UBS causes the first crack in Swiss banking system

LONDON: It's being headlined as a severe blow to the fabled secrecy of the Swiss banking system, the first crack in the stronghold and even the beginning of the end. UBS, the largest Swiss bank came to a landmark settlement with US tax authorities, admitting it 'participated in a scheme to defraud the US". UBS will pay $780 million to settle the investigation, but more critically, the beleaguered bank has also agreed to turn over the details of an estimated 300 to 400 US clients, and closed down its offshore business for Americans.

Tax authorities around the world, including in India, are expected to keenly monitor the developments of this investigation, in order to identify any of their own nationals who may be caught in the US net.

Some years ago, Hasan Ali a Pune-based stud farmer Indian, suddenly hit the limelight for being allegedly involved in handling overseas slush funds, when his name was thrown up by a US investigation involving large overseas fund transfers. US authorities shared the data with Indian tax authorities. More recently, however, following the Liechtenstein scandal, there have been no high-profile disclosures involving Indian nationals, though it is widely accepted that lots of rich Indians have large overseas stashes, including in Switzerland.



The Swiss finance minister publicly assured the media that the UBS incident will make no difference to the hallowed tradition of client confidentiality. Swiss law discriminates between tax fraud and tax evasion or avoidance ��� UBS was caught in a case of fraud; evasion or avoidance is not a criminal offense under Swiss law, and protected by secrecy. "It is evident there has been tax fraud (at UBS)," finance minister Hans-Rudolf Merz said at a press conference with the foreign press. "Bank secrecy will stay," he added.

Some observers believe that this investigation is highly unlikely to throw up any secret hoards held by Indians. After the US tightened its entire tax structure and scrutiny of US nationals following the Patriot Act, most people from other countries wanting to avoid the scrutiny of their own tax authorities are no longer using the US as a conduit, when a dozen other options are available around the world. Besides, large Swiss banks like UBS generally have more stringent compliance norms than many of the smaller or private banks.

However, global governments in Europe and US are getting increasingly intolerant about tax havens, as they battle recessions and dwindling tax receipts at home, and the Swiss have been under pressure about their laws for a while. Cracking down on tax havens is high on the agenda for the G20 summit in April.

UBS has been under investigation, with many of its executives indicted over the past, from American prosecutors for a scheme that alleges it helped American citizens set up and conceal offshore accounts by falsifying, destroying and concealing required documents. The settlement came as the bank faced indictment for non-cooperation for resisting disclosures of client details. Of the $780 million that UBS will pay, $380 million is for profits from its cross-border business, and the rest unpaid taxes and penalties.

In a statement, Peter Kurer, the chairman of UBS AG, said that "UBS sincerely regrets the compliance failures in its US cross-border business that have been identified by the various government investigations in Switzerland and the US, as well as our own internal review." UBS has lost billions in the financial meltdown, and had to take a $60 billion bailout from the Swiss government in October.