fine rather than losing its American banking licence after a tax
fraud investigation. But the beleaguered Swiss bank isn’t out of
the woods yet, after a suit was filed by various state regulators
over its role in the moribund US auction rate securities
market.
UBS, pilloried at Washington standing
room-only hearings over its role in systematic tax evasion by US
nationals, appears to be heading for a large fine for its apparent
transgressions rather than the blow of losing its US banking
licence.
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Senator Carl Levin, who has led the evasion
hearings by a Senate committee, has demanded that UBS’ banking
license should be revoked until the bank “cleans up its act.”
But financial punishment is seen as the more
likely outcome. Helvea analyst Peter Thorne estimates that any fine
imposed could range up to CHF500 million ($490 million).
Even so, UBS is still heading for yet another
confrontation with US regulators. New York Attorney General Andrew
Cuomo announced the filing of a lawsuit against UBS over its
involvement in the sale of auction-rate securities, the $330
billion market which froze up last February. It is alleged that UBS
committed fraud by misleading investors in its marketing of the
long-term securities as liquid money market-like instruments.
“Not only is UBS guilty of committing a
flagrant breach of trust between the bank and its customers, its
top executives jumped ship as soon the securities market started to
collapse, leaving thousands of customers holding the bag,’’ Cuomo
said in a statement.
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By GlobalDataNew York is the third state to bring a
complaint against UBS over the securities, after a lawsuit filed by
Massachusetts regulators last month and a move earlier this week by
the Texas State Securities Board to file notice of a hearing to
suspend UBS’s state license.
A UBS spokesperson said the bank will
“vigorously defend’” itself against the allegations in the suit,
rejecting any claim that it was involved in a campaign to move
auction-rate debt off its books and into client accounts.
At the hearings by the Senate committee, UBS
pledged to stop providing offshore banking services to American
citizens. It has also agreed to work with the US government to
identify American clients who may have been involved in defrauding
the Internal Revenue Service (IRS).
That decision follows an earlier ruling by a
Florida judge to give the IRS permission to serve legal papers on
the bank to attempt to force it to hand over the names of up to
20,000 US clients. In June, Bradley Birkenfeld, a former UBS
banker, pleaded guilty to helping his US clients evade taxes in a
criminal case before the Florida court.
UBS and the Liechtenstein’s LGT Group helped
wealthy Americans disguise ownership of accounts and evade taxes on
hidden assets, according to the report by the Senate Permanent
Subcommittee on Investigations.
“UBS has opened thousands of accounts in
Switzerland that are beneficially owned by US clients, hold
billions of dollars in assets, and have not been reported to US tax
authorities,’’ the 114-page subcommittee report claimed.
Testifying before the subcommittee, Mark
Branson, chief financial officer of UBS US wealth management,
admitted that UBS had made mistakes, saying: “We now know that our
compliance system had failures and misconduct appears to have
occurred.”
The withdrawal from offshore banking for US
nationals, which UBS had begun late last year and accelerated
recently amid the emerging US investigations, will affect some
20,000 US clients with as much as $20 billion in assets held in
Swiss accounts.
Those clients will be asked to use US-based
onshore accounts or one of UBS’ international units – Swiss
Financial Advisors, based in Zurich, or Hong Kong-based Wealth
Management International.
Unlike its Swiss private banking service,
those subsidiaries are registered with the US Securities and
Exchange Commission and subject to American financial transparency
requirements.
Rival Credit Suisse said it is evaluating the
business it conducts from Switzerland with US clients in the light
of investigations into UBS, but will continue to offer these
services.
The LGT role
Unlike UBS, LGT declined to attend
the Washington hearings. Sen. Levin claimed LGT was a “willing
partner” to US clients trying to evade taxes.
LGT chairman Prince Philipp, brother of the
reigning sovereign in Lichtenstein, was present at a meeting with
potential US clients at which LGT representatives promoted the bank
as a safe haven for American money, the Senate investigation
found.
LGT said in a statement that “it has always
been and continues to be in compliance with pertinent laws and
regulations.” Much of the data under investigation “dates back to a
time when the regulatory environment was completely different,” it
stressed.
