IRS, Justice Target Undisclosed Assets In Swiss Accounts

[MikeWB]

IRS, Justice Target Undisclosed Assets In Swiss Accounts
By David S. Hilzenrath
Washington Post Staff Writer
Saturday, November 1, 2008; D01

At the Beverly Hills office of criminal defense lawyer Edward M. Robbins Jr., anxious new clients are showing up with an unexpected problem.

The clients put money in Swiss bank accounts, where it was supposed to stay secret. But now those depositors fear the U.S. Internal Revenue Service and the Justice Department will gain access to their bank records, Robbins said.

"They're coming in from the cold. They're nervous," Robbins said.

And with good reason, the former federal prosecutor said. A lawyer who specializes in tax cases, Robbins thinks the government is gearing up to prosecute large numbers of Americans for failing to disclose foreign accounts on their tax returns and evading taxes on income generated by the accounts.

"If I were one of these guys with 10 to 50 million in my account, I'd be having an aneurysm," Robbins said. "It's an extremely dangerous situation for these guys."

The legendary secrecy of Swiss banks has come under fresh assault lately from U.S. and European authorities who say their citizens have used the privacy to hide assets and dodge taxes.

The U.S. effort to capture back taxes targets Americans who hold undeclared accounts at UBS, one of Switzerland's largest banks. The developments could put UBS in legal jeopardy and undo the reputation for confidentiality that has helped make a small nation in the Alps a magnet for international deposits.

UBS, which also has extensive operations in the United States, has been under investigation by the Justice Department and the Securities and Exchange Commission.

"UBS takes this matter very seriously and is working diligently with both Swiss and U.S. government authorities, consistent with Swiss law and the legal frameworks for intergovernmental cooperation and assistance," UBS spokesman Mark Arena said by e-mail.

Over the summer, the IRS won permission from a federal court to demand that UBS turn over the identities of an estimated 19,000 American clients who have failed to disclose their Swiss-based accounts on U.S. tax returns. It remains unclear what has or will come of that effort. Swiss law restricts the bank's ability to breach client confidentiality. Swiss law also gives clients the opportunity to oppose the release of their names through a judicial process that could slow any disclosures.

"All of these names have to be checked, and each case has to be looked at," Swiss embassy spokeswoman Emilija Georgieva said, declining to say whether the Swiss have turned over any identities to the U.S. government, yet.

Washington lawyer Martin Lobel, chairman of the Tax Analysts information service, said the Swiss government appears to be "using the legal process to delay until people forget about it," and he predicted that "nothing much is going to happen." Even if the IRS got the names of 19,000 UBS depositors, the agency couldn't handle the volume, Lobel said.

However, Robbins said it appears that criminal prosecutors at the Justice Department, as distinct from the civil lawyers handling the IRS demand, are gaining access to such details through a parallel investigation. The Beverly Hills lawyer said he recently contacted the Justice Department on behalf of a new client and was told a prosecutor already had the client's name.

A Justice Department spokesman declined to comment for this story. The IRS did not respond to repeated inquiries.

The curtains began to part on UBS late last year when a depositor named Igor M. Olenicoff, a California real estate billionaire, pleaded guilty to one count of filing a false tax return. Then, in June, a former UBS employee pleaded guilty to helping Olenicoff conceal $200 million and evade taxes of $7.2 million. The former banker, Bradley Birkenfeld, gave investigators details of how UBS allegedly catered to wealthy Americans, potentially violating U.S. banking and securities laws, according to a Senate report.

As described in Senate and court records, UBS bankers allegedly helped clients set up sham companies in offshore havens such as the Bahamas to conceal the identity of account holders. To solicit new clients, bankers not licensed to do business here traveled to art shows, yachting competitions and other upscale events in the United States, falsely declaring at times that they were entering the country for pleasure.

They were trained to avoid and detect surveillance by U.S. law enforcement; one internal training document prepared them for the possibility that they could be "intercepted by an FBI agent."

They allegedly kept American clients informed about their investments by carrying account information to the United States in encrypted form. They allegedly advised clients to misrepresent withdrawals from their Swiss accounts as loans and to tap their Swiss funds by purchasing jewels and art while traveling abroad.

In one instance, Birkenfeld used an American client's funds to buy diamonds. Then, the banker snuck the stones into the United States in a tube of toothpaste, according to a statement of undisputed facts filed in connection with his June guilty plea.

When Sen. Carl M. Levin (D-Mich.), chairman of the Senate's Permanent Subcommittee on Investigations, convened a hearing on the subject in July, he estimated that the abuse of offshore havens worldwide costs the United States about $100 billion annually. The U.S. government isn't the only one concerned. Last month, when representatives of 17 nations met in Paris to discuss international financial transparency, German and French ministers said Switzerland should be added to a blacklist of tax havens, the Swissinfo news service reported.

About 20,000 U.S. clients have about $18 billion on deposit with UBS in Switzerland, and about 19,000 of the clients have not disclosed their accounts to the IRS, the Swiss bank has told Senate investigators, according to a July report by the subcommittee staff. By Birkenfeld's reckoning, such accounts generated about $200 million of annual revenues for UBS, according to court records.

Called to testify before the subcommittee in July, a top UBS official invoked his Fifth Amendment right against self-incrimination. But another UBS executive expressed contrition and promised the bank would cooperate with U.S. authorities.

"UBS genuinely regrets any compliance failures that may have occurred. We will take responsibility for them. We will not seek to minimize them. On behalf of UBS, I am apologizing. I am committing to you that we will take the actions necessary to see that this does not happen again," said Mark Branson, UBS's chief financial officer of global wealth management.

Some Americans familiar with the situation say UBS could strike a cooperative posture secure in the knowledge that the Swiss government could protect its clients. Still, UBS could be forced to choose between violating Swiss law and its stringent privacy protections or defying U.S. law and putting its U.S. business at risk. In his Senate testimony, UBS's Branson noted that almost 32,000 of the company's 80,000 employees were based in the United States.

James Nason, a spokesman for the Swiss Bankers Association, said, "UBS itself cannot decide to hand over client data because then it would be violating Swiss law." Any Swiss bank "waits for instructions from the Swiss authorities," Nason said, adding, "Switzerland doesn't allow fishing expeditions."

Nason put blame elsewhere, saying, "Attacks on Switzerland usually come from countries that have a relatively low level of taxpayer honesty."

Beverly Hills lawyer Robbins represented Olenicoff, which might help explain why, as he related, about 20 other UBS clients have turned to his law firm. In New York, attorney Bryan C. Skarlatos, who specializes in criminal tax law, said his firm has been approached by dozens of people who hold offshore accounts at UBS and other banks. They wanted to come clean with the IRS before getting caught up in a crackdown, he said.

Whether or not the Swiss officially give up clients' secrets, the U.S. government could have other ways of getting information. For example, bank employees have an incentive to expose tax evaders to the IRS, Skarlatos said, because whistle-blowers could receive 30 percent of the money they help the government collect.

Staff researcher Julie Tate contributed to this story.