AG rose 3 percent on Thursday after it agreed to pay $780 million and identify certain American clients to settle criminal fraud charges in the United States.
The settlement, announced on Wednesday, further cracks Switzerland's trademark bank account secrecy and could have wide implications for the $7 trillion-offshore banking industry by making it harder to try to circumvent tax laws.
The deal could also expose some UBS customers to scrutiny by U.S. tax authorities and law enforcement action.
Shares in UBS rose 3 percent at the open, outperforming the wider Swiss blue-chip index, with investors relieved that the damaging probe had ended, freeing Switzerland's largest bank to focus on its restructuring as its struggles to emerge from the credit crisis.
The outcome is certainly positive (for UBS). One problem is off the table, said one Switzerland-based trader on Thursday.
The agreement called for UBS to pay a total of $780 million in fines, penalties, interest and restitution.
Officials described the agreement as one of the biggest tax settlements ever, although smaller than recent media speculation which suggested the fine could be up to 2 billion Swiss francs ($1.71 billion).
The settlement eclipses a $456 million pact in 2005 with accounting firm KPMG over the promotion of tax shelters.
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.
We accept full responsibility for these improper activities, Peter Kurer, chairman of UBS, said in a statement.
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.
Former head of UBS AG's wealth management business, Raoul Weil, was indicted as part of the probe in November.
Weil's lawyer, Aaron Marcu, expressed disappointment that Weil's indictment was not dismissed as part of the settlement and reiterated that the executive engaged in no misconduct.
The chairman of the U.S. Senate's investigations subcommittee that had pursued the fight against tax evasion welcomed the settlement as a tremendous breakthrough.
Efforts to tear away the offshore cloak of secrecy are gradually succeeding and will continue, said Sen. Carl Levin, a Michigan Democrat who worked to expose offshore tax schemes.
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. The Swiss bank had already announced last summer it would stop offering Swiss accounts to U.S. clients, and started last year to close down existing accounts.
VEIL OF SECRECY
John DiCicco, acting assistant attorney general of the Justice Department's Tax Division, said in a statement: The veil of secrecy has been pulled aside and we will continue to aggressively pursue those who shirk their federal tax obligations or assist others in doing so.
UBS' actions helped certain U.S. clients maintain undisclosed accounts in Switzerland and other foreign countries, which in turn enabled the clients to avoid paying tax obligations, the SEC alleged.
From 1999 through 2008, UBS acted as an unregistered broker-dealer and investment adviser to thousands of U.S. clients and offshore entities with U.S. citizens as beneficial owners, the SEC said.
The SEC also alleges UBS conducted business through advisers located primarily in Switzerland, who were not associated with a registered broker-dealer or investment adviser.
A breakthrough in the U.S. case against UBS came in June last year when former UBS banker, Bradley Birkenfeld, pleaded guilty to helping a billionaire hide $200 million in assets from U.S. tax authorities and agreed to cooperate.
(Additional reporting by Rupert Pretterklieber and Jason Rhodes in Zurich; editing by Simon Jessop)
($1=1.173 Swiss Franc)