UBS and the Taxpayers’ Hidden Billions

August 25th, 2009

By Sharona Coutts, ProPublica

Photo: Urbanrenewal, Wikipedia (En)

Last week, the government announced the terms of its deal with UBS to settle a case that could have thrown the Swiss bank into bankruptcy.

At issue was whether UBS would – or could – hand over the names of tens of thousands of American citizens believed to have used their UBS accounts to hide assets and dodge paying taxes. The amounts are said to add up to billions – not chump change in a country facing historic budget deficits.

The bank had already admitted to many of the facts alleged by the Internal Revenue Service. UBS bankers routinely visited the U.S., lied to immigration agents about why they were here and even carried encrypted computers with decoy presentations in case immigration agents stopped and questioned them about their activities. One former banker admitted to stuffing diamonds into a toothpaste tube to smuggle them to a client in California.

In February, UBS paid $780 million in penalties and unpaid taxes. The IRS and the Department of Justice then decided to go after the account holders — and that’s what last week’s settlement was about.

The new agreement is a compromise. The U.S. will not get the full list of names it sought. The bank will hand over 4,550 instead of the 52,000 the government reportedly wanted. Switzerland backed off its initial stance that releasing any names would violate the country’s bank secrecy laws. And UBS has avoided further prosecution.

But the problem of tax evasion isn’t limited to UBS, or even to Switzerland. ProPublica decided this case was ripe for one of our decoders, to parse out what it’s all about and what it will really achieve.

Why should I care about the UBS settlement?

In its 2008 report, “Tax Haven Banks and U.S. Tax Compliance,” the Senate Homeland Security and Governmental Affairs Committee said the U.S. loses $100 billion in tax revenue every year due to “offshore tax abuses.”

To put that in perspective, that’s about what one House proposal for health care reform would cost annually over 10 years.

The committee came up with the figure by relying on studies by various tax experts, so it’s not a hard number. The fact that these accounts are undisclosed to U.S. authorities means it is impossible to say with certainty how much money has been stashed overseas. UBS told the committee it had almost $18 billion held in accounts owned by Americans, but court documents put the number at $20 billion.

Of course, only a fraction of that would be owed as unpaid taxes, but a substantial portion could be eaten up through penalties. Once the bank starts handing over account holders’ names, we should know more about how much money the government is going to recoup.

Who are the people with undeclared UBS accounts?

There are three broad categories of people with UBS accounts that they have not disclosed to the IRS, according to Dave Gannaway, a former IRS criminal investigator who now works at Marks Paneth & Shron LLP, an accounting and consulting firm that advises people with overseas bank accounts.

The first, which is relatively common, is people who inherited an account from a parent – particularly parents who emigrated from Europe to the U.S., Gannaway said.

“In some instances, the children didn’t know they had an account in Switzerland,” he said. “It wasn’t until the account becomes dormant that these banks have reached out and tried to find out who the next-in-line is for this account.”

The second category falls into a gray zone: people who knew they had a dormant account but failed to disclose it to the IRS. “That’s something that those people think they didn’t have to pay any U.S. tax on, because they never took anything out of it,” Gannaway said.

Those people, he said, are distinct from the third group, who opened or used a pre-existing account to hide income.

U.S. bank secrecy law requires people to declare any overseas account holding more than $10,000, regardless of whether that account is active, Gannaway said.

What is UBS’s position?

In a deferred prosecution agreement signed last February, UBS agreed to pay $780 million in taxes and penalties, and “disgorgement of the profits” of its offshore business.

The bank admitted that its employees operated in the U.S. without licenses and in apparent violation of the Securities Exchange Act. The company also admitted that it helped its U.S. clients conceal income from the IRS by referring them to lawyers and consultants who, the bank knew, would help them set up sham offshore companies. Although UBS admitted to conspiring to defraud the United States, the deferred prosecution agreement allows the bank to escape prosecution, and the possibility of conviction, so long as it sticks to certain other conditions.

As part of the agreement, UBS said it would shut down all its Swiss accounts for U.S. citizens and close its “cross-border” business for Americans. The bank sent a letter to its clients in mid-July, advising them that their Swiss accounts would be closed and giving them an option to move their assets into UBS accounts in the United States.

How have account holders responded?

The IRS has said that hundreds of people with overseas accounts have applied to a voluntary disclosure program, which allows some errant taxpayers to escape prosecution by paying their taxes and penalties. People have until Sept. 23 to contact the IRS if they want to participate.

Not everyone will be eligible, however. Anyone who obtained the assets through crime will not qualify, according to the IRS Web site on voluntary disclosure.

The IRS said people should not wait for the deadline but should come forward immediately. If UBS hands over a name before the deadline, that individual won’t be eligible for the program. “Once the Swiss government sends us the name, all bets are off,” said Commissioner Doug Shulman.

How have banks responded?

UBS is not the only bank that has offered accounts to American taxpayers.

Two other large banks, Credit Suisse and HSBC, have asked clients to waive their rights under bank secrecy laws, a move seen as an attempt to sidestep problems with the Swiss government.

Does that suggest those banks also foresee a problem with the IRS?

A spokesperson for HSBC said that the company “abides by the letter and spirit of the law in every country in which it operates and has no offshore U.S. client business of any note in its Private Bank in Switzerland.” Credit Suisse did not return our call seeking comment.

Tax experts say the UBS case will ricochet through the industry. Other banks dread becoming the next UBS, said Ethan Burger, a Georgetown law professor who specializes in international crime. Burger said the case could force industry-wide changes without requiring the authorities to pursue each individual bank or taxpayer.

“What they’re hoping is that releasing a few names will lead more people to come forward than they would ordinarily get, and it’s not just UBS,” Burger said. “It’s going to be a ton of other banks.”

Some hedge funds have also taken defensive steps, according to Gannaway. “We’ve seen some of the hedge funds putting their clients on notice,” she said. “They’ve sent letters to their clients saying, ‘You may have a Bank Secrecy Act filing requirement.’” People with investments in U.S. hedge funds have received this type of letter, Gannaway said, because the hedge funds have made overseas investments that may create filing obligations for the account holder, even though the taxpayer thought she had invested in a domestic company.

Will cracking down on UBS solve the problem of tax evasion?

The U.S. doesn’t seem to be done with Swiss banks and their consultants. On Friday, the Department of Justice indicted a Swiss private banking executive and a lawyer in connection with helping U.S. clients dodge taxes.

While the aggressive actions against UBS have caused optimism among some tax experts, they point out that cracking down on Switzerland or UBS alone won’t solve the problem of rich Americans avoiding taxes.

“There are lots of other jurisdictions that are offering bank secrecy,” said Raymond Baker, at the Center for International Policy. “Indeed, Switzerland is still offering bank secrecy, so it isn’t going to end tax evasion through tax havens.”

While many people have rushed to get their finances in order as a result of the UBS prosecution, others have already moved money elsewhere, Baker said.

“There’s also been some flow of money out of Switzerland into Dubai and Singapore as people continue to look for an alternative,” he said. “This issue isn’t finished, but these are all steps in the right direction.”

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