UBS on Trial: The End of Secret Banking?

U.S. prosecutors are accusing Swiss giant UBS of helping thousands of American clients evade taxes through offshore bank accounts

By Mark Scott

[Editor's note: Late on July 12, representatives of the U.S. government and UBS asked to delay the start of the trial because they are still trying to settle the case. The motion to stay will be delivered at 9am Eastern Time on July 13.]

Nothing less than the future of secret bank accounts is at stake. In a Miami courtroom starting on July 13, federal prosecutors will present their case that Swiss financial giant UBS (UBS) systematically and deliberately violated U.S. law by helping thousands of U.S. clients dodge U.S. taxes via offshore bank accounts. If prosecutors win, UBS could face multibillion-dollar fines—and even confiscation of its U.S. assets. The bank denies any wrongdoing.

The case revolves around some 52,000 U.S. private banking clients who had parked a combined $14.8 billion worth of assets in UBS accounts. The U.S. is demanding that UBS hand over the identities of the clients and their account details, presumably so the government can pursue tax-evasion cases against them. It's unprecedented in the history of Swiss banking for a foreign government to make such an outright demand.

UBS—backed by the Swiss government—has refused to comply. The bank says disclosing the information would violate Swiss law and devastate the country's world-famous reputation for banking privacy. (Not just that, if UBS were to hand over the data, it could also face prosecution from Swiss authorities for doing so.) Earlier this year, UBS agreed to pay $780 million to settle criminal charges in the U.S. that it abetted tax evasion, but the civil case coming to trial in Miami ups the ante.

Even after federal judge Alan Gold starts the proceedings on July 13, UBS and U.S. prosecutors could hammer out a settlement. But the assertiveness of American authorities marks a dramatically more aggressive global stance taken by the U.S. and other countries in recent years against tax evasion and offshore havens such as the Cayman Islands and Liechtenstein. The trial will also put pressure on high-net-worth individuals (and the banks that service them), who could be forced to come clean over where they're putting their assets.

"Cracking Down"

"In the past, governments weren't very aggressive [about offshore accounts]," says Clemens Fuest, research director at Oxford University's Centre for Business Taxation in Britain. "Now, the Obama Administration and others are cracking down on tax evasion and are enforcing laws globally."

At last April's G-20 summit in London, the leaders of the world's largest economies issued specific demands in their communiqué for tax havens to adopt international financial standards. The G-20 turned to a "name-and-shame" list prepared by the Paris-based Organization for Economic Cooperation & Development (OECD) that identified nations failing to sign on to its tax haven standards. On the OECD's so-called blacklist were countries such as Andorra and Monaco. Switzerland reluctantly agreed to the global standards earlier this year.

Still, the U.S. case isn't a sure win—and could backfire if prosecutors lose badly. For one thing, in its demand for account information, the U.S. has used a "John Doe" summons that doesn't implicate specific individuals suspected of tax evasion. Critics say that amounts to a "fishing expedition," which could cause the case to be thrown out of court.

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