Settlement of the IRS v. UBS Case: Why Is the IRS Backing Down?
by Asher Rubinstein, Esq.

Today, for the third time, lawyers for UBS and the Department of Justice requested that the court adjourn the matter to allow both sides additional time to reach a settlement.  Although the terms of the settlement will not be released until they are approved by the court, we have heard the following possible terms:

1.  UBS will disclose the identities of substantially fewer than the 52,000 American account holders which the IRS initially sought.  We’ve heard that the number will be closer to 10,000, possibly 20,000 names.

2.  The IRS may only be focusing on the names of account holders who were visited by UBS bankers in the US.

3.  UBS will not pay a fine.

We are skeptical about these possible terms becoming part of any settlement agreement, because we do not believe that the IRS would settle for so little, when it has such a strong position in this case.

First, given that the facts are so clearly against UBS – – their bankers came to the US to solicit clients, lied to US Customs agents about the purpose of their visits, encrypted data, set up offshore entities to obscure true beneficial ownership of accounts, even smuggled diamonds into the US in toothpaste tubes . . . and now UBS is hiding behind Swiss law for their criminal violations in the US – – the IRS clearly has the upper hand in this case. Therefore, it is very surprising that the IRS would agree to settle for 10,000 or even 20,000 names, as suggested.

In addition, UBS has a very valuable banking license in the US, plus significant assets in the US, both under US jurisdiction and both vulnerable to seizure and receivership by a US court, which gives the US tremendous leverage to obtain a favorable settlement.  Moreover, when UBS agreed to a deferred prosecution of the criminal case against it, it agreed to cooperate with the US government.  UBS’ failure to comply with a court order to release names would be non-cooperation and a violation of the deferred prosecution agreement.  This would lead to a re-institution of the criminal case against UBS.  Again, the US has significant leverage over UBS here.  Therefore, any settlement that would involve disclosure of less than a significant majority of the 52,000 names would have to be seen as a defeat for the US and does not make sense.

Second, such a settlement would defeat the purpose and goals of the Voluntary Disclosure Program.  Most Americans with foreign accounts will refuse to voluntarily disclose their accounts, expecting to be in the majority of undisclosed names and thereby continue to avoid IRS discovery.  The IRS’ threats of discovery and prosecution would suffer a lack of credibility.

The IRS has used a “carrot and a stick” thus far in getting people to come forward.  It has publicized criminal prosecutions and guilty pleas to scare people, and promised a reduction in penalties and no criminal prosecution, in order to encourage voluntary disclosure.  Now, any settlement that would lead a taxpayer to say “I shouldn’t have gone into the program; I would have gotten away with it” severely undercuts what the IRS is trying to accomplish.  Once again, any settlement for less than a majority of 52,000 names would be a serious defeat for the IRS.

We believe it is more likely that a settlement would involve extending the period of the Voluntary Disclosure program (past September 23) and an agreement by UBS to disclose the names of those who do not come forward on their own at the end of that extended period.

Of course, any settlement that involves the disclosure of any number of names raises serious questions about the viability of Swiss secrecy laws.  One ambiguity is the basis for the Swiss to release 10,000 names, but not 42,000 other names.  Perhaps Swiss secrecy laws will be amended in some manner, and that amendment would form a basis to determine which names are released.  For example, the amendment might involve a re-definition of “tax fraud” under Swiss law that would re-classify any account opened in the name of a foreign corporation or trust (i.e., not a person’s name) as fraudulent, and that might form the basis of disclosure.

Of course, there are difficulties with that possibility.  A change in Swiss law would be subject to approval of the Swiss Parliament and the Swiss Federal Council, as well as public referendum in Switzerland, where challenges to traditional Swiss banking secrecy have been met with vigorous opposition.

Another possibility would involve a re-interpretation of banking secrecy laws by Swiss authorities, to deny protection to Swiss banks (and bankers) who affirmatively violate foreign laws on foreign soil.  This would allow the Swiss government to “save face” and would avoid the need to amend current Swiss laws.  Such a compromise would make UBS – – the egregiously guilty party – – the scapegoat in this conflict.  The drawback to this solution is that it would provide the IRS with only about 10,000 names (those people who met UBS bankers in the US) and would create an implication that it is ok to have a secret foreign account as long as one goes to Switzerland (or elsewhere) to open it.

The main point here is that it is not likely that the IRS would accept less than what its leverage over UBS could otherwise ensure.  One might question whether, under the surface, the IRS may agree to less now, in order to obtain more in the near future: an end to Swiss banking secrecy.