U.S., UBS breakthrough averts tax dispute showdown

MIAMI, (Reuters) – The U.S. government and Swiss  bank UBS AG struck an 11th-hour deal to settle a dispute over  tax evasion and Switzerland’s bank secrecy yesterday, heading  off a showdown that had threatened to sour relations between the United States and Switzerland.

The case — which first grabbed the media spotlight in June  2008 when a former UBS banker admitted he once smuggled a  client’s diamonds into the United States in a toothpaste tube  — had been expected to go to trial on Monday.

The main sticking point was that U.S. authorities wanted  UBS to disclose the names of 52,000 wealthy American clients  suspected of using the bank to evade taxes — a demand that  shook the global offshore banking industry and tested  Switzerland’s vaunted tradition of bank secrecy.
Under the settlement, described as an “agreement in  principle” expected to be finalized by next Friday, UBS is  likely to reveal far fewer than 52,000 client names, but would  include the biggest accounts, a U.S. government source told  Reuters.

The deal could serve as a template for other global banks  doing business in the United States.
It remains to be seen if it will boost confidence in UBS,  which has been hard hit by mortgage losses and client  withdrawals. But the bank’s shares closed up 6.9 percent, or 95  cents, at $14.74 yesterday on the New York Stock Exchange.

Before meeting in Washington yesterday, U.S. Secretary of  State Hillary Clinton and her Swiss counterpart, Micheline  Calmy-Rey, said they were pleased with the preliminary  agreement.

“The parties have reached an agreement in principle on the  major issues,” U.S. Justice Department attorney Stuart Gibson  said in a conference call with Florida federal court Judge Alan  Gold.

“There are some other issues that need to get resolved, and  we expect to be able to resolve them during the coming week,”  Gibson said.
He gave no details of the settlement, but said a final  agreement should be ready in time for a pretrial status  conference in the case that the judge set for Friday, Aug. 7.
Judge Gold tentatively reset the UBS trial date for Aug. 10  in U.S. District Court for the Southern District of Florida.  But the trial would be called off if a final agreement is  signed.

It was not clear if Clinton and Calmy-Rey had helped broker  the deal, which was hammered out by government officials. Swiss  Foreign Ministry spokesman Lars Knuchel and State Department  spokesman P.J. Crowley welcomed the agreement.

“What we were facing was the prospect of a conflict between  U.S. laws and Swiss law that might in some way complicate a  very strong bilateral relationship. And I think both the  secretary and the federal councilor were relieved,” Crowley  said.

The U.S. investigation into UBS led to the indictment in  Feburary 2008 of Raoul Weil, a Swiss citizen who was then head  of UBS AG’s wealth management business. He was charged with  conspiring to help thousands of Americans hide $20 billion in  assets from U.S. tax authorities.

Weil, who has since left UBS and denies any criminal  wrongdoing, is considered a fugitive from U.S. justice. A U.S.  spokesman for Weil’s lawyer said Weil was in Switzerland.

In February 2009, UBS agreed to pay $780 million to settle  criminal charges it was facing under a separate but related tax  dispute. It agreed to hand over data related to about 250 U.S.  clients who had secret Swiss accounts and promised to close its  offshore business to U.S. clients.

The Swiss government stretched its bank laws to the limit  to pass along the data without formally violating its laws, but  tax lawyers said the case was a serious hit to bank secrecy.

Swiss media have reported that UBS was likely to pay a  multibillion-dollar fine as part of any agreement. But a U.S.  government source who has followed the case closely downplayed  talk of a financial penalty.

“I don’t think there’s going to be a fine component at all.  I don’t think that was ever really on the table,” said the  source, who spoke on condition of anonymity.
Though he said the settlement was likely to give U.S.  authorities far fewer than 52,000 UBS client names to go after,  he stressed that it would involve a sizable transfer of data by  the Swiss bank involving some of its biggest U.S. customers.

Joann Weiner, a former Treasury Department tax official,  said if the U.S. Internal Revenue Service got roughly 10,000  client names from UBS, it would be a pretty good deal.

Some observers said the “devil was in the details” of the  settlement being worked out and believed it could still take  weeks, not days, to finalize.