June 28, 2009

Switzerland moves to dilute bank secrecy

By Haig Simonian in Zurich

Published: June 23 2009 15:23 | Last updated: June 23 2009 15:23

Switzerland emphasised on Tuesday its willingness to dilute bank secrecy, as the US Department of Justice indicated that it planned to continue with legal action to force UBS to reveal the names of its American offshore private banking clients.

Hans-Rudolf Merz, Switzerland's finance minister, said Bern intended to negotiate 12 revised double taxation treaties this year, extending substantially the range of countries benefiting from greater transparency.

The need for fresh agreements followed Switzerland's acceptance in March of transparency standards set by the Organisation for Economic Co-operation and Development, the industrialised nations' club.

Six deals have already been negotiated, taking Switzerland halfway to the total of 12 required to remove the country from a "grey list" of countries not fully compliant with the new rules.

Talks with the US were concluded last week, surprisingly quickly, suggesting Swiss negotiators were keen to secure a settlement against the background of the UBS case.

The world's biggest wealth manager is to fight a demand by the US Internal Revenue Service that it reveal 52,000 offshore relationships with US clients.

UBS has resisted fiercely, arguing acquiescence would involve breaking Swiss law and that such issues are best negotiated by governments, rather than by legal actions against companies.

The bank's position has been upheld by the Swiss government and important trade federations. UBS is due to go to trial over the issue at a federal court in Miami on July 13.

Bern has also lobbied in Washington, reminding legislators about Switzerland's services in countries such as Iran and Cuba, where the US has no diplomatic representation. The Swiss have also stressed the potential threat to the financial system of destabilising UBS, which has extensive operations in the US.

Legal experts expected next month's court case to be long and complex. An adverse ruling would have triggered an appeal, with the issue possibly lingering for years until going to the Supreme Court.

The New York Times reported on Tuesday the IRS was considering dropping the action. "To have a complete meltdown in Swiss-US relations and go to the mat with Switzerland three years from now when money is getting back into the system doesn't make sense," said an unnamed US official.

However, the US Justice Department on Tuesday said it was not planning to drop its lawsuit. "There is no basis for the report in the New York Times," it said.

UBS and the Swiss finance ministry declined to comment.

Analysts noted that to drop the case would remove a source of uncertainty for the bank – and for Swiss private banking in general.

Switzerland's image as a confidential haven for private assets – whether declared or not – suffered a blow in February. UBS was forced by the Swiss bank regulator to disclose the names of 255 US clients to the American authorities.

The decision was a response to intense US pressure on Switzerland. It reflected fears in Bern UBS might otherwise face indictment. To publish the names was justified by the Swiss on the grounds those involved had used sham companies to evade tax, and so were not covered by the previous – restrictive – interpretation of laws to govern co-operation with foreign tax authorities.

Transfer of names was central to a deal by which UBS paid $780m to settle criminal charges that it had helped rich Americans evade tax. The agreement did not cover the linked – but separate – civil case by the IRS to require the bank to reveal the 52,000 client relationships.

To backtrack on that demand may reflect awareness in Washington of diplomatic and business repercussions. It may also stem from the fact many US taxpayers with undeclared accounts have come forward voluntarily.

Many accounts have also been closed after the bank's decision last year to terminate offshore services for US clients.

UBS has offered to give client data to the IRS on an "anonymised" basis. The information, already assessed by independent auditors, is thought to show only a few account holders breached the rules. Anonymised access would allow the IRS to verify that.

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