UBS on Trial: The End of Secret Banking?

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What's more, the U.S.'s actions raise fundamental issues of state sovereignty. After all, the government is trying to enforce U.S. laws on a financial institution headquartered in another country. "The U.S. wants to turn the world's banks into agents of the IRS," complains James Nason, spokesman for the Swiss Bankers Assn., a trade body.

Rhetoric Heating Up

Yet even if UBS is based in Zurich, prosecutors allege, its employees gave advice to American citizens on U.S. soil about how to avoid taxes. Plus, the transactions may have involved U.S.-based financial assets. As such, the activities fall under America's global tax regime, and clients need to come clean. "If anyone is encouraging people to evade U.S. taxes, then authorities have a pretty good argument to get involved," says Lisa Osofsky, a regulatory adviser at consultancy Control Risks and a former U.S. federal prosecutor.

The rhetoric has heated up as the trial approaches. On July 8 the Swiss government warned that if the Miami judge rules against UBS, it will seize the contested client data itself to prevent the information from being disclosed to U.S. authorities. Folco Galli, spokesman for Switzerland's Federal Office of Justice, also notes that Switzerland will fine UBS if it violates Swiss law and hands over the file to the U.S. And, he warns, "The civil proceedings could also jeopardize the ratification of a new [U.S.-Swiss] tax treaty."

The implications for high-net-worth individuals are equally stark: Come clean and pay taxes or face prosecution. On June 25, for instance, Boca Raton (Fla.) resident Michael Rubinstein pleaded guilty to filing a false tax return that intentionally failed to disclose his Swiss bank account with UBS. Rubinstein's sentencing is set for late September, and he faces a maximum three-year prison sentence and a fine of up to $250,000. U.S. citizens had until June 30 of this year to disclose foreign bank accounts to authorities or face fines and potential prosecution. "We can expect more cases to follow [in the wake of UBS]," says Oxford researcher Fuest.

To be sure, not everyone with a foreign bank account is evading taxes. Analysts say there are many reasons to bank in places such as Switzerland and Monaco, ranging from world-class investment advice to a broadened range of financial products. But with U.S. prosecutors boring in on Switzerland's fabled secret bank accounts, the days of stashing money overseas to keep it from Uncle Sam could well be numbered.

Scott is a reporter in BusinessWeek's London bureau .

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