US breaches Switzerland's banking citadel; UBS to reveal 4,450 names

The US yesterday used a sledgehammer to break into Switzerland's famed  iron-clad banking secrecy laws by managing to squeeze out 4,450 names of wealthy Americans who held secret offshore accounts with Swiss bank UBS.

Breaching the well guarded citadel of Switzerland's secretive banking system that has helped make its banking industry one of the richest in the world and a major source of Swiss wealth, Washington went into a victory lap over its win on tax evaders.

The US has now signalled that it would go after other foreign banks as well as individuals, who have evaded paying taxes in the US by holding offshore or unaccounted accounts.

The two countries signed an agreement yesterday, under which the US will drop a lawsuit filed in a Miami court in exchange for Switzerland agreeing to reveal and hand over data of 4,450 Americans holding offshore accounts with UBS.

Although it was a climb-down for the US, which had been demanding that UBS reveal 52,000 client names, the US Internal Revenue Service (IRS) now say that it did not expect the Swiss government to agree to a number as large as 4,450.

The US Justice Department had begun investigating the tax evasion case since May 2008, (See: UBS under US investigation for tax evasion; senior executive detained)  which led it to file a lawsuit in a Miami court in February 2009 to compel Switzerland's largest bank by assets, UBS, to disclose the names of as many as 52,000 Americans who evaded paying tax in the US. (See: US justice dept hauls UBS to court to force disclosures)

''This agreement sends an unmistakable message to people hiding income and assets offshore,'' said IRS commissioner Douglas Shulman in a statement. ''The IRS will vigorously pursue tax cheats around the world, no matter how remote or secret the location.''

Under the agreement, the IRS has asked UBS to reveal the names in small batches starting from November in order to put pressure on the 52,000 other American UBS clients to come clean voluntarily.

The IRS had earlier given the tax evaders an amnesty until 23 September 2009, to enble them to voluntarily come forward and pay their taxes with a penalty.

The Swiss government now claims that it's banking secrecy laws have not been breached, though it had threatened last month to seize the list of all American clients of UBS in order to prevent the bank from agreeing to hand it over to the US court. (See: Switzerland to defy US; threatens to seize UBS client data)

As far as UBS is concerned, the bank was in a tight corner, since revealing the names to the US court would have made it break Swiss secrecy laws, while it expected to lose the case in the US court and would have ended up paying fines in billions of dollars, which could have brought it to its knees.

UBS amassed more than $50 billion in write-downs and losses since the beginning of the financial crisis. It was bailed out by the Swiss government with an injection of $5.6 billion. The Swiss banker has also placed its toxic assets totalling $38.7 billion to a special state aid fund in April. (See: UBS completes $38.7 billion transfer of toxic assets to state fund)

In February 2009, the Swiss government assembled a task force comprising justice minister Eveline Widmer-Schlumpf, foreign minister Micheline Calmy-Rey Merz along with bankers, diplomats, economists and legal experts to evolve a strategy to protect the banking interests of the country from nations that threaten to undermine its secrecy law.

The case had also threatened to sour the diplomatic relations betwen both countries. Even though Swiss President Hans-Rudolf Merz had hinted last month of coming at an out-of-court settlement, US authorities had declined and maintained a defiant stance.

"With this agreement, we have managed to avoid a conflict between the sovereignty of two states," Swiss justice minister Eveline Widmer-Schlumpf told a media briefing detailing the settlement yesterday.

Swiss newspaper editorials have said that now Germany and France will join the US bandwagon in trying to force the Swiss government to reveal the identity of tax evaders from their countries who hold secret accounts in Swiss banks.

An editorial in the he Zurich-based Tages-Anzeiger newspaper said, ''UBS in this case was not a victim but a perpetrator having sent agents to the US with encrypted laptops and counter-surveillance training as they convinced some wealthy Americans to hide assets at the bank.''

''The criminal behaviour of UBS has not only cost SFr40 million in public money but it nearly led to an economic worst-case scenario," it added.