Swiss Bank Secrecy Under Threat After UBS Tax Deal

Swiss newspapers said the U.S. authorities had cracked Swiss bank secrecy, accusing the government of `capitulating.`

Switzerland defended on Thursday its landmark decision allowing bank giant UBS to transfer client data to the United States in a tax settlement that experts say will dilute bank secrecy laws.

UBS AG agreed late on Wednesday to pay a hefty $780 million fine and disclose the identity of some clients after U.S. investigators accused it of helping wealthy Americans to dodge taxes. The deal had the blessing of the government and the financial regulator.

Some experts say the settlement, a new step in the growing global fight against tax evasion, opens cracks in the country's tough bank secrecy laws and potentially could undermine the $7 trillion global offshore banking industry. ID:nLJ100097

Swiss newspapers said the U.S. authorities had cracked Swiss bank secrecy, accusing the government of "capitulating."

"For Switzerland, (the settlement) is a true catastrophe for the country's first industry, that is to say the banking sector," Geneva lawyer Charles Poncet, a former member of the Swiss parliament, told Radio Suisse Romande. ID:nLJ412106

Finance Minister Hans-Rudolf Merz, who is also the Swiss president under a system that rotates the position each year, said the government had no choice but to let UBS settle the case to avoid criminal charges that could have threatened its existence and undermined Switzerland's economy. The combined liabilities of UBS and rival Credit Suisse Group AG are equivalent to about seven times Switzerland's gross domestic product.

"It became evident that if the American authorities would bring UBS to an indictment ... the whole threat would have been falling also on our economy," Merz told journalists, but added that Swiss bank secrecy remained in place.

The probe added to the uncertainties hanging over UBS, which has written down more toxic assets than any other European bank during the credit crisis and suffered billions of dollars in client withdrawals.

UBS shares rose on news of the deal.

Switzerland does not consider tax evasion a crime and Swiss law prohibits disclosure of client data or names unless the country's authorities believe the client has committed a serious crime such as money laundering or tax fraud.

Both Merz and UBS Chairman Peter Kurer said on Thursday the data concerned solely cases of tax fraud.

"We tolerated a company culture which did not respect foreign laws," Kurer admitted on television on Thursday.

But the unprecedented step in this case was that the data was handed over before a Swiss administrative court had the chance to say whether any fraud had been committed.

"The agreement between UBS and the U.S. department of justice raises serious questions about the rule of law," Swiss business group Economiesuisse said. "It is irritating that among friendly states the legal ways are bypassed by the U.S."

MOVE TOWARDS TRANSPARENCY

The financial crisis is adding pressure on offshore centres such as Switzerland, which alone manages one third of the world's undeclared wealth, to stop helping clients hide their money from the tax man as governments seek funds to pay for more spending.

Thousands of wealthy Westerners avoid taxes by hiding assets in Switzerland and other offshore centres and U.S. lawmakers say tax havens deprive Washington of $100 billion a year.

The UBS tax settlement could set a precedent for similar deals with other banks or by other jurisdictions.

"We highlight that any success by the US tax authority could encourage tax authorities in other jurisdictions to pursue a similar strategy," Merrill Lynch analysts said in a note.

Germany has said it wants Switzerland put on a tax haven blacklist and launched a probe last year into German nationals stashing assets in Liechtenstein. The German Finance Ministry said it had taken note of the UBS deal, but had no more comment.

U.S. President Barack Obama also wants to get tough on tax havens and helped introduce a Senate bill to this end in 2007.

Former UBS banker Bradley Birkenfeld, who once smuggled a client's diamonds into the United States in toothpaste, said he and other UBS bankers helped the bank earn $200 million a year managing $20 billion in assets held in offshore tax havens. ID:nN18464440

POSITIVE FOR UBS

UBS's $780 million fine was lower than some media reports had expected and its shares were up 4.7 percent to 12.79 francs by 1455 GMT, outperforming the DJ index of European bank stocks, which was up 1.2 percent .SX7P>.

Vontobel analysts said in a note: "It is very positive for UBS to have closed off the case now as it will enable them to move forwards again and to start to build up its reputation." ID:nLJ100097

UBS said it will book the settlement charge in its 2008 accounts, which will be published in an audited form in March.

Merz said in an interview with Swiss television that UBS did not need another cash injection because of the fine.

"Its capitalisation is quite OK. Its capital ratio is above 11 percent," Merz said, adding that liquidity was available and that January had been a good month.

UBS, which took $49 billion in writedowns in 2007 and 2008 due to the credit crisis, had to be rescued by the Swiss state last year through a 6 billion Swiss franc ($5.19 billion) cash injection.

Officials described the agreement with the United States as one of the biggest tax settlements ever, although less than media reports that suggested the fine could be as high as 2 billion Swiss francs ($1.7 billion).

The settlement was the largest for UBS since it and Credit Suisse paid $1.25 billion after failing to return wealth to relatives of Holocaust victims.

Swiss financial regulator FINMA, which played a key role in the settlement, said UBS had to hand over a limited amount of client data to avert criminal charges.

"Such charges could have had drastic consequences for UBS and its liquidity situation and ultimately put its existence at risk," the authority said.

Swiss media say UBS turned over 250 client names out of an estimated 17,000 U.S. clients who have concealed their identities and their accounts and hold $20 billion in assets.

The agreement settles the criminal investigations against the bank but not a civil case by the Internal Revenue Service, the U.S. tax collector. The IRS is seeking the names of thousands of UBS clients.