“Over the past six years, LGT has terminated
structures and arrangements that are seen as inappropriate from
today’s point of view,” the bank said.
Heinrich Kieber, a former employee of LGT and
the source of numerous bank documents detailing allegedly secret,
multi-million-dollar accounts gave testimony by video.
Kieber, declared a fugitive by Liechtenstein,
is living in an undisclosed location after providing information to
government officials in the UK, Germany, the US and other countries
on their citizens who hid billions in wealth through the bank. The
committee’s report said that Kieber, now in witness protection, had
given the Senate investigators 12,000 documents.
Bottom of Form
Kieber described stumbling across
the bank’s secrecy schemes while working on a document conversion
project several years ago. He declared that, after going through
thousands of documents, he got a “very clear picture” of the
devices used by LGT to help clients evade tax.
The LGT files showed a long-standing
relationship with Australian billionaire Frank Lowy, the executive
chairman of the shopping centre group Westfield Holdings, and his
sons David, Peter and Steven, who also work for Westfield.
The US report claimed the documents show the
bank helped the Lowys hide ownership of assets from Australian tax
authorities and disguise the beneficiaries of a Liechtenstein
foundation that held $68 million in assets in 2001. Lowy rejected
these accusations, saying the report drew inferences from the
documents and stated them as facts without verification.
He and his family had not been given “any
meaningful opportunity to… have the true position stated”.
Caymans in spotlight
The Cayman Islands also came under
the spotlight in the hearings. Investigators from the Government
Accountability Office told the committee of their investigation of
a five-story building in the Caymans that serves as the address for
thousands of US companies.
The presence of hedge funds and other
financial institutions in the Caymans, the amount of assets
involved, the ease with which US citizens can establish a Caymans
company, and the challenges faced by the IRS in trying to uncover
offshore tax evasion are being investigated.
The hearings meanwhile promise to result in
tougher US tax enforcement overall. Douglas Shulman, head of the
IRS told investigators more enforcement actions aimed at flushing
out US taxpayers who shelter income in bank secrecy jurisdictions
would be carried out.
The IRS is considering changes to its
“qualified intermediary” programme that could put more of an onus
on foreign banks to determine whether or not US taxpayers may be
the beneficial owners of foreign trusts. The IRS also may require
outside auditors of foreign banks to report indications of fraud or
illegal acts.
At the same time senators Max Baucus and Chuck
Grassley, chairman and ranking member of the Senate Finance
Committee, respectively announced they would introduce six new
measures to curb offshore tax evasion.
The steps include lengthening the statute of
limitations for prosecuting individuals who fail to file a foreign
bank account report.
More tax policing
The US assault on evasion looks
likely to be echoed in Europe, where France and Germany want OECD
countries to meet in October to strengthen tax policing in the wake
of the Liechtenstein scandal, based on information provided by
Kieber and which various governments have bought.
French Budget Minister Eric Woerth said French
investigators were focusing on 64 “family groups” out of a list of
200 tax fraud suspects and as much as €1 billion placed in
Liechtenstein.
The status of tax havens that have been taken
off the OECD blacklist will also be assessed, in order to ensure
that they had made a genuine effort to co-operate in international
efforts to fight financial crime.
Offshore banking: Liechtenstein probe
HM Revenue & Customs is
preparing to prosecute about 300 wealthy UK residents with secret
accounts in Liechtenstein as part of its offshore tax evasion
investigation. HMRC said it believes it can recover up to £300
million ($595 million) in unpaid taxes from those who have as much
as £1 billion in the tax haven.
Germany, the US and other countries are also
investigating Liechtenstein account holders in an assault against
evasion.
A spokesman for HMRC said those found to have
circumvented taxes must pay the amount they owe plus interest and a
penalty of up to 100 percent of the unpaid tax, saying: “We are
dealing wealthy people who have used Liechtenstein’s secrecy laws
to escape UK tax.”
In certain circumstances, those found guilty
of tax evasion can face a prison sentence of up to seven years. The
investigation is expected to be completed within three years.
The investigation is based on data obtained
from a paid informant who once worked for Liechtenstein’s LGT
Bank.
